<PAGE>
                                     UNITED STATES
                          SECURITIES AND EXCHANGE COMMISSION
                                Washington, D.C. 20549

                                       FORM 10-K

                 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE 
                            SECURITIES EXCHANGE ACT OF 1934

                      For the fiscal year ended December 31, 1996

                            Commission File Number 0-25622

                               DSP COMMUNICATIONS, INC.
                (Exact name of registrant as specified in its charter)

          Delaware                                 77-0389180
(State or other jurisdiction of      (I.R.S. Employer Identification Number)
incorporation or organization)

              20300 Stevens Creek Boulevard, Cupertino, California 95014
             (Address of principal executive offices, including zip code)

                                    (408) 777-2700
                 (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, $.001 par value
                                   (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 (Section 229.405 of this chapter) 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. [   ]

The aggregate market value of the voting stock held by non-affiliates
of the registrant as of March 10, 1997 was approximately $421,880,700. 
For purposes of this calculation only, (i) shares of Common Stock are
deemed to have a market value of $11.94 per share, the closing sale
price of the Common Stock as reported on the Nasdaq National Market on
March 10, 1997, and (ii) each of the executive officers, directors and
persons holding 5% or more of the outstanding Common Stock is deemed to
be an affiliate.

The number of shares of Common Stock outstanding on March 10, 1997 was
44,872,345 shares.

DOCUMENTS INCORPORATED BY REFERENCE:
Part III of this Report incorporates information by reference from the
definitive Proxy Statement for the registrant's annual meeting of
stockholders to be held on May 15, 1997.

<PAGE>

                            DSP COMMUNICATIONS, INC.

                          1996 FORM 10-K ANNUAL REPORT

                                TABLE OF CONTENTS

                                     PART I                                   
                                                                            Page
                                                                            ----
      Item  1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

      Item  2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . .12
       
      Item  3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . .12

      Item  4. Submission of Matters to a Vote of Security Holders . . . . . .12

                                     PART II

      Item  5. Market for Registrant's Common Equity and Related
               Stockholder Matters . . . . . . . . . . . . . . . . . . . . . .13

      Item  6. Selected Financial Data . . . . . . . . . . . . . . . . . . . .14

      Item  7. Management's Discussion and Analysis of Financial Condition 
               and Results of Operations . . . . . . . . . . . . . . . . . . .15

      Item  8. Financial Statements and Supplementary Data . . . . . . . . . .27

      Item  9. Changes in and Disagreements with Accountants on Accounting 
               and Financial Disclosure. . . . . . . . . . . . . . . . . . . .27

                                    PART III

      Item 10. Directors and Executive Officers of the Registrant  . . . . . .27

      Item 11. Executive Compensation  . . . . . . . . . . . . . . . . . . . .27

      Item 12. Security Ownership of Certain Beneficial Owners and
               Management  . . . . . . . . . . . . . . . . . . . . . . . . . .27

      Item 13. Certain Relationships and Related Transactions . . . . . . . . 27

                                     PART IV

      Item 14. Exhibits, Financial Statement Schedules, and Reports
               on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . 28

      SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
<PAGE>

                                     PART I

      The matters addressed in this report on Form 10-K, with the exception 
of the historical information presented, contain forward-looking statements 
involving risks and uncertainties.  The Company's actual results could differ 
materially from those anticipated in these forward-looking statements as a 
result of certain factors, including those set forth under the heading 
"Certain Factors That May Affect Future Results" in the Management's 
Discussion and Analysis section and elsewhere in this report.

ITEM 1.     BUSINESS

INTRODUCTION

      DSP Communications, Inc. ("DSPC" or the "Company"), a Delaware 
corporation, applies its expertise in digital signal processing ("DSP") 
software, algorithms and VLSI circuit design to develop highly integrated, 
low power and cost-effective chip sets for wireless personal communications 
applications.  The Company believes that it is the largest independent vendor 
of baseband chip sets to original equipment manufacturers ("OEMs") in the 
Japanese digital cellular telephone market, with customers such as Kenwood 
Corporation ("Kenwood"), Kokusai Electric Corporation ("Kokusai"), Kyocera 
Corporation ("Kyocera"), Pioneer Corporation ("Pioneer"), Sanyo Electronic 
Co. Ltd. ("Sanyo") and Sharp Corporation ("Sharp").  Based on its core DSP 
technology, the Company has developed baseband chip sets that support a broad 
range of frequency modulation standards, including the Personal Digital 
Cellular ("PDC") and IS-136 digital standards and the Advanced Mobile Phone 
System ("AMPS") and Total Access Communication System ("TACS") analog 
standards.  In November 1995, the Company signed an agreement with Qualcomm 
Incorporated ("Qualcomm") to license Qualcomm's Code Division Multiple Access 
("CDMA") technology which will permit the Company to develop baseband chip 
sets for CDMA-based subscriber equipment.  The Company is currently 
developing baseband chip sets jointly with NEC Electronics ("NEC"), which 
support both voice and data capabilities, for use in the IS-136 Time Division 
Multiple Access ("TDMA") market and with several customers for use in the 
IS-95 (CDMA) market.

      The Company is capitalizing on its position in the Japanese digital 
cellular market to broaden its technological and geographic customer base 
through acquisitions, licenses and joint development agreements.  In October 
1995, the Company acquired CTP Systems, Ltd. ("CTP Systems"), an Israeli 
company, which is engaged in the development of a wireless private branch 
exchange ("PBX") system for the office environment and other low-mobility and 
wireless local loop applications.  CTP Systems has entered into distribution 
and service agreements with OEMs such as Harris Corporation, Inc. ("Harris") 
and Tadiran Telecommunications Ltd. for its wireless PBX system.

INDUSTRY BACKGROUND

      The demand for wireless personal communications services has grown 
rapidly over the past several years as cellular, paging and other emerging 
wireless personal communications services have become widely available and 
increasingly affordable to growing numbers of consumers and businesses.  
Changes in telecommunications regulations and allocations of additional radio 
spectrum frequencies have further stimulated growth for both wireless voice 
and data communications.  There has also been a general transition from the 
use of analog to digital technologies to improve the reliability and capacity 
of wireless networks.  In addition, most new cellular networks being built 
today utilize digital technology which is capable of transmitting both voice 
and data communications.  Advancements in cellular and paging technology, as 
well as recently introduced services such as personal communications services 
("PCS"), are expected to offer subscribers new means of communicating both 
voice and data over existing and future wireless networks.

                                       3
<PAGE>

     VOICE COMMUNICATIONS

      Wireless voice communications utilize analog or digital transmission 
technology which operate with various transmission standards.  The Company 
has developed products that support a variety of standards, such as PDC, 
IS-136 and AMPS, and is developing products for the IS-95 standards as well 
as next generation products for existing standards.

      In North America, cellular networks primarily rely upon analog 
technology and use the AMPS standard.  According to the Office of 
Telecommunications of the United States Department of Commerce (the "Office 
of Telecommunications"), in the United States, the number of cellular 
subscribers increased from 16 million in December 1993 to 35 million in 
December 1995, and to 38.2  million in June 1996, and as of June 1996, 
approximately 14.5% of the total United States population subscribed to 
cellular services.  Although analog cellular is the most widely deployed 
wireless service available today, it has several limitations, including 
inconsistent service quality, limited capacity and, currently, an inability 
to transfer data without a modem.  Digital technologies are expected to offer 
improved system flexibility, efficiency and increased capacity by allowing a 
given channel of spectrum to carry multiple calls simultaneously.  As a 
result, most new networks being constructed today utilize digital technology. 
Digital subscriber equipment, however, currently is more expensive than 
analog subscriber equipment.  The Telecommunications Industry Association has 
approved two competing digital cellular standards for the United States:  (i) 
IS-54 and its enhanced version, IS-136, forms of TDMA, and (ii) IS-95, a form 
of CDMA.  To date, there has been only limited deployment of TDMA-based and 
CDMA-based digital cellular networks, with wider deployment not expected in 
the United States before the second half of 1997.

      New PCS in the United States will also use CDMA and TDMA technology for 
cellular type application.  Unlike cellular that used the 800 Mhz. frequency, 
PCS will use the 1.9 Ghz. band.  The Company believes that the increasing 
deployment of PCS networks will also accelerate the transition of the 
existing cellular service providers from analog technology to digital 
technology. The Company's baseband products for the TDMA and CDMA standards 
are designed to support telephones that operate in both the 800 Mhz. cellular 
frequency and the 1.9 Ghz. PCS frequency.

      In Japan, cellular services are being provided over analog networks 
based on the Japanese Total Access Communication System ("J-TACS"), and 
Nippon Telephone and Telegraph ("NTT") standards and, increasingly, over 
digital networks based on the PDC standard. The PDC standard is a form of 
TDMA that differs from IS-136 in the following respects:  (i) IS-136 uses the 
800 Mhz. band, while PDC uses both the 800 Mhz. and the 1.5 Ghz. frequency 
bands; (ii) IS-136 requires more bandwidth than PDC (30 kHz compared to 25 
kHz); and (iii) IS-136 is capable of supporting analog communications using 
AMPS, while PDC is only capable of supporting digital communications.  The 
new half-rate PDC standard (RCR-27C) has been defined and its implementation 
in Japan began in early 1996.  The half-rate PDC standard enhances the 
capacity of existing PDC networks.

      According to the Office of Telecommunications, the number of analog and 
digital cellular subscribers in Japan increased from 3.5 million in December 
1994, to 8.0 million in December 1995, and to 18.2 million in December 1996, 
and as of December 1996, approximately 14.5% of the total Japanese population 
subscribed to cellular services.  The Company believes that demand for digital
subscriber equipment in Japan may continue to increase as a result of (i) the 
continued transition from analog to digital; (ii) anticipated price reductions 
in cellular services due to increased competition among wireless communications
providers and potential incentives for users of new half-rate PDC services; 
and (iii) the transition from the full-rate to half-rate PDC standard, 
thereby stimulating subsequent purchases of replacement and next generation 
subscriber equipment.

                                       4
<PAGE>

      REQUIREMENTS OF WIRELESS SUBSCRIBER EQUIPMENT MANUFACTURERS

      The Company believes that growing demand for mobile voice and data 
applications will require a transition from analog to digital technology to 
increase the capacity, quality, convenience and variety of services.  The 
increase in the number of subscribers and the growth of services provided 
over wireless personal communications networks have led to network congestion 
and the need to expand the capacity and capabilities of the networks.  The 
implementation of digital network technology over analog and digital networks 
generally requires the use of DSP technology to maximize their capacity and 
capabilities.  DSP technology involves converting light, sound and other 
naturally occurring analog wave forms into a stream of digital values which 
may then be processed, manipulated, exchanged or stored by electronic systems 
and later converted back into analog signals.  DSP technology provides 
several advantages over analog technologies, including (i) greater levels of 
compression capability, resulting in greater storage and expanded 
communications capacity, (ii) greater ability to process and manipulate 
digital data, resulting in enhanced product performance and functionality, 
and (iii) greater ability to perform routine electronic functions in software 
rather than using dedicated hardware.  The ability of DSP to manipulate voice 
and data communications faster and more efficiently than analog and non-DSP 
microprocessor technologies positions DSP as an important technology for 
existing and future generations of wireless personal communications products.

      Manufacturers of subscriber equipment for wireless personal 
communications compete in a high-growth, cost-competitive market, in which it 
is necessary to offer a compact, cost-effective solution providing a wide 
range of functions.  To increase performance, minimize the size and decrease 
the cost of subscriber equipment, manufacturers require highly integrated 
chip sets. Greater integration of functions minimizes the number and size of 
the integrated circuits required, thereby lowering the cost of manufacturing 
and decreasing power consumption.  Lower power consumption permits extended 
battery life, giving the mobile user more usage time without the need to 
recharge the battery unit.  Due to evolving industry standards and the rapid 
introduction of new communications services, the success of OEMs in the 
wireless personal communications industry also depends on their ability to 
bring new products to market quickly to meet new market demands.

THE DSPC SOLUTION

      DSPC is focused on developing DSP-based software and algorithms and 
designing highly integrated, low power baseband chip sets for subscriber 
equipment operating on both analog and digital wireless personal 
communications networks.  Through its wholly-owned subsidiary, CTP Systems, 
the Company is also focused on developing wireless PBX and other on-premises 
and low-mobility wireless communications applications.

      The key features of DSPC's solution include the following:

      HIGH INTEGRATION.  In 1989, the Company introduced its first chip set 
for analog cellular telephones which consisted of two integrated circuits 
that provided the same functions previously performed by 10 to 15 discrete 
components.  In 1993, the Company reduced this two-chip analog solution to a 
single integrated circuit.  Also in 1993, the Company introduced a new chip 
set solution for digital cellular telephones in Japan consisting of only two 
integrated circuits.  The Company is in the process of developing baseband 
chip sets that it believes will result in more compact and cost-effective 
solutions.

      LOW POWER CONSUMPTION.  The Company's expertise in DSP technology 
enables it to design efficient DSP solutions that minimize power consumption. 
The Company has developed a high degree of functionality in its software 
which decreases the need for dedicated hardware, and thereby reduces the 
millions of instructions per second ("MIPS") required for operation.  The 
components of the baseband chip set are activated intermittently depending on 
the operating mode of the subscriber unit at any given time to minimize power 
consumption.

                                       5
<PAGE>

      COST-EFFECTIVE.  The Company has reduced the number of integrated 
circuits required for a baseband processing subsystem by integrating the DSP 
functions, and has also incorporated some traditional hardware functions into 
its software, thereby reducing the overall cost of the Company's solution to 
OEMs.  As a result, the Company's OEM customers are better able to provide 
competitively priced products to the wireless personal communications market.

      ADAPTABLE TO MULTIPLE STANDARDS.  Based on its core DSP technology, the 
Company has developed products for use with a variety of modulation 
standards.  While each product is designed for a specific wireless 
communications network and modulation standard, all generally rely on the 
same fundamental DSP technology.  By maintaining both standards and system 
flexibility, the Company seeks to reduce the risks associated with relying on 
the success of one or a limited number of existing industry standards.  The 
Company has developed systems expertise in the PDC, Personal HandyPhone 
Services ("PHS"), Digital European Cordless Telephone ("DECT"), IS-136 and 
IS-95 digital standards and the AMPS and TACS analog standards.  The Company 
believes that its expertise with multiple transmission standards will also 
help it develop products to address the needs of emerging wireless services, 
such as narrowband and broadband PCS.

PRODUCTS

      The Company has designed DSP-based software and integrated circuits for 
cellular communications.  To date, the Company has used its DSP expertise 
primarily to develop baseband chip sets for incorporation into cellular 
telephones.  In addition, the Company is currently developing new products 
designed for use in PCS and other emerging wireless personal communications 
services.

      EXISTING PRODUCTS

      The Company has produced baseband chip sets for cellular telephones 
that operate using a variety of frequency modulation standards.  The 
following is a description of the cellular communications products that the 
Company has produced to date.

      AMPS.  The Company introduced its first chip sets in 1989, enabling 
manufacturers to replace 10 to 15 discrete components with a single chip set 
composed of two integrated circuits.  Since then, the Company has developed 
and introduced three additional chip sets for analog cellular telephones 
which operate on AMPS and various European standards.

      PDC.  The Company currently sells chip sets to major Japanese 
manufacturers of digital cellular telephones.  In 1993, the Company 
introduced its first digital chip set, a set of two integrated circuits with 
a VSELP speech coder, channel coder and modem that operates on five volts and 
is based on the PDC standard.  In December 1993, the Company began its first 
volume shipments of this chip set to Kenwood, Kyocera and Sanyo.  In the 
second quarter of 1995, the Company commenced volume shipments of its three 
volt PDC chip set, and in the fourth quarter of 1995, the Company introduced 
and initiated shipments of its half-rate PDC chip set.  The half-rate PDC 
standard enables cellular carriers to increase the capacity of their existing 
cellular networks.

      TDMA.  In early 1995, the Company began jointly developing a third 
generation chip set for digital cellular telephones using the IS-136 
standard, and at the end of 1996, the Company commenced commercial sales of 
this chip set.  IS-136 supports voice and limited data communications, such 
as data cypher mode and short message alpha-numeric paging service.  As a 
result of its development efforts related to products for half-rate PDC and 
IS-136, the Company believes that it is well positioned to develop chip sets 
for TDMA-based standards for data transmission once data protocols are 
established and implemented.

                                       6
<PAGE>

      WIRELESS PBX.  The Company's wholly-owned subsidiary, CTP Systems, has 
developed a wireless PBX system for intra-building communications.  The CTP 
Systems solution includes the development of basestations and handsets, and 
the joint development of a PBX interface card with several OEMs.  CTP 
Systems' wireless PBX system, which enables users to make and receive calls 
while away from their desks, received in October 1996 approval by the Federal 
Communications Commission for operation using the unlicensed 1920 to 1930 
Mhz. frequency band.  The Company commenced commercial shipments of the 
wireless PBX system in the fourth quarter of 1996.

      NEW PRODUCT DEVELOPMENT

      In addition to improving its existing products, the Company is 
currently developing new products that are intended to operate with various 
wireless personal communications networks and frequency modulation standards. 
 
      CDMA.  The Company has developed systems expertise in the IS-95 
standard and believes that its technology may be adapted to develop 
CDMA-based applications for use in cellular and PCS applications.  In 1995, 
the Company signed a license agreement with Qualcomm to license Qualcomm's 
CDMA technology that permits the Company to develop baseband chip sets for 
CDMA products.  The Company is presently developing such a chip set for 
several customers.  The Company does not expect significant revenue from 
CDMA-based products in 1997.

      There can be no assurance that the Company will be successful in 
developing CDMA-based products or any other new products, or in offering such 
products to OEMs or other customers in a timely fashion or that, once 
developed, the Company's new products will be accepted and incorporated by 
OEMs into their products.

SALES, MARKETING AND DISTRIBUTION

      The Company markets its products through a direct sales and marketing 
organization, headquartered in Cupertino, California, and facilitates product 
delivery through a distributor in Japan.  In Japan, the Company's Japanese 
subsidiary performs customer liaison services.  The Company's distributor in 
Japan, Tomen Electronics Corp. ("Tomen"), is not subject to minimum purchase 
requirements and can cease marketing the Company's products at any time.  The 
loss of Tomen as the Company's sole distributor in Japan could have a 
material adverse effect on the Company's business, financial condition and 
results of operations.

      The Company sells its PDC chip sets to OEMs such as Kenwood, Kyocera, 
Pioneer, Kokusai, Sanyo and Sharp, through Tomen.  In 1994, 1995 and 1996, 
product sales to Tomen accounted for 84%, 89% and 91%, respectively, of the 
Company's total revenues.  Sales to this distributor are made through 
specific purchase orders, which are cancelable without significant penalties. 
In 1996, substantially all of Tomen's sales of the Company's products were 
to five Japanese OEMs, although two new Japanese OEM customers have recently 
been added.  The Company expects that a significant portion of its future 
product sales will continue to be concentrated among a limited number of 
major OEMs.  The loss of Tomen as a distributor or one or more of the seven 
major Japanese customers for the Company's PDC chip sets would have a 
material adverse effect on the Company's business, financial condition and 
results of operations.  In addition, the Company's sales to its Japanese OEM 
customers are dependent on the OEMs' continued success in maintaining or 
increasing their market share in the competitive Japanese wireless handset 
market.  The inability of one or more of these OEM customers to succeed in 
this market could have a material adverse effect on the Company's business, 
financial condition and results of operations.  

                                       7
<PAGE>

      The Company sells substantially all of its products and provides 
technology development services primarily to OEMs located outside of the 
United States.  Revenues from Japan accounted for 90%, 94% and 94% of the 
Company's total revenues in 1994, 1995 and 1996, respectively.  Due to its 
international sales, the Company is subject generally to the risks of 
conducting business internationally, including unexpected changes in 
regulatory requirements, fluctuations in exchange rates for the United States 
dollar that could effectively increase the price of the Company's products in 
foreign markets, imposition of tariffs and other barriers and restrictions, 
and the burden of complying with a variety of foreign laws.  During 1996, the 
Company hedged its foreign exchange exposure related to anticipatory revenue 
transactions by entering into dollar/yen option contracts.

CUSTOMER SERVICE AND TECHNICAL SUPPORT

      The Company believes that providing customers with comprehensive 
product service and support is critical to maintaining a competitive position 
in the wireless personal communications industry.  The Company provides 
technical support through its application engineering groups located in Japan 
and Israel.  The application engineering group offers full service technical 
support to customers, product upgrades and training, if necessary.  The 
Company works closely with its customers to monitor the performance of its 
product designs, and to provide application design support and assistance.  
The Company believes that close contact with its customers improves their 
level of satisfaction and provides the Company with insights into future 
product development.

      The Company provides several levels of technical support to its 
customers.  The Company's standard support package is generally offered with 
all product sales, and includes provision of evaluation and prototyping 
systems, full technical documentation and application design assistance.  
During an OEM's production phase, the Company also provides failure analysis 
and replacement of defective components.  In some cases, the Company also 
offers more extensive support arrangements for additional quarterly payments, 
which includes training, system level design, implementation and integration 
support, as well as early releases of new product versions when they become 
available.  The Company believes that tailoring the technical support level 
to its customers' needs is essential for the success of product introductions 
and to achieve a high satisfaction level among its customers.

MANUFACTURING

      The Company uses independent foundries to manufacture its baseband chip 
sets.  The Company to date has ordered products from its foundries primarily 
upon receipt of orders from its distributor or OEM customers and does not 
maintain any significant inventory of its products.  This strategy allows the 
Company to avoid the significant capital investment required for wafer 
fabrication facilities and inventories, and to focus its resources on 
algorithm and software development, product design, quality assurance, 
marketing and customer support.  The Company may in the future maintain 
limited inventory in anticipation of orders from its distributor or OEM 
customers.  Designs of the Company's baseband chip sets are verified by both 
the Company and the customer prior to orders being placed.  Upon receipt of 
such orders, the manufacturers ship the devices through the Company's 
distributor to the Company's customers.  The Company has also developed 
procedures with its contract manufacturers to conduct comprehensive quality 
control and quality assurance throughout the manufacturing and assembly 
process.  The Company's reliance on independent foundries involves a number 
of risks, including the possibility of a shortage of certain key components 
and reduced control over delivery schedules, manufacturing capacity, quality 
and costs.

      To date, the Company has purchased most of its DSP chips for cellular 
telephones from Texas Instruments Incorporated ("TI"), which embeds the 
Company's software algorithms in TI's standard products.  The Company also 
buys all of the DSP chips used in CTP Systems' products from TI.  The Company 
is dependent on TI to produce a sufficient quantity of DSP chips to meet the 
Company's needs and to deliver

                                       8
<PAGE>

them in a timely manner.  Furthermore, TI's manufacturing schedule is 
entirely independent from the Company's supply requirements.  The Company's 
reliance on TI involves a number of risks, including the possibility of an 
insufficient supply of DSP chips, noncompetitive pricing and discontinued 
production of the DSP chip currently utilized to produce the Company's 
products.  Currently, the Company purchases its application specific 
integrated circuits ("ASICs") for its PDC chip sets from Atmel ES2, a wholly 
owned subsidiary of Atmel Inc., and VLSI Technology, Inc. ("VTI"); all of its 
ASICs for analog baseband chip sets from TI; its ASICs for CTP Systems' 
products from American Microsystems, Inc. ("AMI"); and the Radio Frequency 
("RF") chip sets for CTP Systems' products from Rockwell Semiconductor 
Systems, Inc.

      CTP Systems currently manufactures its own wireless communications 
systems and is therefore subject to various risks associated with the 
manufacturing process, including risks resulting from CTP Systems' 
inexperience in mass production, risks involved with the ramp-up of 
production, errors in the manufacturing process, shortages of required 
components, manufacturing equipment failures and disruptions of operations at 
the manufacturing facility.  Prolonged inability of CTP Systems to deliver 
products in a timely manner could result in the loss of customers and 
materially adversely affect its results of operations.  In addition, certain 
of the components included in CTP Systems' products are obtained from a 
single source or a limited group of suppliers.  The partial or complete loss 
or delay of the supply of components from certain of these sources could 
result in a significant reduction in CTP Systems' revenues and could also 
damage certain customer relationships.  

      Although the Company extensively tests its software and hardware 
products prior to their introduction, design errors may be discovered after 
initial product sampling, resulting in delays in volume production or recalls 
of products sold.  Although the Company has not experienced any significant 
errors to date, the occurrence of such errors could have a material adverse 
effect on the Company's business, financial condition and results of 
operations.  

RESEARCH AND DEVELOPMENT

      The Company believes that its future success depends on its ability to 
adapt to the rapidly changing wireless personal communications environment 
and to continue to meet its customers' needs.  Therefore, the continued 
timely development and introduction of new products is essential in 
maintaining its competitive position.  The Company develops most of its 
products in-house and, as of December 31, 1996, had a research and 
development staff of 88 people, including six people holding doctorate 
degrees in areas related to DSP.  The Company is focusing its current 
development efforts primarily on the development of enhanced versions of its 
existing digital cellular chip sets and new applications involving IS-95 and 
IS-136.  During 1994, 1995 and 1996, the Company spent approximately $1.7 
million, $3.0 million and $5.3  million, respectively, on research and 
development activities, excluding any offsetting grants from the Officer of 
the Chief Scientist in Israel's Ministry of Industry and Trade (the "Chief 
Scientist").

      The Government of Israel encourages research and development projects 
oriented towards products for export.  Until February 1996, the Company 
received grants from the Chief Scientist for the development of certain 
products.  Under the terms of the Israeli Government grants, a royalty of 3% 
of the sales of the developed products is generally required to be paid until 
150% of the grant is repaid.  In 1996, the Company repaid all amounts owed 
pursuant to the grants relating to products being marketed by the Company, 
and the Company has no further obligation to pay royalties under these 
grants.  In 1994, 1995 and 1996, the Company paid and accrued royalties to 
the Chief Scientist of approximately $574,000, $1,142,000 and $724,000, 
respectively.  The terms of Israeli Government participation also contained 
restrictions on the location of research and development activities and 
subsequent transfer of the developed technology. There are currently no 
grants from the Chief Scientist outstanding for any product currently being 
developed or marketed by the Company, and the Company intends to fund future 
research and development efforts for new products primarily from its own 
funds and through research and development arrangements with its major

                                       9
<PAGE>

OEM customers.  The Company does, however, participate with several other 
companies in the development of generic CDMA technology for which the Chief 
Scientist has issued grants.  The total grants received to date in connection 
with this technology are not material and there are no royalty obligations 
under the terms of these grants.  

COMPETITION

      The markets for the Company's products are extremely competitive, and 
the Company expects that competition will increase.  Many of the Company's 
competitors have entrenched market positions, established patents, 
copyrights, tradenames, trademarks and intellectual property rights and 
substantial technological capabilities.  Both in the cellular market and in 
other wireless personal communications markets, the Company's existing and 
potential competitors include large and emerging domestic and international 
companies, many of which have significantly greater financial, technical, 
manufacturing, marketing, sales and distribution resources and management 
expertise than the Company. The Company believes that its ability to compete 
successfully in the wireless personal communications market depends upon a 
number of factors within and outside its control, including price, quality, 
availability, product performance and features; timing of new product 
introductions by the Company, its customers and competitors; and customer 
service and technical support.  The Company's current OEM customers 
continuously evaluate whether to develop and manufacture their own chip sets 
and could elect to compete with the Company at any time.  Price competition 
in the markets in which the Company currently competes and proposes to 
compete is intense and is likely to increase, which could have a material 
adverse effect on the Company's business, financial condition and results of 
operations.  Moreover, large manufacturers of wireless personal 
communications equipment could also elect to enter into the component market 
and compete directly with the Company.

      In the Japanese digital cellular market, the Company faces competition 
from existing cellular telephone manufacturers that develop in-house 
solutions, such as Motorola, Inc. ("Motorola"), NEC,  Panasonic Company and 
Sony Corporation, from other DSP-based baseband chip suppliers, such as Asahi 
Kasei, and, in the future, may face competition from other chip suppliers.  
In addition, PHS has emerged in Japan as a potential competitor of existing 
digital cellular networks and could reduce sales of digital cellular 
telephones incorporating the Company's chip sets.  The Company believes that 
its current advantage stems from its experience in this market, early market 
presence and established customer base.

      In the United States digital cellular market, the Company intends to 
compete with products for second and third generation digital cellular 
telephones.  The Company is aware that other integrated circuit and 
subscriber equipment manufacturers such as AT&T, Motorola, Nokia 
Telecommunications and TI have been developing products for the IS-136 market.

INTELLECTUAL PROPERTY

      Although the Company has eight patent applications pending or allowed 
in the United States, Japan and Israel, the Company relies primarily on its 
trade secret program and copyrights to protect its intellectual property.  
The Company attempts to protect its trade secrets and other proprietary 
information through agreements with its customers, suppliers, employees and 
consultants, and through other security measures.  Although the Company 
intends to protect its rights vigorously, there can be no assurance that 
these measures will be successful.  In addition, the laws of certain 
countries in which the Company's products are or may be developed, 
manufactured or sold, including Hong Kong, Japan, Korea and Taiwan, may not 
protect the Company's products and intellectual property rights to the same 
extent as the laws of the United States.

      While the Company's ability to compete may be affected by its ability 
to protect its intellectual property,  the Company believes that, because of 
the rapid pace of technological change in the wireless personal 
communications industry, its technical expertise and ability to introduce new 
products on a timely

                                       10
<PAGE>

basis will be more important in maintaining its competitive position than 
protection of its intellectual property and that patent, trade secret and 
copyright protections are important but must be supported by other factors 
such as the expanding knowledge, ability and experience of the Company's 
personnel, new product introductions and frequent product enhancements.  
Although the Company continues to implement protective measures and intends 
to defend vigorously its intellectual property rights, there can be no 
assurance that these measures will be successful.  

      While the Company has not been involved in any patent or other 
intellectual property rights litigation, there can be no assurance that third 
parties will not assert claims against the Company with respect to existing 
and future products.  In the event of litigation to determine the validity of 
any third party's claims, such litigation could result in significant expense 
to the Company, and divert the efforts of the Company's technical and 
management personnel, whether or not such litigation is determined in favor 
of the Company.  Both the semiconductor and the wireless personal 
communications industries are subject to frequent litigation regarding patent 
and other intellectual property rights.  Leading companies and organizations 
in the wireless personal communications industry have numerous patents that 
protect their intellectual property rights in these areas.  In the event of 
an adverse result of any such litigation, the Company could be required to 
expend significant resources to develop non-infringing technology or to 
obtain licenses to the technology which is the subject of the litigation.  
There can be no assurance that the Company would be successful in such 
development or that any such license would be available on commercially 
reasonable terms.

BACKLOG

      The Company's backlog was approximately $25.9 million at December 31, 
1995 and $6.8 million at December 31, 1996.  The Company includes in its 
backlog all accepted product purchase orders with respect to which a delivery 
schedule has been specified for product shipment within one year.  
As a result of a reduction during 1996 in the lead time between receipt of 
product orders and shipment of products due primarily to an increase in the 
supply of integrated circuits and increased competition between OEMs in the 
Japanese wireless handset market, the Company experienced declining backlog 
levels throughout 1996, and the Company anticipates that the market for its 
baseband chip sets will continue to be characterized by short-term order and 
shipment schedules.  In addition, product orders in the Company's backlog are 
subject to changes in delivery schedules or to cancellation at the option of 
the purchaser without significant penalty. Accordingly, the Company believes 
that backlog as of any particular date is not necessarily a reliable 
indicator of sales or revenues for any future period.

EMPLOYEES

      As of December 31, 1996, the Company had 153 full and part-time 
employees, including 88 in research and development, 17 in marketing and 
sales, 22 in production, and 26 in corporate, administration and production 
coordination.  The Company believes that its future prospects will depend, in 
part, on its ability to continue to attract and retain skilled engineering, 
marketing and management personnel, who are in great demand.  In particular, 
there is a limited supply of highly qualified engineers with DSP experience.  
None of the Company's employees are covered by a collective bargaining 
agreement, and the Company has never experienced any strike or work stoppage. 
The Company believes its relations with its employees to be good.

                                       11
<PAGE>

ITEM 2.    PROPERTIES

      The Company's headquarters are located in an approximately 9,500 square 
foot leased facility in Cupertino, California.  This facility houses the 
Company's management, marketing and sales personnel.  The lease for the 
Cupertino facility terminates in February 1998, with an option for a three 
year extension until February 2001.  The Company's subsidiary, DSPC Israel 
Ltd. ("DSPCI"), leases approximately 10,000 square feet for research and 
development, application engineering and manufacturing coordination 
activities, in a facility in Givat Shmuel, Israel.  This lease terminates in 
April 2001.  In addition, DSPCI leases an approximately 5,000 square foot 
facility for research and development activities in Givat Shmuel.  This lease 
terminates in March 1999, and DSPCI has an option to extend the lease until 
2002. The Company's subsidiary, CTP Systems, leases approximately 11,000 
square feet for research and development, engineering and manufacturing 
activities in a facility in Petah-Tikva, Israel. This lease terminates in 
October 1997, and CTP Systems has an option to extend the lease until October 
1999.  The Company's Japanese subsidiary leases approximately 3,200 square 
feet in Tokyo for marketing and engineering liaison activities.  This lease 
expires in October 1997, with an option for a two year extension until 
October 1999.    

ITEM 3.     LEGAL PROCEEDINGS

      None.

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

      The Company held a special meeting of stockholders on November 12, 
1996, at which the following matters were voted upon.  The share numbers 
shown below have been retroactively adjusted to reflect the two-for-one stock 
split effected in December 1996.

      1.  The Company's stockholders voted upon and approved a proposal to 
approve an amendment to the Company's Certificate of Incorporation to effect 
a two-for-one stock split.  The results of the voting were as follows:

      Number of Shares voted FOR     33,394,404
      Number of Shares voted AGAINST    208,302
      Number of Shares ABSTAINING        32,806
      Number of Broker Non-Votes            n/a

      2.  The Company's stockholders voted upon and approved a proposal to 
approve an amendment to the Company's Certificate of Incorporation to 
increase the number of shares of Common Stock that the Company is authorized 
to issue from 70,000,000 to 110,000,000 shares.  The results of the voting 
were as follows:

      Number of Shares voted FOR     32,680,846
      Number of Shares voted AGAINST    727,584
      Number of Shares ABSTAINING       227,082
      Number of Broker Non-Votes            n/a

      3.  The Company's stockholders voted upon and approved a proposal to 
ratify the action of the Board adopting the Company's 1996 Stock Option Plan 
(the "1996 Plan").  The number of shares of the Company's common stock 
reserved for issuance under the 1996 Plan is 3,000,000.  The results of the 
voting were as follows:

      Number of Shares voted FOR     18,970,772
      Number of Shares voted AGAINST  9,990,600
      Number of Shares ABSTAINING       231,958
      Number of Broker Non-Votes      4,442,182

                                       12
<PAGE>

                                     PART II

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

      The Common Stock of the Company has been traded on the Nasdaq National 
Market (Nasdaq Symbol:  DSPC) since the Company's initial public offering on 
March 7, 1995.  Prior to that date, there was no public market for the 
Company's Common Stock.  The following table presents for the periods 
indicated the high and low bid prices for the Common Stock, as reported by 
the Nasdaq National Market.

      On March 5, 1996, the Company effected a two-for-one stock split of the 
Company's Common Stock. The stock split was reflected on the Nasdaq National 
Market System commencing on March 26, 1996. On November 13, 1996, the Company 
effected another two-for-one stock split of the Company's Common Stock, and 
the stock split was reflected on the Nasdaq National Market System commencing 
on December 3, 1996.  All per share data shown below have been retroactively 
adjusted to reflect both of the stock splits.

                                                      Price Range of
                                                       Common Stock
                                                   ----------------------
                                                    High            Low  
                                                   ----------------------
Fiscal Year Ended December 31, 1995
  First Quarter (from March 7, 1995) . . . . . . . $ 3.31          $ 2.50
  Second Quarter . . . . . . . . . . . . . . . . . $ 5.31          $ 2.81
  Third Quarter. . . . . . . . . . . . . . . . . . $ 8.31          $ 5.19
  Fourth Quarter . . . . . . . . . . . . . . . . . $11.88          $ 6.81

Fiscal Year Ended December 31, 1996
  First Quarter. . . . . . . . . . . . . . . . . . $13.94          $ 7.50
  Second Quarter . . . . . . . . . . . . . . . . . $24.50          $11.38
  Third Quarter. . . . . . . . . . . . . . . . . . $30.25          $18.75
  Fourth Quarter . . . . . . . . . . . . . . . . . $30.50          $16.25

      On March 10, 1997, the closing price of the Company's Common
Stock as reported on the Nasdaq National Market was $11.94 per
share.  As of March 10, 1997, there were approximately 61 holders
of record of the Common Stock.

DIVIDEND POLICY

      To date, the Company has neither declared nor paid any cash dividends 
on shares of its Common Stock.  The Company presently intends to retain all 
future earnings for use in its business and does not anticipate paying cash 
dividends on its Common Stock in the foreseeable future.  

                                       13
<PAGE>

ITEM 6.     SELECTED FINANCIAL DATA

(Dollars in thousands, 
except per share data)        1996      1995     1994     1993     1992 
-------------------------------------------------------------------------
Statement of Operations Data
 (Year ended December 31)
 
 Total revenues              $ 88,899  $40,867   $15,966  $ 4,098  $ 2,629

 Gross profit                $ 41,196  $17,021   $ 6,631  $ 2,135  $   853

 Operating income (loss)     $ 20,010  $(2,391)  $ 2,655  $(1,142) $(2,436)

 Net income (loss)(1)(2)     $ 21,750  $(2,358)  $ 2,233  $(1,026) $(2,580)

 Net income (loss) per 
  share(1)(2)                $   0.48  $ (0.08)  $  0.09  $ (0.08) $ (0.22)

 Shares used in computing 
  net income (loss) per 
  share(3)                     45,564   30,252    25,624   12,604   11,476

 Balance Sheet Data
 (As of December 31)

 Cash, cash equivalents and
  short-term investments     $136,833  $27,988   $ 8,387  $ 3,636  $ 2,452

 Working capital             $129,230  $29,193   $ 5,476  $ 3,602  $ 1,566

 Total assets                $155,354  $44,119   $11,028  $ 6,397  $ 3,782

 Long-term obligations       $  --     $    --   $   132  $   191  $    --

 Total stockholders' equity  $136,844  $34,868   $ 6,532  $ 4,122  $ 2,142
 
__________________________

(1)  Net loss for 1995 includes a charge of $10,850,000 for acquired 
in-process technology primarily in connection with the acquisition of CTP 
Systems Ltd. and, to a lesser extent, in connection with a licensing 
arrangement.  Excluding this charge, pro forma net income for 1995 was 
$8,492,000 or $0.24 per share (based on 35,752,000 shares).  

(2) Net income for 1996 includes a charge of $5,000,000 in connection with 
the termination of a proposed acquisition of Proxim Inc. Excluding this charge,
pro forma net income for 1996 was $26,125,000 or $0.57 per share.

(3)  Net income (loss) per share information reflects the common stock 
two-for-one split effected in March 1996 and the common stock two-for-one 
split effected in December 1996.

                                       14
<PAGE>

ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 
AND RESULTS OF OPERATIONS

      This Management's Discussion and Analysis of Financial Condition and 
Results of Operations should be read in conjunction with the 1996 
Consolidated Financial Statements and notes thereto. The matters addressed in 
this Management's Discussion and Analysis of Financial Condition and Results 
of Operations, with the exception of the historical information presented, 
contain forward-looking statements involving risks and uncertainties.  The 
Company's actual results could differ materially from those anticipated in 
these forward-looking statements as a result of certain factors, including 
those set forth under the heading "Certain Factors That May Affect Future 
Results" following this Management's Discussion and Analysis section, and 
elsewhere in this report.

OVERVIEW

      DSPC, a Delaware corporation incorporated on November 23, 1994, 
succeeded to the business of DSP Telecommunications Ltd. ("DSP Telecom"), an 
Israeli corporation, pursuant to a reorganization completed upon the closing 
of the Company's initial public offering ("IPO") on March 14, 1995, under 
which DSP Telecom became a wholly owned subsidiary of DSPC (the 
"Reorganization"). The Reorganization was accounted for in a manner similar 
to a pooling of interests.

      The consolidated financial statements present the financial condition 
of the Company as of December 31, 1996, the consolidated results of 
operations and cash flows of the Company from the Reorganization date, and 
the combined financial position, results of operations and cash flow of the 
Company with DSP Telecom prior to the Reorganization.

      Until the fourth quarter of 1993, the Company derived most of its 
revenues from technology development services and sales of analog baseband 
chips sets for cellular telephones.  In December 1993, the Company began the 
first volume shipments of its digital baseband chip sets to Japanese OEMs 
through its distributor in Japan.

      The fourth quarter of 1996 included a charge of $5.0 million, included 
in general and administrative expenses, in connection with the termination of 
a proposed acquisition of Proxim, Inc.

      The fourth quarter of 1995 included a charge of $10.9 million for 
acquired in-process technology, primarily in connection with the purchase of 
CTP Systems.

      The Company recorded a net income of $21.8 million on total revenues of 
$88.9 million in 1996, compared to a net loss of $2.4 million on total 
revenues of $40.9 million in 1995, and a net income of $2.2 million on total 
revenues of $16.0 million in 1994. Excluding the charge for the proposed 
acquisition in 1996 of $5.0 million, and for acquired in-process technology 
in 1995 of $10.9 million, pro forma net income was $26.1 million for 1996 and 
$8.5 million for 1995.

      The results of operations subsequent to the acquisition of CTP Systems 
on October 26, 1995 include the results of CTP Systems. CTP Systems has 
developed its wireless PBX product for commercial production, and commercial 
shipments commenced in the fourth quarter of 1996.  CTP Systems' activities 
incurred losses throughout 1996 and are expected to continue to incur losses 
during the first half of 1997.

                                       15
<PAGE>

RESULTS OF OPERATIONS

      The following table sets forth the percentage relationships of certain 
items from the Company's consolidated statements of operations as a 
percentage of total revenues for the years ended December 31:

                                        1996         1995           1994
                                       ------       ------         -----
 Revenues:

  Product                               95.8%        90.9%          88.9%

  Technology development                 4.2          9.1           11.1
                                       -----        -----          -----
     Total revenues                    100.0        100.0          100.0

 Cost of Revenues:

  Product                               49.7         52.6           49.0

  Technology development                 4.0          5.8            9.4
                                       -----        -----          -----
     Total cost of revenues             53.7         58.4           58.4
                                       -----        -----          -----
 Gross Profit                           46.3         41.6           41.6

 Operating Expenses:

  Research and development               6.0          6.2            7.8

  Sales and marketing                    4.1          5.9            6.2

  General and administrative            13.7          8.9           10.9

  Charge for acquired in-process 
   technology                             --         26.5             --
                                       -----        -----          -----
     Total operating expenses           23.8         47.5           24.9
                                       -----        -----          -----
 Operating income (loss)                22.5         (5.9)          16.7

 Other income (expense)                  5.5          2.8           (2.0)
                                       -----        -----          -----
 Income (loss) before provision 
  for income taxes                      28.0         (3.1)          14.7

 Provision for income taxes             (3.5)        (2.7)          (0.7)
                                       -----        -----          -----
 Net income (loss)                      24.5%        (5.8)%         14.0%
                                       -----        -----          -----
                                       -----        -----          -----

REVENUES

      PRODUCT:   Product revenues consist primarily of baseband chip sets for 
digital cellular telephones.  Revenues from sales to distributors are 
recognized at the time the products are shipped by the distributor to the OEM 
customer. Other product revenues are recorded when products are shipped to 
customers. Product revenues increased to $85.1 million in 1996 from $37.1 
million and $14.2 million in 1995 and 1994, respectively.

                                       16
<PAGE>

      The key contributing factor in the Company's product revenue growth in 
1996 and 1995 was the large increase in demand leading to volume shipments of 
the Company's Japanese PDC digital cellular chip sets.  Sales prices for the 
Company's chip sets have declined significantly as a result of volume 
discounts and price pressures; however, the increased  sales volume has more 
than offset the effect of decreasing per unit prices.  During 1996, the 
Company commenced volume shipments of its new half-rate chip sets.  The 
Company believes that the growth rate in its product revenues will likely 
decline in the future from the rate the Company experienced from 1994 to 1996.

      TECHNOLOGY DEVELOPMENT AND OTHER:  The Company has funded its 
technology development in part using revenue from technology development 
agreements. Following successful completion of technology development 
agreements with OEMs, the Company's strategy is to develop and market 
products incorporating the developed technology.  Revenues are recognized 
only when applicable customer milestones, including deliverables, have been 
met, but not in excess of the amount that would be recognized using the 
percentage of completion method. Technology development revenues were $3.8 
million in 1996, $3.7 million in 1995, and $1.8 million in 1994.  The 
Company's technology development revenues fluctuate, and may continue to 
fluctuate, depending on the number and size of technology development 
agreements and the timing of related milestones and deliverables.

      In 1995 and 1996, technology development revenues increased relative to 
1994 following the initiation and/or completion of contracts for development 
and support of products for PDC, TDMA and CDMA applications.

      Revenues from Japan, consisting of sales of digital chip sets for 
cellular telephones and technology development services, accounted for 94.2%, 
94.2% and 89.6% of total revenues in 1996, 1995 and 1994, respectively.  The 
Company expects that revenues from Japan will continue to account for most of 
its revenues through at least 1998.  Virtually all sales are denominated in 
United States dollars to reduce the effect of fluctuations in foreign 
currency exchange rates.  In 1996, the Company entered into dollar/yen option 
contracts in order to hedge against the increase in the value of the U.S. 
dollar against the yen and decrease exposure to currency-driven sales price 
pressure.

COST OF REVENUES

      COST OF PRODUCTS SOLD:   Cost of products sold consists primarily of 
materials, and, to a lesser extent, warranty costs and royalties.  Cost of 
products sold increased to $44.2 million in 1996, from $21.5 million in 1995 
and $7.8 million in 1994.  The increases in 1996 and 1995 were due to 
increased volume sales of chip sets. The cost of products as a percentage of 
product revenues was 51.9%,  57.9%, and 55.2% for 1996, 1995 and 1994, 
respectively.  The effect of the decrease in sales prices in 1996 was more 
than offset by cost reductions received from the Company's suppliers due to 
increased order volumes and by the fact that in the second quarter of 1996 
the Company completed its obligations to pay royalties to the Chief Scientist 
of the Israeli Ministry of Trade and Industry on grants relating to products 
currently being marketed by the Company.  Sales of CTP Systems' wireless PBX 
systems to Beta sites were made in small quantities and resulted in negative 
margins.  The Company expects that it will continue to experience negative 
margins on low volume initial sales of these wireless PBX systems until 
higher volume sales are achieved.  Higher volume sales are anticipated during 
the second half of 1997.

      The Company anticipates that the average sales prices of chip sets may 
decrease as a result of volume discounts and price pressures, which would 
increase the cost of products sold as a percentage of product revenues; 
however, any such price decreases may be offset to a certain extent by 
further cost reductions from suppliers if the Company's order volumes 
increase.

                                       17
<PAGE>

      COST OF TECHNOLOGY DEVELOPMENT:   Cost of technology development is 
comprised primarily of engineering salaries, subcontractors' costs and 
related costs.  The costs of technology development contracts are recorded as 
incurred. Cost of technology development increased to $3.6 million in 1996 
from $2.4 million in 1995 and $1.5 million in 1994 resulting from increased 
technology development activities.  The Gross margin on technology 
development in 1996 was 5.9%, compared to 36.8% in 1995 and 15.8% in 1994.  
The margins on technology development vary depending on the similarity or 
diversity of the products and technologies developed, and as contractual 
milestones are reached.

RESEARCH AND DEVELOPMENT EXPENSES

      Research and development expenses primarily consist of salaries and 
related costs of employees engaged in ongoing research, design and 
development activities, and materials and subcontracting costs, reduced 
through 1995 and 1996 by grants from the Chief Scientist.  Net research and 
development expenses increased to $5.3 million in 1996 from $2.5 million and 
$1.2 million in 1995 and 1994, respectively.  The increases were due to the 
increased level of activities in connection with the development of CDMA, the 
growth in the number of engineering personnel and in projects under 
development, the inclusion of CTP Systems' research and development 
activities, and, to a lesser extent, due to a decision in 1996 not to apply 
for further grants from the Chief Scientist.  As a percentage of total 
revenues, research and development expenses were 6.0% in 1996 and 6.2% in 
1995, a decrease from 7.8% in 1994. The Company expects that its research and 
development expenses will continue to increase in the future, in absolute 
dollars.

      The Company records software development costs in accordance with 
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs 
of Computer Software to be Sold, Leased or Otherwise Marketed."  To date, the 
Company has expensed all of its software costs.

SALES AND MARKETING EXPENSES

      Sales and marketing expenses are mainly comprised of employee related 
expenses, trade exhibition expenses, and charges for customer liaison 
services in Japan.  Sales and marketing expenses increased to $3.7 million 
(4.1% of revenues) in 1996 from $2.4 million (5.9% of revenues) in 1995, and 
from $1.0 million (6.2% of revenues) in 1994.  The increase reflects 
primarily the growth of sales and marketing staff at the Company's 
headquarters in Cupertino, California, and Tokyo offices, increased 
participation at trade exhibitions, increased promotion and marketing 
research activities, and the inclusion of CTP Systems.

GENERAL AND ADMINISTRATIVE EXPENSES

      General and administrative expenses in 1996 were $12.2 million (13.7% 
of revenues) compared to $3.6 million (8.9% of revenues) in 1995, and $1.7 
million (10.9% revenues) in 1994.

      General and administrative expenses increased, in absolute dollars, as 
a result of increased staffing levels at the Company's headquarters in 
Cupertino, California, and at the facilities of DSPC Israel Ltd., an Israeli 
subsidiary of the Company ("DSPCI"), increased facility expenses, increased 
administration expenses and fees, and the inclusion of CTP Systems' 
administration expenses and related amortization of the goodwill recorded 
with the acquisition of CTP Systems.  General and administrative expenses in 
1996 also include a charge of approximately $5 million in connection with the 
termination of a proposed acquisition of Proxim, Inc.
 
                                       18
<PAGE>

CHARGE FOR ACQUIRED IN-PROCESS TECHNOLOGY

      The Company recorded a charge of $10.9 million in the fourth quarter of 
1995, which consisted of $9.6 million for acquired in-process technology 
associated with the acquisition of CTP Systems, and  $1.3 million for 
acquired in-process technology associated with a licensing arrangement. The 
Company acquired 100% of the shares of CTP Systems for $13.6 million in cash, 
plus $0.5 million of related transaction costs.

      A contingent earn-out is payable by the Company in March 1998, the 
amount of which will be based on the profits and revenues of CTP Systems in 
1996 and 1997.  Based on CTP Systems' results of operations for 1996, the 
Company does not expect that it will be obligated to make any payments under 
the contingent earn out.  The transaction was accounted for as a purchase.  
The purchase price has been allocated, based on an independent appraisal, as 
follows (in millions):  

                   Net tangible assets                 $ 0.4
                   Acquired developed technology         1.7
                   Acquired in-process technology        9.6
                   Goodwill                              2.4
                                                       -----
                   Total purchase price                $14.1
                                                       -----
                                                       -----

      The acquired in-process technology represents the appraised value of 
technology in the development stage that had not yet reached technological 
feasibility and did not have alternative future uses.  The acquired developed 
technology and goodwill are amortized over five years, and reflected as cost 
of product revenues and operating expenses, respectively.

OTHER INCOME (EXPENSE)

      Other income (expense) includes interest and investment income, foreign
currency remeasurement gains and losses, and other expenses.  Other income in
1996 was $4.8 million compared to $1.1 million in 1995, and an expense of $0.3
million in 1994.

      Other income in 1996 and 1995 was generated primarily from interest and
realized gains on the Company's cash and investment balances, including the
proceeds from the IPO completed in March 1995, and from the Company's follow-on
public offerings completed in June 1995 and April 1996.  Other expense in 1994
resulted from the decline in value of investments then held in marketable equity
securities.  All these investments were liquidated in the second half of 1994,
resulting in realized losses.

PROVISION FOR INCOME TAXES

      The tax provisions for 1996, 1995 and 1994 have been influenced by the 
Company's Israeli operating subsidiaries' status as "Approved Enterprises" 
for Israeli tax purposes.  

      The Approved Enterprise status was granted according to investment 
plans and will allow the Company's Israeli subsidiaries a two to four year 
tax holiday on undistributed earnings, and a corporate tax rate of 10% to 25% 
for an additional six to eight years on each of the investment plans' 
proportionate share of income.

                                       19
<PAGE>

      As of December 31, 1996, the Company had United States federal, state, 
and Israel net operating loss carryforwards of approximately $15.6 million, 
$8.1 million and $3.5 million, respectively.  The United States federal and 
state net operating loss carryforwards will expire at various dates beginning 
in years 2000 through 2011.  The Israeli loss carryforwards have no 
expiration date.

      The Company's effective tax rate was approximately 13% for 1996 and 
1995 (excluding the charge for Israeli acquired in-process technology of $9.6 
million in 1995) and 5% for 1994.  The Company believes its effective income 
tax rate will increase in the future due to the utilization of its Israeli 
net operating loss carryforwards, the elimination over time of the tax 
benefits awarded with Approved Enterprise status, unutilized loss 
carryforwards in the United States and potential increases due to rules 
regarding controlled foreign corporations ("CFC").  Losses incurred by the 
Company or any of its subsidiaries in one country generally will not be 
deductible by entities in other countries in the calculation of their 
respective local taxes.  In addition, losses generated by one Israeli entity 
will not offset income generated by another Israeli entity. Therefore, losses 
incurred by one Israeli entity or a combined loss of the U.S. entities will 
increase the Company's effective tax rate.

      A net deferred tax asset of approximately $2.1 million is reflected in 
the financial statements.  Approximately $4.5 million of future U.S. taxable 
income will be necessary to realize this deferred tax asset.  While there can 
be no assurance that future income will be sufficient to realize this 
benefit, management  is of the opinion that it is more likely than not that 
this benefit will be realized in the near future based upon projected income 
from financial instruments and product sales.  A valuation allowance of 
approximately $5.6 million was provided in the financial statements.  Of the 
valuation allowance, $4.3 million is for deferred tax assets attributable to 
stock option deductions, the benefit of which will be credited to equity when 
realized.  The remaining valuation allowance relates to operating losses, tax 
credit carryforwards, and temporary differences of entities in the 
consolidated group for which the generation of taxable income in the near 
future is not projected.

      DSP Telecom, DSPCI and CTP Systems (collectively, the "Israeli 
Companies") are CFCs for United States income tax purposes.  Accordingly, all 
or a portion of the earnings of DSP Telecom are subject to United States 
taxation if, among other things: (i) the Israeli Companies accumulate cash 
and other passive assets in excess of 25% of total assets; (ii) the Israeli 
Companies lend funds to the Company or otherwise invest in certain proscribed 
assets; or (iii) the Israeli Companies engage in various types of 
transactions defined in the Subpart F provisions of the United States 
Internal Revenue Code.  However, if the Israeli Companies' earnings become 
subject to United States taxation, DSPC may be eligible to utilize its 
Israeli and other foreign income taxes as a credit against its United States 
income taxes.  The Company believes that its existing plans will minimize the 
impact of the CFC rules for the immediate future, subject to any changes in 
United States tax laws that may occur.  However, over time, the CFC rules may 
cause the Company's tax rate to increase, except to the extent that the 
taxable amount is offset by otherwise unutilized United States losses.

FOREIGN CURRENCY TRANSACTIONS

      Substantially all of the Company's sales and a substantial portion of 
its costs are denominated in United States dollars.  Since the dollar is the 
primary currency in the economic environment in which the Company operates, 
the dollar is its functional currency, and, accordingly, monetary accounts 
maintained in currencies other than the dollar (principally cash and 
liabilities) are remeasured using the foreign exchange rate at the balance 
sheet date. Operational accounts and nonmonetary balance sheet accounts are 
remeasured and recorded at the rate in effect at the date of the transaction. 
The effects of foreign currency remeasurement are reported in current 
operations and have been immaterial to date.

                                       20
<PAGE>

IMPACT OF INFLATION

      The rate of inflation in Israel in 1996, 1995 and 1994 was 10.6%, 8.1% 
and 14.7%, respectively.  While substantially all of the Company's sales and 
expenses are denominated in United States dollars, a portion of the Company's 
expenses are denominated in Israeli shekels.  The Company's primary expense 
paid in Israeli currency is Israeli-based employee salaries.  As a result, an 
increase in the value of Israeli currency in comparison to the United States 
dollar could increase the cost of technology development, research and 
development expenses and general and administrative expenses.

LIQUIDITY AND CAPITAL RESOURCES

      The Company uses independent foundries to fabricate its baseband chip 
set products, minimizing its need to invest in manufacturing equipment and to 
develop integrated circuit fabrication processes.  However, the Company 
relies on its independent foundries to achieve acceptable manufacturing 
yields and to allocate to the Company a sufficient portion of foundry 
capacity to meet the Company's needs.  The Company to date has ordered 
products from its foundries primarily upon receipt of orders for chipsets 
from its distributor or OEM customers and has not maintained any significant 
inventory of its chipsets.  This strategy allows the Company to avoid 
utilizing its capital resources for manufacturing facilities and inventory, 
and allows the Company to focus substantially all of its resources on the 
design, development and marketing of its products.  The Company may in the 
future maintain limited inventory in anticipation of orders from its 
distributors or OEM customers.  CTP Systems has commenced manufacturing its 
PBX systems product and therefore utilizes capital resources for its 
manufacturing facility. To date, production of PBX systems has been limited 
and has not had a material effect on the Company's liquidity or capital 
resources.

      Since its inception, the Company has financed its operations and 
investments in capital equipment primarily through cash provided by 
operations, sales of equity securities and, to a lesser extent, debt and 
lease arrangements. The Company received gross proceeds of approximately $9.4 
million through private sales of equity securities prior to the IPO in March 
1995, approximately $18.9 million from the IPO, $10.5 million from the 
follow-on offering in June 1995, and $75.6 million from the second follow-on 
offering in April 1996.  

      The Company's operating activities provided cash of  $32.9 million in 
1996, $4.0 million in 1995 and $5.8 million in 1994.  Net cash provided from 
operations in 1996 was comprised primarily of net income, an increase in 
current liabilities, and a decrease in trade accounts receivable.  Trade 
accounts receivable decreased to $7.1 million at December 31, 1996 due to the 
timing of shipments and payments.  Accounts receivable have to date been 
primarily from Tomen, the Company's distributor in Japan, which accounted for 
71.5% of the Company's accounts receivable at December 31, 1996.  The 
Company's write-offs of accounts receivable have not been material to date.

      The Company's investing activities, other than purchases of and 
proceeds from sales and maturities of short-term investments, have consisted 
of expenditures for fixed assets, which totaled $2.7 million in 1996.

      In obtaining approval of the Reorganization from Israeli tax 
authorities, which was completed immediately before the closing of the IPO, 
the Company agreed to invest in activities in Israel in an amount of not less 
than $9.0 million out of the proceeds of the IPO within three years after the 
IPO.  In October 1995 the Company completed the acquisition of CTP Systems, 
for $13.6 million in cash.  In 1995, the Company transferred $4.5 million out 
of the IPO proceeds to Israel in order to finance a part of the CTP Systems 
acquisition, and in 1996, an additional $0.5 million was transferred by the 
Company to increase the capital of DSPCI.  

                                       21
<PAGE>

      As of December 31, 1996, the Company had $136.8 million of cash, cash 
equivalents and short-term investments.  The Company believes that its 
existing cash, cash equivalents and short-term investment balances, will be 
sufficient to meet its cash requirements for at least the next twelve months. 
As of December 31, 1996, the Company also had issued bank guarantees and 
letters of credit totalling $2.2 million.

      While operating activities may provide cash in certain periods, to the 
extent the Company may experience growth in the future, the Company 
anticipates that its operating and investing activities may use cash and 
consequently, such growth may require the Company to obtain additional 
sources of financing.  The Company may also from time to time consider the 
acquisition of complementary businesses, projects or technologies which may 
require additional financing or require the use of a significant portion of 
its existing cash, although the Company has no present understandings, 
commitments or agreements, nor is it engaged in any discussions or 
negotiations with respect to any such transaction.

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

      Future trends for the Company's revenue and profitability remain 
difficult to predict, despite the strong financial results described in this 
report.  The Company operates in a rapidly changing and developing market 
that involves a number of risks, some of which are beyond the Company's 
control.  The following discussion highlights certain of these risks.

      RELIANCE ON A SINGLE JAPANESE DISTRIBUTOR AND A SMALL NUMBER OF OEMS; 
COMPETITION IN JAPANESE OEM MARKET.  Substantially all of the Company's sales 
of baseband chip sets for digital cellular telephones are to Tomen, the 
Company's distributor in Japan.  Tomen's sales of the Company's products are 
concentrated in a small number of Japanese OEM customers.  Prior to 1997, 
five OEM customers accounted for substantially all of Tomen's sales of the 
Company's baseband chip sets.  The loss of Tomen as a distributor or the loss 
of or significant reduction in Tomen's sales to any of these Japanese OEMs 
would have a material adverse effect on the Company's business, financial 
condition and results of operations. 

      Because the world-wide cellular subscriber equipment industry is 
dominated by a small number of large corporations, the Company expects that a 
significant portion of its future product sales will continue to be 
concentrated in a limited number of OEMs.  In addition, the Company believes 
that the manufacture of subscriber equipment for emerging telecommunications 
services, such as personal communications services ("PCS"), will also be 
concentrated in a limited number of OEMs.  As a result, the Company's 
performance is likely to depend on relatively large orders from a limited 
number of distributors and OEMs.  The Company's performance will also depend 
in part on gaining additional OEM customers, both within existing markets and 
in new markets.  The competition between OEMs in the Japanese wireless 
handset market is intense and is increasing.  The Company's performance 
depends significantly on the ability of its OEM customers to maintain and 
increase their market share in this market.  The loss of any existing OEM 
customer, a significant reduction in the level of sales to any existing 
customers, or the failure of the Company to gain additional OEM customers 
could have a material adverse effect on the Company's business, financial 
condition and results of operations.

        REDUCED VISIBILITY; DECREASED BACKLOG.  Over the past year, the 
period of time between the receipt of orders for the Company's products and 
the date requested by OEM customers for shipment of products has been 
reduced, due primarily to an increase in the supply of integrated circuits 
and increased competition among OEMs in the Japanese wireless handset market. 
This reduced lead time has resulted in decreased backlog levels and has 
decreased the time period for which the Company is able to estimate future 
product demand.  The Company anticipates that the market for its baseband 
chip sets will continue to be characterized by short-term order and shipment 
schedules.  Accordingly, since the Company's revenue expectations and planned 
operating expenses are in large part based on these estimates rather than on 
firm customer orders, the Company's quarterly operating results could be 
materially adversely affected if orders and revenues do not meet expectations.


                                       22
<PAGE>


      DEPENDENCE ON JAPANESE MARKET.  The future performance of the Company 
will be dependent, in large part, upon its ability to continue to compete 
successfully in the Japanese market.   The Company's ability to continue to 
compete in this market will be dependent upon several factors, including no 
deterioration of existing trade relations between Japan, Israel and the 
United States or imposition of tariffs in the wireless personal 
communications industry, no adverse changes in the Japanese 
telecommunications regulatory environment, the Company's ability to develop 
products that meet the technical requirements of its Japanese customers, and 
the Company's ability to maintain satisfactory relationships with its 
Japanese customers and its distributor.  All of the Company's sales to its 
Japanese customers are denominated in United States dollars and, therefore, 
fluctuations in the exchange rate for the United States dollar could 
materially increase the price of the Company's products to these customers 
and require the Company to reduce prices of its products to remain 
competitive.  Moreover, the expected emergence of Personal HandyPhone 
Services, a microcellular technology potentially competitive with today's 
existing Japanese analog and digital cellular networks, could reduce sales in 
Japan of digital cellular telephones incorporating the Company's baseband 
chip sets.  There can be no assurance that changes in the political or 
economic conditions, trade policy or regulation of telecommunications in 
Japan will not have a material adverse effect on the Company's business, 
financial condition and results of operations.

      RELIANCE ON TEXAS INSTRUMENTS AND OTHER THIRD PARTY MANUFACTURERS.  All 
of the Company's integrated circuits are currently fabricated by independent 
third parties, and the Company intends to continue using independent 
foundries in the future.  To date, the Company has purchased most of the DSP 
chips for its baseband chip sets for cellular telephones from Texas 
Instruments Incorporated ("TI").  The Company also buys all of the DSP chips 
used in the products of CTP Systems from TI.  The Company purchases standard 
DSP chips from TI, and TI embeds the Company's proprietary software 
algorithms in TI's chips.  In addition, the Company currently purchases its 
application specific integrated circuits ("ASICs") for its PDC
chip sets from Atmel ES2 and VTI; all of its ASICs for analog baseband chip 
sets from TI and its ASICs for CTP Systems' products from AMI.  Accordingly, 
the Company is and will remain dependent on independent foundries, including 
TI, AMI, Atmel ES2 and VTI, to achieve acceptable manufacturing yields, to 
allocate to the Company a sufficient portion of foundry capacity to meet the 
Company's needs and to offer competitive pricing to the Company.  Although 
the Company has not experienced material quality, allocation or pricing 
problems to date, if such problems were to arise in the future, they would 
have a material adverse effect on the Company's business, financial condition 
and results of operations.

      EXPECTED FLUCTUATIONS IN QUARTERLY OPERATING RESULTS AND POTENTIAL 
QUARTERLY LOSSES.  The Company's quarterly operating results depend on the 
volume and timing of product orders received and delivered during the quarter 
and the timing of new product introductions by the Company and its customers. 
The Company anticipates that for the foreseeable future new product 
introductions may cause significant fluctuations in quarterly operating 
results.  The Company's quarterly operating results may also vary 
significantly depending on other factors, including the introduction of new 
products by the Company's competitors; market acceptance of new products; the 
greater number of manufacturing days in the second and third quarters; 
adoption of new technologies and standards; relative prices of the Company's 
products; competition; the cost and availability of components; the mix of 
products sold; the quality and availability of chip sets manufactured for the 
Company by third parties; changes in the Company's distribution arrangements; 
sales of wireless subscriber equipment by OEMs and changes in general 
economic conditions.

      RELIANCE ON A SINGLE PRODUCT.  Since December 1993, the Company has 
relied upon sales from a single product, its baseband chip set for digital 
cellular telephones for use in Japan, to generate substantially all of its 
product sales. The Company is in the process of developing additional 
products for digital cellular telephones, PCS and wireless PBX applications; 
however, there can be no assurance that it will be successful in doing so.

                                       23
<PAGE>

      DECLINING SALES PRICES.  Manufacturers of wireless personal 
communications equipment are experiencing, and are likely to continue to 
experience, intense price pressure, which has resulted and is expected to 
continue to result in downward pricing pressure on the Company's products.  
As a result, the Company has experienced, and expects to continue to 
experience, declining sales prices for its products.  In addition, pricing 
competition among handset manufacturers and component suppliers has 
increased.  There can be no assurance that either increases in unit volume or 
reductions in per unit costs will offset declines in per unit sales prices, 
in which case the Company's gross profit would be adversely affected.  Since 
cellular telephone manufacturers frequently negotiate supply arrangements far 
in advance of delivery dates, the Company often must commit to price 
reductions for its products before it is aware of how, or if, such cost 
reductions can be obtained.  As a result, such current or future price 
reduction commitments could have, and any inability of the Company to respond 
to increased price competition would have, a material adverse effect on the 
Company's business, financial condition and results of operations.

      UNCERTAINTIES RELATED TO DEVELOPMENT, PRODUCTION AND MARKETING OF 
CDMA-BASED PRODUCT.  The Company is currently developing a baseband chip set 
for CDMA products pursuant to a license agreement with Qualcomm for CDMA 
technology. Although the Company expects to complete successfully the 
development of this chip set and to deliver the product, there can be no 
assurance that the development work will be successfully completed, or that 
completion of development will not be delayed.  To date, there has
been only limited deployment of CDMA-based digital cellular networks, and the 
success of the Company in marketing its CDMA-based chip set will be dependent 
on, among other things, the success of the CDMA standard and growth of the 
CDMA subscriber population.  There can be no assurance that the CDMA standard 
will be widely adopted or that the CDMA-based chip set will be successful in 
the marketplace.  Sales of the Company's CDMA-based products will also be 
dependent on the success of the Company's OEM customers in completing their 
development of CDMA-based handsets in a timely manner and in successfully 
competing in the CDMA-based handset market. In addition, the Company intends 
to use independent foundries to manufacture the product, and there can be no 
assurance that this chip set will be able to be manufactured in commercial 
quantities at reasonable cost.  If the Company is unable, for technological 
or other reasons, to develop, introduce and manufacture in a timely manner 
the CDMA-based chip set and to market the product successfully, or if the 
Company's OEMs are unable successfully to develop and market their products, 
the Company's business and results of operations could be materially and 
adversely affected. 

      RISK OF INCREASED INCOME TAXES.  DSPCI and CTP Systems, two Israeli 
subsidiaries of the Company, operate as "Approved Enterprises" under Israel's 
Law for the Encouragement of Capital Investments, 1959, as amended.  An 
Approved Enterprise is eligible for significant income tax rate reductions 
for several years following the first year in which it has income subject to 
taxation in Israel (after consideration of tax losses carried forward).  
There can be no assurance that this favorable tax treatment will continue, 
and any change in such tax treatment could have a material adverse effect on 
the Company's net income and results of operations.  As of this date, the 
Company is not aware of any circumstances that might cause it to lose its 
favorable tax treatment.  If Israel's tax incentives or rates applicable to 
DSPCI or CTP Systems are rescinded or changed, their income taxes could 
increase and their results of operations and cash flow would be adversely 
affected.  In addition, the Company's income tax rate would increase if all 
or a portion of the earnings of DSP Telecom, DSPCI or CTP Systems were to 
become subject to United States federal and state income tax as a result of 
actual or deemed dividends or through operation of United States tax rules 
applicable to "controlled foreign corporations."

                                       24
<PAGE>

      MARKETS FOR THE COMPANY'S PRODUCTS ARE HIGHLY COMPETITIVE. The markets 
for the Company's products are extremely competitive, and the Company expects 
that competition will increase.  Many of the Company's competitors have 
entrenched market positions, established patents, copyrights, tradenames, 
trademarks and intellectual property rights and substantial technological 
capabilities.  The Company's current competitors in the digital cellular 
market include other suppliers of DSP-based chip sets and existing cellular 
telephone manufacturers that develop chip set solutions internally.  Both in 
the cellular market and in other wireless personal communications markets, 
the Company's existing and potential competitors include large and emerging 
domestic and international companies, many of which have significantly 
greater financial, technical, manufacturing, marketing, sales and 
distribution resources and management expertise than the Company.  The 
Company believes that its ability to compete successfully in the wireless 
personal communications market will depend upon a number of factors both 
within and outside of its control, including price, quality, availability, 
product performance and features; timing of new product introductions by the 
Company, its customers and competitors; and customer service and technical 
support.  There can be no assurance that the Company will have the financial 
resources, technical expertise, or marketing, sales, distribution and 
customer service and technical support capabilities to compete successfully. 

      RELIANCE ON INTERNATIONAL OPERATIONS; RISKS OF OPERATIONS IN ISRAEL. 
The Company is subject to the risks of doing business internationally, 
including unexpected changes in regulatory requirements; fluctuations in the 
exchange rate for the United States dollar; imposition of tariffs and other 
barriers and restrictions; and the burdens of complying with a variety of 
foreign laws.  The Company is also subject to general geopolitical risks, 
such as political and economic instability and changes in diplomatic and 
trade relationships, in connection with its international operations.  In 
particular, the Company's principal research and development facilities are 
located in the State of Israel and, as a result, as of December 31, 1996, 135 
of the Company's 153 employees were located in Israel, including all of the 
Company's research and development personnel.  Therefore, the Company is 
directly affected by the political, economic and military conditions to which 
that country is subject.  In addition, many of the Company's expenses in 
Israel are paid in Israeli currency, thereby also subjecting the Company to 
foreign currency fluctuations and to economic pressures resulting from 
Israel's generally high rate of inflation.  The rate of inflation in Israel 
for 1995 and 1996 was 8.1% and 10.6%, respectively.  While substantially all 
of the Company's sales and expenses are denominated in United States dollars, 
a portion of the Company's expenses are denominated in Israeli shekels.  The 
Company's primary expense paid in Israeli currency is Israeli-based employee 
salaries.  As a result, an increase in the value of Israeli currency in 
comparison to the United States dollar could increase the cost of technology 
development, research and development expenses and general and administrative 
expenses.  There can be no assurance that currency fluctuations, changes in 
the rate of inflation in Israel or any of the other aforementioned factors 
will not have a material adverse effect on the Company's business, financial 
condition and results of operations.

      In the past, the Company has obtained royalty-bearing grants from the 
Office of the Chief Scientist in Israel's Ministry of Industry and Trade (the 
"Chief Scientist") and the Israel-United States Binational Industrial 
Research and Development Foundation to fund research and development.  The 
terms of the grants from the Chief Scientist prohibit the transfer of 
technology developed pursuant to the terms of these grants to any person, 
without the prior written consent of the State of Israel.  The Company does 
not expect to apply for such grants for the development of new products in 
the future.

      OPERATIONAL RISKS ASSOCIATED WITH CTP SYSTEMS.  On October 26, 1995, 
the Company acquired for $14.1 million CTP Systems, a developer and 
manufacturer of wireless private branch exchanges ("PBXs") and other 
low-mobility wireless communications applications.  CTP Systems began 
commercial shipments of wireless PBX equipment to two OEM customers in the 
fourth quarter of 1996, and the PBX system is currently in Beta testing with 
other OEMs, which may identify quality or operational problems in the product

                                       25
<PAGE>

that require the Company to incur additional engineering expenses to correct 
any problems or redesign the product, and also may result in a delay in 
making the product commercially available.  

      Although CTP Systems has commenced manufacturing its PBX product, it 
has not yet manufactured commercial quantities on a continuous basis.  The 
Company believes that CTP Systems' existing manufacturing facilities will 
enable it to produce commercial quantities of its PBX equipment.  No 
assurance can be given, however, that manufacturing or control problems will 
not arise as CTP Systems increases production of its product, or as 
additional facilities are required in the future.  CTP Systems is subject to 
various risks associated with the manufacturing process, including errors in 
the manufacturing process, shortages of required components, manufacturing 
equipment failures and disruptions of operations at the manufacturing 
facility.  Prolonged inability of CTP Systems to deliver products in a timely 
manner could result in the loss of customers and a material adverse effect on 
its results of operations.  In addition, CTP Systems may be required to 
develop, adapt or acquire additional production technology, facilities and 
technical personnel in the event the PBX system equipment is modified or 
redesigned.  Since CTP Systems has limited manufacturing experience, there 
can be no assurance that prices for CTP Systems' products will cover the 
manufacturing costs for its product.  In addition, certain of the components 
included in CTP Systems' products are obtained from a single source or a 
limited group of suppliers.  The partial or complete loss or delay of the 
supply of components from certain of these sources could result in a 
significant reduction in CTP Systems' revenues and could also damage certain 
customer relationships.

      MANAGEMENT OF GROWTH. The growth in the Company's business has placed, 
and is expected to continue to place, a significant strain on the Company's 
management and operations.  To manage its growth, the Company must continue 
to implement and improve its operational, financial and management 
information systems and expand, train and manage its employees.  The 
anticipated increase in product development and marketing and sales expenses 
coupled with the Company's reliance on OEMs to successfully market and 
develop products that incorporate the Company's proprietary technologies 
could have an adverse effect on the Company's performance in the next several 
quarters.  The Company's failure to manage growth effectively could have a 
material adverse effect on the Company's business, financial condition and 
results of operations.

      FUTURE ACQUISITIONS.  The Company's strategy includes obtaining 
additional technologies and will involve, in part, acquisitions of products, 
technologies or businesses from third parties.  Identifying and negotiating 
these acquisitions may divert substantial management resources.  An 
acquisition could absorb substantial cash resources, could require the 
Company to incur or assume debt obligations, or could involve the issuance of 
additional Common or Preferred Stock.  The issuance of additional equity 
securities would dilute and could represent an interest senior to the rights 
of then outstanding Common Stock of the Company.  An acquisition which is 
accounted for as a purchase, like the acquisition of CTP Systems, could 
involve significant one-time, non-cash write-offs, or could involve the 
amortization of goodwill and other intangibles over a number of years, which 
would adversely affect earnings in those years. Acquisitions outside the 
digital communications area may be viewed by outside market analysts as a 
diversion of the Company's focus on digital communications. For these and 
other reasons, the market for the Company's stock may react negatively to the 
announcement of any acquisition.  An acquisition will continue to require 
attention from the Company's management to integrate the acquired entity into 
the Company's operations, may require the Company to develop expertise in 
fields outside its current area of focus, and may result in departures of 
management of the acquired entity.  An acquired entity may have unknown 
liabilities, and its business may not achieve the results anticipated at the 
time of the acquisition. 

      VOLATILITY OF STOCK PRICE.  The price of the Company's Common Stock has 
recently experienced substantial fluctuation, and the Company believes that 
factors such as announcements of developments related

                                       26
<PAGE>

to the Company's business, announcements by competitors, quarterly 
fluctuations in the Company's financial results and general conditions in the 
wireless personal communications industry in which the Company competes or 
the national economies in which the Company does business, fluctuation in 
levels of consumer spending for cellular telephones in Japan, and other 
factors could cause the price of the Company's Common Stock to continue to 
fluctuate in the future, perhaps substantially.  In addition, in recent years 
the stock market in general, and the market for shares of small 
capitalization technology stocks in particular, have experienced extreme 
price fluctuations, which have often been unrelated to the operating 
performance of affected companies.  Such fluctuations could have a material 
adverse effect on the market price of the Company's Common Stock.

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The response to this Item is submitted as a separate section of this Form 
10-K. See Item 14.

ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
            FINANCIAL DISCLOSURE

None.


                                    PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      The information regarding directors and executive officers required by 
Item 10 is incorporated by reference from the information under the captions 
"Election of Directors," "Directors and Executive Officers" and "Section 
16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive 
proxy statement for its annual meeting of stockholders to be held on May 15, 
1997.

ITEM 11.    EXECUTIVE COMPENSATION

      The information required by Item 11 is incorporated by reference from 
the information under the caption "Executive Compensation and Other 
Information" in the Company's definitive proxy statement for its annual 
meeting of stockholders to be held on May 15, 1997.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The information required by Item 12 is incorporated by reference from 
the information under the caption "Security Ownership of Certain Beneficial 
Owners and Management" in the Company's definitive proxy statement for its 
annual meeting of stockholders to be held on May 15, 1997.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      The information required by Item 13 is incorporated by reference from 
the information under the caption "Certain Relationships and Related 
Transactions" in the Company's definitive proxy statement for its annual 
meeting of stockholders to be held on May 15, 1997.

                                       27
<PAGE>

                                     PART IV

ITEM 14.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

      (a)1. FINANCIAL STATEMENTS

            The financial statements filed as a part of this report are
identified in the Index to Consolidated Financial Statements on page F-1.

      (a)2. FINANCIAL STATEMENT SCHEDULES

            The following financial statement schedule is filed as part of this
Report:
                                                                          Page
                                                                          ----
            Schedule II - Valuation and Qualifying Accounts. . . . . . . . .S-1

            Schedules not listed above have been omitted because the 
information required to be set forth therein is not applicable or is shown in 
the financial statements or notes thereto.

      (a)3. EXHIBITS

            The following exhibits are filed herewith or are incorporated by 
reference to exhibits previously filed with the Commission.  The Company 
shall furnish copies of exhibits for a reasonable fee (covering the expense 
of furnishing copies) upon request.

Exhibit
Number                 Exhibit Title
-------                -------------
 2.1       Termination Agreement and General Release, dated November 21, 1996,
           among DSP Communications, Inc., Proxim, Inc. and Data Merger
           Corporation (Filed as Exhibit 2.1 to the Registrant's Current Report
           on Form 8-K, dated November 21, 1996, as filed on November 26, 1996,
           and incorporated herein by reference).

3.1        Amended and Restated Certificate of Incorporation of the Company
           (Filed as Exhibit 3.1 to the Registrant's Registration Statement on
           Form S-1, File No. 33-87506, as declared effective on March 7, 1995,
           and incorporated herein by reference).

3.1A       Certificate of Amendment of Amended and Restated Certificate of
           Incorporation, dated March 5, 1996 (Filed as Exhibit 3.1A to the
           Registrant's Annual Report on Form 10-K for the year ended December
           31, 1995, as filed on March 30, 1996, and incorporated herein by
           reference).

3.1B       Certificate of Amendment of Amended and Restated Certificate of
           Incorporation, dated November 13, 1996.

3.2        Bylaws of the Company (Filed as Exhibit 3.2 to the Registrant's
           Registration Statement on Form S-1, File No. 33-87506, as declared
           effective on March 7, 1995, and incorporated herein by reference).

                                       28
<PAGE>

Exhibit
Number                 Exhibit Title
-------                -------------

3.3        Written Consent dated January 26, 1995, amending the Bylaws of the
           Company (Filed as Exhibit 3.7 to the Registrant's Registration
           Statement on Form S-1, File No. 33-87506, as declared effective on
           March 7, 1995, and incorporated herein by reference).

10.1       Form of Indemnification Agreement for directors and executive
           officers (Filed as Exhibit 10.1 to the Registrant's Registration
           Statement on Form S-1, File No. 33-87506, as declared effective on
           March 7, 1995, and incorporated herein by reference).

10.2       1995 Director Stock Option Plan (Filed as Exhibit 10.2 to the
           Registrant's Registration Statement on Form S-1, File No. 33-87506,
           as declared effective on March 7, 1995, and incorporated herein by
           reference).

10.3       1995 Employee and Consultant Stock Plan (Filed as Exhibit 10.3 to the
           Registrant's Registration Statement on Form S-1, File No. 33-87506,
           as declared effective on March 7, 1995, and incorporated herein by
           reference).

10.4       1992 Israeli Key Employee Share Incentive Plan (Filed as Exhibit 10.4
           to the Registrant's Registration Statement on Form S-1, File No. 33-
           87506, as declared effective on March 7, 1995, and incorporated
           herein by reference).

10.5       1995 Employee Stock Purchase Plan (Filed as Exhibit 10.5 to the
           Registrant's Registration Statement on Form S-1, File No. 33-87506,
           as declared effective on March 7, 1995, and incorporated herein by
           reference).

10.6       Non-Exclusive Distribution Agreement dated as of January 1, 1994,
           between DSP Telecom and Tomen Electronics Corp. (Filed as Exhibit
           10.8 to the Registrant's Registration Statement on Form S-1, File No.
           33-87506, as declared effective on March 7, 1995, and incorporated
           herein by reference).

10.7       Technology Agreement and License Agreement dated as of January 7,
           1994 between DSP Group and DSP Telecom (Filed as Exhibit 10.14 to the
           Registrant's Registration Statement on Form S-1, File No. 33-87506,
           as declared effective on March 7, 1995, and incorporated herein by
           reference).

10.8       License Agreement dated as of March 25, 1994 between DSP Telecom and
           DSP Semiconductors USA, Inc. (Filed as Exhibit 10.15 to the
           Registrant's Registration Statement on Form S-1, File No. 33-87506,
           as declared effective on March 7, 1995, and incorporated herein by
           reference).

10.9       Technical Support Agreement dated October 21, 1992 between DSP
           Telecom and DSP Semiconductors Ltd. (Filed as Exhibit 10.16 to the
           Registrant's Registration Statement on Form S-1, File No. 33-87506,
           as declared effective on March 7, 1995, and incorporated herein by
           reference).

                                       29
<PAGE>

Exhibit
Number           Exhibit Title
-------          -------------

10.10      Lease Agreement dated February 21, 1991 for the Company's facility
           located in Givat Shmuel, Israel, together with documentation
           transferring the Lease from DSP Semiconductors Ltd. to DSP Telecom
           (in Hebrew) (Filed as Exhibit 10.27 to the Registrant's Registration
           Statement on Form S-1, File No. 33-87506, as declared effective on
           March 7, 1995, and incorporated herein by reference).

10.11      Lease Agreement dated February 21, 1991 for the Company's facility
           located in Givat Shmuel, Israel, together with documentation
           transferring the Lease from DSP Semiconductors Ltd. to DSP Telecom
           (in English) (Filed as Exhibit 10.28 to the Registrant's Registration
           Statement on Form S-1, File No. 33-87506, as declared effective on
           March 7, 1995, and incorporated herein by reference).

10.12      Development and License Agreement dated May 1, 1993 between Texas
           Instruments Incorporated and DSP Telecom (Filed as Exhibit 10.29 to
           the Registrant's Registration Statement on Form S-1, File No. 33-
           87506, as declared effective on March 7, 1995, and incorporated
           herein by reference).

10.13      Lease Agreement dated December 15, 1994 for the Company's
           headquarters located in Cupertino, California (Filed as Exhibit 10.30
           to the Registrant's Registration Statement on Form S-1, File No. 33-
           87506, as declared effective on March 7, 1995, and incorporated
           herein by reference).

10.14      Development and License Agreement dated as of March 31, 1993 between
           NEC Electronics Inc. and DSP Telecom, Inc. (Filed as Exhibit 10.33 to
           the Registrant's Registration Statement on Form S-1, File No. 33-
           87506, as declared effective on March 7, 1995, and incorporated
           herein by reference).

10.15      1994 Employee and Consultant Stock Plan (Filed as Exhibit 10.34 to
           the Registrant's Registration Statement on Form S-1, File No. 33-
           87506, as declared effective on March 7, 1995, and incorporated
           herein by reference).

10.16      Stock Purchase Agreement, dated October 13, 1995, by and between DSP 
           Telecommunications Ltd., the holders of the Ordinary Shares of CTP
           Systems Ltd., and CTP Systems Ltd. (Filed as Exhibit 10.35 to the
           Registrant's Current Report on Form 8-K, dated October 26, 1995, as
           filed on November 13, 1995, and incorporated herein by reference).

10.17      Addendum No. 1 to Lease Agreement between Multiline Service
           International Limited and DSP Semiconductors Ltd. and DSPC Israel
           Ltd. dated December 3, 1995, together with Guarantee by DSP
           Communications Inc. (in English & Hebrew) (Filed as Exhibit 10.36 to
           the Registrant's Annual Report on Form 10-K for the year ended
           December 31, 1995, as filed on March 30, 1996, and incorporated
           herein by reference).

                                      30
<PAGE>

Exhibit
Number          Exhibit Title
-------         ------------- 

10.18      Addendum No. 2 to Lease Agreement between Multiline Service
           International Limited and DSPC Israel Ltd., dated December 3, 1995
           (in English and Hebrew) (Filed as Exhibit 10.37 to the Registrant's
           Annual Report on Form 10-K for the year ended December 31, 1995, as
           filed on March 30, 1996, and incorporated herein by reference).

10.19      Lease Agreement for CTP Systems' facility located in Petah-Tikva,
           Israel (in Hebrew) (Filed as Exhibit 10.38 to the Registrant's Annual
           Report on Form 10-K for the year ended December 31, 1995, as filed on
           March 30, 1996, and incorporated herein by reference).

10.20      Amended and Restated Employment Agreement, dated December 15, 1995
           between DSP Telecom, Inc. and Davidi Gilo (Filed as Exhibit 10.39 to
           the Registrant's Quarterly Report on Form 10-Q for the quarter ended
           June 30, 1996, as filed on August 12, 1996, and incorporated herein
           by reference).

10.21      Amended and Restated Employment Agreement dated November 1, 1995
           between DSP Telecom, Inc. and Nathan Hod (Filed as Exhibit 10.40 to
           the Registrant's Quarterly Report on Form 10-Q for the quarter ended
           June 30, 1996, as filed on August 12, 1996, and incorporated herein
           by reference).

10.22      1996 Nonstatutory Employee and Consultant Stock Option Plan (Filed as
           Exhibit 10.41 to the Registrant's Quarterly Report on Form 10-Q for
           the quarter ended June 30, 1996, as filed on August 12, 1996, and
           incorporated herein by reference).

10.23      1996 Stock Option Plan (Filed as Exhibit 10.42 to the Registrant's
           Quarterly Report on Form 10-Q for the quarter ended September 30,
           1996, as filed on November 14, 1996, and incorporated herein by
           reference).

10.24      Employment Agreement, dated as of June 15, 1996, between DSP Telecom,
           Inc. and Michael Lubin (Filed as Exhibit 10.43 to the Registrant's
           Quarterly Report on Form 10-Q for the quarter ended September 30,
           1996, as filed on November 14, 1996, and incorporated herein by
           reference).

10.25      Amended and Restated Employment Agreement, dated as of November 1,
           1996, between DSP Telecom, Inc. and Davidi Gilo.

11.1       Statement regarding computation of net income (loss) per share.

21.1       Subsidiaries of the Company.

23.1       Consent of Ernst & Young LLP, Independent Auditors.

27.        Financial Data Schedule
------------------

                                       31
<PAGE>

(b)   REPORTS ON FORM 8-K

            On October 31, 1996, the Company filed with the Securities and 
Exchange Commission a report on Form 8-K, reporting under Item 5, Other 
Events, that the Company, Proxim, Inc., a Delaware corporation ("Proxim"), 
and Data Merger Corporation, a Delaware corporation and wholly-owned 
subsidiary of the Company ("Data Merger"), entered into an Agreement and Plan 
of Merger (the "Merger Agreement") providing for the merger of Proxim with 
and into Data Merger, with Proxim as the surviving corporation.  Under the 
terms of the Merger Agreement, Proxim stockholders were to receive 0.70 
shares of the Company's common stock for each share of Proxim common stock, 
subject to adjustments under certain conditions.  The merger was intended to 
qualify as a tax-free reorganization and a pooling-of-interests for 
accounting and financial reporting purposes, and was subject to certain 
conditions, including, among other things, the approval of the respective 
stockholders of the Company and of Proxim.

            On November 26, 1996, the Company filed with the Securities and 
Exchange Commission a report on Form 8-K, reporting under Item 5, Other 
Events, that the Company, Proxim, and Data Merger had entered into a 
Termination Agreement and General Release, which provided for the mutual 
termination of the Merger Agreement by the Company, Proxim and Data Merger, 
effective as of November 21, 1996.  Following the unexpected reduction in the 
Company's share price and that of Proxim, the Boards of Directors of the 
Company and Proxim determined that both companies should pursue a working 
partnership outside the context of a merger.

                  (REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.)


                                       32
<PAGE>

                                   SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

DSP COMMUNICATIONS, INC.


By:  /s/ Nathan Hod                                   
     -------------------------------------------------
     Nathan Hod, Chief Executive Officer and President

Date:  March 17, 1997 

      Pursuant to the requirements of the Securities Exchange Act of 1934, 
this report has been signed below by the following persons on behalf of the 
registrant and in the capacities and on the dates indicated.

 Signature                     Title                                    Date
 ---------                     -----                                    ----

/s/ Davidi Gilo            Chairman of the Board                  March 17, 1997
-------------------------  of Directors      
 Davidi Gilo    

/s/ Nathan Hod             President, Chief Executive Officer     March 17, 1997
-------------------------  and Director (Principal
Nathan Hod                 Executive Officer)
 
/s/ Gerald Dogon           Executive Vice President and Chief     March 17, 1997
-------------------------  Financial Officer (Principal
Gerald Dogon               Financial and Accounting Officer)

/s/ Neill Brownstein       
-------------------------  Director                               March 17, 1997
Neill Brownstein              

/s/ Lewis Broad                       
-------------------------  Director                               March 17, 1997
Lewis Broad    

/s/ Andrew Schonzeit                
-------------------------  Director                               March 17, 1997
Andrew Schonzeit     

/s/ Shigeru Iwamoto                  
-------------------------  Director                               March 17, 1997
Shigeru Iwamoto      

/s/ Avraham Fischer                 
-------------------------  Director                               March 17, 1997
Avraham Fischer      

                                       33
<PAGE>

                            DSP COMMUNICATIONS, INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                          Page
                                                                          ----


Report of Ernst & Young LLP, Independent Auditors. . . . . . . . . . .    F-2

Consolidated Balance Sheets as of December 31, 1996 and 1995 . . . . .    F-3

Consolidated Statements of Operations --
Years ended December 31, 1996, 1995, and 1994. . . . . . . . . . . . .    F-4

Consolidated Statements of Stockholders' Equity --
Years ended December 31, 1996, 1995, and 1994. . . . . . . . . . . . .    F-5

Consolidated Statements of Cash Flows --
Years ended December 31, 1996, 1995, and 1994. . . . . . . . . . . . .    F-6

Notes to Consolidated Financial Statements . . . . . . . . . . . . . .    F-7


                                       F-1
<PAGE>


              Report of Ernst & Young LLP, Independent Auditors

The Board of Directors and Stockholders
DSP Communications, Inc.

We have audited the accompanying consolidated balance sheets of DSP 
Communications, Inc. as of December 31, 1996 and 1995, and the related 
consolidated statements of operations, stockholders' equity and cash flows for 
each of the three years in the period ended December 31, 1996. These financial 
statements are the responsibility of the Company's management. Our 
responsibility is to express an opinion on these financial statements based on 
our audits.

We conducted our audits in accordance with generally accepted auditing 
standards. Those standards require that we plan and perform the audit 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 
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 DSP 
Communications, Inc. at December 31, 1996 and 1995, and the consolidated results
of its operations and its cash flows for each of the three years in the period 
ended December 31, 1996, in conformity with generally accepted accounting 
principles.

                                             /s/ ERNST & YOUNG LLP


San Jose, California
January 15, 1997




                                       F-2
<PAGE>

                       DSP Communications, Inc.
                                   
                      Consolidated Balance Sheets
            (In thousands, except share and per share data)


                                                      DECEMBER 31,
                                                    1996         1995
                                               ---------------------------
ASSETS                                                        
Current assets:                                               
 Cash and cash equivalents                         $77,799       $10,292
 Short-term investments                             59,034        17,696
 Trade accounts receivable (net of allowance for               
  doubtful accounts of  $132 and $139 in 1996
  and 1995, respectively)                           7,054         8,838
 Other current assets                               3,373         1,448
                                               ---------------------------
Total current assets                              147,260        38,274
                                                              
Property and equipment, net                         3,565         1,823
Goodwill (net of accumulated amortization of                  
 $574 and $82 in 1996 and 1995, respectively)       1,887         2,379
Other assets                                        2,642         1,643
                                               ---------------------------
                                                 $155,354       $44,119
                                               ---------------------------
                                               ---------------------------

LIABILITIES AND STOCKHOLDERS' EQUITY                          
Current liabilities:                                          
 Accounts payable                                $  3,747       $ 3,419
 Accrued liabilities                               11,793         5,189
 Deferred income                                    2,490           473
                                               ---------------------------
Total current liabilities                          18,030         9,081

Other liabilities                                     480           170
                                                              
Commitments and contingencies                                 
                                                              
Stockholders' equity:                                         
 Preferred stock, par value $0.001 per share,                  
  5,000,000 shares authorized; no shares issued
  and outstanding                                       -             -
 Common stock, par value $0.001, 110,000,000                   
  shares authorized; 44,497,177 shares issued                  
  and outstanding at December 31, 1996
  (36,211,844 shares in 1995)                          44            36
 Additional paid-in capital                       127,226        47,008
 Retained earnings (deficit)                        9,574       (12,176)
                                               ---------------------------
Total stockholders' equity                        136,844        34,868
                                               ---------------------------
                                                 $155,354       $44,119
                                               ---------------------------
                                               ---------------------------

                        SEE ACCOMPANYING NOTES.

                                  F-3
<PAGE>

                       DSP Communications, Inc.
                                   
                 Consolidated Statements of Operations
                 (In thousands, except per share data)


                                           YEAR ENDED DECEMBER 31,
                                        1996        1995         1994
                                  ----------------------------------------
Revenues:                                                     
  Product (includes related party                             
    revenues of $6,260, $8,379 and                            
    $3,690 in 1996, 1995 and 1994,
    respectively)                      $85,128      $37,127     $14,189
  Technology development (includes                               
    related party revenues of $113,                               
    $710 and $225 in 1996, 1995 and
    1994, respectively)                  3,771        3,740      1,777
                                  ----------------------------------------
Total revenues                          88,899       40,867     15,966
                                  ----------------------------------------
Cost of revenues:                                              
  Product                               44,153       21,483      7,839
  Technology development                 3,550        2,363      1,496
                                  ----------------------------------------
Total cost of revenues                  47,703       23,846      9,335
                                  ----------------------------------------
Gross profit                            41,196       17,021      6,631

Operating expenses:                                            
  Research and development               5,311        2,524      1,243
  Sales and marketing                    3,685        2,407        993
  General and administrative            12,190        3,631      1,740
  Charge for acquired in-process
    technology                               -       10,850          -
                                  ----------------------------------------
Total operating expenses                21,186       19,412      3,976
                                  ----------------------------------------
Operating income (loss)                 20,010       (2,391)     2,655
                                                               
Interest and other income
  (expense), net                         4,848        1,148       (312)
                                  ----------------------------------------
Income (loss) before provision 
  for income taxes                      24,858       (1,243)     2,343
Provision for income taxes              (3,108)      (1,115)      (110)
                                  ----------------------------------------
Net income (loss)                      $21,750      $(2,358)    $2,233
                                  ----------------------------------------
                                  ----------------------------------------
Net income (loss) per share              $0.48       $(0.08)     $0.09
                                  ----------------------------------------
                                  ----------------------------------------
Shares used in computing net 
  income (loss) per share               45,564       30,252     25,624
                                  ----------------------------------------
                                  ----------------------------------------

                        SEE ACCOMPANYING NOTES.
                                  F-4
<PAGE>

                            DSP Communications, Inc.
                                        
                 Consolidated Statements of Stockholders' Equity
                        (In thousands, except share data)

<TABLE>
<CAPTION>

                                      COMMON STOCK             ORDINARY SHARES     ADDITIONAL   RETAINED      NOTES       TOTAL
                                   ----------------------------------------------   PAID-IN     EARNINGS      FROM    STOCKHOLDERS'
                                     SHARES       AMOUNT      SHARES      AMOUNT    CAPITAL    (DEFICIT)  STOCKHOLDERS    EQUITY
                                   -----------------------------------------------------------------------------------------------
<S>                                <C>            <C>        <C>          <C>       <C>         <C>       <C>         <C>
Balance at December 31, 1993                -      $ -       5,240,010    $ 1,275   $  14,931   $(12,051)    $(33)        $4,122
 Issuance of ordinary shares for
  cash                                      -        -          35,626         25           1          -        -             26
 Issuance of ordinary shares for                                                                                                
  options exercised                         -        -          57,693         11          21          -        -             32
 Issuance of ordinary shares for                                                                                                
  warrants exercised                        -        -         388,031         75          11          -        -             86
 Issuance of common stock                 400        -               -          -           -          -        -              -
 Payment on notes receivable from                                                                                               
  stockholders                              -        -               -          -           -          -       33             33
 Net income                                 -        -               -          -           -      2,233        -          2,233
                                   -----------------------------------------------------------------------------------------------
Balance at December 31, 1994              400        -       5,721,360      1,386      14,964     (9,818)       -          6,532
 Conversion of ordinary shares                                                                                                  
  into common stock                22,885,440       23      (5,721,360)    (1,386)      1,363          -        -              -
 Issuance of common stock for                                                                                                   
  warrants exercised                  505,432        -               -          -         187          -        -            187
 Issuance of common stock pursuant                                                                                              
  to options exercised              1,073,940        1               -          -         922          -        -            923
 Issuance of common stock in                                                                                                    
  public offerings, net            11,746,632       12               -          -      29,241          -        -         29,253
 Change in net unrealized gain on                                                                                               
  securities available for sale             -        -               -          -         331          -        -            331
 Net loss                                   -        -               -          -          -      (2,358)       -         (2,358)
                                   -----------------------------------------------------------------------------------------------
Balance at December 31, 1995       36,211,844       36               -          -      47,008    (12,176)       -         34,868
 Issuance of common stock under                                                                                                 
  stock option and stock purchase                                                                                               
   plans (2,076,882 shares and
  11,187 shares, respectively)      2,088,069        2               -          -       3,273          -        -          3,275
 Issuance of common stock in                                                                                                      
  public offering, net              6,197,264        6               -          -      75,616          -        -         75,622
 Tax benefit related to stock
  option plans                              -        -               -          -       1,617          -        -          1,617
 Change in net unrealized gain on                                                                                                 
  securities available for sale             -        -               -          -        (288)         -        -           (288)
 Net income                                 -        -               -          -           -     21,750        -         21,750
                                   -----------------------------------------------------------------------------------------------
Balance at December 31, 1996       44,497,177      $44               -      $   -    $127,226    $ 9,574      $ -       $136,844
                                   -----------------------------------------------------------------------------------------------
                                   -----------------------------------------------------------------------------------------------
</TABLE>

                             SEE ACCOMPANYING NOTES.
                                       F-5
<PAGE>

                       DSP Communications, Inc.
                                   
                 Consolidated Statements of Cash Flows
                            (In thousands)


                                                 YEAR ENDED DECEMBER 31,
                                             1996        1995         1994
                                      ------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)                          $21,750       $(2,358)      $2,233
Adjustments to reconcile net income                            
 (loss) to net cash provided by
 operating activities:
 Charge for acquired in-process                                 
  technology, in connection with CTP
  acquisition                                    -         9,600            -
 Depreciation and amortization               1,778           557          332
 Compensation expenses related to                               
  shares issued in a subsidiary                310           170            -
 Other                                          (1)         (360)         355
Changes in operating assets and                                
 liabilities, net of effects of
 acquisition:
 Trade accounts receivable                   1,784        (7,257)         602
 Other current assets                       (1,647)         (169)          (5)
 Accounts payable                              333         2,007          410
 Accrued liabilities                         6,604         2,431        1,353
 Deferred income                             2,017          (621)         472
                                      ------------------------------------------
Net cash provided by operating
 activities                                 32,928         4,000        5,752
                                      ------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of CTP, net of cash 
 acquired                                        -       (13,886)           -
Cash purchases of equipment                 (2,702)       (1,203)        (267)
Proceeds from sales of equipment                10            34           31
Purchases of short-term investments        (97,340)      (68,685)      (2,454)
Sales and maturities of short-term 
 investments                                55,714        51,934        3,920
Other assets                                     -          (750)           -
                                      ------------------------------------------
Net cash provided by (used in)
 investing activities                      (44,318)      (32,556)       1,230
                                      ------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of lease obligations                  -          (190)         (59)
Issuance of common and ordinary
 shares for cash                            78,897        30,892          144
Repayment of stockholders' notes 
 receivable                                      -             -           33
Deferred public offering costs                   -             -         (529)
                                      ------------------------------------------
Net cash provided by (used in)
 financing activities                       78,897        30,702         (411)
                                      ------------------------------------------
Increase in cash and
 cash equivalents                           67,507         2,146         6,571
Cash and cash equivalents at 
 beginning of year                          10,292         8,146         1,575
                                      ------------------------------------------
Cash and cash equivalents at end of
 year                                      $77,799       $10,292        $8,146
                                      ------------------------------------------
                                      ------------------------------------------

SUPPLEMENTAL DISCLOSURES OF CASH                               
 FLOW INFORMATION
Interest paid                              $     -       $   127        $   77
                                      ------------------------------------------
                                      ------------------------------------------
Income taxes paid                          $   730       $   445        $   28
                                      ------------------------------------------
                                      ------------------------------------------
SUPPLEMENTAL NONCASH INVESTING AND                             
 FINANCING INFORMATION
Equipment cost payable                     $   125       $   130        $   45
                                      ------------------------------------------
                                      ------------------------------------------
Loan provided to CTP before                $    -        $   750       $    -
acquisition
                                      ------------------------------------------
                                      ------------------------------------------


                             SEE ACCOMPANYING NOTES.
                                      F-6

<PAGE>

                                DSP Communications, Inc.

                         Notes to Consolidated Financial Statements

                                    December 31, 1996


1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND BASIS OF PRESENTATION

DSP Communications, Inc. ("DSPC" or the "Company"), a Delaware corporation 
incorporated on November 23, 1994, succeeded to the business of DSP 
Telecommunications Ltd., an Israeli corporation ("DSP Telecom"), pursuant to a 
reorganization completed upon the closing of the Company's initial public 
offering ("IPO") on March 14, 1995, under which DSP Telecom became a wholly 
owned subsidiary of DSPC (the "Reorganization"). The Reorganization was 
accounted for in a manner similar to a pooling of interests.

The consolidated financial statements present the financial condition of the 
Company as of December 31, 1996 and 1995, the consolidated results of operations
and cash flows of the Company from the Reorganization date and the combined 
financial position, results of operations and cash flows of the Company with DSP
Telecom prior to the Reorganization.

The consolidated financial statements include the accounts of DSPC, its 
subsidiaries DSP Telecom Inc., a California corporation; DSP Communications 
(Japan) Inc., a Japanese corporation; DSPC Israel Ltd. ("DSPCI"), an Israeli 
company; DSP Telecom; and effective October 31, 1995, CTP Systems Ltd., an 
Israeli company ("CTP") (see Note 2). DSPC wholly owns all of its subsidiaries 
except for less than a 1% minority interest in DSPCI represented by nonvoting 
preferred stock of DSPCI held by certain employees and advisors. Intercompany 
accounts and transactions have been eliminated in consolidation.

NATURE OF OPERATIONS AND RELATED CONCENTRATIONS

The Company applies its expertise in the development, design and marketing of 
DSP (digital signal processing) software, algorithms and VLSI circuit design to 
develop highly integrated, low power and cost-effective chip sets for wireless 
personal communications applications. Following the CTP Acquisition, DSPC also 
provides wireless PBX solutions for the office environment and other low-
mobility and wireless local loop applications.

Substantially all of DSPC's product revenues to date have been generated from 
the sale of a single product, its baseband chip set for digital cellular 
telephones for use in Japan.

                                       F-7
<PAGE>
                                DSP Communications, Inc.

                         Notes to Consolidated Financial Statements


1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

NATURE OF OPERATIONS AND RELATED CONCENTRATIONS (CONTINUED)

Substantially all of the Company's product revenues are from sales to one 
distributor in Japan who in turn sells to OEM manufacturers in Japan. The 
Company's distributor is not subject to minimum purchase requirements and can 
cease marketing the Company's products at any time. The loss of the Company's 
sole distributor in Japan could have a material adverse effect on the Company's 
business, financial condition and results of operations. Substantially all of 
these distributor sales were made to a small number of customers in 1996, 1995 
and 1994. Because the worldwide cellular subscriber equipment industry is 
dominated by a small number of large corporations, DSPC expects that a 
significant portion of its future product revenues will continue to be 
concentrated in a limited number of customers. The loss of one of these 
customers would have a material adverse effect on the Company's results of 
operations.

The Company uses independent foundries to manufacture its baseband chip sets. 
The Company's reliance on independent foundries involves a number of risks, 
including the possibility of a shortage of certain key components and reduced 
control over delivery schedules, manufacturing capacity, quality and costs.

DSPC's integrated circuits are fabricated by independent third party suppliers. 
The Company's reliance on these suppliers involves a number of risks, including 
the possibility of an insufficient supply of DSP chips, noncompetitive pricing 
and discontinued production of the DSP chip currently utilized to produce the 
Company's products. During and at the end of 1996 the Company had three major 
suppliers for the integrated circuits. The reliance on a small number of 
suppliers may subject the Company from time to time to quality, allocation and 
pricing constraints.

REVENUE RECOGNITION

PRODUCT - Product revenue relates to baseband chip sets for cellular 
telephones and to wireless PBX systems. Revenue from product sales to 
customers, other than sales to distributors, are recorded when products are 
shipped. Sales to distributors, under agreements allowing price protection 
and right of return on products unsold by the distributor, are not recognized 
until the products are sold by the distributor to OEM manufacturers. Through 
December 31, 1996,  the Company deferred recognition of sales to distributors 
until the products were sold in complete chip sets by the distributors to OEM 
manufacturers. Revenue deferred for unmatched chip sets is no longer 
significant to the Company's operations. DSPC accrues estimated sales 
returns/exchanges for end-user sales and warranty costs upon recognition of 
sales. DSPC has not experienced significant warranty claims to date.

                                       F-8
<PAGE>

                                DSP Communications, Inc.

                         Notes to Consolidated Financial Statements

1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

REVENUE RECOGNITION (CONTINUED)

TECHNOLOGY DEVELOPMENT - DSPC performs best-efforts research and product 
development work under technology development agreements. Due to technology risk
factors, the costs of these agreements are expensed as incurred and revenues are
recognized when applicable customer milestones are met, including deliverables, 
and in any case, not in excess of the amount that would be recognized using the 
percentage-of-completion method. Costs incurred under technology development 
agreements are included in the cost of technology development. Revenues under 
support agreements are recorded pro rata over the terms of the agreements.

Deferred income consists of the following at December 31 (in thousands):


                                     1996       1995
                                -------------------------
Product revenues                   $2,390       $425
Technology development revenues       100         48
                                -------------------------
                                   $2,490       $473
                                -------------------------
                                -------------------------

RESEARCH AND DEVELOPMENT

Research and development costs are expensed as incurred and reduced by related 
participation from programs sponsored by the Israeli government.

CHARGE FOR ACQUIRED-IN-PROCESS TECHNOLOGY

The charge for acquired-in-process technology of $10,850,000 in 1995 was 
recorded in the fourth quarter of 1995 and consists of $9,600,000 of acquired 
in-process technology in connection with the CTP Acquisition (see note 2) and 
$1,250,000 of acquired in-process technology in connection with a license 
arrangement.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted 
accounting principles requires management to make estimates and assumptions that
affect amounts reported in the financial statements and accompanying notes. 
Actual results could differ from these estimates.

                                       F-9
<PAGE>
                                DSP Communications, Inc.

                         Notes to Consolidated Financial Statements

1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INVENTORIES

Inventories are stated at the lower of cost (first-in, first-out) or market and 
are included in other assets.

PROPERTY AND EQUIPMENT

Property and equipment is recorded at cost. Depreciation and amortization is 
provided using the straight-line method over the estimated useful lives of the 
assets (generally from 3 to 5 years), or the life of the lease, whichever is 
shorter.

FOREIGN CURRENCY TRANSACTIONS

Substantially all of DSPC's sales are made in United States dollars. In 
addition, a substantial portion of DSPC's costs are incurred in dollars. Since 
the dollar is the primary currency in the economic environment in which DSPC 
operates, the dollar is its functional currency, and accordingly, monetary 
accounts maintained in currencies other than the dollar (principally cash and 
liabilities) are remeasured using the foreign exchange rate at the balance sheet
date. Operational accounts and nonmonetary balance sheet accounts are measured 
and recorded at the rate in effect at the date of the transaction. The effects 
of foreign currency remeasurement, which have been immaterial to date, are 
reported in current operations.

The Company utilizes financial instruments to reduce financial market risks. 
These instruments are used to hedge anticipatory transactions. The foreign 
exchange forward contract position as of December 31, 1996 is to hedge 
$20,000,000 in foreign currency exposure. This contract matures in January 1997.
The Company does not use derivative financial instruments for trading purposes. 
Gains and losses on currency options that are designated and effective as hedges
of anticipated transactions are deferred and recognized in income in the same 
period that the underlying transactions are settled.

                                       F-10
<PAGE>

                                DSP Communications, Inc.

                         Notes to Consolidated Financial Statements

1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

NET INCOME (LOSS) PER SHARE

Net income (loss) per share reflects the common stock splits through December 
31, 1996 and is computed using the weighted average number of shares of common 
stock, Class B ordinary shares and dilutive ordinary equivalent shares from 
Class A convertible ordinary shares (using the as if-converted method) and from 
dilutive share options and warrants (using the treasury stock method). Pursuant 
to the Securities and Exchange Commission ("SEC") Staff Accounting Bulletins, 
common and common equivalent shares issued at prices below the IPO price per 
share during the 12-month period prior to the IPO have been included in the 
calculation through December 31, 1994 (using the treasury stock method).

CONCENTRATIONS OF CREDIT RISK

Financial instruments that subject DSPC to credit risk consist principally of 
cash equivalents and short term investments and trade receivables. The majority 
of DSPC's product sales are to a single distributor who in turn sells to 
manufacturers of consumer electronics products. No collateral is required from 
the distributor or end customers. At December 31, 1996, approximately $5,000,000
or approximately 70% of trade accounts receivable is due from the distributor. 
Write-offs of accounts receivable through December 31, 1996 have been 
insignificant.

CASH EQUIVALENTS AND SHORT - TERM INVESTMENTS

DSPC considers all highly liquid investments with a maturity of three months or 
less, when purchased, to be cash equivalents. 

At December 31, 1996, pursuant to SFAS 115, all debt securities are designated 
as available-for-sale. Available-for-sale securities are carried at fair value, 
which is determined based upon the quoted market prices of the securities, with 
unrealized gains and losses reported in stockholders' equity. Realized gains and
losses and declines in value judged to be other-than-temporary on available for-
sale securities are included in interest income. The cost of securities sold is 
based on the specific identification method. Interest and dividends on 
securities classified as available-for-sale are included in interest income.

                                       F-11
<PAGE>

                                DSP Communications, Inc.

                         Notes to Consolidated Financial Statements

1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INTANGIBLE ASSETS

Intangible assets consist of acquired developed technology and goodwill 
resulting from the CTP acquisition (see note 2) which are being amortized over 
the estimated useful lives of five years.

Acquired developed technology at December 31, 1996, with a cost of $1,700,000 
and accumulated amortization of $397,000, are included in other assets.

Management assesses the realizability of the goodwill and the acquired 
technology at each balance sheet date.

ACCOUNTING FOR STOCK-BASED COMPENSATION

The Company has elected to follow Accounting Principles Board Opinion No. 25, 
"Accounting for Stock Issued to Employees" ("APB 25") and related 
interpretations in accounting for its employee stock options because, as 
discussed below, the alternative fair value accounting provided for under FASB 
Statement No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123") 
requires use of option valuation models that were not developed for use in 
valuing employee stock options. Under APB 25, because the exercise price of the 
Company's employee stock options equals the market price of the underlying stock
on the date of the grant, no compensation expense is recognized. 

RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform to the current year
presentation.


                                       F-12
<PAGE>

                                DSP Communications, Inc.

                         Notes to Consolidated Financial Statements

2. MERGER AND ACQUISITION ACTIVITY

On October 26, 1995, the Company acquired all of the outstanding shares of CTP, 
which develops wireless PBX and other low mobility wireless applications, for 
$13,600,000 in cash. The transaction was accounted for as a purchase. The 
purchase price of $14,100,000, which consisted of the $13,600,000 cash payment 
and $500,000 of transaction costs, was allocated based on an independent 
appraisal as follows (in thousands):

                   Net tangible assets                $  369
                   Acquired developed technology       1,700
                   Acquired in-process technology      9,600
                   Goodwill                            2,461
                                                  --------------
                   Total purchase price              $14,130
                                                  --------------
                                                  --------------

The purchase price allocation resulted in a $9,600,000 charge to acquired in-
process technology in the fourth quarter of 1995. The acquired in-process 
technology represents the appraised value of technology in the development stage
that had not yet reached technological feasibility and does not have alternative
future uses. The results of CTP are consolidated from October 31, 1995. The 
results of operations of CTP from October 26, 1995 to October 31, 1995 were not 
material to DSPC.

In connection with the acquisition, prior shareholders of CTP were entitled to 
receive a contingent earn-out payment on March 31, 1998. Due to CTP's operating 
results for the year ended December 31, 1996, the Company will not be required 
to make this contingent earn-out payment. 

The following unaudited pro forma financial summary is presented as if the 
operations of the Company and CTP were combined as of January 1, 1995. The 
unaudited pro forma combined results are not necessarily indicative of actual 
results that would have occurred had the purchase been consummated at this date,
or of the future operations of the combined entities.

                                       F-13
<PAGE>

                                DSP Communications, Inc.

                         Notes to Consolidated Financial Statements

2. MERGER AND ACQUISITION ACTIVITY (CONTINUED)

In accordance with SEC Regulation S-X, Rule 11-02(b)(5), nonrecurring charges, 
such as the charge for acquired in-process technology resulting from the 
acquisition, are not reflected in the following pro forma financial summary for 
the fiscal year ended December 31 (in thousands):


                                        1995           1994
                                   -------------------------------
              Revenues                $42,810        $16,608
                                   -------------------------------
                                   -------------------------------
              Net income              $ 4,883        $ 1,049
                                   -------------------------------
                                   -------------------------------
              Net income per share    $  0.14        $  0.04
                                   -------------------------------
                                   -------------------------------
              Shares used in 
               computing net  
               income per share        35,752         25,624
                                  -------------------------------
                                  -------------------------------

In the fourth quarter of 1996, the Company incurred a charge of approximately 
$5,000,000 in connection with the termination of a proposed acquisition of 
Proxim, Inc.

3. AVAILABLE-FOR-SALE SECURITIES

The following is a summary of available-for-sale securities at December 31, 
1996: (in thousands)


                          Unamortized    Unrealized    Unrealized  Fair Market
                             Cost            Gains        Losses      Value
                          -----------------------------------------------------
Bank time deposit             $13,904     $     -      $    -       $13,904
Commercial paper                6,039           -           -         6,039
Closed-end mutual fund 
 shares                        20,577           -           -        20,577
U.S. corporate obligations     30,658          29          (2)       30,685
U.S. municipal obligations     19,430          11          (3)       19,438
U.S. government obligations     7,233           8           -         7,241
                          -----------------------------------------------------
                              $97,841         $48         $(5)      $97,884
                          -----------------------------------------------------
                          -----------------------------------------------------
Reported as:
 Cash equivalents             $38,850         $ -         $ -       $38,850
 Short-term investments        58,991          48          (5)       59,034
                          -----------------------------------------------------
                              $97,841         $48         $(5)      $97,884
                          -----------------------------------------------------
                          -----------------------------------------------------

                                       F-14
<PAGE>

                                DSP Communications, Inc.

                         Notes to Consolidated Financial Statements

3. AVAILABLE-FOR-SALE SECURITIES (CONTINUED)

The following is a summary of available-for-sale securities at December 31, 1995
(in thousands):

                          Unamortized    Unrealized    Unrealized  Fair Market
                             Cost            Gains        Losses      Value
                          -----------------------------------------------------
Bank time deposit             $ 4,686        $  -        $  -       $ 4,686
Commercial paper               14,137         284          (2)       14,419
Closed-end mutual fund 
 shares                         1,300           2           -         1,302
U.S. government obligations     5,228          47           -         5,275
                          -----------------------------------------------------
                              $25,351        $333        $ (2)      $25,682
                          -----------------------------------------------------
                          -----------------------------------------------------
Reported as:
 Cash equivalents              $ 7,986       $  -        $ -        $ 7,986
 Short-term investments         17,365        333          (2)       17,696
                          -----------------------------------------------------
                               $25,351       $333        $ (2)      $25,682
                          -----------------------------------------------------
                          -----------------------------------------------------

During the years ended December 31, 1996 and 1995, the change in net unrealized 
gains was a decrease of $288,000 and an increase of $331,000, respectively. 
Proceeds from the sale of available-for-sale securities for the year ended 
December 31, 1996 were $106,822,000. Realized gains and losses on the sale of 
available-for-sale securities for the year ended December 31, 1996 were 
immaterial.

Proceeds from the sale of available-for-sale securities for the year ended 
December 31, 1995 were $13,019,000. Realized gains on the sale of available-for-
sale securities during 1995 were $369,000. There were no realized losses on the 
sale of available-for-sale securities during 1995.

Proceeds from the sales of available-for-sale securities and the related gross 
realized gains and losses for the year ended December 31, 1994 were $3,793,000, 
$96,000 and $450,000, respectively.

The contractual maturity of available-for-sale securities as of December 31, 
1996 is as follows: 1997 - $88,707,000; 1998 - $8,081,000; 1999 - $1,096,000.

                                       F-15
<PAGE>

                                DSP Communications, Inc.

                         Notes to Consolidated Financial Statements

4. PROPERTY AND EQUIPMENT

Property and equipment consist of the following at December 31 (in thousands):


                                                1996            1995
                                      ---------------------------------------
    Computer and laboratory equipment         $ 4,047          $ 2,437
    Furniture and fixtures and other              752              558
    Leasehold improvements                      1,100              231
                                      ---------------------------------------
                                                5,899            3,226
    Accumulated depreciation                   (2,334)          (1,403)
                                      ---------------------------------------
                                              $ 3,565          $ 1,823
                                      ---------------------------------------
                                      ---------------------------------------

5. ACCRUED LIABILITIES

Accrued liabilities consist of the following at December 31 (in thousands):


                                                1996            1995
                                      ---------------------------------------
    Accrued royalties                        $   235          $ 1,036
    Warranty reserve                           3,069              807
    Compensation and benefits                  3,533            1,711
    Income tax authorities                     3,570              761
    Other                                      1,386              874
                                      ---------------------------------------
                                             $11,793           $5,189
                                      ---------------------------------------
                                      ---------------------------------------

6. LEASES

DSPC leases facilities under noncancelable operating lease arrangements. The 
Company leases facilities in Cupertino, California, in Israel and in Japan under
noncancelable operating leases. The California facility lease expires in 
February 1998, the Israeli facilities leases expire in October 1997, March 1999,
and April 2001, and the Japanese lease expires in October 1997. 


                                       F-16
<PAGE>

                                DSP Communications, Inc.

                         Notes to Consolidated Financial Statements

6. LEASES

Future minimum payments under noncancelable operating leases with initial terms 
of one year or more consist of the following at December 31, 1996 (in 
thousands):

                            1997               $   896
                            1998                   736
                            1999                   694
                            2000                   508
                            2001                   526
                            Thereafter             457
                                            ----------------
                                                $3,817
                                            ----------------
                                            ----------------

The gross rental payments under all operating leases were $865,000, $497,000 and
$176,000 in 1996, 1995 and 1994, respectively. Rental expense, net of 
reimbursements from sublessees, was $784,000, $412,000 and $84,000 in 1996, 
1995, and 1994, respectively.

7. COMMITMENTS AND CONTINGENCIES

ISRAELI GOVERNMENT RESEARCH GRANTS

The Company has participated in programs sponsored by the Israeli Government for
the support of research and development activities. Through December 31, 1996 
the Company has obtained grants from the Office of the Chief Scientist in the 
Israeli Ministry of Industry and Trade (the "Chief Scientist") aggregating 
approximately $2,800,000 for participation in a number of research and 
development projects. The terms of the grants from the Chief Scientist prohibit 
the transfer of technology developed pursuant to the terms of these grants to 
any person, without the prior written consent of the Chief Scientist. The 
Company is obligated to pay royalties to the Chief Scientist, amounting to 3% of
the sales of the products developed out of such projects up to an amount equal 
to 150% of the grant received. For the years ended December 31, 1996, 1995 and 
1994, the Company charged cost of revenues for approximately $724,000, 
$1,142,000 and $574,000, respectively, for royalties on products that were 
commercially developed out of projects funded by research grants from the Chief 
Scientist. As of December 31, 1996 the Company has repaid all amounts owed 
pursuant to the grants relating to products being currently marketed by the 
Company. As of December 31, 1996, the Company has decided not to apply for 
further grants from the Chief Scientist. 

                                       F-17
<PAGE>

                                DSP Communications, Inc.

                         Notes to Consolidated Financial Statements

7. COMMITMENTS AND CONTINGENCIES (CONTINUED)

OTHER ROYALTY COMMITMENTS

In connection with certain license and technology development agreements, DSPC 
agreed to pay royalties on certain sales based on specified rates, which are 
generally 6% to 8% subject to certain limitations.

CTP participated with one of its customers in a program sponsored by the BIRD 
Foundation, which was terminated prior to the acquisition by DSPC. In 
connection with the program, CTP agreed to pay to the BIRD Foundation 
royalties on its wireless PBX product sales at specified rates of 2.5% to 5%, 
up to an aggregate total of approximately $800,000 as adjusted for changes in 
the consumer price index. 

SEVERANCE LIABILITY

The Company's liability for severance pay and pension, pursuant to Israeli law 
is fully provided for through insurance contracts and by accrual. At December 
31, 1996, virtually all of the liability is funded. The amounts maintained with 
insurance companies and part of pension and severance pay funds, are not under 
the control of the Company and, therefore, are not included in the financial 
statements. Pension and severance expenses for the years ended December 31, 
1996, 1995 and 1994 amounted to approximately $802,000, $493,000 and $161,000, 
respectively.

INVESTMENT COMMITMENT

In obtaining approval of the Reorganization from Israeli tax authorities, the 
Company has agreed to invest in activities in Israel no less than $9,000,000 out
of the proceeds of the initial public offering within three years after 
consummation of the offering. Through December 31, 1996, $5,000,000 has been 
transferred to Israel primarily in order to finance a portion of the CTP 
acquisition, and to increase the capital of DSPCI.

8. CREDIT ARRANGEMENTS

As of December 31, 1996, the Company had issued bank guarantees and a letter of 
credit totaling $2,150,000. The term of the letter of credit is through 
November 27, 1997.

                                       F-18
<PAGE>

                                DSP Communications, Inc.

                         Notes to Consolidated Financial Statements

9. STOCKHOLDERS' EQUITY

PREFERRED STOCK

The board of directors has the authority, without any further vote or action by 
the stockholders, to provide for the issuance of up to 5,000,000 shares of 
preferred stock from time to time in one or more series with such designations, 
rights, preferences and limitations as the board of directors may determine, 
including the consideration received therefore, the number of shares comprising 
each series, dividend rates, redemption provisions, liquidation preferences, 
redemption fund provisions, conversion rights and voting rights, all without the
approval of the holders of common stock.

SHARE OPTION PLANS

1995 EMPLOYEE AND CONSULTANT STOCK PLAN

DSPC's 1995 Employee and Consultant Stock Plan (the "1995 Plan") provides for 
(i) the grant to employees of incentive stock options, (ii) the grant to 
employees and consultants of DSPC of nonstatutory stock options and (iii) the 
grant of stock options which comply with the applicable requirements of Israeli 
law to the extent granted to persons who may be subject to income tax in Israel.
A total of 4,800,000 shares of common stock have been reserved for issuance 
under the 1995 Plan.

Options granted under the 1995 Plan have an exercise price no less than the fair
market value of the common stock on the date of grant. The period within which 
the option may be exercised is determined at the time of grant. In no event may 
the term of an incentive stock option be longer than ten years. 

1996 STOCK OPTION PLAN

DSPC's 1996 Stock Option Plan (the "1996 Plan") provides for (i) the grant to 
employees of incentive stock options, (ii) the grant to employees, consultants 
and nonemployee directors of DSPC of nonstatutory stock options, and (iii) the 
grant of stock options which comply with the applicable requirements of Israeli 
law to the extent granted to persons who may be subject to income tax in Israel.
A total of 3,000,000 shares of common stock have been reserved for issuance 
under the 1996 Plan.

Options granted under the 1996 Plan have an exercise price no less than the fair
market value of the common stock on the date of grant. The period within which 
the option may be exercised is determined at the time of grant. In no event may 
the term of an incentive stock option be longer than ten years. 

                                       F-19
<PAGE>

                                DSP Communications, Inc.

                         Notes to Consolidated Financial Statements


9. STOCKHOLDERS' EQUITY (CONTINUED)

SHARE OPTION PLANS (CONTINUED)

1995 DIRECTOR STOCK OPTION PLAN

Each nonemployee director of the Company is entitled to participate in the 
Company's 1995 Director Stock Option Plan (the "Director Option Plan"). The 
board of directors and the stockholders have authorized a total of 600,000 
shares of common stock for issuance under the Director Option Plan. The Director
Option Plan provides for the grant of nonstatutory options to nonemployee 
directors of the Company.

The Director Option Plan provides that each eligible director shall be granted 
an option to purchase 32,000 shares of common stock on the later of March 14, 
1995 or the date on which the optionee first becomes a director of the Company. 
Thereafter, beginning on January 1, 1996, each nonemployee director shall be 
granted an option to purchase 8,000 additional shares of common stock on January
1 of each year if, on such date, he or she shall have served on the Company's 
board of directors for at least six months.

Options granted under the Director Option Plan have an exercise price equal to 
the fair market value of the common stock on the date of grant and have a term 
of ten years, unless terminated sooner upon termination of the optionee's status
as a director or otherwise pursuant to the Director Option Plan.

                                       F-20
<PAGE>

                                DSP Communications, Inc.

                         Notes to Consolidated Financial Statements

9. STOCKHOLDERS' EQUITY (CONTINUED)

SHARE OPTION PLANS (CONTINUED)

A summary of the Company's stock option activity under all option plans, and 
related information for the years ended December 31 is as follows (in thousands 
except per share information):

<TABLE>
<CAPTION>
                                1994                  1995                 1996
                          --------------------------------------------------------------
                                      Weighted-            Weighted-           Weighted-
                                      Average              Average             Average  
                                      Exercise             Exercise            Exercise 
                           Options     Price      Options    Price     Options   Price  
                          --------------------------------------------------------------
<S>                       <C>        <C>         <C>      <C>         <C>      <C>
Outstanding-beginning of 
 year                      1,663      $0.06       3,531     $0.99      5,534   $ 2.71
Granted                    2,673      $0.86       3,238     $3.98      4,307   $19.92
Exercised                   (231)     $0.70      (1,068)    $0.87     (2,077)  $ 1.57
Forfeited                   (574)     $0.45        (167)    $2.40       (374)  $ 3.94
                          --------------------------------------------------------------
Outstanding-end of year    3,531      $0.99       5,534     $2.71      7,390   $13.00
                          --------------------------------------------------------------
                          --------------------------------------------------------------
Exercisable at end of year                        1,360                  995

Weighted-average fair 
 value of options granted 
 during the year                                            $1.75              $11.39

</TABLE>




                                       F-21
<PAGE>

                                DSP Communications, Inc.

                         Notes to Consolidated Financial Statements

9. STOCKHOLDERS' EQUITY (CONTINUED)

SHARE OPTION PLANS (CONTINUED)

The options outstanding at December 31,1996 have been segregated into ranges for
additional disclosure as follows (in thousands except per share information):


                          OPTIONS OUTSTANDING               OPTIONS EXERCISABLE
               -----------------------------------------------------------------
                                 WEIGHTED-                 OPTIONS
                   OPTIONS        AVERAGE    WEIGHTED-    CURRENTLY    WEIGHTED-
  RANGE OF      OUTSTANDING AT   REMAINING    AVERAGE    EXERCISABLE   AVERAGE
  EXERCISE       DECEMBER 31,   CONTRACTUAL  EXERCISE   AT DECEMBER 31, EXERCISE
   PRICES           1996           LIFE       PRICE          1996        PRICE
--------------------------------------------------------------------------------
$0.06-$0.08          177           1.6       $  0.06         119        $  0.07
$1.00-$1.27          355           2.2       $  1.13         110        $  1.17
$1.70-$2.50          519           4.3       $  1.95         146        $  2.03
$3.25-$3.88        1,375           3.6       $  3.60         266        $  3.85
$5.00-$6.00          508           3.6       $  5.29         111        $  5.11
$9.44-$10.91         702           4.2       $ 10.06          25        $  9.44
$15.88-$22.75      2,940           5.0       $ 19.28           8        $ 18.25
$24.00-$31.25        814           5.3       $ 28.54         210        $ 24.00
                   -----           ---       -------         ---        -------
$0.06-$31.25       7,390           4.9       $ 13.00         995        $  7.49
                   -----           ---       -------         ---        -------
                   -----           ---       -------         ---        -------

Substantially all options were granted at fair market value in 1996 and 1995. 
Options to purchase 420,000 shares were granted with an exercise price in excess
of the fair market value on the date of grant. The weighted-average exercise 
price and the weighted-average fair value of these options are $26.00 and $9.08,
respectively.

In 1992, options to purchase ordinary shares equivalent to 21,180 common shares,
not designated under any option plan, were granted to an employee; 15,000 of 
these options were canceled in 1994, leaving a balance of 6,180 options 
outstanding at December 31, 1994. These options were exercised in 1995.



                                       F-22
<PAGE>

                                DSP Communications, Inc.

                         Notes to Consolidated Financial Statements

9. STOCKHOLDERS' EQUITY (CONTINUED)

SHARE OPTION PLANS (CONTINUED)

1995 EMPLOYEE STOCK PURCHASE PLAN

DSPC has reserved 2,000,000 shares of common stock for issuance under the 1995 
Employee Stock Purchase Plan (the "1995 Purchase Plan"). Under the 1995 Purchase
Plan, eligible employees are permitted to purchase shares of common stock at the
end of each six month purchase period during a two year offering period (the 
"Offering Period"), through payroll deductions not exceeding 10% of an 
employee's compensation. The price per share is equal to 85% of the fair market 
value of the common stock on the first day of the Offering Period or on the last
day of the applicable purchase period, whichever is lower.

PRO FORMA DISCLOSURES

The Company has elected to follow Accounting Principles Board Opinion No. 25, 
"Accounting for Stock Issued to Employees" and related interpretations in 
accounting for its employee stock options because, as discussed below, the 
alternative fair value accounting provided for under FASB Statement No. 123, 
"Accounting for Stock-Based Compensation," requires use of option valuation 
models that were not developed for use in valuing employee stock options. Under 
APB 25, because the exercise price of the Company's employee stock options 
equals the market price of the underlying stock on the date of the grant, no 
compensation expense is recognized. 

Pro forma information regarding net income (loss) and net income (loss) per 
share is required by SFAS 123, which also requires that the information be 
determined as if the Company has accounted for its employee stock options 
granted subsequent to December 31, 1994 under the fair value method of that 
Statement. The fair value for these options was estimated at the date of grant 
using a Black-Scholes pricing model with a graded vesting approach with the 
following assumptions for 1995 and 1996 respectively: risk-free interest rates 
from 5.0% to 7.0%; no dividend yield; volatility factor of the expected market 
price of the Company's common stock of 0.65 for both years; and a weighted-
average expected life of the option of 2.5 years for both years. 

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully 
transferable. In addition, option valuation models require the input of highly 
subjective assumptions including the expected stock price volatility. Because 
the Company's employee stock options have characteristics significantly 
different from those of traded options, and because changes in the subjective 
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single 
measure of the fair value of its employee stock options.

                                       F-23
<PAGE>

                                DSP Communications, Inc.

                         Notes to Consolidated Financial Statements

9. STOCKHOLDERS' EQUITY (CONTINUED)

PRO FORMA DISCLOSURES (CONTINUED)

For purposes of pro forma disclosures, the estimated fair value of the options 
is amortized to expense over the options' vesting period. The Company's pro 
forma information follows (in thousands except for earnings (loss) per share 
information):


                                         1996             1995
                                     --------------------------------
Pro forma net income (loss)             $15,194          $(3,452)
Pro forma net income (loss) per share   $  0.34          $ (0.11)

Because SFAS 123 is applicable only to options granted subsequent to December 
31, 1994, its pro forma effect will not be fully realized until 1998.

COMMON STOCK RESERVED FOR FUTURE ISSUANCE

As of December 31, 1996, approximately 12,000,000 shares of common stock are 
reserved for future issuance upon exercise of share options under the Company's 
stock option and stock purchase plans.

10. INCOME TAXES

The tax provision consists of the following for the years ended December 31 (in 
thousands):


                                    1996              1995              1994
                              --------------------------------------------------
Current:
 Federal                            $  630          $    -              $  -
 State                                 170               -                 -
 Israel                              2,770           1,115               110
                              --------------------------------------------------
                                     3,570           1,115               110

Deferred:
 Federal                              (183)              -                 -
 Israel                               (279)              -                 -
                              --------------------------------------------------
                                      (462)              -                 -
                              --------------------------------------------------
Provision for income taxes          $3,108          $1,115              $110
                              --------------------------------------------------
                              --------------------------------------------------

                                       F-24
<PAGE>

                                DSP Communications, Inc.

                         Notes to Consolidated Financial Statements

10. INCOME TAXES (CONTINUED)

Pretax income (loss) from foreign operations was $24,655,000 in 1996, 
$(164,000) in 1995, and $3,237,000 in 1994.

The tax benefits resulting from the exercise of nonqualified stock options and 
the disqualifying dispositions of shares acquired under the Company's incentive 
stock option plans reduced taxes payable by $1,617,000 in 1996. Such benefit was
credited to additional paid-in capital.

A reconciliation between DSPC's effective tax rate and the United States 
("U.S.") statutory rate (35%) is as follows (in thousands):


                                              DECEMBER 31,
                             ------------------------------------------------
                                  1996           1995           1994
                             ------------------------------------------------
Tax (benefit) at U.S. 
 statutory rate                  $ 8,700       $   (435)      $   820
Operating losses utilized              -              -          (289)
Valuation of temporary 
 differences                        (163)           399             -
Lower effective tax 
 rate of Israel                   (7,656)        (2,209)         (421)
Charge for acquired Israeli
 in-process technology                 -          3,360             -
Unbenefited foreign losses         1,518              -             -
State taxes, net of federal 
 benefit                             110              -             -
Other                                599              -             -
                              --------------------------------------------------
Provision for income taxes       $ 3,108        $ 1,115       $   110
                              --------------------------------------------------
                              --------------------------------------------------

                                       F-25
<PAGE>

                                DSP Communications, Inc.

                         Notes to Consolidated Financial Statements

10. INCOME TAXES (CONTINUED)

Significant components of DSPC's deferred tax assets for U.S. federal, state and
Israel income taxes are as follows at December 31 (in thousands):


                                               1996               1995
                                     ----------------------------------------
Deferred tax assets:
 Net operating loss carryforwards       $    6,178            $   694
 Accruals and reserves not currently
  deductible                                   535                 20
 Foreign tax credits                           484                  -
 Capitalized research and development          409                 89
 Capitalized license fee                         -                497
 Other                                          97                  2
                                     ----------------------------------------
Total deferred tax assets                    7,703              1,302
 Valuation allowance                        (5,624)            (1,302)
                                     ----------------------------------------
Total deferred tax assets                  $ 2,079             $    -
                                     ----------------------------------------
                                     ----------------------------------------


Of the valuation allowance as of December 31, 1996, $4,331,000 is related to the
benefits of stock options, which will be credited to paid-in capital when 
realized.

As of December 31, 1996, DSPC has U.S. federal and state and Israel net 
operating loss carryforwards of approximately $15,600,000, $8,100,000 and 
$3,500,000 respectively. The federal and state net operating loss carryforwards 
will expire beginning in years 2000 through 2011 if not utilized. The Israeli 
loss carryforwards have no expiration date.

Net undistributed earnings of the Israeli subsidiaries amounted to approximately
$21,300,000 at December 31, 1996. Those earnings are considered to be 
indefinitely reinvested, and accordingly, no provision for U.S. federal and 
state income taxes has been provided thereon. Upon distribution of those 
earnings in the form of dividends or otherwise, the Company would be subject to 
both U.S. income taxes (subject to an adjustment for foreign tax credits) and 
additional Israeli corporate income and withholding taxes. Withholding taxes of 
approximately $3,750,000 would be payable upon remittance of all previously 
unremitted net earnings at December 31, 1996.


                                       F-26
<PAGE>

                                DSP Communications, Inc.

                         Notes to Consolidated Financial Statements

10. INCOME TAXES (CONTINUED)

The Approved Enterprise status was granted according to several investment plans
and will allow the Israeli subsidiaries a two to four year tax holiday on 
undistributed earnings and a corporate tax rate of 10% to 25% for an additional 
six to eight years on each of the investment plan's proportionate share of 
income. 

The per share benefit of the Israeli tax holiday was $0.17 for 1996, $0.70 for 
1995 and $0.01 for 1994.

11. RELATED PARTY TRANSACTION

In prior years, DSP Telecom entered into technology licensing, engineering, and 
marketing arrangements and had transactions with DSP Group, Inc. a Delaware 
corporation, and its subsidiaries ("DSP Group"). DSP Group was DSP Telecom's 
parent, prior to the Reorganization in 1995, and is primarily engaged in the 
development of DSP-based software for digital speech products. One of DSPC's 
former directors is DSP Group's chairman of the board.

Pursuant to these arrangements and transactions, the Company performed certain 
contract engineering, research and development, sales and marketing, and general
and administrative services for, and received certain research and development, 
sales and marketing, and general and administrative services from DSP Group, 
amounting to approximately none and $64,000, respectively, in 1996, $183,000 and
$1,135,000, respectively, in 1995 and $370,000 and $713,000, respectively, in 
1994.

Currently, the Company has a license agreement with DSP Group, which gives DSPC 
rights to develop five integrated circuits using DSP Group's current generation 
digital signal processor technology.

DSPC performed certain technology development services for a former, significant
stockholder in the amounts of $112,500 in 1996, $710,000 in 1995 and $225,000 in
1994. DSPC also sold chipsets to the same former, significant stockholder. 
Product revenues from such transactions amounted to $6,260,000, $8,379,000 and 
$3,690,000 in 1996, 1995, and 1994, respectively. Management believes that the 
transactions with the former stockholder were at arms-length.

                                       F-27
<PAGE>

                                DSP Communications, Inc.

                         Notes to Consolidated Financial Statements

11. RELATED PARTY TRANSACTION (CONTINUED)

In the normal course of business, DSPC provided officers and employees loans, 
which amounted to an aggregate of $319,000 at December 31, 1996.

12. INDUSTRY SEGMENT REPORTING

DSPC and its subsidiaries operate in one industry segment, principally the 
development and marketing of integrated circuits for the wireless communications
market. Operations in Israel include research, development and sales.

Operations in the U.S. include marketing and sales. The following is a summary 
of operations within geographic areas for the years ended December 31 (in 
thousands):


                              1996           1995          1994
                        ------------------------------------------
Revenues from 
 unaffiliated 
 customers:
 United States              $  2,711        $ 1,066      $   869
 Europe                            -            167          538
 Israel                        1,917            525          247
 Japan                        83,771         38,517       14,307
 Others                          500            592            5
                        ------------------------------------------
                            $ 88,899        $40,867      $15,966
                        ------------------------------------------
Income (loss) before 
 provision for income 
 taxes (including 
 intercompany amounts):
 United States              $    203        $(1,079)     $  (894)
 Israel                       24,655           (164)       3,237
                        ------------------------------------------
                            $ 24,858        $(1,243)     $ 2,343
                        ------------------------------------------
Identifiable assets:
 United States              $105,587        $31,637      $   570
 Israel                       51,107         20,365       11,722
 Eliminations                 (1,340)        (7,883)      (1,264)
                        ------------------------------------------
                            $155,354        $44,119      $11,028
                        ------------------------------------------
                        ------------------------------------------

In 1996, 1995 and 1994 sales of chip sets through one distributor accounted for 
91%, 89% and 84% of total revenues, respectively.

                                       F-28
<PAGE>

                            DSP COMMUNICATIONS, INC.

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>

          Col. A            Col. B             Col. C              Col. D         Col. E
-----------------------  ------------  -----------------------   ----------    ------------
                                              Additions
                                       -----------------------
                                                     Charged to
                         Balance at    Charged to    Other
                         Beginning of  Costs and     Accounts    Deductions    Balance at
Descriptions             Period        Expenses      Describe    Describe      End of Period
------------             ------------  -----------   ----------- ----------    -------------
<S>                      <C>           <C>           <C>         <C>           <C>
 Allowance for Doubtful
   Accounts

 Years Ended:

 December 31, 1994 ...... $ 65,000       $       --     $  --    $(15,000)(1)  $   50,000

 December 31, 1995 ...... $ 50,000       $   89,000     $  --    $     --      $  139,000

 December 31, 1996 ...... $139,000       $       --     $  --    $( 7,000)(1)  $  132,000

 Warranty Reserve:

 Years Ended:

 December 31, 1994 ...... $ 53,000       $  372,000     $  --    $     --      $  425,000

 December 31, 1995 ...... $425,000       $  382,000     $  --    $     --      $  807,000

 December 31, 1996 ...... $807,000       $2,262,000     $  --    $     --      $3,069,000

</TABLE>

(1) Estimated Allowance reduced as a result of a lower outstanding accounts 
receivable balance.

                                       S-1