RESULTS OF OPERATIONS

The following table presents line items from our statement of operations as percentages of our total revenues for the periods indicated:

2002 Compared With 2001

Total Revenues

Total revenues decreased 24.0% to $19.2 million in 2002 from $25.2 million in 2001. This decrease was primarily due to the slowdown in the global economy, which resulted in delays in licensing decisions on a number of potentially significant deals towards the end of 2002, offset by the added revenue derived from the Parthus business following the combination with Parthus on November 1, 2002.

Licensing and royalty revenues accounted for 76.8% of our total revenues in 2002, compared with 83.0% of total revenues in 2001. Other revenues, consisting principally of technical support revenues, accounted for 23.2% of total revenues in 2002, compared with 17.0% of total revenues in 2001. Revenues from two customers accounted for 13% and 11% of total revenues in 2002. Revenues from three customers accounted for 24%, 15% and 14% of total revenues in 2001.

Licensing and Royalty Revenues

Licensing and royalty revenues decreased 29.7% to $14.7 million in 2002 from $21.0 million in 2001.

Licensing Revenues decreased 10.1% to $12.3 million in 2002 from $13.7 million in 2001. The decrease was a result of the persistent downturn and challenging market conditions in the semiconductor industry and the slowdown in the wireless and cellular market.

27

Table of Contents

Unit and Prepaid Royalty Revenues decreased 66.5% to $2.4 million in 2002, compared with $7.3 million in 2001. The decrease in such revenues was primarily due to delays in licensing decisions on a number of significant deals and lower per-unit royalties from some license agreements due to volume pricing. We had 13 royalty-paying licensees in 2002 and 10 in 2001. Royalty-generating licensees reported sales of 81.1 million chips incorporating our technology in 2002, compared with 79.2 million chips in 2001. One royalty-generating licensee accounted for 8% of total revenues in 2002.

Other Revenues

Other revenues, including technical support revenues of $3.7 million, increased 4.0% to $4.5 million in 2002 from $4.3 million in 2001. The increase was primarily due to revenues generated in IP creation and hard IP of $800,000 following the combination with Parthus, offset by a decrease in technical support revenues of $600,000. The decrease in technical support revenues reflected fewer technical support and related services to our DSP cores licensees in 2002 as a result of the slowdown in the global wireless and cellular markets.

Geographic Revenue Analysis

In 2002, revenues in the United States represented 37.6% of total revenues, while Asia represented 23.0% and Europe, Middle East and Africa represented 39.4%. In 2001, revenues in the United States represented 43.0% of total revenues, while Asia represented 28.7% and Europe, Middle East and Africa represented 28.3%.

Cost of Revenues

Cost of revenues was $2.2 million in 2002, compared with $1.3 million in 2001. Cost of revenues accounted for 11.3% of total revenues in 2002, compared with 5.0% in 2001. Gross profit decreased to 88.7% in 2002 from 95.0% in 2001. The increase in total cost of revenues and decrease in gross profit were due primarily to the change in revenue mix in 2002, with a lower amount of revenues derived from higher gross margin royalty revenues.

Cost of revenues includes related labor costs and, where applicable, travel, related overhead and material costs.

Operating Expenses

Total operating expenses for 2002 were $37.7 million compared with $10.8 million in 2001. This increase principally reflects one-time non-cash charges of $15.8 million relating to in-process research and development, $14.2 million of which arose in connection with the combination with Parthus and $1.6 million of which arose in connection with an acquisition of wireless design technology in the fourth quarter of 2002. In addition, we incurred a restructuring charge of $6.4 million representing primarily severance costs and provision for onerous leases following a headcount reduction in November 2002. We also continued our investment, internally and by acquisition, in developing and licensing a strong portfolio of technology platforms. The investment has resulted in higher numbers of engineering staff, facility costs and depreciation charges together with additional sales and marketing and administrative costs required to support our investments following the combination with Parthus in November 2002.

Research and Development Expenses, Net

Research and development expenses, net of related government research grants, increased by 65.1% from $5.1 million, or 20.2% of total revenues in 2001, to $8.4 million, or 43.8% of total revenues in 2002. We view research and development as a principal strategic investment and have continued our commitment to invest heavily in this area, which represents the largest of our ongoing operating expenses. This commitment is reflected primarily in higher labor and associated costs resulting from increased headcount and increased

28

Table of Contents

investment in design tools and sub-contract design following the combination with Parthus. The number of research and development personnel was 186 at December 31, 2002 compared with 47 at year-end 2001. Research and development expenses consist primarily of related labor and associated costs connected with the development of our intellectual property. Because technological feasibility is generally not established until all design, coding and testing activities are completed, we expense all development costs as incurred. Work that we perform to develop technology for customers on a fee-for-services basis is not included in research and development expenses; nevertheless, we generally retain the right to use intellectual property developed in this manner. Research and development expenses include payments that we make to third parties to license technology from them when we incorporate their technology into our intellectual property as part of our research and development activities.

We recorded research grants from the MAGNET programs of the Chief Scientist of Israel of $869,000 in 2002, compared with grants of $542,000 in 2001. We have no obligation to pay royalties on the intellectual property developed using these research grants, and all monies received are non-refundable.

We intend to continue to focus our research and development efforts on the development of products with high performance, low power consumption and manufacturing process independence, while maintaining compatibility with our existing products.

Sales and Marketing Expenses

Sales and marketing expenses increased by 15.3% to $3.4 million in 2002 from $2.9 million in 2001. This increase was primarily due to an increase in the number of sales and marketing personnel to support our increased sales and marketing efforts throughout 2002. It also reflects the additional sales and marketing personnel following the combination with Parthus. The total number of sales and marketing personnel was 25 at December 31, 2002, compared with 5 at year-end 2001.

Sales and marketing expenses as a percentage of total revenues were 17.5% in 2002, compared with 11.5% in 2001. The percentage increase reflects lower revenues in 2002 compared with 2001. Sales and marketing expenses consist of related labor costs, including commissions, travel and other costs associated with sales and marketing activity, as well as advertising, trade show participation, public relations and other marketing costs.

General and Administrative Expenses

General and administrative expenses increased by 25.3% to $3.6 million in 2002, compared with $2.8 million in 2001. General and administrative expenses as a percentage of total revenues were 18.4% in 2002, compared with 11.2% in 2001. The increase in absolute terms reflects our commitment to investing in a management and administrative structure to support our business going forward and increased facility costs following our combination with Parthus. The percentage increase reflects lower revenues in 2002 compared with 2001. General and administrative expenses consist primarily of related labor costs, information systems and technology, infrastructure, facilities costs, telephone and other office costs and depreciation.

Amortization of Intangibles

We recorded an expense of approximately $189,000 in the fourth quarter of 2002 in connection with the amortization of intangible assets acquired in the combination with Parthus. As of December 31, 2002, the amount of other intangible assets was $5.5 million. We anticipate ongoing charges in connection with the amortization of other intangibles of approximately $284,000 per quarter.

In-process Research and Development

The charge of $15.8 million in 2002 represents one-time non-cash charges of $14.2 million arising in connection with the combination with Parthus and $1.6 million relating to acquired wireless design technology

29

Table of Contents

which had not reached technological feasibility and had no alternative future use. Both these amounts were expensed in the fourth quarter of 2002.

The value assigned to purchased in-process technology relates to six IP platforms (Platforms A, B, C, D, E and F) valued at $3.0 million, $1.0 million, $0.7 million, $2.4 million $3.5 million and $3.6 million, respectively. The estimated fair value of the acquired in-process research and development platforms that had not yet reached technological feasibility and had no alternative future use amounted to $14.2 million.

Technological feasibility or commercial viability of these platforms was not established at the acquisition date. These products were considered to have no alternative future use other than the technological indications for which they were in development. Accordingly, these amounts were immediately expensed in the consolidated statement of operations on the acquisition date in accordance with FASB Interpretation No. 4, “Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method.” The estimated fair values of these platforms were determined using discounted cash flow models. Platforms A, B, C, D, E and F were estimated to be 54%, 22%, 89%, 6%, 44% and 70% complete, respectively; estimated costs to completion of these platforms were approximately $5.8 million, $1.5 million, $0.7 million, $4.4 million $0.1 million and $2.0 million, respectively, and discount rates of 25%, 30%, 25%, 30%, 30% and 30% respectively, were used. All platforms involve completion of design, coding, implementation and testing

activities before establishment of technical feasibility. At the valuation date the above activities had not been completed for these platforms. Platforms A, B and C were expected to be completed by the end of 2005, platform D was expected to be completed by end of 2010 and platforms E and F were expected to be completed by the end of 2007. The principal risks relating to the development of these platforms include the successful completion of the design, coding, implementation and testing activities.

Restructuring Charge

We incurred a restructuring charge of $6.4 million following the rationalization of certain product lines in the fourth quarter to enhance strategic focus and to further reduce costs. This principally resulted in severance costs following a headcount reduction of 46 employees and onerous lease commitments arising from a reduction in our facility and design tool requirements.

Interest and Similar Income, Net

Financial income, net, was $277,000 in 2002, compared with $462,000 in 2001, reflecting the lower interest rate environment in 2002 which impacted overall returns on cash and cash equivalents invested.

Foreign Exchange Loss

We incurred foreign exchange losses of approximately $484,000 in 2002 arising principally on euro liabilities as a result of the appreciation of the euro against the US dollar.

Provision for Income Taxes

The provision for income taxes was $1.0 million in 2002 compared with $3.3 million in 2001, and was provided for domestic and foreign tax liabilities. The reduction in the provision for income taxes reflects lower revenues and consequently lower taxable profits in 2002 compared with 2001. The provisions for income taxes for 2001 and for the first 10 months of 2002 relate to periods during which we were a wholly owned subsidiary of DSP Group.

30

Table of Contents

2001 Compared With 2000

Total Revenues

Total revenues were $25.2 million in 2001, compared with $22.9 million in 2000. The increase of 10.2% was primarily the result of an increase in revenues from new licensees of our technology and higher number of technical support agreements.

Licensing and royalty revenues accounted for 83.0% of total revenues in 2001, compared with 87.1% in 2000. Other revenues, consisting principally of technical support revenues, accounted for 17.0% of total revenues in 2001, compared with 12.9% of total revenues in 2000. Revenues from three customers accounted for 24%, 15% and 14% of total revenues in 2001. Revenues from one customer accounted for 18% of total revenues in 2000.

Licensing and Royalty Revenues

Licensing and royalty revenues were $21.0 million in 2001, compared with $20.0 million in 2000. This increase of 5.1% was primarily due to an increase in licensing revenues, which was offset by a slight decrease in royalty revenues.

Licensing Revenues increased by 9.0% to $13.7 million in 2001 from $12.6 million in 2000, primarily as a result of higher licensing fees we were able to negotiate for the licensing of certain of our products in 2001.

Unit and Prepaid Royalty Revenues were $7.3 million in 2001, compared with $7.4 million in 2000. Our royalty-paying licensees reported sales of 79.2 million units of DSP core-based chips incorporating our technology in 2001, compared with 111.3 million units in 2000. A majority of the royalties in these periods were from PineDSPCores and OakDSPCores. In 2001, one of our licensees started to ship products utilizing our TeakLite technology, and 47% of our total unit and prepaid royalties in 2001 were generated from the agreement with this TeakLite DSP core licensee, which generated higher royalty revenues than our license agreements for Pine and Oak Cores.

Other Revenues

Other revenues, consisting principally of technical support revenues, increased to $4.3 million in 2001 from $3.0 million in 2000, representing an increase of 44.8%. This growth was driven mainly by the increasing number of technical support agreements we entered into with our licensees and the broader offering of applications, services and development tools we licensed in 2001.

Geographic Revenue Analysis

In 2001, revenues generated in the Unites States represented 43.0% of total revenues, while Asia represented 28.7% and Europe, Middle East and Africa represented 28.3%. In 2000, revenues generated in the United States represented 52.2% of total revenues, while Asia represented 26.8% and Europe, Middle East and Africa represented 21.1%. The decrease in the revenues generated in the United States was primarily due to fewer licensing deals signed with U.S. companies and recognized in 2001 compared with 2000.

Cost of Revenues

Cost of revenues increased to $1.3 million in 2001 from $0.4 million in 2000. The increase was primarily due to a three-fold increase in support personnel, as our business grew and we began to provide more support to our licensees. Cost of revenues accounted for 5.0% of total revenues in 2001, compared with 1.8% in 2000. Gross profits decreased to 95.0% in 2001 from 98.2% in 2000 reflecting the increase in cost of revenues.

31

Table of Contents

Operating expenses

Total operating expenses for 2001 were $10.8 million compared with $10.1 million in 2000. This increase was due to our investment internally in developing our DSP cores licensing business. The investment resulted in a slight increase in engineering staff, facility costs and depreciation charges together with additional sales and marketing and administrative costs required to support our investment.

Research and Development Expenses, Net

Research and development expenses, net, increased by 5.4% to $5.1 million in 2001 from $4.8 million in 2000. The increase of approximately 5.0% primarily resulted from an increase in the number of engineering

personnel. Research and development expenses as a percentage of the total revenues were 20.2% in 2001, compared with 21.1% in 2000.

We receive research grants from the magnet programs of the Office of Chief of Israel. In 2001 and 2000, we recorded $542,000 and $578,000, respectively, in these research grants. We have no obligation to pay royalties on the intellectual property developed using these grants, and all monies received are non-refundable.

Sales and Marketing Expenses

Sales and marketing expenses increased to $2.9 million in 2001 from $2.5 million in 2000. The increase of approximately 18.0% was primarily due to an increase in commissions paid to our sales representatives. In addition, we incurred higher facilities and overhead costs for the services we used from DSP Group’s Japanese subsidiary, Nikon DSP K.K., which provided marketing and sales services for us in Japan, and an increase in our market data research and communications efforts. Sales and marketing expenses as a percentage of total revenues were 11.5% in 2001 and 10.8% in 2000.

General and Administrative Expenses

General and administrative expenses were $2.8 million in both 2001 and 2000. General and administrative expenses as a percentage of total revenues were 11.2% in 2001 and 12.2% in 2000.

Interest and Similar Income, Net

Financial income, net was $462,000 in 2001, compared with $322,000 in 2000. This increase of 43.5% was due to higher levels of net income from operations in the later period.

Provision for Income Taxes

The provision for income taxes was $3.3 million in 2001 compared with $3.4 million in 2000. We had an effective tax rate of 23.9% in 2001, compared with 27% in 2000. The decrease was primarily due to a lower percentage of total revenues generated in the United States, which are subject to higher tax rates than revenues earned elsewhere; revenues earned elsewhere generally benefit from Israeli tax holiday treatment and tax-exempt income status. Revenues generated in the United States represented 43.0% of total revenues in 2001, compared with 52.2% in 2000.

LIQUIDITY AND CAPITAL RESOURCES

ParthusCeva became a stand-alone business on November 1, 2002, when the separation and spin-off of the DSP cores licensing business from DSP Group and the combination with Parthus Technologies plc were effected. Immediately prior to the separation and spin-off, all of the year-end available cash from the operations of the DSP cores licensing business was transferred to DSP Group. As part of the assets contributed to us in the separation, DSP Group made a total net contribution of $45.6 million, including $7.6 million in transaction

32

Table of Contents

expenses relating to the combination. At the time of the combination, Parthus Technologies plc had net cash of $42.1 million. As of December 31, 2002, we had approximately $73.8 million in cash and cash equivalents.

Net cash used in operating activities in 2002 was $1.9 million, compared with $9.5 million of net cash provided by operating activities in 2001 and $10.6 million in 2000. The net cash outflow from operating activities in 2002 principally reflects the settlement arrangements contained in our combination agreement with Parthus, pursuant to which trade receivables and other accounts receivables and prepaid expenses together with income taxes payable prior to November 1, 2002 were settled by DSP Group. Cash generated from operating activities in 2001 and 2000 was primarily from net income, which was offset by an increase in trade receivables and movements in income tax payable. Cash flows from operating activities may vary significantly from quarter to quarter depending on the timing of our receipts and payments. As of December 31, 2002, we had outstanding transaction costs of $2.9 million and outstanding restructuring costs of $5.4 million arising from the combination with Parthus, which we expect will have an adverse impact on our operating cash flow when settled in 2003.

Cash flow from operations has been used to fund working capital requirements, as well as property and equipment expenditures, which to date have been relatively low due to the fact that our licensing business model requires no manufacturing facilities. Capital equipment purchases of computer hardware and software used in engineering development, company vehicles, furniture and fixtures amounted to approximately $860,000 in 2002, $1.5 million in 2001, and $696,000 in 2000. The high level of capital expenditures in 2001 was due to investments in new software for the design of our next generation of DSP cores.

Cash required for investments consisted of approximately $1.6 million invested in November 2002 in the design and development of digital media solutions for both wireless infrastructures and computer product applications.

Net cash provided by financing activities of $35.7 million reflects the issuance of shares and capital return of $4.3 million to DSP Group as part of the combination with Parthus on November 1, 2002.

We believe that our current cash on hand, including the amounts contributed to us by DSP Group upon our separation from DSP Group and the amounts previously held by Parthus, along with cash from operations, will provide sufficient capital to fund our operations for the next 12 months. We cannot assure you, however, that the underlying assumed levels of revenues and expenses will prove to be accurate.

The table below presents the principal categories of our contractual obligations as of December 31, 2002:

Capital lease obligations are principally on our leasehold properties located in the United States, Ireland, Israel and the United Kingdom.

Our operating lease obligations relate to licence agreements entered into for design tools of $3.8 million and obligations under motor vehicle leases of $820,000.

Purchase obligations consist of capital commitments of $364,000 and operating purchase order commitments of $620,000.

33

Table of Contents

CRITICAL ACCOUNTING POLICIES, ESTIMATES AND ASSUMPTIONS

The preparation of consolidated financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Management bases its estimates and judgments on historical experience and on other factors that are believed to be reasonable under current circumstances. Actual results may differ from these estimates if these assumptions prove to be incorrect or if conditions develop other than as assumed for purposes of such estimates. Our significant accounting policies and the basis of preparation of our consolidated financial statements are detailed in note 3 to our financial statements, which appear elsewhere in this Annual Report. The following is a brief discussion of those of our critical accounting policies that require significant estimates and judgments by management:

Revenue Recognition

Significant management judgments and estimates must be made and used in connection with the recognition of revenue in any accounting period. Material differences in the amount of revenue in any given period may result if these judgments or estimates prove to be incorrect or if management’s estimates change on the basis of development of the business or market conditions.

In recognizing revenue, we apply the provisions of Statement of Position No. 97-2, “Software Revenue Recognition,” as amended by Statement of Position No. 98-9. A portion of our revenue is derived from license agreements that entail the customization of our application IP to the customer’s specific requirements. Revenues from initial license fees for such arrangements are recognized based on the percentage to completion method over the period from signing of the license through to customer acceptance, as such IP requires significant modification or customization that takes time to complete. The percentage to completion is measured by monitoring progress using records of actual time incurred to date in the project compared to the total estimated project requirement, which corresponds to the costs related to earned revenues. Estimates of total project requirements are based on prior experience of customization, delivery and acceptance of the same or similar technology and are reviewed and updated regularly by management. After delivery, if uncertainty exists about customer acceptance of the IP, license revenue is not recognized until acceptance.

We believes that the use of the percentage of completion method is appropriate as we have the ability to make reasonably dependable estimates of the extent of progress towards completion, contract revenues and contract costs. In addition, contracts executed include provisions that clearly specify the enforceable rights regarding services to be provided and received by the parties to the contracts, the consideration to be exchanged and the manner and terms of settlement. In all cases we expect to perform our contractual obligations and our licensees are expected to satisfy their obligations under the contract.

If we do not accurately estimate the resources required or the scope of the work to be performed, or do not manage our projects properly within the planned periods of time or satisfy our obligations under the contracts, then future results may be significantly and negatively affected or losses on existing contracts may need to be recognized.

Acquired Intangibles and Goodwill

Intangible assets and goodwill arising on acquisition are capitalized and amortized to the income statement over the period during which benefits are expected to accrue, currently estimated at five years. Where events and circumstances are present which indicate that the carrying value may not be recoverable, we will recognize an impairment loss. Factors we consider important which could trigger an impairment include:

34

Table of Contents

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.

We incurred one-time non-cash charges in 2002 of $14.2 million arising in connection with the combination with Parthus and $1.6 million relating to acquired wireless design technology. The value assigned to acquired in-process R&D was determined by identifying those acquired specific in-process R&D projects that would be continued and for which:

Business Combinations

We have accounted for the combination with Parthus utilizing the purchase method of accounting, with ParthusCeva treated as the accounting acquirer. The purchase method of accounting requires the determination of the acquiring entity in all business combinations. Financial Accounting Standards Board’s (“FASB”) Statement of Accounting Standard 141 provides that all pertinent facts and circumstances should be considered. A detailed analysis of the facts and circumstances as applicable to the combination is contained in our registration statement on Form S-1 filed with the Securities and Exchange Commission on July 30, 2002, as amended (Registration Number 333-97353).

The combination also required management to estimate the fair value of the assets acquired and liabilities assumed. These estimates have been based on our business plans for the entity acquired, including redundancies, restructuring, use of assets acquired and assumptions as to the ultimate resolution of obligations assumed for which no future benefit will be received. Should the actual use of assets or resolution of obligations differ from our estimates, revisions to the estimated fair values would be required. If a change in estimate occurs after one year following the acquisition, the change would be recorded in our statement of operations.

Accounting for Stock Based Compensation

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

The Parthus options we assumed were valued by applying the Black-Scholes valuation model in accordance with FASB Interpretation No. 44 (“FIN 44”), “Accounting for Certain Transactions Involving Stock Compensation—an Interpretation of APB 25.” The calculations were made using the following assumptions: (i) a valuation date of October 31, 2002, (ii) a market share price of $1.359, which represents the fair value of our

35

Table of Contents

common stock on that date, (iii) a risk-free interest rate of 2%, (iv) volatility of 60%, (v) time to expiration of 5 years and (vi) an annual dividend rate of 0%. The calculations were made after taking into consideration the repricing of certain Parthus options by Parthus prior to the combination. The intrinsic value of unvested options of Parthus has been allocated to deferred compensation. Such deferred compensation was deducted from the fair value of the awards in determining the amount of the purchase price. The final amount of deferred compensation was also determined on the consummation date based on the closing price of our common stock on that date. The calculation of the deferred compensation amounting to $37,000 was based on the number of Parthus unvested options outstanding multiplied by the intrinsic value, which is the difference between the market price on October 31, 2002 of $1.359 and the various exercise prices. This deferred compensation was deducted from the fair value of the awards in determining the amount of the purchase price.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which addresses significant issues regarding the recognition, measurement, and reporting of costs associated with exit and disposal activities, including restructuring activities. SFAS No. 146 requires that costs associated with exit or disposal activities be recognized when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is effective for all exit or disposal activities initiated after December 31, 2002. We do not expect the adoption of SFAS No. 146 to have a material impact on our results of operations or financial position.

FACTORS 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 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 Annual 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 OUR MARKETS

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 the first half of 2003, our business could be further materially and adversely affected.

36

Table of Contents

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.

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:

Our corporate restructuring following the consummation of the combination resulted in a one-time 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.

37

Table of Contents

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.

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. 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.

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

38

Table of Contents

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

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 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, 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.

Although DSP Group is contractually obligated to provide us with 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. 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. We cannot assure you that DSP Group 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

39

Table of Contents

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.

Our historical consolidated financial statements 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 our business. Accordingly, this information does not necessarily reflect what our financial position, results of operations and cash flows would have been had our business operated as a separate, stand-alone entity during the periods presented. We have not made adjustments to the historical financial information 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 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 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 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 OUR

COMBINATION WITH PARTHUS

A number of factors could impair our ability to successfully complete the long-term integration 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. Although we have made substantial progress in integrating our businesses, we cannot assure you that such integration will be completed in the most efficient, effective and timely manner or ultimately be successful over the long-term. We may encounter future difficulties in connection with the integration of these businesses, including:

40

Table of Contents

In addition, the anticipated benefits of the combination may not be realized and its value may not 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 have written off substantial acquired in-process research and development expenses, which may adversely affect our stock price.

The amount of excess cost attributable to in-process research and development of Parthus was approximately $14.2 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 expensed the value of such in-process research and development. This amount was recorded as part of our research and development expense in the quarter ended December 31, 2002. This write-off, which was non-cash charge, reduced our net income, negatively impacted our results of operations and reduced our earnings per share for that fiscal quarter.

ADDITIONAL RISKS RELATING TO OUR BUSINESS

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 and employees are located in Dublin, Ireland and Herzeliya, Israel. 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 not be successful in licensing integrated, system-level solutions.

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

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.

41

Table of Contents

We may seek to expand our business through acquisitions that could result in diversion of resources and extra 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. 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 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.

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. 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.

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. 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. 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.

Our business depends on OEMs and their suppliers 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 our business and results of operations due to the delay or discontinuance of orders for products containing our IP, especially our DSP cores, until those necessary components are available.

42

Table of Contents

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

Historically a substantial portion of the revenues from the licensing of our DSP cores has been derived in any period from a relatively small number of 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 is to broaden 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 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 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.

Part of our revenues is generated from the sale of silicon chips embodying our intellectual property, which we refer to as Hard IP. Any interruption in our relationship with 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:

ADDITIONAL RISKS RELATING TO OUR

INTERNATIONAL OPERATIONS

The Israeli tax benefits that we currently receive and the government programs in which we participate require us to meet 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.

Our corporate tax rate 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 taxable income of the business of Parthus historically has 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 our Irish

43

Table of Contents

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.