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DSP Group Issues Letter To Shareholders Regarding Potential Proxy Contest

Starboard has also called upon the company to cease work on the development of new products and to focus all of our resources on our legacy technology. We believe this demand shows a lack of understanding of the technology landscape, where companies must innovate or perish. The corporate graveyard is littered with tech companies that failed to improve and develop new products. Starboard is also demanding that DSP Group put itself up for a quick sale, with a focus on short-term returns and undermining shareholder value that would be generated and realized in the mid-term by executing on the existing growth initiatives.

Up until now, DSP Group's main focus has been on providing wireless System-on-Chips (SoCs) for cordless DECT phones widely used in homes today, a market where we have a 70% market share. Recently, we expanded into SoCs targeting IP phones for office and businesses. We have quickly moved into third position in this product category, following Texas Instruments and Broadcom, and we are well positioned for strong revenue growth and market share expansion in this segment.* Based on market research reports and DSP Group internal estimates, there are approximately 45-50 million IP terminals sold each year and the number of units sold annually is growing in the mid-teens on a percentage basis, as more businesses replace old dual transfer mode phones with new IP based telephony systems.*

On February 25 th, we unveiled our revolutionary HDClear solution, a comprehensive voice enhancement product for mobile devices. Incorporating proprietary, groundbreaking noise cancellation algorithms, HDClear dramatically improves user experience and delivers unparalleled voice quality and call intelligibility. This breakthrough technology, which we are very excited about, will enable people to use their cell phones for conversation in virtually any conditions, whether in a car, on a train or in other noisy surroundings. HDClear will also facilitate the use of speech recognition and voice commands by eliminating background noise.

According to a recent Reuters report, the market research firm International Data Corporation estimates that 63 percent of all mobile units will have technology to eliminate background noise by 2015, or about 1.7 billion units, up from 500 million in 2012.* We intend to be a market leader in this category and believe that HDClear will help build our mobile business segment to account for a third of our revenue within three years.*

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