CEVA INC - Annual Report: 2002 (Form 10-K)

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

FOR ANNUAL OR TRANSITION REPORTS PURSUANT TO

SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2002

or

Commission File Number 000-49842

PARTHUSCEVA, INC.

(Exact name of Registrant as specified in its charter)

2033 Gateway Place, Suite 150

San Jose, California 95110-1002

(Address of principal executive offices, including Zip Code)

(408) 514-2900

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.001 per share

(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ¨ No x

The aggregate market value of voting stock held by non-affiliates of the Registrant as of March 26, 2002, was approximately $40,700,000 (based upon the closing price for shares of the Registrant’s common stock of $3.03, as reported by The NASDAQ National Market on that date). Shares of common stock held by each officer, director and holder of 5% or more of the outstanding common stock of the Registrant have been excluded from this calculation in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of March 26, 2003, there were 18,079,119 shares of Common Stock outstanding.

DOCUMENT INCORPORATED BY REFERENCE:

Portions of the registrant’s definitive Proxy Statement for its Annual Meeting of Stockholders for the year ended December 31, 2002, which will be filed with Securities and Exchange Commission within 120 days after the end of the registrant’s fiscal year, are incorporated by reference into Part III hereof.

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ANNUAL REPORT ON FORM 10-K

YEAR ENDED DECEMBER 31, 2002

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Our website address is www.parthusceva.com. Copies of our filings with the Securities and Exchange Commission are made available on our website as soon as practicable after filing.

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FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

This Annual Report includes forward-looking statements that are subject to a number of risks and uncertainties. All statements, other than statements of historical facts, included in this Annual Report regarding our strategy, future operations, financial position, estimated revenues, projected costs, prospects, plans, and objectives of management are forward-looking statements. The words “will”, “believe”, “anticipate”, “intend”, “estimate”, “expect”, “project”, and similar expressions are intended to identify forward-looking statements, although not all forward- looking statements in this report contain these identifying words. We cannot guarantee future results, levels of activity, performance or achievements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or strategic alliances. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including the risks described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors That Could Affect Our Operating Results” and elsewhere in this Annual Report. We do not assume any obligations to update any of the forward-looking statements we make.

This report contains market data prepared by third parties, including Gartner-Dataquest and Forward Concepts. Actual market results may differ from the projections of such organizations.

*****

ParthusCeva was formed through the combination of Parthus Technologies plc and ParthusCeva (formerly known as Ceva, Inc.) on November 1, 2002. Unless otherwise indicated, the financial information in this annual report includes the results of the business of Parthus only for the period following the combination on November 1, 2002.

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PART I

ITEM 1.    BUSINESS

Overview

ParthusCeva licenses to semiconductor companies and electronic equipment manufacturers complete, integrated intellectual property solutions that enable a wide variety of electronic devices. Our programmable DSP cores and application-level IP platforms power wireless devices, handheld devices, consumer electronics products, GPS devices, consumer audio products and automotive applications. ParthusCeva was formed in November 2002 through the combination of ParthusCeva (formerly known as Ceva), the former DSP cores licensing business of DSP Group, founded in 1991, and Parthus Technologies plc, a provider of platform-level IP for the consumer electronics market, founded in 1993. Our company was incorporated in Delaware in 1999.

A programmable DSP core is a special-purpose, software-controlled processor that, through complex mathematical calculations, analyzes, manipulates and enhances digital voice, audio and video signals. These chips are used in a wide variety of electronic devices, including digital cellular telephones, modems, disk drive controllers, MP3 players, voice-over packet products and digital cameras, and are critical to the performance of the electronic products in which they are used. A DSP core-based sub-system incorporates additional hardware blocks required as interfaces from the DSP core for the overall system.

Our portfolio of IP platforms spans broadband and local area wireless connectivity as well as key application IP including multimedia, location and smartphone/handheld technologies. The intellectual property we license can take the form of schematics and designs for silicon chips and circuitry and software to perform particular functions on those chips. In addition, we also sell finished modules (which we refer to as Hard IP).

We develop our integrated portfolio of open-licensable IP in three distinct areas: DSP cores, system-on-a-chip sub-systems and application-specific platform IP.

DSP Cores—ParthusCeva is the leading licensor of DSP cores with 69% market share in 2001, according to Gartner/Dataquest. Our family of SmartCores is targeted at high-volume wireless, multimedia, computing and telecommunication markets. We offer PalmDSPCore, Teak, TeakLite, and the recently introduced CedarDSPCore, and continue to earn royalties on our PineDSPCore and OakDSPCore. All are soft cores and thus can be manufactured at any foundry and are all complemented by a full set of development tools and software from third-party developers.

System-on-a-Chip Sub-Systems—ParthusCeva’s SoC offering is an integrated, DSP core-based subsystem incorporating a large set of system interfaces and peripheral components, together with a full set of software and hardware development tools. Seamlessly interfacing with any central processing unit (CPU), ParthusCeva’s SoC significantly lowers the complexity, cost of development, and time-to-market for SoC designs.

Application-specific Platforms:    ParthusCeva’s application-specific platforms consist of full, verified IP solutions in both hardware and software, pre-integrated with industry-standard processors (typically ParthusCeva’s DSP and ARM’s CPU). ParthusCeva’s comprehensive platform IP targets two key market segments:

Industry Background

Semiconductors, the key building blocks of electronic products, are devices that permit the controlled flow of electronic signals. An integrated circuit is a semiconductor that combines a number of individual electronic

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circuits, each of which performs a particular function. Continuous improvements in semiconductor design have led to smaller, more complex integrated circuits that perform a wide range of functions. As the performance of semiconductors has improved and their size, cost, and power consumption have decreased, they have been used in an increasing number of applications, including telecommunications systems, automotive electronics, audio and video devices and a range of other consumer electronics products. Rising consumer expectations have increased the demand for more frequent introductions of high-performance semiconductors with lower power consumption and enhanced functionality.

Systems-on-a-Chip

Semiconductor manufacturing processes have advanced significantly in recent years to allow a substantial increase in the number of circuits placed on a single chip. At the same time, requirements for increased product functionality, higher performance and lower cost have driven demand for such system-level integration. Through this integration, complete electronic systems containing both analog and digital functions are combined on a single silicon chip, known as a system-on-a-chip. A typical system-on-a-chip incorporates a processor (such as a DSP core or a general purpose processor), memory, input/output devices and other specific components, as well as software.

The increased complexity of system-on-a-chip design and manufacturing requires a high level of design resources to fully capitalize on the improvements in semiconductor manufacturing technology and to maximize functionality. Designers’ capabilities and semiconductor companies’ internal design resources have not kept pace with the advances in this technology. As a result, some chip manufacturers are facing a growing “design gap” between their increasing manufacturing potential and needs and their limited chip design capabilities.

Semiconductor Intellectual Property

To address this “design gap,” many semiconductor designers and manufacturers are increasingly choosing to license proven intellectual property components, such as processor cores and application-specific IP, from third parties, rather than to develop those technologies internally. By relying on third parties for the most advanced designs of specialized components, system-on-a-chip designers and manufacturers can create differentiated products while reducing their development costs, complexity, risk and time to market.

The creation of licensable, re-useable design components, which we refer to as third-party semiconductor intellectual property (SIP), is a relatively new and emerging trend in the semiconductor market. According to Gartner-Dataquest, the market for semiconductor intellectual property was $892 million in 2001, representing a 25% year-on-year growth from 2000.

Semiconductor intellectual property providers have traditionally delivered intellectual property blocks only for functions and only for individual components with a relatively narrow function, referred to as block-level IP. The continuing evolution of electronic products has created significant demand for semiconductor intellectual property providers that add greater value by offering complete digital systems, as well as software, which we refer to as platform-level IP. We believe that this approach provides semiconductor companies and electronic product manufacturers with several key advantages, including improved time to market and a reduction in the risks, costs and complexities in bringing new products and technologies to market.

Digital Signal Processor Cores

A key piece of semiconductor IP in the computer chips driving many electronic products is the DSP core, which processes the digital data derived from converted analog signals. Once a signal (such as the human voice) has been converted to digital form, a DSP core is used to analyze, manipulate and enhance the data. The signal can then be transmitted over a network (such as the cellular telephone network), compressed and stored (such as in answering machines) or recognized as a command (such as through voice recognition). Digital signal

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processing is used in many fields, including telecommunications, speech and music processing, imaging, medicine and seismology. As the number of electronic devices that require the processing of digital data has grown, so has the demand for reliable DSP cores.

A DSP-based system-on-a-chip includes several components. The DSP core controls the processing of the chip and uses mathematical calculations to process information. Other parts of the system-on-a-chip include data memory components, which host the data before and after it is processed by the DSP core, and the program memory component, which stores the software used to operate the DSP core. A chip designer may add its own specific proprietary technology to provide differentiated functionality (such as special functions and input/output electronics, which control the transfer of data between the DSP core and other electronic devices that are connected to the chip).

Programmable DSP cores are instructed by software programs to process ultra-fast mathematical calculations, including addition, subtraction and multiplication. The math-intensive signal processing performed by the DSP core is generally used for data compression, error correction, voice recognition and security.

A programmable DSP-based design allows the same chip to be programmed and reprogrammed with different software and used for several generations and different applications of products, which reduces the internal development costs for manufacturers and allows them to differentiate their products through varying the software functionality. In addition, a programmable approach allows for “field upgrades” of the technology, such as replacement of software through remote downloading, rather than physical removal and replacement of the entire chip.

According to Forward Concepts, a market research firm, worldwide programmable DSP chip shipments increased to $6.1 billion in 2000 and then decreased to $4.3 billion in 2001, before increasing to $4.9 billion in 2002. Forward Concepts predicts that this market will grow at a compound annual rate of 24% from 2002 to 2007.

Licensable DSP cores are typically licensed to semiconductor companies or directly to system OEMs. By using licensable DSP cores, manufacturers of ASSPs (application-specific standard products, which are off-the-shelf chips targeted to a specific type of application for a broad range of system OEMs) and ASICs (application-specific integrated circuits, which are chips that are customized to meet a specific customer’s needs) have multiple sources of DSP technology, thereby enabling competition among their chip suppliers as well as a wider variety of more differentiated products.

The manufacturers of DSP-based system-on-a-chip technologies face a “make or buy” dilemma—whether to develop a given DSP chip design or to license it from a third party. Internal development of a DSP core requires considerable design resources and specialization, which many semiconductor companies do not have. In today’s rapidly evolving markets, it is usually not cost-effective for most semiconductor companies and designers to devote the engineering resources necessary to develop complicated components such as a programmable DSP core. Therefore, companies may concentrate on the integration of software, hardware and embedded memory, and rely on licensing other intellectual property, such as DSP cores, from third parties.

Licensing also offers a substantial time-to-market advantage, which in most cases is a crucial factor for a manufacturer’s competitive market positioning. Further, the licensee can choose the method and source of chip production. This is a significant advantage for the licensee, as a licensed chip can easily be produced by several manufacturers, eliminating its dependence upon a single source of chip production.

End Markets

Third-party semiconductor intellectual property is licensed and deployed by semiconductor companies and electronic equipment manufacturers serving a wide variety of high-volume end markets. These include the markets for:

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Products such as these require state-of-the-art functionality, but generally must also be easy to use and convenient in terms of both size and battery life. Providers of semiconductor intellectual property help address these requirements by focusing on integrated circuit technology that:

The ParthusCeva Solution

We offer complete, open, integrated solutions for semiconductor manufacturers and OEMs, enabling wireless and wireline communications, applications and multimedia through our DSP processor cores and platform-level IP. Our IP licensing business model, including royalties, offers a scalable business with multiple revenue streams and solid gross margins.

Our designs of programmable DSP cores and platform-level IP are used in a wide variety of electronic devices, including digital cellular telephones, modems, disk drive controllers, MP3 players, personal computers, voice-over packet products and digital cameras, and are critical to the performance of the electronic products in which they are used. Our designs are independent of specific semiconductor manufacturing processes, and can therefore be used by a wide variety of customers. We market our technology and designs as well as a wide array of software and hardware development tools and technical support services. We license our DSP cores and platforms to leading semiconductor companies throughout the world. These companies incorporate our designs into application-specific chips or custom-designed chips that they manufacture, market and sell to OEMs of a variety of electronic products. We also license our designs to OEMs directly.

The key benefits we offer our licensees include:

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Strategy

We believe that our recent combination with Parthus has positioned us to address two of the major converging trends in our industry. First, we believe that our industry is moving towards open-standard processor architectures and away from traditional proprietary solutions. Second, we believe that increased semiconductor product complexity and demands for reduced time-to-market have led more companies to decide to license complete platform-level IP solutions, rather than licensing individual components from multiple suppliers. ParthusCeva combines the expertise of a provider of DSP architectures with the expertise of a supplier of complete platform-level IP solutions. We believe ParthusCeva is well positioned to take full advantage of these major industry shifts as market conditions improve and to become a leading supplier of open-standard DSP solutions to the industry. To meet this goal we intend to:

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In addition, we have and seek to expand relationships with companies that offer complementary technologies for designing system-on-a-chip applications based on our DSP core designs. We believe that these relationships will increase the markets for our products.

Products and Technology

SmartCores

A programmable DSP core is a special purpose, software-controlled processor that, through complex mathematical calculations, analyzes, manipulates and enhances digital voice, audio and video signals. The programmable DSP cores we design are used as the central processors in semiconductor chips made for specific applications. These chips are used in a wide variety of electronic devices, including digital cellular telephones,

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modems, disk drive controllers, MP3 players, voice-over packet products and digital cameras, and are critical to the performance of the electronic products in which they are used.

Our SmartCores family of cores currently includes TeakLite, Teak, PalmDSPCore and the recently introduced CedarDSPCore. In addition, PineDSPCore and OakDSPCore still generate royalty revenues, although we no longer actively license them. By offering a range of performance, price and power consumption balances, our cores family addresses a wide range of applications, from low-end, high-volume applications, such as digital answering machines, disk drive controllers, low-speed modems and VoIP terminals, to high-performance applications such as 3G cellular communication devices, broadband modems, consumer multimedia and VoIP gateways. Our current offerings are:

Our designs are independent of specific semiconductor manufacturing processes, and can therefore be used by a wide variety of customers. The DSP cores we design are appropriate for use in both current and emerging

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applications requiring digital signal processing. We market our technology and designs as well as a wide array of software development tools and technical support services. We believe the following to be the key benefits of our DSP cores offerings:

Applications for our DSP Cores

Solutions using DSP cores technology are currently used in a wide variety of applications. We focus our efforts on the following selected high-volume, high-growth markets and applications:

Cellular telephone handsets.    The cellular handset market is currently the largest market for DSP cores technology. Cellular telephones use DSP cores for voice compression, by which the human voice is compressed after being digitized, and channel coding, by which DSP techniques are used to encode the information. Our DSP cores are currently used in all types of digital cellular telephones, and we believe they will continue to be used in the next generations of cellular telephones (2.5G and 3G). Many of these next-generation phones will incorporate video, audio and data features in addition to voice, extending the use of advanced DSP cores in their designs. Our OakDSPCore and TeakLite cores are widely used in current cellular telephones, and our Teak and Cedar offerings target the next generation of cellular telephones.

Optical and magnetic disk drives.    A disk drive controller is the chip that controls the mechanism that reads and writes data from a memory disk platter. The disk drive controller market is characterized by high volume and extreme price sensitivity. Programmable DSP cores are designed to meet the requirements of this market by providing flexibility in the adoption of advanced search algorithms within the controller, resulting in the capability to support higher density, lower cost disks. We believe that the compact code size, heat dissipation characteristics and flexibility of our PineDSPCore, OakDSPCore and TeakLite offerings are particularly well suited to this cost competitive market.

Digital Subscriber Line applications.    Digital subscriber line (DSL) technology significantly increases the bandwidth of copper telephone lines for data transmission. The use of DSL-related applications is driven by the increasing demand for high-speed connectivity to the Internet. A programmable DSP core is used primarily to

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improve the quality of the signals received through the telephone line. By offering flexibility across multiple DSL standards, our programmable DSP solution is designed to allow a customer to re-use the same chip for different DSL markets. In addition, a programmable DSP solution allows for field upgrades of the technology as standards evolve or are enhanced. We believe our TeakLite, Teak and PalmDSPCore offerings are well suited to address the different cost and performance requirements of multiple DSL standards.

Voice-over packet network applications. Voice-over packet network technology enables the transmission of voice, along with video and data, over the same infrastructure in the form of small units of digital information (“packets”). This technology allows telecommunications operators to offer higher-value, unified services that combine fast data access, cheap voice rates and advanced voice and fax services to their customers. DSP technology is a key element in voice-over packet network applications.

We believe that our SmartCores family (in particular our TeakLite, Teak and PalmDSPCore) is an attractive solution for these applications because they provide a low-power, cost-effective, programmable platform for the local area network (LAN) and packet-based telephony markets. Our Teak and TeakLite cores are designed to provide a low power consumption, low-cost solution for small to middle size residential gateways and integrated accesses devices. Our PalmDSPCore is designed to provide higher performance and can be embedded in multi-channel, multi-service central office gateways, where channel density and heat dissipation are the most important factors.

Consumer audio applications.    Consumer electronics constitute a large market for DSP cores technology. Digital versatile disc (DVD) players and digital set-top boxes require DSP cores for their high fidelity audio features. In addition, recent improvements in the speed of Internet connections have provided the ability to easily download music from the Internet. This has created a significant market for DSP-based portable players (such as MP3 players) that decode high quality audio. Furthermore, we expect demand for digital audio to expand to the home audio market in the future. DSP cores technology is used to decode the compressed data being downloaded from the Internet or retrieved from the on–board memory or disk that stores the high-fidelity audio data. DSP cores technology may also be used in the future to enhance the security of digital stored media by preventing unauthorized copies or downloads of audio and visual data. Our technology can be used in low-power, price-sensitive semiconductor products targeted specifically at the portable audio market. In addition, our 24-bit PalmDSPCore can easily be used for current audio compression algorithms.

Digital still cameras.    Digital still cameras are a relatively new, yet fast-growing, market. Digital still cameras use a DSP chip to adjust the contrast and detail of the image captured by the lens and to compress the digital data for storage on the memory card. Our OakDSPCore, TeakLite and Teak offerings provide a low-power, cost-effective and programmable platform for this application.

System-on-a-chip subsystems

We offer XpertTeak, a highly integrated, low-power Teak core-based DSP sub-system for system-on-a-chip designs. This subsystem platform incorporates a large set of system interface peripheral components, together with a full set of software and hardware development tools. Xpert has a seamless interface to any CPU, which significantly lowers the complexity, cost of development, and time-to-market for SoC designs. In addition to the Teak core, it incorporates advanced peripherals and a system interface set, such as direct memory accesses (DMA) controllers, timers, power consumption management units, serial ports and CPU interfaces. Delivered as a pre-integrated and verified solution, it enables OEMs (Original Equipment Manufacturers) and ODMs (Original Design Manufacturers) to significantly reduce development time, risk and cost of GSM/GPRS base-band chips for efficient development of handsets.

Application-Specific Platforms

The continuing evolution of the consumer electronics market has created significant demand for semiconductor intellectual property providers that can add greater value by delivering the complete system

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solutions that combine mixed-signal and DSP cores technology, as well as related software—which we refer to as platform-level IP. This approach permits our customers to introduce feature-rich products while simultaneously minimizing their development cost, risk, complexity and time to market. We also offer our technology in discrete building blocks for specific functions that our customers use to develop complete systems and products.

Our platforms are licensed and deployed by some of the world’s largest semiconductor companies and OEMs in wireless communications devices, multimedia appliances, GPS devices, portable electronic products and other consumer electronic devices. Our current platforms include:

Each of the IP platforms described above has been developed for a specific end-market. They all adhere, however, to the specifications of our open, flexible and highly power-efficient architecture, which allows the rapid integration of our platforms and various third-party intellectual property into a single integrated circuit. Our solutions are based on a substantial portfolio of intellectual property, including building blocks for analog integrated circuits, digital integrated circuits, systems software and other functions.

In addition, in February 2003 we entered into an agreement with Intersil Corporation pursuant to which we will provide our wireless IP expertise as well as sales, marketing and customer support in licensing Intersil’s 802.11 PRISM platform (consisting of a baseband processor and medium access controller). PRISM solutions are the leading deployed 802.11 WLAN technology. In addition, Intersil will supply radio front-end products and reference designs—delivering a complete WLAN product solution to licensees. This technology is designed to enable new, wireless-capable products that will serve growing consumer demand for wireless connectivity wherever they live, work or play.

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    Development and Integration

We have significant expertise in the design and development of high-performance digital, analog, mixed-signal and software technology for our customers. Our development services include complete development activities, such as development of specific systems or technology on a contract basis. Our policy is to retain ownership of, or rights to use, the intellectual property we develop under contract. Our integration services include consulting services to supplement or facilitate the integration of our licensed intellectual property and that of third parties into a customer’s product. In performing either development or integration services, we focus on designing comprehensive systems tailored to specific requirements, making the key design decisions and tradeoffs required to create the most competitive system for the customer while shortening their time-to-market.

We support products through manufacturing and volume production to meet customer requirements. Our computer aided design (CAD) team develops in-house design flows. The team provides each design group working on a development project a template identifying which CAD tools to use to meet its specific design goals. The team also writes software to assure that the identified tools can be used on an integrated and seamless basis. In addition, a team of layout engineers with experience in digital, analog, radio frequency and system-on-a-chip layout processes determines the physical layout requirements for each project. We also have an in-house capacity to test the performance of our intellectual property as embodied in silicon against a variety of parameters. This capability enables us to perform complete system-level product development combining our integrated circuit and software intellectual property.

Customers

We have licensed our DSP core designs and IP platforms to leading semiconductor companies throughout the world. These companies incorporate our cores and platforms into application-specific chips or custom-designed chips that they manufacture, market and sell to OEMs of a variety of electronic products. We also license our core designs and platforms to OEMs directly. To date, we have entered into more than 140 license agreements with more than 100 licensees, including Atmel, Cirrus Logic, Fujitsu, Hitachi, Infineon Technologies, Kawasaki, LSI Logic, Maxim, Mitsubishi, Motorola, National Semiconductor, NEC, nVidia, Oki, Philips Semiconductors, Prairiecom, Samsung, Seiko-Epson, Sharp Microelectronics, Sony, STMicroelectronics and Texas Instruments. More than 100 of our current license agreements have royalty components, of which approximately 10 have produced royalty revenues to date. Two customers accounted for 12.6% and 10.6% of our total revenues in 2002, respectively. The identity of our greater-than-10% customers varies from period to period, depending on when license agreements are signed, and we do not believe that we are materially dependent on any one or any small number of licensees.

Sales, Marketing and Technical Support

We license DSP cores and complete platform solutions to perform specific application functions. These solutions typically incorporate both intellectual property to be embodied on a silicon chip and intellectual property in the form of software. On occasion, we enter into portfolio licensing agreements whereby a customer licenses multiple platforms. By entering into a portfolio license, our customers have access to multiple technology platforms in our portfolio, enabling them to obtain from one supplier all of the IP required to build next-generation electronic devices. We believe that portfolio license arrangements will generally be larger than other license agreements and will allow us to develop close, strategic long-term relationships with our portfolio license customers. Although the precise terms of each of our contracts vary from licensee to licensee, they generally require payment of an initial license fee and ongoing per-unit royalties. Under the terms of these license agreements, we may also provide integration services to help accelerate the customer’s product development cycle. In addition, we enter into collaborative agreements for the sale or distribution of our products where the third party can provide additional access to special expertise or potential customers.

Maintaining close relationships with our customers is a core part of our strategy. We typically launch each new DSP core, platform or platform upgrade with a signed license agreement with a blue-chip customer, which

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helps ensure that we are clearly focused on viable applications that meet broad industry needs. Strengthening these relationships is a significant part of our strategy. It allows us to create a roadmap for the future development of existing cores and platforms, and it helps us to anticipate the next potential applications for the market. We seek to use these relationships to deliver new products in a faster time to market through our research and development base.

    Sales Force

The leaders within our targeted markets include a small number of very large organizations. We therefore believe it is essential to maintain a comprehensive and capable direct sales and marketing organization focused on these market leaders. Towards this end, we have located our headquarters in San Jose, California and have established a direct sales force. Each of our sales offices is closely aligned with key customer accounts and supported by a focused central marketing team.

Our sales and marketing force numbers approximately 25 people. We have a total of ten sales offices, located in San Jose, California; Nashua, New Hampshire; Austin, Texas; Dublin, Ireland; Herzeliya, Israel; Hong Kong, China; Tokyo, Japan; Seoul, Korea; Northampton, England and Sophia Antipolis, France. We also have an independent sales representative covering Taiwan and China. In addition, we systematically conduct sales prospecting from our principal offices, and the sales leads are distributed to our regional offices and representatives.

    Marketing

We use a variety of marketing initiatives to stimulate demand and brand awareness in our target markets. These marketing efforts include presenting at key industry trade shows and conferences, distributing global press releases, organizing customer seminars, posting information on our website, issuing periodic newsletters and producing marketing materials. In addition, we have established co-marketing programs with our alliance partners and customers.

Our marketing and business development department participates in refining our intellectual property offerings to address specific new market needs and to use our brand name and close relationships to reach and create demand within system OEMs and semiconductor companies.

Our marketing department is responsible for defining the road map for our next-generation DSP cores and IP platforms and their key features. In defining the road map, the marketing department coordinates with our sales and research and development departments to take into consideration future trends in semiconductor technology, including DSP cores architectures and digital signal processing algorithms and competitive positioning of our products. Our marketing department also runs competitive analyses to help us maintain our competitive position.

Technical Support

We offer technical support services through our offices in Israel, the United Kingdom and the United States, as well as through the Japanese subsidiary of DSP Group, which provides us with dedicated employees to provide various technical support services to our customers. Each of our independent sales representatives in Southeast Asia also maintains engineers who provide technical support services for our products. Our technical support services include:

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We believe that our technical support services are key factors in our licensees’ ability to embed our cores and platforms in their designs and products. Our technology is highly complex, combining a sophisticated DSP cores architecture, integrated circuit designs and development tools. Effective customer support is critical in helping our customers implement our solutions and helps to shorten the time to market for their applications. Our support organization is made up of experienced engineers and professional support personnel. We conduct detailed technical training for our licensees and their customers and visit our licensees on a regular basis to closely track the implementation of our technology.

Research and Development

Our future competitive position will largely depend on our ability to develop new generations of DSP cores and IP platforms in a timely manner to meet the evolving and rapidly changing requirements of our target markets. Towards this end, we intend to maintain significant research and development teams dedicated to developing new technological solutions and new versions of our existing technology.

Research and Development Staff and Expenses

Our research and development team consists of approximately 180 employees working in six development centers located in Ireland, Israel and the United Kingdom. This team consists of engineers who possess significant experience in developing advanced programmable DSP cores and application platforms. We believe that our strengths are in our expertise in:

Our research and development expenses, net of related non-refundable research grants, were $8.4 million in 2002, $5.1 million in 2001, and $4.8 million in 2000. Giving effect to the combination with Parthus for the entire year, our pro forma combined research and development expenses for 2002 would have been approximately $27.6 million.

Research and Development Focus

Our research and development resources are focused in the areas of DSP and application signal processing, mixed signal and wireline communications IP and wireless communications. We seek to deliver further innovative solutions that offer clear benefits to our customers in the areas of:

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In particular, we concentrate our efforts on product improvement, next-generation product evolution and future product revolution:

Our research and development projects are initiated based on new technology trends, emerging applications and inputs from customers and our sales and marketing personnel. We have a budgeting process in which we assess each project, establish financial goals and targets and assign resources. We monitor our projects through a variety of processes. We have frequent staff meetings to update our staff on progress and share information. We also conduct regular project reviews with the participation of management, sales, marketing and customer support. In these meetings, we review a number of aspects of the project including human, financial and technical resources used and required in the future, achievement of milestones and problems encountered. In addition, we re-evaluate the project in light of the initial definition and current market conditions.

We are involved in research programs with a number of university and independent research groups worldwide. These include both student sponsorships at undergraduate, masters and doctorate levels, and joint research programs. In addition, a small number of our staff work one day per week at affiliated academic institutions, providing a strong link to the faculty and student bodies. We also encourage our research and development personnel to maintain active roles in the various international organizations that develop and maintain standards in the electronics and related industries. This involvement allows us to influence the development of new standards; keeps us informed as to important new developments regarding standards; and allows us to demonstrate our expertise to existing and potential customers who also participate in these standards-setting bodies.

Proprietary Rights

Our success and ability to compete are dependent on our ability to develop and maintain the proprietary aspects of our intellectual property and to operate without infringing the proprietary rights of others. We rely on a combination of patent, trademark, trade secret and copyright laws and contractual restrictions to protect the proprietary aspects of our technology. These legal protections afford only limited protection of our technology. We also seek to limit disclosure of our intellectual property and trade secrets by requiring employees and consultants with access to our proprietary information to execute confidentiality agreements with us and by restricting access to our source code and other intellectual property. Due to rapid technological change, we believe that factors such as the technological and creative skills of our personnel, new product developments and enhancements to existing products are more important than specific legal protections of our technology in establishing and maintaining a technology leadership position.

We have an active program to protect our proprietary technology through the filing of patents. We hold five U.S. patents related to our DSP cores technology, with expiration dates between 2013 and 2019, and have 15 patent applications related to this technology pending in the United States, 9 pending in Israel, seven pending in Japan, seven pending in Europe and four pending in South Korea. We hold 21 U.S. patents related to our application platforms technology, with expiration dates between 2011 and 2020, and 10 non-U.S. patents on

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various aspects of this technology. We also have 34 patent applications pending in the United States relating to our application platforms technology and an additional 11 pending in Ireland, the United Kingdom and other jurisdictions.

We actively pursue foreign patent protection in other countries where we feel it is prudent to do so. Our policy is to apply for patents or for other appropriate statutory protection when we develop valuable new or improved technology. The status of patents involves complex legal and factual questions, and the breadth of claims allowed is uncertain. Accordingly, we cannot assure you that any patent application filed by us will result in a patent being issued, or that our issued patents, and any patents that may be issued in the future, will afford adequate protection against competitors with similar technology; nor can we provide assurance that patents issued to us will not be infringed or that others will not design around our technology. In addition, the laws of certain countries in which our products are or may be developed, manufactured or sold may not protect our products and intellectual property rights to the same extent as the laws of the United States. We can provide no assurance that our pending patent applications or any future applications will be approved or will not be challenged by third parties, that any issued patents will effectively protect our technology, or that patents held by third parties will not have an adverse effect on our ability to do business.

The semiconductor industry is characterized by frequent litigation regarding patent and other intellectual property rights. Questions of infringement in the semiconductor field involve highly technical and subjective analyses. Litigation may in the future be necessary to enforce our patents and other intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. We cannot assure you that we would be able to prevail in any such litigation, or be able to devote the financial resources required to bring such litigation to a successful conclusion.

In any potential dispute involving our patents or other intellectual property, our licensees could also become the targets of litigation. We are generally bound to indemnify licensees under the terms of our license agreements. Although our indemnification obligations are generally subject to a maximum amount, these obligations could nevertheless result in substantial expenses. In addition to the time and expense required for us to indemnify our licensees, a licensee’s development, marketing and sale of products embodying our solutions could be severely disrupted or shut down as a result of litigation.

We also rely on trademark, copyright and trade secret laws to protect our intellectual property. PalmDSPcore, PineDSPcore, OakDSPcore, OCEM, TeakDSPcore, Pine, Teak and Teaklite are United States registered trademarks of ParthusCeva or its affiliates. Parthus, the Parthus logo and BlueStream are European Community trademarks of ParthusCeva or its affiliates. The registration of the following trademarks is pending in the United States: ParthusCeva, the ParthusCeva logo, SmartCores, Assyst, CedarDSPcore, Parthus, the Parthus logo, MediaStream, BlueStream, PLLXpert and NavStream. Application for the following trademarks is pending in other jurisdictions: ParthusCeva, the ParthusCeva logo, SmartCores, CedarDSPcore, Parthus, the Parthus logo, MediaStream, InfoStream, BlueStream, PLLXpert and NavStream. The following trademarks are in use: PalmASSYST, PINE ASSYST SIMULATOR, XpertDSP, XpertPalm, OpenKey, DSCKey, VoPKey, EDP, SmartCores Enabled, CamStream, VoPStream, PDKit, ODKit, TLDKit, TDKit and ChannelStream.

Competition

We believe that we are positioned to offer one of the most comprehensive offerings of DSP cores and application-specific platforms. Nevertheless, the markets we serve are highly competitive and are characterized by rapid technological change, especially with respect to wireless, telecommunications and multimedia applications. These trends lead to frequent product introductions, short product life-cycles and increased product capabilities, typically representing significant performance, power consumption and cost improvements in each new generation of products.

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DSP Cores

We compete with other suppliers of licensed programmable DSP cores and with suppliers of other DSP solutions. We believe that the principal competitive elements of a programmable DSP-based system are processor performance, overall system cost, power consumption, flexibility, reliability, software availability, ease of implementation, customer support and name recognition.

The market is dominated by large, fully integrated semiconductor companies that have significant brand recognition, a large installed base and a large network of support and field application engineers. We face direct and indirect competition from:

We face direct competition mainly from various private intellectual property companies such as 3DSP and StarCore, a venture formed by Infineon Technologies, Agere and Motorola. In addition, some large chip manufacturing companies such as LSI Logic make their proprietary DSP technology available for license to create a second source for their technology.

In recent years, we have also faced competition from companies that offer microcontroller/microprocessor intellectual property. These companies’ products are used for control and system functions in various applications, including personal digital assistants and video games. Embedded systems typically incorporate both microprocessors responsible for system management and a programmable DSP that is responsible for communication and video/audio/voice compression. Recently, companies such as ARC, ARM Holdings, MIPS, and Tensilica have added a DSP extension to their products in addition to the microcontroller functions, which may successfully compete with our designs in applications that involve low to moderate DSP performance requirements.

With respect to certain large potential customers, we also compete with their internal engineering teams supplying programmable DSP cores, who may design products for use by other divisions internally, rather than licensing our products. These companies, which include Fujitsu, NEC and Philips, both license our designs for some applications and use their own proprietary cores for other applications. In the future, such companies may choose to license their proprietary DSP cores to third parties and, as a result, become direct competitors.

We also compete indirectly with several general purpose programmable DSP semiconductor companies, such as Agere Systems, Analog Devices, Motorola and Texas Instruments. These companies have proprietary chip technologies that can be accessed only as part of their semiconductor products, while our technology is licensed to multiple vendors. OEMs may prefer to buy general purpose chips from large, established semiconductor companies rather than license our products. In addition, the general purpose semiconductor companies are major competitors of semiconductor companies that license our technologies. It is also possible that in the future these DSP semiconductor companies may choose to license their proprietary DSP cores to third parties and compete directly with us.

Our SmartCores architecture is an independent DSP technology licensed to other companies, which we make available together with a full package of design tools, technical support and tightly coupled application IP. We believe that designs using our SmartCores architecture offer high performance along with small memory size and low-power consumption. In addition, our experience in designing and licensing programmable DSP cores can help semiconductor companies and system OEMs to create a competitive system-on-a-chip solution that takes advantage of our licensees’ proprietary intellectual property as well as ours.

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Application-specific Platforms

Because of our complete platform approach and our strong resources in key areas such as mixed-signal technology, we believe that we are extremely competitive in delivering complete solutions that meet the requirements of our customers. In addition, we believe that the difficulty of attracting an adequate number of qualified technical staff, particularly in the areas of analog and mixed signal technology, coupled with the difficulty of combining know-how across the range of technologies required to provide a complete solution in this market area, present substantial barriers to entry for new entrants into this area. Other important competitive factors include price, product quality, design cycle time, reliability, performance, customer support, name recognition and reputation and financial strength.

Given our reliance on relationships with a number of leading companies in the semiconductor and electronics industry, our competitive position is dependent on the competitive positions of those companies. In addition, the companies with whom we have relationships do not license our intellectual property exclusively, and several of them also design, develop, manufacture and market products based on their own intellectual property or on other third-party intellectual property. They therefore often compete with each other and with us in various applications.

We compete with a variety of companies, ranging from smaller, niche semiconductor design companies to large semiconductor manufacturers and OEMs, many of whom are our customers. We believe that our principal competition comes from the in-house research and development teams of such manufacturers, many of whom have significantly greater financial and/or technical resources than we do. In addition, we must in such cases overcome any organizational bias against out-sourced solutions before we can compete successfully.

Aside from the in-house research and development groups of such manufacturers, we do not compete with any individual company across the range of our market offerings. Within particular market segments, however, we do face competition to a greater or lesser extent from other industry participants. For example, in the following specific areas we compete with the companies indicated:

We cannot be certain that we will have the financial resources, technical expertise, and marketing or support capabilities to compete successfully in the future.

Employees

The table below presents the number of employees of ParthusCeva as of December 31, 2002, by function and geographic location.

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Our employees are not represented by any collective bargaining agreements, and we have never experienced a work stoppage. We believe our employee relations are good.

A number of our employees are located in Israel. Certain provisions of Israeli law and of the collective bargaining agreements between the Histadrut (General Federation of Labor in Israel) and the Coordination Bureau of Economic Organizations (the Israeli federation of employers’ organizations) apply to our Israeli employees.

ITEM 2.    PROPERTIES

Our headquarters are located in San Jose, California and we have principal offices in Dublin, Ireland and Herzeliya, Israel.

We lease land and buildings for our executive offices, engineering, sales, marketing, administrative and support operations and design centers. The following table summarizes information with respect to the principal facilities leased by us:

ITEM 3.    LEGAL PROCEEDINGS

From time to time, the Company is involved in litigation relating to claims arising out of its operations in the normal course of business. The Company is not presently a party to any legal proceedings, the adverse outcome of which, in management’s opinion, would have a material adverse effect on the Company’s results of operations or financial position.

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

In October 2002, our then sole stockholder approved by written consent an amendment and restatement of our certificate of incorporation changing our name to ParthusCera, Inc., increasing our total authorized stock and creating a class of undesignated preferred stock.

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EXECUTIVE OFFICERS OF THE REGISTRANT

Below are the names, ages and principal recent business experience of our current executive officers. All such persons have been elected to serve until their successors are elected and qualified or until their earlier resignation or removal.

Eliyahu Ayalon, age 60, has served as Chairman of our board of directors since November 2002 and as a member of our board of directors since November 1999. Mr. Ayalon also served as our Chief Executive Officer from November 1999 to January 2001. Mr. Ayalon has served as President, Chief Executive Officer and a member of the board of directors of DSP Group, Inc. since April 1996. In January 2000, Mr. Ayalon was appointed to serve as Chairman of the board of directors of DSP Group.

Brian Long, age 46, has served as Vice Chairman of our board of directors since November 2002. He served as Chief Executive Officer and a member of the board of directors of Parthus Technologies plc from 1993 until November 2002, and was one of the co-founders of Parthus.

Kevin Fielding, age 40, has served as our President, Chief Executive Officer and as a member of our board of directors since November 2002. He served as President of Parthus Technologies plc from March 2001 until November 2002. He served as Chief Operating Officer of Parthus from 1998 to 2001. He previously served as Managing Director of the StrongARM business of Digital Semiconductor.

Gideon Wertheizer, age 46, has served as our Executive Vice President—Business Development and Chief Technology Officer since November 2002. Mr. Wertheizer also served as our Chief Executive Officer and President from January 2001 until November 2002. Mr. Wertheizer was with DSP Group from 1990 to early 2001, serving most recently as Executive Vice President of Intellectual Property.

Elaine Coughlan, age 31, has served as our Chief Financial Officer and Secretary since November 2002. She served as Chief Financial Officer of Parthus from March 2001 until November 2002, and had served as Parthus’ Vice President—Finance from August 2000 to March 2001 and as its Corporate Controller from December 1999 to August 2000. Ms. Coughlan joined Parthus from IONA Technologies plc, where she held several senior financial positions. She had previously spent eight years at Ernst & Young, a public accounting firm, as a senior audit manager. She is an Associate of the Institute of Chartered Accountants in Ireland.

Issachar Ohana, age 37, has served as our Vice President and General Manager of the DSP Intellectual Property Licensing Division since November 2002. Prior to joining us, Mr. Ohana was with DSP Group beginning in August 1994 as a VLSI design engineer. He was appointed Project Manager of DSP Group’s research and development in July 1995, Director of Core Licensing in August 1998, and Vice President—Sales of the Core Licensing Division in May 2000.

Bat-Sheva Ovadia, age 39, has served as our Chief Scientist—DSP Technologies since November 2002. Prior to joining us, she was with DSP Group beginning in September 1988 as a DSP algorithm engineer. She was appointed Chief Architect of the DSP core architectures and served as Department Manager of DSP Group Architecture and Algorithm Department beginning in 1996, the Marketing and Business Development Director beginning in 1998 and Vice President—Marketing and Business Development beginning in May 2000.

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PART II

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

Our common stock began trading on The NASDAQ National Market under the symbol “PCVA” and on the London Stock Exchange under the symbol “PCV” on November 1, 2002. As of March 26, 2003, there were 8,911 holders of record of our common stock, some of whom are holders in nominee name for the benefit of different shareholders. The closing price of our common stock on The NASDAQ National Market on March 26, 2003 was $3.03 per share. The following table sets forth, for the period indicated, the range of high and low closing prices per share of our common stock, as reported on The NASDAQ National Market.

On November 1, 2002, we issued an aggregate of 8,998,887 shares of our common stock in exchange for the entire issued share capital of Parthus Technologies plc in a transaction exempt from registration pursuant to Section 3(a)(10) of the Securities Act of 1933.

From January through October 2002, ParthusCeva granted options to purchase an aggregate of 139,236 shares of its common stock at a weighted average exercise price of $10.90 per share. No underwriters were involved in any of the foregoing sales of securities. Such sales were made in reliance upon an exemption from registration pursuant to Rule 701 of the Securities Act of 1933.

We have never paid any cash dividends. We intend to retain future earnings, if any, to fund the development and growth of our business and currently do not anticipate paying cash dividends in the foreseeable future.

Information as of December 31, 2002 regarding options granted under our option plans and remaining available for issuance under those plans is contained in definitive proxy statement for our Annual Meeting of Stockholders to be held in 2003 and incorporated herein by reference.

ITEM 6.    SELECTED FINANCIAL DATA

ParthusCeva was formed through the combination of Parthus Technologies plc and ParthusCeva (formerly known as Ceva, Inc.) on November 1, 2002. Prior to that date, our DSP cores licensing business was part of DSP Group, Inc. With respect to periods prior to November 1, 2002, the financial data below have been prepared as if the separation of this business had been in effect throughout the relevant periods. The financial statements show this business as an entity carved out from the consolidated financial statements of DSP Group using the historical results of operations and historical bases of assets and liabilities of this business, as described in notes 1-3 to our financial statements, which appear elsewhere in this Annual Report. This information may not reflect what our financial position or results of operations actually would have been had this business operated as a separate, stand-alone entity for the periods presented, and may not be indicative of our future financial position or results of operations. We have not made adjustments to our historical financial information for periods prior to November 1, 2002 to reflect the significant changes in the cost structure, funding and operations which have resulted from the separation of the DSP cores licensing business from DSP Group and our combination with Parthus. The financial data below include the results of the business of Parthus only for the period following the combination on November 1, 2002.

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The following selected financial data should be read in conjunction with, and are qualified by reference to, our consolidated financial statements and the related notes, as well as our “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, both appearing elsewhere in this Annual Report.

On a pro forma combined basis, giving effect to the combination with Parthus as of January 1, 2002, revenues for 2002 would have been $51.2 million and net loss would have been $32.4 million. This pro forma combined financial information is unaudited and is presented for illustrative purposes only; it is not necessarily indicative of the financial position or results of operations that would have actually been reported had the transaction occurred at the beginning of 2002, nor is it necessarily indicative of future financial position or results of operations.

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ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

You should read the following discussion together with the consolidated financials statements and related notes appearing elsewhere in this annual report. This discussion contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those included in such forward-looking statements. Factors which could cause actual results to differ materially include those set forth under “Factors That Could Affect Our Operating Results”, as well as those otherwise discussed in this section and elsewhere in this Annual Report. See “Forward-Looking Statements and Industry Data”.

INTRODUCTION

ParthusCeva was formed through the combination of Parthus Technologies plc and ParthusCeva (formerly known as Ceva, Inc.) on November 1, 2002. Prior to that date, our DSP cores licensing business was part of DSP Group, Inc. On November 1, 2002, (1) DSP Group contributed the DSP cores licensing business to ParthusCeva, which was then its wholly owned subsidiary; (2) DSP Group distributed all of the existing common stock of ParthusCeva to the stockholders of DSP Group; and (3) ParthusCeva immediately thereafter combined with Parthus Technologies plc. These transactions are described in detail in the Report on Form 8-K of ParthusCeva dated November 1, 2002, as amended.

With respect to periods prior to November 1, 2002, the discussion below assumes that the separation of the DSP cores licensing business from DSP Group had been in effect throughout the relevant periods. Our financial statements show the DSP cores licensing business as an entity carved out from the consolidated financial statements of DSP Group using the historical results of operations and historical bases of assets and liabilities of this business, as described in notes 1-3 to our financial statements included elsewhere in this Annual Report. This information may not reflect what our financial position or results of operations actually would have been had we operated as a separate, stand-alone entity for the periods presented, and may not be indicative of our future financial position or results of operations. We have not made adjustments to our historical financial information for periods prior to November 1, 2002 to reflect the significant changes in our cost structure, funding and operations that have resulted from the separation of the DSP cores licensing business from DSP Group and our combination with Parthus. This discussion includes the results of the business of Parthus only for the period following the combination on November 1, 2002.

You should read the following discussion together with the audited financial statements and related notes appearing elsewhere in this Annual Report. This discussion contains “forward-looking statements”, which are subject to certain risks and uncertainties that could cause actual results to differ materially from those stated, including those discussed below under the caption “Factors that Could Affect Our Operating Results”.

BUSINESS OVERVIEW

ParthusCeva licenses to semiconductor companies and electronic equipment manufacturers complete, integrated intellectual property solutions that enable a wide variety of electronic devices. Our programmable DSP cores and application-level IP platforms power wireless devices, handheld devices, consumer electronics products, GPS devices, consumer audio products and automotive applications. We develop and market our integrated portfolio of open-licensable IP in three distinct areas: DSP cores; system-on-a-chip sub-systems and application-specific platform IP.

Our strategy is to engage in licensing and royalty agreements with leading semiconductor manufacturers and OEMs that have a track record of successful adoption and deployment of key next-generation technologies. In addition, we derive a portion of our revenues from development work, which we refer to as IP creation, and from the sale of our technology in module form, which we refer to as Hard IP.

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Although the precise terms of our license agreements vary from licensee to licensee, they generally require payment of an initial license fee, prepaid royalties and ongoing per-unit royalties. Under the terms of these license agreements, we may also provide integration services and technical support to help accelerate the customer’s product development cycle. Key features of these arrangements include:

We seek to leverage our substantial investment to date in research and development and to utilize our experienced R&D staff to enhance our technology offerings and to drive future revenue growth by offering cutting-edge solutions. We also anticipate that, as the global economy in general and the consumer electronics industry in particular recover, we will begin to realize increased royalty revenues, which will incrementally increase our profit margins.

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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.

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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

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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 administrativeexpensesconsist 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

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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.

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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.

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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

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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.

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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:

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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

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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.

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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.

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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

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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

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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:

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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.

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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.

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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

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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.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

A majority of our revenues and a portion of our 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. dollar, principally the euro, the Israeli NIS and the British pound. Increases in the volatility of the exchange rates of the 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 $484,000 in 2002 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 past, but may in the future, hedge against fluctuations in exchange rates. Future hedging transactions may not successfully mitigate losses caused by currency fluctuations. We expect to continue to experience the effect of exchange rate fluctuations on an annual and 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 majority of 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 of December 31, 2002.

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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

PARTHUSCEVA, INC. AND ITS SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2002

(IN U.S. DOLLARS)

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REPORT OF INDEPENDENT AUDITORS

To the Shareholders of PARTHUSCEVA, INC.

We have audited the accompanying consolidated balance sheets of ParthusCeva, Inc. (the “Company”) and its subsidiaries as of December 31, 2001 and 2002, and the related consolidated statements of operations, changes in stockholders’ equity and Related Company investment and cash flows for each of the three years in the period ended December 31, 2002. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit in order to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Company’s management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries as of December 31, 2001 and 2002, and the consolidated results of their operations and cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.

/s/    Kost Forer & Gabbay

KOST FORER & GABBAY

A Member of Ernst & Young Global

Tel-Aviv, Israel

January 21, 2003

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PARTHUSCEVA, INC. AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

U.S. dollars in thousands, except share data

The accompanying notes are an integral part of the consolidated financial statements.

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PARTHUSCEVA, INC. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

U.S. dollars in thousands, except share and per share data