DSP TECHNOLOGY INC, 10-K, 1999-05-03

DSP TECHNOLOGY INC
10-K, 1999-05-03
INSTRUMENTS FOR MEAS & TESTING OF ELECTRICITY & ELEC SIGNALS

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934 For the Fiscal Year Ended January 31, 1999 or

TRANSITION REPORT PURSUANT TO SECTION 14 OR 15(D) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934 For the transition period from _________________ to
__________________

Commission File Number 0-14677

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

DELAWARE 94-2832651
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)

48500 KATO ROAD, FREMONT, CALIFORNIA 94538
(Address of principal executive offices, zip
code)

Registrant's telephone number, including area code: (510) 657-7555

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 (229.405 of this chapter) is not contained herein,
and will not be contained, to the best of 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 registrant's voting Common Stock held by
non-affiliates of the registrant was approximately $10,407,445 (based on the
closing sales price of the Company's Common Stock at March 31,1999 as reported
by NASDAQ). Shares of Common Stock held by each officer and director and by each
person who owns more than 5% of the Company's Common Stock have been excluded
because such persons may be deemed to be affiliates. This is not intended to be
a conclusive determination of affiliate status for any other purposes. The
number of shares outstanding of the registrant's Common Stock at March 31, 1999
was 2,242,179.

This report (including exhibits) contains 62 pages. The Index to
Exhibits begins on page 44 of this report.

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THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS. THESE STATEMENTS
RELATE TO FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF DSPT. IN SOME
CASES, YOU CAN IDENTIFY FORWARD-LOOKING STATEMENTS BY TERMINOLOGY SUCH AS "MAY,"
"WILL," "SHOULD," "EXPECTS," "PLANS," "ANTICIPATES," "BELIEVES," "FUTURE,"
"INTENDS," "ESTIMATES," "PREDICTS," "POTENTIAL," OR "CONTINUE" OR THE NEGATIVE
OF SUCH TERMS AND OTHER COMPARABLE TERMINOLOGY. THESE STATEMENTS ONLY REFLECT
MANAGEMENT'S EXPECTATIONS AND ESTIMATES. ACTUAL EVENTS OR RESULTS MAY DIFFER
MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF
COMPETITION, TECHNOLOGICAL CHANGE AND THE RISKS OUTLINED BELOW. THESE FACTORS
MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM ANY FORWARD-LOOKING
STATEMENTS. WE ARE NOT UNDERTAKING ANY OBLIGATIONS TO UPDATE ANY FORWARD-LOOKING
STATEMENTS CONTAINED IN THIS REPORT TO REFLECT ANY FUTURE EVENTS OR
DEVELOPMENTS.

ITEM 1: BUSINESS

INTRODUCTION

DSP Technology Inc. or DSPT designs, develops, manufactures, markets
and integrates high-speed computer-automated instrumentation for measurement and
control applications. DSPT has two divisions, the transportation group, which
focuses on powertrain testing, and the lab group, which focuses on vehicle
safety and component testing, general data acquisition and signal analysis.
Powertrain testing is currently DSPT's largest market and major focus.

On January 21, 1999, DSPT announced its strategic decision to relocate
its corporate headquarters to, and consolidate its transportation group
operations in Ann Arbor, Michigan in order to allow efficient operation of the
transportation group, its largest and most profitable business segment. DSPT
recorded a one-time pre-tax restructuring charge of $496,000 in the fourth
quarter of 1999 which consists of $306,000 in severance pay and $190,000 in
estimated idle facility and winding down costs in connection with the
restructuring.

DSPT's products are used to gather and measure analog signals generated
by transducers and/or detectors which measure physical properties such as
temperature, pressure and acceleration. These products have been used primarily
in the transportation industry, in powertrain testing such as dynamometer
control and automotive combustion research, and vehicle impact and simulation
testing. Aerospace companies, universities and government-funded agencies use
DSPT's products in ultrasonics, chemical kinetics, plasma diagnostics,
spectroscopy, fusion research, explosives testing and vibration analysis.

On March 23, 1999, DSPT, MTS Systems Corporation and Badger Merger
Corp., a wholly-owned subsidiary of MTS, entered into an Agreement and Plan
of Merger pursuant to which MTS is to acquire DSPT in a stock-for-stock
merger. Badger Merger Corp. will merge with and into DSPT and outstanding
shares of DSPT's stock and net option shares represented by outstanding
options to purchase DSPT's common stock will be exchanged for an aggregate of
2,077,000 shares of MTS common stock. The exchange ratio will be determined
at closing by dividing the 2,077,000 MTS common shares by the sum of the
total number of DSPT's common shares outstanding plus the net option shares.
DSPT's net option shares will represent DSPT's shares issuable upon exercise
of outstanding options less a number of DSPT's shares with a value, based
upon the implied DSPT share value at closing, equal to the aggregate exercise
price of such options. The merger will be accounted for as a
pooling-of-interests, and will be a tax-free reorganization. The merger is
subject to, among other things, regulatory approval, approval of the
stockholders of DSPT and customary closing conditions.

DSPT was incorporated in California in July 1982 and began operations
in May 1984. DSPT reincorporated in Delaware in September 1997.

STRATEGY

DSPT's strategy is to focus its resources on the transportation market
as DSPT's largest market. DSPT defines the transportation market as including
the following industries and segments:

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o major vehicle manufacturers and their suppliers;

o the diesel industry, e.g., manufacturers of heavy trucks, farm and
construction equipment and large stationary engines;

o the fuels and lubricants industry;

o small engine manufacturers; and

o racing engine technology.

DSPT believes that the fundamental factors of government environmental
regulation, global competition among vehicle manufacturers, and rapid
technological progress are expanding the demand for advanced turnkey powertrain
test solutions. Large domestic and international customers demand more custom
turnkey solutions that require more complex services. DSPT believes that
investments in this area are necessary and logical steps towards expanding its
share of the transportation market.

To address its customers' needs in the transportation market, DSPT
announced its strategic decision in early fiscal 1997 to focus more heavily and
expand its capabilities on the services side of the business, continue
development of new products with higher levels of capability and integration,
and take a more aggressive approach to marketing with the goal of becoming a
full-service company capable of manufacturing and providing turnkey integration
of DSPT's products.

DSPT also continues to invest in the development of data acquisition
products. In fiscal 1999, DSPT introduced ADAPT-CAS, its new combustion analysis
system, BaseLine ADAPT, its new, low-cost dynamometer control system, and
software enhancements to ADAPT-DAC, DSPT's primary dynamometer control system.

DSPT entered into a Strategic Alliance Agreement dated February 26,
1995 with FEV Motorentechnik GmbH & Co. KG. As of February 26, 1999, FEV
beneficially owned approximately 12.7% of DSPT's outstanding common stock. DSPT
entered into the strategic relationship with FEV in order to combine resources,
technology and distribution for joint product development and distribution
within certain territories. Under the terms of the agreement, DSPT and FEV have
agreed to jointly develop and manufacture certain products as well as act as
sole distributors of each other's pre-existing products within certain
respective territories, and to act as strategic partners with respect to
distribution for other parts of the world. DSPT, MTS and FEV have entered into
an agreement which will supersede this agreement effective upon the merger.

PRODUCTS AND CUSTOMERS

DSPT manufactures and markets data acquisition and control products
in the form of integrated systems, modules and proprietary software developed
by DSPT. The transportation group provides powertrain testing and the lab
group provides vehicle safety and component testing and general data
acquisition and signal analysis.

POWERTRAIN TESTING PRODUCTS.

DSPT supplies a wide range of products and services for powertrain
test cells. DSPT's RedLine and BaseLine products are accepted as standards by
leading automakers around the world. These systems help its customers develop
more cost effective, fuel efficient engines. By integrating hardware,
software, services and expertise into a cost-effective system, DSPT creates
solutions that focus on its customers' specific needs. These solutions, based
on industry standards, provide long-term flexibility for changing test
requirements. The following is a list of DSPT's major customers in the
transportation market:

o Engelhard Corporation o John Deere
o FEV o Lubrizol Corporation
o General Motors Corporation o Sverdrup Technology, Inc.

REDLINE ADAPT-DAC. The data acquisition and control system is a crucial
component in a powertrain test cell. RedLine ADAPT-DAC offers real-time control
over the engine being tested. Multi-processor architecture

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allows the system to acquire data on hundreds of pre-set parameters
simultaneously as the engine responds to test conditions. It can interface with
and control a wide variety of other test instruments and systems, including
emission benches, combustion analyzers and other devices. With its networking
capabilities, ADAPT-DAC can provide centralized, remote control of an entire
suite of test cells. It features innovative graphics and runs on a personal
computer in the Windows environment. The systems sell from $60,000 for a base
model up to $500,000 with accessory products, hardware spares, custom software,
integration, installation and training.

REDLINE ADAPT-CAS. DSPT introduced the RedLine ADAPT-CAS at the SAE
show in February 1998. It is the third generation combustion analysis product of
RedLine ACAP which was introduced in 1991. ADAPT-CAS incorporates years of
feedback from industry leaders around the world. Designed for seamless
integration with ADAPT-DAC or with VME-bus or VMX-bus systems from other
vendors, it enhances the usefulness and quality of test data, raises the
efficiency of test cell operations and increases test safety. It is easy to use
and features dynamic graphic displays. Integrated with ADAPT-DAC, the combined
system offers a single user interface for operation, display of data, and system
configuration. The systems range in price from approximately $30,000 for a base
system to over $150,000.

REDLINE DYNO. DSPT offers a line of dynamometers called RedLine DYNO.
These dynamometers are low-inertia, high-response units designed for the quick
transient conditions of sophisticated powertrain testing. They interface
directly with RedLine ADAPT-DAC and provide another element in the complete
solution for powertrain testing. The systems range in price from approximately
$25,000 to $125,000.

REDLINE CONNECT. As test cell electronics proliferate, test-cell wiring
becomes more complex, time-consuming and error-prone. The RedLine CONNECT system
provides a fast, simple, modular solution for interfacing test cell
instrumentation and signals. It combines the flexibility of individual signal
connections with the speed and convenience of single-point mass termination.
These systems range in price from approximately $15,000 to $25,000.

BASELINE ADAPT. BaseLine ADAPT is a self-contained data acquisition and
control system needing only a PC workstation and test cell interfaces to
implement an operational test system. It is the lower cost alternative to
RedLine ADAPT and offers space savings of approximately 70%, a significant
advantage in the equipment-crammed environment of today's test cell. Typical
systems range in price from approximately $35,000 to $45,000.

TEST CELL INSTRUMENTATION AND ACCESSORY PRODUCTS. DSPT provides a
comprehensive array of test cell accessories (e.g., engine supports, coolant
control systems, containerized powertrain test cells) as integral parts of
RedLine installations.

TEST CELL SERVICES. DSPT provides test cell services to its customers
as part of a turnkey solution. These services are provided with sales of the
powertrain testing products described above. DSPT provides services in the areas
of custom manufacturing, system integration, project engineering and management,
installation and commissioning. Test cell services personnel work in close
partnership with customers to design, install and service a wide variety of
powertrain test facilities. In the planning phase, project and applications
engineers work closely with customers' selected contractors to design and
integrate complex systems and facilities that will meet their needs. During
installation, DSPT's installers and commissioning engineers work with the
customer to ensure timely completion and thorough testing of all equipment.

VEHICLE SAFETY AND COMPONENT TESTING PRODUCTS.

IMPAX data acquisition systems are systems typically used in
collecting and processing data from full-scale vehicle crash tests, sled
simulators and component test stands. In addition, they have been used for
investigating lift-off dynamics for space launch vehicles. Systems prices
range from about $150,000 to $400,000 depending on the configuration. Major
customers for this product are General Motors Corporation, Autoliv,
Lockheed-Martin and Morton International.

GENERAL DATA ACQUISITION AND SIGNAL ANALYSIS PRODUCTS.

SIGNAL ACQUISITION PRODUCTS. SigLab high-performance signal acquisition
products are subsystems for personal computers and workstations in the
electronic and electro-mechanical device analysis market. SigLab products
provide a cost-effective, portable technology for measurement applications like
computer hard disk head positioning or acoustic noise suppression systems in
automobiles. The products are controlled by and integrated

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with the MATLAB software from The MathWorks Inc. of Natick, Massachusetts. The
products range in price from $5,000 for a base 2-channel unit to $30,000 for a
6-channel system with optional software and additional memory. Major customers
for these products are distributors such as Signaltech, Sigmatest and
Accoutionies, and customers such as G-Tech Instrument, Inc. and Phase Metrics.

CUSTOM DATA ACQUISITION SYSTEMS. DSPT also designs custom systems for
customer-specific measurement or control applications. These systems are
configured from DSPT's line of modules, such as signal conditioners, transient
recorders, analog-to-digital converters and interface modules. These systems are
typically sold to universities, government-funded labs and research and
development labs. The typical selling price of a system ranges from about
$25,000 to about $300,000 for a complex installation. Major customers for these
products are Boeing Commercial Airplane, Naval Air Warfare Center, Telogy,
Stanford Linear Accelerator and Ethyl Corporation.

MANUFACTURING AND SUPPLIERS

DSPT manufactures its products from components and prefabricated parts
such as integrated circuits, printed circuit boards, power supplies and
enclosures manufactured by others. Manufacturing operations consist of assembly
of printed circuit boards, power supplies and crates, system integration and
final testing. Materials and components used by DSPT in manufacturing are
available primarily from domestic sources. Where possible, DSPT buys from
multiple sources to avoid dependence on any single supplier. However, certain
custom analog devices are only available from a limited number of suppliers.

MARKETING AND SALES

In the United States, DSPT primarily sells and services its products
through its own sales and service organizations located in Michigan and
California. In Canada, Western Europe, Korea and Japan, DSPT sells its products
through independent distributors through whom DSPT provides technical and
administrative assistance. For its transportation market products, DSPT
distributes its products through FEV in Europe except for the United Kingdom. In
the United Kingdom, DSPT operates a sales and customer support subsidiary for
its powertrain testing products. DSPT's standard terms of sale generally require
payment within 30 days of shipment.

The following customers accounted for over 10% of fiscal 1999 net
sales: General Motors accounted for 15%, Sverdrup for 14% and Engelhard for 12%.
In fiscal 1998, General Motors accounted for 21% of net sales and Hyundai Motor
accounted for 14% of net sales. General Motors accounted for 18% of net sales in
fiscal 1997. No other customer accounted for 10% or more of DSPT's net sales in
fiscal years 1999, 1998 or 1997. Sales of DSPT products through DSPT's
relationship with FEV during fiscal 1999 were approximately $1,249,000 or
approximately 5% of DSPT's total net sales.

Export sales, primarily to the United Kingdom, Western Europe, and the
Far East, accounted for approximately 20%, 35% and 32% of sales in 1999, 1998
and 1997, respectively.

At January 31, 1999, DSPT had an order backlog of approximately
$4,800,000 compared to a backlog of approximately $11,500,000 at January 31,
1998, and approximately $9,500,000 at January 31, 1997. Backlog consists of
orders believed by management to be firm and scheduled for delivery within
twelve months. However, most orders can be rescheduled or canceled by customers
without significant penalty. In addition, backlog is dependent on the timing of
orders, particularly large orders, and on seasonal spending for capital
requirements. Accordingly, backlog at January 31, 1999, or at any other date,
may not be indicative of prospective sales.

SERVICE AND WARRANTY

DSPT maintains a telephone hotline staffed with qualified technicians
to respond to service calls. Most servicing is performed at its facilities in
Fremont, California and Ann Arbor, Michigan.

DSPT generally extends a one-year warranty for its products. Warranty
costs have been nominal to date.

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RESEARCH AND DEVELOPMENT

DSPT's ability to compete successfully in an industry subject to rapid
technological change depends on, among other things, its ability to anticipate
and respond to such change. Accordingly, DSPT is committed to a high level of
research and development activity. In 1999, the principal products introduced
were the transportation group's RedLine ADAPT-CAS, its new combustion analysis
system, BaseLine ADAPT, a lower cost dynamometer controller and several software
enhancements and upgrades to ADAPT-DAC system, its primary dynamometer control
product. In 1999, the lab group introduced several new software add-ons which
have helped broaden the market for its signal acquisition products. DSPT expects
that in 2000 research and development activities will focus primarily on
software development for new products and product enhancements.

DSPT incurred expenditures for research and development of $2,765,000
in fiscal 1999, $2,352,000 in fiscal 1998 and $2,203,000 in fiscal 1997,
representing 11%, 11%, and 12% of total sales in each such period. In accordance
with the Statement of Financial Accounting Standards No. 86 which requires the
capitalization of software development costs incurred subsequent to establishing
the technological feasibility of producing the finished software product, DSPT
capitalized $522,000, $517,000, and $630,000 in fiscal 1999, 1998 and 1997,
respectively.

COMPETITION

Competition, from both U.S. and foreign competitors, is strong and
active. Some of these competitors are substantially larger companies with
greater resources. DSPT management believes that these companies include AVL
located in Graz, Austria, and Sverdrup, a system integrator based in Tennessee.

DSPT competes primarily on the basis of product diversity, features and
functions, price/performance, flexibility, and technical support. In addition,
DSPT believes that an additional competitive factor in the automotive market is
its installed base in the United States. DSPT believes that it competes
favorably with respect to all these factors. Systems integration experience and
ability is increasingly a factor in large system orders and DSPT believes that
it has the personnel and the resources to compete in this area, although many of
its competitors are substantially larger with greater resources.

PROPRIETARY RIGHTS

DSPT relies upon a combination of copyright, trade secret laws and
non-disclosure and licensing agreements to establish and maintain its
proprietary rights to its products. The laws of foreign countries may not
protect DSPT's proprietary rights to the same extent as do the laws of the
United States. Although DSPT continues to implement protective measures and
intends to defend its proprietary rights, these measures may not be successful.
DSPT believes, however, that, because of the rapid pace of technological change
in the automated test, measurement and control industries, the legal protections
for its products are less significant factors in DSPT's success than the
knowledge, ability, and experience of DSPT's employees, the frequency of product
enhancements and the timeliness and quality of support services provided by
DSPT.

DSPT is subject to the risk of adverse claims and litigation alleging
infringement of intellectual property rights. Technology used in DSPT's products
is licensed from third parties on a non-exclusive basis. These license
agreements generally require DSPT to pay royalties and to fulfill
confidentiality obligations in order to maintain the licenses. The termination
of any of these licenses may have a material adverse effect on DSPT's
operations. While it may be necessary or desirable in the future to obtain other
licenses relating to one or more of its products or relating to current or
future technologies, DSPT may not be able to do so on commercially reasonable
terms.

EMPLOYEES

DSPT had 158 employees at January 31, 1999. Of these employees, 107
worked in manufacturing and engineering, 29 in marketing and sales and 22 in
administration. None of DSPT's employees is represented by a labor union and
there has never been a disruption of operations due to labor dispute.

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ITEM 2: PROPERTIES

DSPT's facilities consist of approximately 28,000 square feet of space
in Fremont, California and approximately 26,000 square feet of space in Ann
Arbor, Michigan which are leased under operating leases. The Fremont facility
lease provides for monthly rent payments of $15,146 through October 1998 and
$35,388 from November 1998 through lease expiration on July 1999. DSPT plans to
move its lab group to a smaller location when the lease expires.

The Ann Arbor facility leases consist of:

o A seven-year lease for one building which expires in January
2000, providing for annually increasing monthly rental
payments reaching $10,257 during the seventh year. DSPT
expects to move out of this facility when the lease expires.

o A 31-month lease for another building which expires in June
1999, with monthly rental payments of $4,308 from December
1996 through May 1998 and increasing to $4,602 per month
thereafter. DSPT plans to extend its lease on this facility
until it is able to move into its new facility.

o A facility sublease commencing October 1998, providing for
monthly rental payments of $4,696, and renewable annually each
June until June 2002. If DSPT does not renew the lease, DSPT
is responsible to pay the lessor a one-time payment to cover
the unamortized costs of the tenant improvements. DSPT expects
to renew its lease for another year in June 1999.

DSPT is obligated to pay real estate taxes, insurance and maintenance
expenses associated with the leased facilities.

DSPT is in the process of constructing a new 57,200 square foot
facility located in Ann Arbor, Michigan, which will house its corporate
headquarters and transportation group. Under the terms of the construction
contract, DSPT is obligated to pay the contractor $3,750,000 for the
construction of the new facility which is expected to be completed sometime
during the fall of calendar 1999. Management believes that the new facilities
will be adequate for the company over the next two to three years.

DSPT also owns a condominium located in Ann Arbor, Michigan.

ITEM 3: LEGAL PROCEEDINGS

Not applicable.

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

No matter was submitted to a vote of security holders during the fourth
quarter of the Company's fiscal year ended January 31, 1999.

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PART II

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

MARKET INFORMATION

DSPT's common stock is currently traded on the Nasdaq National Market
under the symbol "DSPT." The following table sets forth, for the periods
indicated, the high and low closing sales prices of the common stock as reported
by the Nasdaq market.

YEAR ENDED YEAR ENDED
JANUARY 31, 1999 JANUARY 31, 1998
---------------- ----------------
HIGH LOW HIGH LOW
---- --- ---- ---

<S> <C> <C> <C> <C>
First Quarter $ 10.625 $ 8.000 $ 6.375 $ 5.375
Second Quarter 10.000 7.500 6.000 4.875
Third Quarter 9.375 5.375 11.625 5.625
Fourth Quarter 7.938 6.50 11.313 8.000

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HOLDERS

The approximate number of holders of record of DSPT's common stock at
March 31, 1999 was 90. DSPT believes that these recordholders represent
approximately 1,050 beneficial owners.

DIVIDEND POLICY

DSPT has never declared or paid a dividend. DSPT's policy is to retain
earnings for use in its business.

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ITEM 6: SELECTED FINANCIAL DATA

The following table presents selected historical financial data for
DSPT derived from the audited financial statements of DSPT and is qualified by
reference to and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and the related notes, included elsewhere in this report.

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

YEARS ENDED JANUARY 31,
-----------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS DATA (FOR THE YEAR):
Net sales ................................................ $25,396 $22,038 $17,987 $15,538 $12,977
Operating income ......................................... 2,277 2,543 1,234 1,956 1,416
Net income ............................................... 1,582 1,646 914 1,277 874
Net income per common share (basic) ...................... .70 .74 .42 .60 .42
Weighted average shares used in computing basic net income
per share ............................................. 2,253 2,211 2,168 2,131 2,079
Net income per common share (diluted) .................... .64 .68 .40 .55 .40
Weighted average shares and equivalents used in computing
diluted net income per share .......................... 2,437 2,304 2,331 2,189 2,479
BALANCE SHEET DATA (AT YEAR END):
Working capital .......................................... $ 8,276 $ 8,173 $ 5,726 $ 5,472 $ 4,190
Total assets ............................................. 17,068 16,730 11,799 10,294 8,744
Long-Term obligations .................................... -- -- -- -- --
Stockholders' equity ..................................... 12,016 10,657 8,687 7,698 6,268

</TABLE>

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

RESULTS OF OPERATIONS

The following table sets forth, for the indicated periods, the
percentages that certain items in the consolidated statements of income bear to
net sales. The table and subsequent discussion should be read in conjunction
with the consolidated financial statements and notes included elsewhere in this
report.

YEAR ENDED JANUARY 31,
----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net sales .................................... 100% 100% 100%
Gross profit ................................. 53 54 56
Research and development expenses ............ 11 11 12
Marketing, general and administrative expenses 32 31 37
Restructuring costs .......................... 2 -- --
Operating income ............................. 9 12 7
Net income ................................... 6 7 5

</TABLE>

For accounting purposes, DSPT changed to a 52/53 week convention with
the fiscal year ending on the Sunday nearest the end of January effective on the
fiscal year beginning February 1, 1997. However, for financial reporting
purposes, each fiscal quarter or year is presented as if it ended on the last
day of such period. The number of days covered in each year used in the
period-to-period comparisons are essentially the same with 1999 and 1998 having
364 days and 1997 having 366 days.

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OVERVIEW. One of the major trends occurring in the transportation
industry, DSPT's largest market, is that large customers are demanding custom
turnkey solutions that require more complex integration services. DSPT believes
that investments in this area are necessary to expand its share of the
transportation market. Starting in 1997, DSPT invested heavily in developing
significant service capabilities in the areas of custom manufacturing, system
integration, project engineering/management, installation and commissioning with
the goal of becoming a full-service company capable of manufacturing and
providing turnkey integration of its products. DSPT's turnkey solutions, which
combine its products and integration services, have provided DSPT's growth in
the last three years.

REVENUES AND SALES BACKLOG. Revenues were $25,396,000, $22,038,000 and
$17,987,000 in 1999, 1998 and 1997, respectively, with annual revenue growth of
15% from 1998 to 1999 and 23% from 1997 to 1998. Revenue growth during 1999 and
1998 was principally driven by several large orders, contracts greater than
$1,000,000, for the transportation group turnkey RedLine data acquisition and
control systems that increased sales backlogs to $9,500,000 at January 31, 1997
and to $11,500,000 at January 31, 1998. In addition, the introduction of new
products in the lab group slowed the decline in revenues for the lab group from
1997 to 1998 and resulted in a slight increase from 1998 to 1999.

Overall revenue growth slowed in 1999 and sales backlog decreased to
$4,800,000 at January 31, 1999, as the total dollar amount of large orders for
transportation group products dropped significantly in 1999 compared to 1998,
primarily due to delays in budgetary approvals from several major customers, as
well as the delay in the introduction of DSPT's new RedLine combustion product,
Redline ADAPT-CAS. In addition, revenues and sales bookings from the Asian
market for Transportation Group products fell dramatically, reflecting the
economic conditions in that region.

The revenue increase in 1997 compared to 1996 was principally due to
continued increase in demand for the transportation group products and services
associated with RedLine ADAPT-DAC.

Product revenues amounted to $21,349,000, $19,114,000 and $16,154,000
in 1999, 1998 and 1997, respectively. Product revenues grew by 12% in 1999 from
1998, and by 18% in 1998 from 1997. Product revenue growth in 1999 and 1998 was
primarily due to the large orders received for its turnkey solutions in 1998 and
1997. The decrease in the rate of product revenue growth experienced in 1999 is
attributable to the factors described above.

Service revenues amounted to $4,047,000, $2,924,000 and $1,833,000 in
1999, 1998 and 1997, respectively. Service revenues grew by 38% in 1999 from
1998, and by 59% in 1998 from 1997. Service revenues amounted to 16%, 13% and
10% of total revenues in 1999, 1998 and 1997, respectively. The growth in
service revenues in all periods reflects an increase in integration services
revenues as part of turnkey system solutions introduced in 1997 to fill the
growing need from DSPT's large transportation group customers. In addition,
maintenance contracts and training services also increased as product revenues
increased.

GROSS PROFIT. Gross profit percentage decreased to 53% in 1999 compared
to 54% in 1998 and 56% in 1997. Gross profit percentage is subject to change due
to various factors, including variation in product mix, changes in component
costs and revenue levels. As anticipated in 1999 and 1998, the decrease in gross
profit percentages is a result of product mix shift towards lower margin
transportation group turnkey RedLine systems. This shift in product mix
decreased the gross profit percentage in the transportation group segment from a
high of 56% in 1997 to 52% in 1998 and 51% in 1999. These percentages were
offset partially by the increasing gross profit margins for the lab group that
went from 58% in 1997 to 62% in 1998 and 68% in 1999. The increase in margins in
the lab group was primarily due to a shift in product mix to higher margin new
products.

Information regarding gross margins related to product sales and
service sales are not provided separately as such information is not readily
available from DSPT's management information system.

RESEARCH AND DEVELOPMENT. DSPT invests in new product and application
developments in both the transportation group and lab group. The majority of the
research and development expenses in all the periods

10
<PAGE>

presented were for the transportation group which introduced several new
products and enhancements during the last three years.

Research and development expenses during the last three years remained
at 11-12% of revenues. The increase in absolute dollars in 1999 compared to 1998
was primarily due to the addition of engineering consultants in the short term
to accelerate the completion of certain product development projects, including
RedLine which was behind schedule. DSPT anticipates research and development
expenses to continue to increase in absolute dollars as it continues to add
personnel to staff its development projects. However, it is expected that
research and development expenses will remain at approximately 11% of net sales.

MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. Marketing, general and
administrative expenses increased in absolute dollar amounts by $1,095,000, or
16% in 1999 from $6,916,000 in 1998. As a percentage of sales, these expenses
increased slightly to 32% in 1999 compared to 31% in 1998. The increase in
spending in 1999 compared to 1998 was due to increased sales and marketing
expenses, including the hiring of additional marketing personnel and increased
advertising and sales collateral budgets. These expenses were primarily incurred
to permit increased focus on industrial manufacturers and a broad range of
transportation industry equipment suppliers. DSPT also increased trade show
expenses to introduce new products and incurred higher administrative support
costs in 1999.

Marketing, general and administrative expenses increased in absolute
dollar amounts by 3% in 1998 compared to 1997, and decreased as a percentage of
sales to 31% in 1998 from 37% in 1997. The increase in absolute dollars was a
result of DSPT hiring additional sales and applications personnel to address the
increased level of sales opportunities primarily for turnkey systems. The
decrease in the percentage of sales was a result of increased revenues.

RESTRUCTURING COSTS. On January 21, 1999, DSPT announced its strategic
decision to relocate its corporate headquarters to, and consolidate its
transportation group operations in, Ann Arbor, Michigan in order to allow
efficient operation of the transportation group, its largest and most profitable
business segment. DSPT recorded a one-time, pre-tax restructuring charge of
$496,000 in the fourth quarter of 1999 which consists of $306,000 in severance
pay and $190,000 in estimated idle facility and winding down costs.

DSPT expects that after the move and consolidation is complete sometime
in fiscal 2000, earnings will benefit from a lower cost structure and improved
operating efficiencies. Manufacturing, sales and service for the transportation
group will be consolidated with corporate headquarters into a single,
company-owned facility in Ann Arbor.

OTHER INCOME. Other income, net of interest expense in 1999 was
essentially unchanged at $221,000 compared to $225,000 in 1998, and increased
from $123,000 in 1997. On average, DSPT had much higher available cash to invest
or to take advantage of vendor early payment discounts in 1999 and 1998 than in
1997.

INCOME TAXES. The effective tax rate computed for 1999 was 37% compared
to 40% in 1998 and 33% in 1997. The lower tax rate in 1999 versus 1998 reflect
primarily the higher research and development credits and lower state tax rates.

The higher tax rate in 1998 compared to 1997 reflect 1998's higher
domestic income contribution, higher state income taxes and lower research and
development tax credits compared to 1997. Domestic tax rates historically have
been higher than DSPT's foreign subsidiary's tax rates.

Factors that may affect the tax rates include research and development
tax credits, differences in state tax rates, software capitalization levels and
foreign income contributions.

NET INCOME. As a result of the factors discussed above, net income
decreased in absolute dollars to $1,582,000, or $.64 per diluted share in 1999,
from $1,646,000, or $.68 per diluted share in 1998. 1997 net income was
$914,000, or $.40 per diluted share.

11
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOWS. During 1999, operating activities used $724,000 of cash,
compared with cash generated of $3,915,000 and $929,000 in 1998 and 1997,
respectively. The cash used in 1999 for operating activities was largely due to
the application of customer prepayments against receivables and to increased
accounts receivable brought about primarily by high shipments in the last month
of the year end. The major uses of cash in investing and financing activities
included additions to property and equipment, investment in software development
and the repurchase of DSPT's common stock on the open market.

Capital expenditures for property and equipment additions totaled
$1,743,000 in 1999, $407,000 in 1998, and $1,015,000 in 1997. Major capital
expenditures in 1999 included the purchase of land for the Ann Arbor building
site and construction-in-progress costs for the new 57,200 square foot facility.
DSPT purchased the land late in the second quarter of 1999 in anticipation of
growth over the next three to five years. Due to the rising building lease costs
in the Ann Arbor, Michigan area, DSPT found that it would cost less to own its
own facility. Building construction costs along with furniture, fixtures and
equipment is currently estimated at $4,600,000. DSPT anticipates that the
construction and eventual mortgage of the building will be financed through the
Michigan Strategic Fund industrial bond financing. In August 1998, the Michigan
Strategic Fund adopted an inducement resolution for a loan not to exceed
$5,900,000 for DSPT. The bond issuance is pending negotiations between DSPT,
Michigan Strategic Fund and DSPT's bank. As part of the financing, DSPT's bank
will be expected to issue a letter of credit and will require a guarantee from
MTS. DSPT expects the financing to be completed in May 1999.

DSPT has secured a building contractor to build the first phase on the
property, and began construction of the first phase in February 1999. Based on
DSPT's current growth plans, DSPT believes that the building site is sufficient
to allow DSPT to grow over the next three to five years.

SHARE REPURCHASE PLAN. In May 1998, DSPT announced plans to repurchase
up to 225,000 shares of its outstanding common stock, which represents
approximately 10% of its shares, at prevailing market prices because it deemed
the repurchase a good investment. DSPT terminated the repurchase plan in March
1999 in connection with the board of directors' approval of the proposed merger
between DSPT and MTS. As of January 31, 1999, the DSPT had repurchased
approximately 51,000 shares on the open market for an aggregate amount of
$397,000, or $7.72 per share. As a result of the small number of shares of
repurchased common stock through January 31, 1999, the repurchase had minimal
effect on net income per share. DSPT made no further common stock repurchases
after January 31, 1999.

FOREIGN CURRENCIES. DSPT denominates substantially all of its
transactions in U.S. currency other than transactions by its foreign subsidiary.
The assets and liabilities of the Company's foreign subsidiary is denominated in
the country's local currency and translated at the year-end rate of exchange.
The related income statement items are translated at the average rate of
exchange for the year. The resulting translation adjustments are excluded from
income and reflected as a separate component of shareholders' equity. Realized
and unrealized exchange gains or losses arising from transaction adjustments are
reflected in operations and are not material.

WORKING CAPITAL. Working capital at January 31, 1999 was $8,276,000
compared to $8,173,000 at the beginning of the fiscal year, while the current
ratios stood at 2.8 to 1.0 at January 31, 1999 and at 2.5 to 1.0 at January 31,
1998. DSPT has a $4,000,000 secured bank line of credit with no balance
outstanding at January 31, 1999. DSPT currently anticipates that internally
generated funds, bank borrowings and anticipated revenue bonds will be
sufficient to satisfy its anticipated operating needs over the foreseeable
future.

Management believes that inflation has not had a material effect on
DSPT's operations or financial condition.

YEAR 2000 COMPLIANCE

DSPT has an informal initiative in place to address Year 2000 issues
and risks. The five elements of the initiative can be summarized as follows:

12
<PAGE>

o product readiness;

o internal infrastructure readiness;

o facilities readiness;

o supplier and vendor readiness; and

o DSPT's contingency plan.

PRODUCT READINESS. DSPT's products perform functions related to
acquiring data from tests of other companies' products and do not perform date
calculations and, therefore DSPT does not consider Year 2000 issues and risks
related to its products to be significant. All products sold by DSPT since the
beginning of calendar 1998 have been tested by DSPT and determined to be Year
2000 compliant. DSPT has contacted all of its significant customers and informed
them that prior versions of DSPT products may not be Year 2000 compliant.
Customers with earlier versions of DSPT products, other than some former DSPT
products which are obsolete, may upgrade at the cost of an annual maintenance
contract to assure compliance.

INTERNAL INFRASTRUCTURE READINESS. DSPT has also reviewed its internal
management information systems, billing, outside payroll and other information
service functions critical to its operations and determined the nature and
extent of any Year 2000 issues related to such functions. DSPT's management
information systems, billing and outside payroll systems are run on software
provided by third party vendors. DSPT has obtained certifications from each of
such vendors that those systems have been tested and are Year 2000 compliant.
DSPT has a small number of noncompliant personal computers which will be phased
out of use during DSPT's consolidation of the transportation group to Ann Arbor.

FACILITIES READINESS. DSPT has conducted a limited review of its
facilities, including air conditioning, heating and other facilities related
systems, and has determined that its facilities are not Year 2000 compliant.
DSPT's California lease expires at the end of July 1999 and DSPT will relocate
the remaining operations being conducted in Fremont, California to a new
facility in the same area. DSPT expects to consolidate all of its operations in
Michigan into a new company-owned facility before the end of calendar 1999. As a
term and condition to entering into any new lease or building construction, DSPT
is requiring its lessor/building contractor to certify that the premises are
Year 2000 compliant.

SUPPLIER AND VENDOR READINESS. DSPT does not have any formal plan for
addressing Year 2000 compliance with its suppliers and vendors. DSPT has
received voluntary certification of Year 2000 compliance from many of its
existing suppliers and vendors who are critical to DSPT's operations. DSPT is in
the process of selecting new suppliers of most components and new assembly
houses for transportation group products as a result of the consolidation of its
transportation group operations in Ann Arbor, Michigan. DSPT has made the
receipt of Year 2000 compliance certification a term and condition of entering
into any new relationship with suppliers and vendors. DSPT intends to seek
certification of Year 2000 compliance from any remaining existing suppliers and
vendors critical to its operations beginning in May or June, 1999. DSPT expects
to concentrate on its suppliers of circuit boards, limited source vendors and
outside assembly houses for such third party products. DSPT expects to have the
supplier/vendor certification project complete by the fall of 1999.

CONTINGENCY PLANNING. DSPT does not consider the risks associated with
Year 2000 issues to be significant to DSPT. DSPT has begun outlining the
measures that it can take in January 2000 to minimize any Year 2000 related
problems. Such measures include the following:

o developing alternate supplier relationships;

o stocking critical inventory items; and

o stocking critical alternate parts and components.

13
<PAGE>

DSPT has also done the following with respect to Year 2000 issues and
compliance: notified its significant customers regarding the need to update
DSPT's older products for Year 2000 compliance; determined a course of action
for phasing out noncompliant end user computers; and implemented policies
regarding Year 2000 compliance with new suppliers and vendors and new landlords.
DSPT also expects to implement a more formal policy with respect to existing
suppliers and vendors who are critical to its operations. DSPT's costs to date
in addressing Year 2000 issues have not been significant, and DSPT expects that
any future costs will be immaterial.

FACTORS THAT MAY AFFECT FUTURE RESULTS

THE POTENTIAL BUSINESS COMBINATION WITH MTS IS SUBJECT TO COMPLETION
AND THE COSTS OF SUCH BUSINESS COMBINATION ARE SUBSTANTIAL AND MAY ADVERSELY
AFFECT OUR RESULTS OF OPERATIONS. On March 23, 1999, DSPT, MTS and Badger
Merger Corp. entered into an Agreement and Plan of Merger pursuant to which
MTS is to acquire DSPT in a stock-for-stock merger. The merger is subject to,
among other things, regulatory approval, approval of the stockholders of DSPT
and customary closing conditions. DSPT has incurred significant costs to date
in connection with its potential merger with MTS. Such costs have been incurred
and will be paid by DSPT regardless of whether the merger with MTS is
consummated.

DSPT NEEDS TO DEVELOP AND MANAGE ITS SYSTEMS INTEGRATION SERVICES. DSPT
believes that the successful marketing and expansion of its transportation
products will be increasingly dependent on its ability to offer systems
integration services. Success depends on DSPT's ability to attract and retain
qualified technical personnel, market acceptance of these services, timing of
service revenues, and the ability to manage customer projects profitably. The
successful management of these projects depends on the timely availability and
quality of key products, the availability of key 11 personnel, the ability to
integrate different products from a variety of vendors effectively, and the
management of difficult scheduling and delivery problems. Most of DSPT's systems
integration projects use fixed price contracts. The pricing of fixed price
contracts requires accurate cost estimates in order to be profitable.

DSPT'S QUARTERLY RESULTS HAVE FLUCTUATED SIGNIFICANTLY IN THE PAST AND
MAY FLUCTUATE SIGNIFICANTLY IN THE FUTURE. DSPT's quarterly operating results
have varied significantly depending on a number of factors.
These factors include:

o timing of receipt of system orders from and shipments to major
customers;

o variations in product mix and component costs;

o economic conditions prevailing within geographic markets and in the
worldwide transportation industry;

o market acceptance of new products and services;

o timing and levels of operating expenditures;

o exchange rate fluctuations;

o DSPT's sales being concentrated in only a few customers; and

o DSPT's net sales being sporadic and typically generated in the last
month of the quarter.

DSPT IS HIGHLY DEPENDENT ON ITS SALES OVERSEAS. A significant part of
DSPT's revenue growth in the past few years has been due to increases in DSPT's
international sales, particularly in Western Europe and Asia.

14
<PAGE>

DSPT IS HIGHLY DEPENDANT ON ITS SALES OVERSEAS. A significant part of DSPT's
revenue growth in the past few years has been due to increases in DSPT's
international sales, particularly in Western Europe and Asia. International
sales accounted for approximately 20%, 35% and 32% of net sales in fiscal
years 1999, 1998 and 1997, respectively. DSPT's international dsales are
subject to the following risks:

o political and economic changes and disruptions;

o foreign regulation;

o tariffs or other barriers; and

o exchange rate fluctuations.

DSPT PURCHASES SEVERAL KEY COMPONENTS FROM LIMITED SOURCES AND SALES
COULD BE LOST OR DELAYED IF THESE COMPONENTS ARE UNAVAILABLE. DSPT currently
purchases several key components used in the manufacture of its products from a
single or limited sources and is dependent on supply from these sources to meet
DSPT's needs. DSPT may encounter shortages and delays in obtaining such
components in the future. Shortages and delays could have an adverse effect on
DSPT's ability to meet customer orders and could result in lost or delayed sales
and revenues.

ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

DSPT management believes that the market risk associated with DSPT's
market risk sensitive instruments as of January 31, 1999 is not material, and
therefore, disclosure is not required.

15
<PAGE>

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

DSP TECHNOLOGY INC. AND SUBSIDIARIES

Index to Consolidated Financial Statements

PAGE
----

<S> <C>
Report of Independent Certified Public Accountants........... 17
Consolidated Balance Sheets.................................. 18
Consolidated Statements of Income............................ 19
Consolidated Statement of Stockholders' Equity............... 20
Consolidated Statements of Cash Flows........................ 21
Notes to Consolidated Financial Statements................... 22

Index to Supplementary Data

Auditors Report on Schedule II............................... 41
Valuation and Qualifying Accounts............................ 42

</TABLE>

16
<PAGE>

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of DSP Technology Inc.:

We have audited the accompanying consolidated balance sheets of DSP
Technology Inc. and subsidiaries as of January 31, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended January 31, 1999. 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 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of DSP
Technology Inc. and subsidiaries as of January 31, 1999 and 1998, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended January 31, 1999, in conformity with
generally accepted accounting principles.

/s/ GRANT THORNTON LLP

GRANT THORNTON LLP
San Jose, California
March 12, 1999, except for Note N as to
which the date is March 23, 1999

17
<PAGE>

DSP TECHNOLOGY INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)

JANUARY 31,
-----------
1999 1998
---- ----
<S> <C> <C>

ASSETS
Current assets:
Cash and cash equivalents .................................................................. $ 1,432 $ 4,701
Accounts receivable, net of allowance for doubtful accounts of $185 in 1999 and $150 in 1998 7,122 5,581
Inventories ................................................................................ 3,052 2,682
Deferred income taxes ...................................................................... 808 577
Prepaid expenses and other ................................................................. 334 216
------- -------
Total current assets .................................................................... 12,748 13,757
Property and equipment, net ................................................................... 2,557 1,341
Other assets .................................................................................. 1,763 1,632
------- -------
$17,068 $16,730
------- -------
------- -------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................................... $ 906 $ 687
Accrued liabilities ........................................................................ 2,621 3,755
Income taxes payable ....................................................................... 945 1,142
------- -------
Total current liabilities ............................................................... 4,472 5,584
Deferred income taxes ......................................................................... 580 489
Commitments ................................................................................... -- --
Stockholders' equity:
Preferred stock; 2,500,000 shares authorized; none issued .................................. -- --
Common stock; 25,000,000 shares authorized, $.001 par value; shares issued and outstanding:
2,241,579 in 1999 and 2,264,860 in 1998.................................................. 3,057 3,301
Retained earnings .......................................................................... 8,920 7,338
Accumulated other comprehensive income ..................................................... 39 18
------- -------
Total stockholders' equity .............................................................. 12,016 10,657
------- -------
$17,068 $16,730
------- -------
------- -------
</TABLE>

The accompanying notes are an integral part of these financial statements

18
<PAGE>

DSP TECHNOLOGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)

YEAR ENDED JANUARY 31,
----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>

Net sales
Products .................................................................... $21,349 $19,114 $16,154
Services .................................................................... 4,047 2,924 1,833
------- ------- -------
25,396 22,038 17,987
Cost of sales .................................................................. 11,847 10,227 7,842
------- ------- -------
Gross profit ................................................................ 13,549 11,811 10,145
Operating expenses:
Research and development .................................................... 2,765 2,352 2,203
Marketing, general and administrative ....................................... 8,011 6,916 6,708
Restructuring costs ......................................................... 496 -- --
------- ------- -------
11,272 9,268 8,911
------- ------- -------
Operating income ............................................................ 2,277 2,543 1,234
Other income, net .............................................................. 221 225 123
------- ------- -------
Income before income taxes .................................................. 2,498 2,768 1,357
Income taxes ................................................................... 916 1,122 443
------- ------- -------
Net income .................................................................. $ 1,582 $ 1,646 $ 914
------- ------- -------
------- ------- -------

Net income per share:
Basic ....................................................................... $ .70 $ .74 $ .42
------- ------- -------
------- ------- -------
Diluted ..................................................................... $ .64 $ .68 $ .40
------- ------- -------
------- ------- -------
Weighted average shares used in computing basic net income per share ........... 2,253 2,211 2,168
------- ------- -------
------- ------- -------
Weighted average shares and equivalents used in computing diluted net income per
share .......................................................................... 2,479 2,437 2,304
------- ------- -------
------- ------- -------
</TABLE>

The accompanying notes are an integral part of these financial statements.

19
<PAGE>

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)

ACCUMULATED
OTHER TOTAL
COMMON STOCK COMPREHENSIVE RETAINED STOCKHOLDERS'
SHARES AMOUNT INCOME EARNINGS EQUITY
------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Balance at January 31, 1996 ....................... 2,154 $ 2,920 $ 4,778 $ 7,698
Comprehensive income:
Foreign currency translations .................. 7 7
Net income ..................................... 914 914
-------
Comprehensive income .............................. 921
Exercise of stock options ......................... 26 68 68
----- ------- ------- ------- -------
Balance at January 31, 1997 ....................... 2,180 $ 2,988 $ 7 $ 5,692 $ 8,687

Comprehensive income:
Foreign currency translations .................. 11 11
Net income ..................................... 1,646 1,646
-------
Comprehensive income .............................. 1,657
Exercise of stock options ......................... 85 313 313
Balance at January 31, 1998 ....................... 2,265 $ 3,301 $ 18 $ 7,338 $10,657
----- ------- ------- ------- -------
Comprehensive income:
Foreign currency translations .................. 21 21
Net income ..................................... 1,582 1,582
Comprehensive income .............................. 1,603
Exercise of stock options ......................... 28 99 99
Repurchase of common stock ........................ (51) (397) (397)
Compensation charge from nonqualified stock options 54 54
----- ------- ------- ------- -------
Balance at January 31, 1999 ....................... 2,242 $ 3,057 $ 39 $ 8,920 $12,016
----- ------- ------- ------- -------
----- ------- ------- ------- -------
</TABLE>

The accompanying notes are an integral part of this financial statement.

20
<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

YEAR ENDED JANUARY 31,
----------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities:
Net income .......................................................... $ 1,582 $ 1,646 $ 914
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization .................................... 975 1,107 847
Deferred income taxes ............................................ (140) (80) 217
Changes in operating assets and liabilities:
Accounts receivable ............................................ (1,541) (797) (1,482)
Inventories .................................................... (370) (667) 180
Prepaid expenses and other ..................................... (118) (24) (149)
Accounts payable ............................................... 219 (112) 340
Accrued liabilities ............................................ (1,134) 1,906 478
Income taxes payable ........................................... (197) 936 (416)
------- ------- -------
Net cash (used in) provided by operating activities ......... (724) 3,915 929
------- ------- -------
Cash flows from investing activities:
Purchases of property and equipment ................................. (1,743) (407) (1,015)
Redemptions of certificates of deposit, net of purchases ............ -- -- 199
Investment in software development .................................. (522) (517) (630)
Other ............................................................... 18 74 (44)
------- ------- -------
Net cash used in investing activities ....................... (2,247) (850) (1,490)
------- ------- -------
Cash flows from financing activities:
Repurchase of common stock .......................................... (397) -- --
Proceeds from issuance of common stock .............................. 99 313 68
------- ------- -------
Net cash (used in) provided by financing activities ......... (298) 313 68
------- ------- -------
Increase (decrease) in cash and cash equivalents ....................... (3,269) 3,378 (493)
Cash and cash equivalents at beginning of period ....................... 4,701 1,323 1,816
------- ------- -------
Cash and cash equivalents at end of period ............................. $ 1,432 $ 4,701 $ 1,323
------- ------- -------
------- ------- -------
Supplemental disclosure of cash flow information:
Cash paid during year for income taxes .............................. $ 1,086 $ 23 $ 639
------- ------- -------
------- ------- -------
Cash paid during year for interest .................................. $ 18 $ 22 $ 22
------- ------- -------
------- ------- -------

</TABLE>

The accompanying notes are an integral part of these financial statements.

21
<PAGE>

DSP TECHNOLOGY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS. The Company designs, develops, manufactures, markets and
integrates high-speed computer-automated instrumentation for measurement and
control applications. The Company has two groups, the Transportation Products
Group, which focuses on powertrain testing, and the Lab Products Group, which
focuses on vehicle safety and component testing and general data acquisition and
signal analysis. The Company's principal markets are in the United States,
United Kingdom, Western Europe, and the Far East. Powertrain testing is
currently the Company's largest market and major focus.

The Company's fiscal year ends on the Sunday nearest to January 31.
However, for financial statement purposes, each fiscal year is presented as if
it ended on January 31.

PRINCIPLES OF CONSOLIDATION. The consolidated financial statements
include the accounts of the Company and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated.

INVENTORIES. Inventories are stated at the lower of cost (first-in,
first-out) or market. The Company periodically reviews its inventories for
potential slow-moving or obsolete items and writes down specific items to net
realizable value as appropriate.

REVENUE RECOGNITION. The Company recognizes revenue primarily upon
shipment when the product need only be manufactured and delivered. Revenue on
contracts requiring delivery, installation and integration and contracts
requiring longer delivery periods (long-term contracts) is recognized based on
completed milestones or deliverables. Long-term contracts typically run from 18
to 24 months. The Company evaluates profitability on long-term contracts on an
ongoing basis and recognizes losses when identified. Historically, no losses
have been incurred on long-term contracts and no losses are anticipated on
contracts in progress at January 31, 1999.

COST OF SALES. Information regarding cost of sales related to product
sales and service sales are not disaggregated as such information is not readily
available from the Company's management information system.

PROPERTY AND EQUIPMENT. Property and equipment are stated at cost.
Depreciation and amortization are computed using the straight-line method based
on the estimated useful lives of the assets or the lease term if shorter.
Building and improvements are depreciated over 40 years. Machinery, equipment,
and furniture are depreciated over three to five years.

INTANGIBLE ASSETS. Cost in excess of net assets of acquired business
("goodwill") is amortized on a straight line basis over 25 years. The Company
evaluates the realizability of goodwill periodically by comparing the carrying
value to the undiscounted future cash flows of the related assets. Purchased
technology, is included in other assets and amortized over five years. Effective
February 1, 1996, impairments, if any, are recognized in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of," if
applicable.

RESEARCH AND DEVELOPMENT. Expenditures for research and development are
expensed as incurred, except for certain costs incurred in developing computer
software to be sold, which have been capitalized in accordance with the
provisions of SFAS No. 86, "Accounting for the Costs of Computer Software to Be
Sold, Leased or Otherwise Marketed." Such costs are capitalized once
technological feasibility of the product has been established based upon
completion of a detailed program design. Software costs capitalized amounted to
$522,000, $517,000 and $630,000 for the years ended January 31, 1999, 1998 and
1997, respectively. Capitalized software is included in other assets and is
being amortized to Research and Development expenses on a straight-line basis
over the lesser of three years or the estimated economic lives of the respective
products, beginning when the products are offered

22
<PAGE>

for sale. To date, the estimated useful lives of the products have always
exceeded three years. The Company evaluates the realizability of capitalized
software on an ongoing basis relying on a number of factors including operating
results, business plans, market trends and product development cycles.

TRANSLATION OF FOREIGN CURRENCIES. The Company denominates
substantially all of its transactions in U.S. currency, except for transactions
by its foreign subsidiary. The assets and liabilities of the Company's foreign
subsidiary are denominated in the country's local currency and translated at the
year-end rate of exchange. The related income statement items are translated at
the average rate of exchange for the year. The resulting translation adjustments
are excluded from income and reflected as a separate component of stockholders'
equity. Realized and unrealized exchange gains or losses arising from
transaction adjustments are reflected in operations and are not material.

INCOME TAXES. The Company accounts for income taxes using an asset and
liability approach for financial accounting and reporting purposes.

NET INCOME PER SHARE. The following table sets forth the computation of
basic and diluted earnings per shares ("EPS").

YEAR ENDED JANUARY 31,
------------------------
1999 1998 1997
------ ------ ------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
Numerator
Net income ......................................... $1,582 $1,646 $ 914
------ ------ ------
------ ------ ------

Denominator
Number of shares on which basic EPS is calculated:
Average outstanding during the year ............. 2,253 2,211 2,168
Add: Incremental shares under stock option plans 226 226 136
------ ------ ------
Number of shares on which diluted EPS is calculated 2,479 2,437 2,304
------ ------ ------
------ ------ ------

Basic EPS .......................................... $ .70 $ .74 $ .42
Diluted EPS ........................................ $ .64 $ .68 $ .40

</TABLE>

CASH AND CASH EQUIVALENTS. The Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less to be
cash equivalents. These instruments are recorded at their carrying values which
approximate fair values because of their short maturity.

USING ESTIMATES. In preparing financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements, as well as revenue and expenses during the
reporting period. Actual results could differ from those estimates.

RECLASSIFICATIONS. Certain reclassifications have been made in the
prior year financial statements to conform with the fiscal 1999 presentation.

COMPREHENSIVE INCOME. The Company adopted SFAS No. 130, "Reporting
Comprehensive Income," effective February 1, 1998. SFAS No. 130 establishes new
rules for presenting comprehensive income and its components. The adoption had
no impact on the Company's net income or stockholder's equity. SFAS No. 130
requires foreign currency translation adjustments to be included in other
comprehensive income. Prior year financial statements have been reclassified to
conform to the requirements of SFAS No. 130.

23
<PAGE>

SEGMENT REPORTING. The Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," effective February 1, 1998,
SFAS No. 131 establishes new rules for presenting reportable business segments.
The adoption had no effect on the Company's net income or stockholders' equity.

NOTE B-INVENTORIES

Inventories consist of:

JANUARY 31,
-----------
1999 1998
------ ------
(THOUSANDS)

<S> <C> <C>
Raw materials . ........ $1,607 $1,695
Work-in-process ........ 1,068 637
Finished goods ......... 377 350
------ ------
$3,052 $2,682
------ ------
------ ------
</TABLE>

NOTE C-PROPERTY AND EQUIPMENT

Property and equipment consist of:

JANUARY 31,
-----------
1999 1998
------- -------
(THOUSANDS)

<S> <C> <C>
Building and improvements ............... $ 111 $ --
Machinery and equipment ................. 805 734
Office furniture ........................ 2,152 1,914
Computer equipment ...................... 2,550 2,263
------- -------
5,618 4,911
Accumulated depreciation and amortization (4,097) (3,570)
Land and construction in progress ....... 1,036 --
------- -------
$ 2,557 $ 1,341
------- -------
------- -------
</TABLE>

NOTE D-OTHER ASSETS

Other assets consist of:

JANUARY 31,
-----------
1999 1998
------ ------
(THOUSANDS)

<S> <C> <C>
Capitalized software, net of accumulated amortization of $1,106 in 1999
and $849 in 1998 ................................................... $1,464 $1,199
Cost in excess of net assets of acquired business, net of accumulated
amortization of $759 in 1999 and $641 in 1998 ...................... 126 244
Other ................................................................. 173 189
------ ------
$1,763 $1,632
------ ------
------ ------
</TABLE>

24
<PAGE>

NOTE E-BANK LINE OF CREDIT

At January 31, 1999, the Company has a $4,000,000 line of credit with a
bank renewable annually in May. Under the provisions of the line of credit
agreement, interest on borrowings is charged at the bank's prime rate of
interest (7.75% at January 31, 1999). Borrowings are collaterized by all
unencumbered assets of the Company and the Company must maintain certain
financial ratios and be profitable on an annual basis. There was no outstanding
balance at January 31, 1999 or 1998. Funds were borrowed at a weighted average
interest rate of 8.1% and 8.63% during 1999 and 1998, respectively.

NOTE F-ACCRUED LIABILITIES

Accrued liabilities consist of:

JANUARY 31,
-----------
1999 1998
---- ----
(THOUSANDS)
<S> <C> <C>
Employee compensation and benefits $ 697 $ 755
Commissions ...................... 47 112
Customer deposits ................ 711 1,969
Restructuring costs .............. 496 --
Other ............................ 670 919
------ ------
$2,621 $3,755
------ ------
------ ------
</TABLE>

NOTE G-INCOME TAXES

Earnings before taxes consists of:

YEAR ENDED JANUARY 31,
------------------------------
1999 1998 1997
------ ------ ------
(THOUSANDS)

<S> <C> <C> <C>
U.S. operations .......... $1,927 $2,269 $ 962
Foreign operations ....... 571 499 395
------ ------ ------
$2,498 $2,768 $1,357
------ ------ ------
------ ------ ------
</TABLE>

25
<PAGE>

Income tax expense consists of:

YEAR ENDED JANUARY 31,
-----------------------------------
1999 1998 1997
------- ------- -------
(THOUSANDS)
<S> <C> <C> <C>
Currently payable:
Federal income taxes .. $ 720 $ 800 $ 67
State income taxes .... 176 227 43
Foreign taxes ......... 160 175 116
------- ------- -------
1,056 1,202 226
Deferred:
Federal income taxes .. (110) (71) 184
State income taxes .... (30) (9) 33
------- ------- -------
(140) (80) 217
------- ------- -------
$ 916 $ 1,122 $ 443
------- ------- -------
------- ------- -------
</TABLE>

The difference between income tax rates computed by applying the
Federal statutory income tax rate to income before income taxes and the actual
effective tax rate is reconciled as follows:

YEAR ENDED JANUARY 31,
----------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate ................... 34.0% 34.0% 34.0%
Goodwill ................................. 1.6 .5 1.1
State income taxes, net of federal benefit 4.6 5.4 2.7
Research and development credits ......... (2.6) (1.8) (3.3)
Benefit of foreign sales corporation ..... (.4) (1.0) (3.8)
Other .................................... (.5) 2.4 2.0
---- ---- ----
Effective tax rate .................... 36.7% 40.5% 32.7%
---- ---- ----
---- ---- ----
</TABLE>

At January 31, 1999 and 1998, respectively, the major components of
deferred tax assets are: inventory reserves and cost capitalization-$289,000 and
$284,000; receivable and warranty reserves-$118,000 and $105,000; restructuring
accrual-$198,000 and none; and accrued compensation-$147,000 and $126,000. The
major item in non-current deferred tax liabilities is research and development
expenses of $580,000 at January 31, 1999 and $481,000 at January 31, 1998.

NOTE H-STOCK OPTION PLANS

The Company has two stock option plans, the 1991 Option Plan ("1991
Option Plan") and the 1991 Directors Option Plan ("1991 Directors Option Plan")
accounted for under APB Opinion 25, "Accounting for Stock Issued to Employees,"
and related interpretations. The 1991 Option Plan provides for the granting of
incentive and non-statutory options to employees. The 1991 Directors Option Plan
provides for the granting of nonqualified stock options to directors of the
Company who are not employees of the Company. The options, which have terms of
five or ten years when issued, typically vest over three years. The exercise
price of each option equals the market price of the Company's stock on the date
of grant or, in the case of those holding more than 10% of the Company's
outstanding common stock, 110% of the market price. Accordingly, no compensation
cost has been recognized for grants from either plan. A total of 1,129,327
shares of the Company's common stock have been reserved for issuance under the
1991 Option Plan, of which 255,182 shares are available for grant at January 31,
1999. The 1991 Directors Option Plan has 75,000 common shares reserved, of which
6,000 shares are available for grant at January 31, 1999.

26
<PAGE>

Had compensation costs for the plans been determined based on the fair
value of the options at the grant dates consistent with the method of SFAS No.
123, "Accounting for Stock-Based Compensation," the Company's net income and
income per share would have been reduced to the pro forma amounts indicated
below. Pro forma results for 1999, 1998 and 1997 may not be indicative of pro
forma results in future periods because the pro forma amounts do not include pro
forma compensation cost for options granted prior to February 1, 1995.

YEAR ENDED JANUARY 31,
----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income (In thousands):
As reported ........... $ 1,582 $ 1,646 $ 914
Pro forma ............. $ 1,269 $ 1,310 $ 678
Net income per share:
As reported-Basic ..... $ .70 $ .74 $ .42
As reported-Diluted ... $ .64 $ .68 $ .40
Pro forma-Basic ....... $ .56 $ .59 $ .31
Pro forma-Diluted ..... $ .51 $ .55 $ .30

</TABLE>

A summary of the status of the various stock option plans as of January
31, 1999, 1998 and 1997, and changes during the years ending on those dates is
presented below.

YEAR ENDED JANUARY 31,
------------------------------------------------------------
1999 1998 1997
----------------- ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 600 $4.81 602 $4.47 555 $4.29
Granted ........................ 135 7.68 103 6.09 95 5.11
Exercised ...................... (28) 3.53 (85) 3.69 (26) 2.67
Forfeited ...................... (17) 6.07 (20) 5.83 (22) 4.81
--- --- ---
Outstanding at end of year ..... 690 $5.39 600 $4.81 602 $4.47
--- --- ---
--- --- ---
</TABLE>

The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model using the following weighted
average assumptions.

<TABLE>
<S> <C> <C> <C>
Weighted-average fair value of options
granted during the year ........... $ 5.56 $ 4.27 $ 3.18
Expected term (years) ................ 7 7 6
Volatility ........................... 77.0% 67.0% 60.0%
Risk free interest rate .............. 5.2% 6.3% 6.8%
Dividend yield ....................... -- -- --

</TABLE>

27
<PAGE>

The following information applies to options outstanding at January 31,
1999:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- -------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ------------------------ -------------- ----------- -------- -------------- ---------
(IN THOUSANDS) (IN YEARS) (IN THOUSANDS)

During 1999, the Company awarded options for 39,000 shares to certain
non-employees for services rendered or to be rendered. These stock options are
included in the stock option plan information above. The Company recognized a
charge to earnings of approximately $54,000 in connection with the option
grants.

NOTE I-COMMITMENTS

LEASES. The Company leases its facilities in Fremont, California and
Ann Arbor, Michigan under operating leases which expire at various times
during 2000. Rental expenses were $433,000 in 1999, $350,000 in 1998, and
$303,000 in 1997.

Future minimum rental commitments for all leases with initial
non-cancelable lease terms of more than one year are $382,000 in 2000.

The Company has entered into a construction contract to build a 57,200
square foot facility on its eight acre land in Ann Arbor, Michigan, which will
house all of its Ann Arbor, Michigan operations. The Company expects to vacate
all of its leased facilities in Ann Arbor, Michigan once the new building is
completed. Under the terms of the construction contract, the Company is
obligated to pay the contractor $3,750,000 for the construction of the new
facility which is expected to be completed in the fall of 1999.

NOTE J-MAJOR CUSTOMERS AND FOREIGN SALES

Three separate customers accounted for 10% or more of net sales in 1999
as follows: 15%, 14% and 12%. One customer accounted for 21% and 18% of net
sales for 1998 and 1997, respectively. One other customer accounted for 14% of
net sales in 1998.

28
<PAGE>

Foreign sales were as follows:

YEAR ENDED JANUARY 31,
----------------------
1999 1998 1997
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
United Kingdom ("UK") ...... $2,948 $2,640 $2,916
Asia/Pacific Rim ........... 601 3,496 1,476
Western Europe, excluding UK 1,531 1,457 1,352
Other countries ............ 41 148 16
------ ------ ------
$5,121 $7,741 $5,760
------ ------ ------
------ ------ ------
</TABLE>

NOTE K-BUSINESS SEGMENTS AND FOREIGN OPERATIONS

BUSINESS SEGMENTS. The Company operates in two business segments:
Transportation Products Group and Lab Products Group. The Company's
reportable segments are strategic business units that offer different
products and services. They are managed separately based on the fundamental
differences in their operations.

The Transportation Products Group designs, manufactures and sells
primarily integrated systems and services for powertrain testing.

The Lab Products Group consists of the Company's SigLab Group and
Advanced Research Group. The SigLab Group provides high-performance signal
acquisition products used as subsystems for personal computers and workstations
in the electronic and electro-mechanical device analysis market. The Advanced
Research Group designs, manufactures and sells standard and custom systems to
advanced research laboratories conducting studies for defense and aerospace
related data acquisition and testing.

Information by industry segment is set forth below (in thousands):

YEAR ENDED JANUARY 31,
----------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Net sales:
Transportation Products Group .. $21,661 $18,309 $13,354
Lab Products Group ............. 3,735 3,729 4,633
------- ------- -------
$25,396 $22,038 $17,987
------- ------- -------
------- ------- -------

Income from operations:
Transportation Products Group .. $ 2,032 $ 2,467 $ 931
Lab Products Group ............. 245 76 303
------- ------- -------
$ 2,277 $ 2,543 $ 1,234
------- ------- -------
------- ------- -------
</TABLE>

29
<PAGE>

TRANSPORTATION LAB
GROUP GROUP
------- -------
<S> <C> <C>
1999
Identifiable assets ............ $14,856 $ 2,212
Depreciation and amortization .. 758 217
Net capital expenditures ....... 1,700 43
1998
Identifiable assets ............ $14,766 $ 1,964
Depreciation and amortization .. 878 229
Net capital expenditures ....... 385 22
1997
Identifiable assets ............ $ 9,016 $ 2,783
Depreciation and amortization .. 692 155
Net capital expenditures ....... 978 37

</TABLE>

GEOGRAPHIC INFORMATION. A summary of the Company's operations by geographic area
is presented below:

YEAR ENDED JANUARY 31,
----------------------
1999 1998 1997
---- ---- ----
(THOUSANDS)
<S> <C> <C> <C>
Net Sales
United States .... $22,488 $19,402 $15,083
United Kingdom ... 2,908 2,636 2,904
Operating Margin
United States .... $ 1,799 $ 2,042 $ 839
United Kingdom ... 478 501 395
Identifiable Assets
United States .... $14,642 $14,960 $10,408
United Kingdom ... 2,426 1,770 1,391

</TABLE>

NOTE L-EMPLOYEE BENEFIT PLAN

The Company has established the DSP Technology Inc. 401(k) Profit
Sharing Plan covering substantially all employees of the Company who have at
least six months of service and are at least twenty-one years of age. The amount
participants may voluntarily contribute in any year is established by law and
subject to cost of living adjustments. The Company has the option to make
matching contributions on a year to year basis. Contributions to the plan by the
Company in 1999, 1998, and 1997 aggregated $137,000, $85,000, and $69,000,
respectively.

NOTE M-RESTRUCTURING COSTS

On January 21, 1999, the Company announced its strategic decision to
relocate its corporate headquarters to, and consolidate its Transportation Group
operations in, Ann Arbor, Michigan, in order to focus on its largest and most
profitable business segment. The Company recorded a one-time pre-tax
restructuring charge of $496,000 ($314,000 after tax) in the fourth quarter of
1999 which consist of: $306,000 in severance pay and $190,000 in estimated idle
facility and winding down costs.

Had one-time after-tax restructuring costs of $314,000 been excluded
from the 1999 results as reported, the Company's net income and net income per
share would have been increased to the pro forma amounts indicated below:

30
<PAGE>

YEAR ENDED
JANUARY 31,
1999
----------
<S> <C>
Net income (In thousands):
As reported ........... $ 1,582
Pro forma ............. 1,896
Net income per share:
As reported-Basic ..... $ .70
As reported-Diluted ... $ .64
Pro forma-Basic ....... $ .84
Pro forma-Diluted ..... $ .76

</TABLE>

NOTE N-SUBSEQUENT EVENT

On March 23, 1999, the Company entered into a merger agreement with MTS
Systems Corporation ("MTS"). Pursuant to the agreement, the stockholders and
option holders of the Company will receive an aggregate consideration of
2,077,000 shares of MTS common stock in exchange for the outstanding shares and
net option shares of the Company.

NOTE O-RELATED PARTY

The Company has a strategic alliance agreement with FEV Motorentechnik
GmbH & Co. KG ("FEV"). The purpose of the alliance is to develop and distribute
test instrumentation and control products for the transportation industry. FEV
is a privately-held company based in Aachen, Germany, and is a leader in
complete engine and powertrain research and development and instrumentation for
the transportation industry. FEV owns approximately 12.7% of the Company's
common stock. During fiscal 1999, 1998, and 1997, the Company sales to FEV were
$1,249,000, $1,040,000, and $1,102,000, respectively.

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

Not applicable

PART III

ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS

DIRECTORS AND EXECUTIVE OFFICERS OF DSPT

The following table sets forth information as to each director and
executive officer of DSPT as of March 31, 1999:

31
<PAGE>

NAME AGE POSITION WITH COMPANY
---- --- ---------------------
<S> <C> <C>
Howard O. Painter, Jr. 63 Director and Chairman of the Board
F. Gil Troutman, Jr. 55 Director, President and Chief Executive Officer
J. Scott Kamsler 51 Director
Michael A. Ford 60 Director and General Manager, Lab Groups
Joe M. Millares, Jr. 46 Vice President, Finance, Chief Financial Officer and
Secretary
Larry Moulton 53 General Manager, Transportation Group

</TABLE>

HOWARD O. PAINTER, JR. has served as Chairman of the Board since March
1988, and as a Director since June 1987. He also served as DSPT's Chief
Executive Officer form March 1988 until October 1989 and as President from March
1988 until July 1988. Since 1985, Mr. Painter has been an independent business
development and marketing consultant. From April 1992 to January 1994, he also
served as the President of Adtron Instruments, a manufacturer of electronic
instruments. From 1980 to 1985, he held the position of Vice President and
General Manager of the Service Products Division of GenRad, Inc., a test
equipment manufacturer.

F. GIL TROUTMAN, JR. has served as Chief Executive Officer of DSPT
since October 1989 and as a Director and President since July 1988. from 1985
until July 1988, Mr. Troutman held the position of Product Line Manager of the
Test Systems and Instruments Group of GenRad, Inc. Prior to his work as Product
Line Manager, he had held various other ,management positions with GenRad, Inc.
since 1967, including the position of National Sales Manager of all GenRad
products from 1982 to 1985.

J. SCOTT KAMSLER is a founder of DSPT and has served as a Director
since November 1988. He served as DSPT's Vice President of Finance, Chief
Financial Officer and Secretary from April 1984 until September 1989. From
January 1984 until September 1989, he was also the Vice President, Finance and
Chief Financial Officer of Solitec, Inc. Since October 1989, Mr. Kamsler has
also served as Vice President, Finance and Chief Financial Officer of
Symmetricom, Inc., formerly Silicon General Inc.

MICHAEL A. FORD has served as a Director of DSPT since October 1988 and
has served as the General Manager of the Lab Group since January 1999. Mr. Ford
also served DSPT as its Product Line Manager for the SigLab Group on a
part-time, interim basis from July 1994 through January 1999. In addition, Mr.
Ford has been an independent management and marketing consultant since March
1994. Mr. Ford served as President of On-Line Environment Corporation, a company
providing environmental monitoring equipment and services to large computer
installations, from October 1989 to March 1994. Prior to his work with OnLine
Environmental Corporation, Mr. Ford was the President of Western Management
Partners, a business development and marketing consulting Company from 1986 to
1989.

JOSE M. MILLARES, JR. has served as Vice President, Finance, Chief
Financial Officer and Secretary since October 1989, and served as Controller
since September 1984. From 1980 to 1984, he served as Corporate Controller for
Transend Corporation, a data communication software/hardware company. Mr.
Millares is a Certified Public Accountant in California.

LARRY MOULTON has served DSPT as its General Manager for the
Transportation Group since January 1999. He also served as the Director of
Operations from November 1996 to February 1997. From 1994 to 1996, he served as
Vice President of Sales and Marketing for Eagle Test Systems, Inc., a
manufacturer of test systems for the semiconductor industry. From 1990 to 1994,
he held the positions of General Manager, Data Acquisition Division and Vice
President of Keithley Instruments, Inc., a publicly-held manufacturer of
hardware and software data acquisition products.

32
<PAGE>

COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

Section 16(a) of the Securities Exchange Act of 1934 requires DSPT's
officers and directors, and persons who own more than ten percent of a
registered class of DSPT's equity securities, to file reports of ownership and
changes in ownership with the Securities and Exchange Commission. Officers,
directors and greater than ten-percent shareholders are required by SEC
regulations to furnish the Company with copies of all Section 16(a) forms they
file.

To DSPT's knowledge, based solely on review of the copies of such
reports furnished to DSPT's and written representation that no other reports
were required, all Section 16(a) filing requirements applicable to its officers,
directors and greater than ten percent shareholders were complied with, except
that, due to administrative errors, annual statements of beneficial ownership
for each of Messrs. Painter, Troutman, Kamsler, Ford, Millares and Moulton were
not timely filed and a statement of change in beneficial ownership for Mr.
Moulton's spouse relating to his spouse's purchase of 1,000 shares of DSPT
common stock was not timely filed.

ITEM 11: EXECUTIVE COMPENSATION

The following table sets forth information concerning the compensation
of the Chief Executive Officer of DSPT and the three (3) other executive
officers of DSPT as of January 31, 1998 whose total salary and bonus for the
fiscal year ended January 31, 1999 exceeded $100,000, for services in all
capacities to DSPT, during the fiscal years ended January 31, 1999, 1998 and
1997.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------ ---------------------
SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS
- --------------------------- ---- ------ ----- ---------------------
<S> <C> <C> <C> <C>
F. Gil Troutman, Jr ....................... 1999 $192,046 $ 0 $5,000
Chief Executive Officer and President .. 1998 $173,076 $ 51,000 $ 0
1997 $175,448 $ 0 $ 0

Alan S. Broad ............................. 1999 $157,817 $ 0 $2,000
Senior Vice President .................. 1998 $151,341 $ 30,000 $ 0
1997 $138,812 $ 0 $ 0

Larry Moulton ............................. 1999 $144,752 $ 0 $3,500
Director of Operations and ............. 1998 $126,648 $ 31,100 $ 0
General Manager for Transportation Group 1997 $ 30,590 $ 0 $ 0

Jose M. Millares, Jr ...................... 1999 $127,346 $ 0 $2,000
Chief Financial Officer, Secretary ..... 1998 $118,500 $ 23,600 $ 0
and Vice President, Finance ............ 1997 $118,841 $ 0 $ 0

</TABLE>

The following table provides the specified information concerning
grants of options to purchase DSPT's common stock made during the fiscal year
ended January 31, 1999 to the persons named in the Summary Compensation Table:

33
<PAGE>

OPTION GRANTS IN LAST FISCAL YEAR

% OF TOTAL POTENTIAL REALIZABLE
NUMBER OF OPTIONS VALUE AT ASSUMED
SECURITIES GRANTED TO EXERCISE ANNUAL RATES OF
UNDERLYING EMPLOYEES OR BASE STOCK PRICE
OPTIONS IN FISCAL PRICE EXPIRATION APPRECIATION FOR
NAME GRANTED(1) YEAR ($/SH)(2) DATE OPTION TERM(3)
- ---------------------- ---------- ---------- ---------- ---------- ---------------------
5% 10%
------- --------
<S> <C> <C> <C> <C> <C> <C>
F. Gil Troutman, Jr 5,000 5.6% $ 8.125 2/22/08 $25,550 $64,750
Alan S. Broad ...... 2,000 2.2% $ 8.125 2/22/08 $10,220 $25,900
Larry Moulton ...... 3,500 3.9% $ 8.125 2/22/08 $17,885 $45,325
Jose M. Millares, Jr 2,000 2.2% $ 8.125 2/22/08 $10,220 $25,900

</TABLE>

- ---------------

(1) Options granted during fiscal 1999 under DSPT's 1991 Stock Option Plan
generally vest in equal annual amounts over a three-year period;
provided, however, no option may be exercised in whole or in part until
six months after the date of grant.

(2) The option was granted at fair market value on the date of grant.

(3) Potential gains are net of exercise price, but before taxes associated
with exercise. These amounts represent certain assumed rates of
appreciation only, based on the Securities and Exchange Commission
rules. Actual gains, if any, on stock option exercises are dependent on
the future performance of the common stock, overall market conditions
and the optionholder's continued employment throughout the vesting
period. The amounts reflected in the table may not necessarily be
achieved. One share of stock purchased at $8.125 in fiscal 1999 would
yield profits of approximately $5.11 per share at 5% appreciation over
ten years, or approximately $12.95 per share at 10% appreciation over
the same period.

The following table provides specified information concerning
unexercised options held as of January 31, 1999 by the persons named in the
Summary Compensation Table. Such executive officers did not exercise any options
during the year ended January 31, 1999.

FISCAL YEAR-END OPTION VALUES

NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END
--------------------------------- --------------------------------
NAME EXERCISABLE(1) UNEXERCISABLE EXERCISABLE(2) UNEXERCISABLE
- -------------------------- -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
F. Gil Troutman, Jr ...... 51,666 3,334 $219,400 $ 0
Alan S. Broad ............ 30,833 0 $ 97,984 $ 0
Larry Moulton ............ 9,500 19,000 $ 19,277 $ 38,548
Jose M. Millares, Jr...... 28,166 1,334 $109,858 $ 0

</TABLE>

- ---------------

34
<PAGE>

(2) Based on the closing price of $6.938, as reported on the Nasdaq
National Market, on January 29, 1999, less the exercise price.

COMPENSATION OF DIRECTORS

DSPT pays a monthly fee of $2,725 to its Chairman of the Board and
$1,500 to the other non-employee directors. DSPT also reimburses these directors
for expenses incurred in attending each Board and committee meeting. DSPT's 1991
Outside Directors Stock Option Plan (the "Directors Plan") provides for the
initial automatic grant of an option to purchase 6,000 shares of DSPT's Common
Stock to directors of DSPT who are not employees of DSPT or any parent or
subsidiary corporation (an "Outside Director") upon initial appointment or
election to the Board of Directors, and subsequent grants to each Outside
Director of an option to purchase 3,000 shares of common stock on each
anniversary of the date of his or her initial grant. A total of 75,000 shares of
the authorized but unissued common stock of DSPT are reserved for issuance under
the Directors Plan. Messrs. Painter and Kamsler were each granted options to
purchase 3,000 shares of common stock under the Directors Plan during the fiscal
year ended January 31, 1999, while Mr. Ford was granted options to purchase
3,000 shares of Common Stock under a separate standalone agreement during the
fiscal year ended January 31, 1999.

Since July 1994, Michael A. Ford served as Product Line Manager on a
part-time, interim basis for the Company's SigLab Group at a $6,000 monthly
salary. Mr. Ford's salary was increased to $7,200 per month in December 1997 and
to $7,500 per month in February 1999.

The following table provides the specified information concerning all
compensation paid to persons who were directors of DSPT during fiscal 1999 who
are not named in the Summary Compensation Table.

DIRECTOR COMPENSATION FOR LAST FISCAL YEAR

CASH COMPENSATION SECURITY GRANTS
----------------- ---------------
NUMBER OF SECURITIES UNDERLYING
NAME ANNUAL RETAINER FEES OPTIONS (#)
- --------------------- -------------------- -------------------------------
<S> <C> <C>
Howard O. Painter, Jr $32,700 3,000
J. Scott Kamsler $18,000 3,000
Michael A. Ford $18,000 3,000

</TABLE>

EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS

DSPT has entered into retention agreements dated as of January 18, 1999
with F. Gil Troutman, Jr., DSPT's President and Chief Executive Officer, and
Larry Moulton, DSPT's General Manager of the Transportation Group. If Mr.
Troutman or Mr. Moulton resigns for "good reason" or is terminated without
"cause" within 12 months after the date of a merger or acquisition of DSPT, each
officer is entitled to all salary, accrued but unused vacation and his pro rata
target bonus for the year each officer is entitled to all salary, accrued but
unused vacation and his pro rata target bonus for the year each through the date
of his termination or resignation and an additional 18 months (12 months for Mr.
Moulton) of salary and bonus, reimbursement of any expenses incurred in
connection with DSPT's business, reimbursement of his health insurance premiums
for 18 months (12 months for Mr. Moulton) and any benefits under DSPT's 401(k)
plan or other benefit plans.

In connection with the merger agreement with MTS, MTS has entered into
separate employment agreements with Mr. Troutman and Mr. Moulton which will
become effective upon the closing of the merger. Under the employment
agreements, MTS has agreed to employ Messrs. Troutman and Moulton after the
merger becomes effective and the retention agreements described above will have
no effect.

DSPT has also entered into a separation agreement and general release
of claims dated as of January 29, 1999 with Jose M. Millares, Jr., DSPT's Vice
President and Chief Financial Officer,

35
<PAGE>

in connection with his termination of employment with DSPT effective as of June
30, 1999. The agreement provides that DSPT shall pay certain severance benefits
to Mr. Millares in consideration for his years of service, including payment
of Mr. Millares' salary through June 30, 1999, an additional twelve (12)
months of salary and reimbursement of certain health insurance premiums. If,
however, Mr. Millares voluntarily resigns or is terminated for cause, he
shall only be entitled to any salary and accrued but unused vacation that he
has earned through his last day of his employment.

All options under the DSPT 1991 Directors' Stock Option Plan and 1991
Stock Option Plan, the "Plans", and certain options issued outside the Plans
contain terms that provide that vesting of all such options will accelerate
thirty days prior to a transfer of control if the options are not assumed by the
acquiror, except that vesting with respect to options for 39,000 shares granted
outside the Plans do not accelerate upon a transfer of control. Under the terms
of the merger agreement with MTS, MTS has not assumed any outstanding options
other than the unvested portion options for 39,000 shares will accelerate thirty
days prior to the effective time of the merger.

ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information as of February 26,
1999, with respect to the beneficial ownership of DSPT's common stock by (1) all
persons known by DSPT to be the beneficial owners of more than 5% of the
outstanding common stock of DSPT, (2) each director of DSPT, (3) the Chief
Executive Officer and the three other executive officers of DSPT as of January
31, 1999 whose salary and bonus for the year ended January 31, 1999 exceeded
$100,000, and (4) all executive officers and directors of DSPT as a group:

NUMBER OF PERCENTAGE
SHARES OF CLASS
--------- ----------
NAME AND ADDRESS OF BENEFICIAL OWNERS(1) SHARES OWNED(2)
---------------------------------------- -------------------------------

<S> <C> <C>
FEV Motorentechnik GmbH & Co. KG.................................................. 285,000(3) 12.71%
Neuenhostrasse 181
52078 Aachen, Germany
FMR Corp.......................................................................... 224,100(4) 9.99%
82 Devonshire Street
Boston, MA 02109
Kennedy Capital Management, Inc................................................... 138,000(5) 6.15%
10829 Olive Blvd.
St. Louis, MO 63141
F. Gil Troutman, Jr............................................................... 116,666(6) 5.09%
Alan S. Broad..................................................................... 96,868(7) 4.27%
J. Scott Kamsler.................................................................. 61,200(8) 2.72%
Howard O. Painter, Jr............................................................. 79,000(9) 3.49%
Jose M. Millares, Jr.............................................................. 38,666(10) 1.70%
Michael Ford...................................................................... 21,000(11) *
Larry Moulton..................................................................... 19,032(12) *
Executive officers and directors as a group (seven persons)....................... 432,432(13) 17.88%

</TABLE>

- ---------------

* Less than 1%

(1) Except as otherwise indicated, the address of each beneficial owner is
c/o DSP Technology Inc., 48500 Kato Road, Fremont, California
94538-7338.

(2) Except as indicated in the footnotes to this table, the persons named
in the table have sole voting and investment power with respect to all
shares of common stock shown as beneficially owned by them, subject to
community property laws, where applicable.

36
<PAGE>

(3) According to a Schedule 13D filed with the Securities and Exchange
Commission on June 8, 1998, FEV has sole voting power and sole
dispositive power with respect to the 285,000 shares of the DSPT's
common stock.

(4) According to a Schedule 13G/A filed with the Securities and Exchange
Commission on January 7, 1999, all 224,100 shares are beneficially
owned by FMR Corp. through its wholly-owned subsidiary, Fidelity
Management & Research Company, "Fidelity", which is deemed to
beneficially own such shares as a result of acting as an investment
advisor to various investment companies registered under Section 8 of
the Investment Company Act of 1940, the "Funds". The ownership of one
investment company, Fidelity Low-Priced Stock Fund, amounts to 224,100
shares of DSPT's common stock. Edward C. Johnson 3d, Chairman of FMR
Corp., FMR Corp., through its control of Fidelity, and the Funds each
has the sole power to dispose of the 224,100 shares owned by the Funds.
Neither FMR Corp. nor Edward C. Johnson 3d has the sole power to vote
or direct the voting of the shares owned directly by the Funds, which
power resides with the Funds' board of trustees. Fidelity carries out
the voting of the shares under written guidelines established by the
Funds' board of trustees. Members of the Edward C. Johnson 3d family,
through their ownership of voting common stock of FMR Corp. and their
execution of a stockholder's voting agreement, may be deemed, under the
Investment Company Act of 1940, to form a controlling group with
respect to FMR Corp., and may therefore be deemed to beneficially own
the shares of DSPT's stock beneficially owned by FMR Corp.

(5) According to a Schedule 13G filed with the Securities and Exchange
Commission on February 5, 1999, all 138,000 shares are beneficially
owned by Kennedy Capital Management, Inc. which is deemed to
beneficially own such shares as a result of acting as an investment
advisor to various companies registered under Section 203 of the
Investment Advisers Act of 1940. Kennedy Capital is deemed to have the
sole power to vote or to direct the vote of 126,100 of the 138,000
shares beneficially owned. Kennedy Capital has the sole power to
dispose or to direct the disposition of 138,000 shares.

(6) Includes 51,666 shares subject to stock options exercisable within 60
days of February 26, 1999.

(7) Includes 24,832 shares subject to stock options exercisable within 60
days of February 26, 1999.

(8) Includes 9,000 shares subject to stock options exercisable within 60
days of February 26, 1999.

(9) Includes 24,000 shares subject to stock options exercisable within 60
days of February 26, 1999.

(10) Includes 28,166 shares subject to stock options exercisable within 60
days of February 26, 1999.

(11) Includes 21,000 shares subject to stock options exercisable within 60
days of February 26, 1999.

(12) Includes 17,832 shares subject to stock options exercisable within 60
days of February 26, 1999.

(13) Includes 176,496 shares subject to stock options exercisable within 60
days of February 26, 1999.

37
<PAGE>

ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

DSPT entered into a Strategic Alliance Agreement dated February 26,
1995 with FEV Motorentechnik GmbH & Co. KG. As of February 26, 1999, FEV
beneficially owned approximately 12.5% of DSPT outstanding common stock. DSPT
entered into the strategic relationship with FEV in order to combine resources,
technology and distribution for joint product development and distribution
within certain territories. Under the terms of the agreement, DSPT and FEV have
agreed to jointly develop and manufacture certain products as well as act as
sole distributors of each other's pre-existing products within certain
respective territories, and to act as strategic partners with respect to
distribution for other parts of the world. DSPT, MTS and FEV have entered into
an agreement which will supersede this agreement effective upon the merger.

PART IV

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

(a)(1) FINANCIAL STATEMENTS

The financial statements required in accordance with this Item have
been filed as part of this Report under Part II, Item 8.

(a)(2) FINANCIAL STATEMENT SCHEDULES

The following financial statement schedule has been filed as part of
this Report:

SCHEDULE DESCRIPTION PAGE NO.
- -------- ----------- --------
<S> <C> <C>
Auditors' Report on Schedule II 41
Valuation and Qualifying Accounts 42
</TABLE>

Financial statement schedules not listed above have been omitted
because the information required to be set forth therein is inapplicable or is
shown in the Consolidated Financial Statements or Notes thereto.

(a)(3) EXHIBITS

The following exhibits are filed or incorporated by reference as part
of this Report:

Ex. No. Description
- ------- -----------

2.1 Agreement and Plan of Merger among MTS Systems Corporation, Badger
Merger Corp. and DSP Technology Inc. (1)

3.1 Certificate of Incorporation (2)

3.2 Amendment to Restated By-laws (2)

10.1 Profit Sharing Plan Employees' Retirement Trust (3) **

10.2 Non-Qualified Unfunded Deferred Compensation Plan (3) **

10.3 1991 Directors Stock Option Plan, as amended (5) **

10.4 Form of 1991 Directors Stock Option Plan Agreement (4) **

10.5 1991 Stock Option Plan , as amended (5) **

10.6 Form of 1991 Stock Option Plan Agreement (4) **

10.7 Lease Agreement dated July 15, 1992 between Varsity Drive Company Inc.
and DSP Technology Inc. (5)

38
<PAGE>

10.8 Lease Agreement dated August 2, 1993 between Minos Management Company
and DSP Technology Inc. (6)

10.9 Strategic Alliance Agreement By and Between FEV Motorentechnik GmbH &
Co. KG and DSP Technology Inc. dated February 26, 1995. (6) +

10.10 Form of Indemnity Agreement (6)

10.11 Retention Agreement By and Between DSP Technology Inc. and Larry
Moulton dated January 18, 1999.

10.12 Retention Agreement By and Between DSP Technology Inc. F. Gil Troutman
dated January 18, 1999.

10.13 Separation Agreement and General Release of Claims By and Between DSP
Technology Inc. and Jose M. Millares dated January 29, 1999.

21.1 Subsidiaries of Registrant (7)

23.1 Consent of independent Certified Public Accountants (to incorporate
report on consolidated financial statements into Company's Form S-8
Registration Statements)

24.1 Power of Attorney (8)

27.1 Financial Data Schedule

- ----------

** Compensatory plan or arrangement.

+ Confidential treatment has been granted for certain portions of this
exhibit.

(1) Incorporated by reference to the corresponding Exhibit filed as part of
DSPT's Current Report on Form 8-K filed March 26, 1999.

(2) Incorporated by reference to the corresponding Exhibit filed as part of
the DSPT Quarterly Report on Form 10-Q (File No. 0-13677) on December
18, 1997.

(3) Incorporated by reference to the corresponding Exhibit filed as part of
the Company's Annual Report on Form 10-K (File No. 0-14677) on April
24, 1987.

(4) Incorporated by reference to the corresponding Exhibit filed as part of
the Company's Annual Report on Form 10-K (File No. 0-14677) on April
27, 1992.

(5) Incorporated by reference to the corresponding Exhibit filed as part of
the Company's Annual Report on Form 10-K (File No. 0-14677) on April
27, 1993.

(6) Incorporated by reference to the corresponding Exhibit filed as part of
the Company's Annual Report on Form 10-K (File No. 0-14677) on April
21, 1994.

(7) Incorporated by reference to the corresponding Exhibit filed as part of
the Company's Annual Report on Form 10-K (File No. 0-14677) on April
22, 1994.

(8) Included on page 42 to this Report.

(b) REPORTS ON FORM 8-K

Current Report on Form 8-K filed March 26, 1999 relating to the
Agreement and Plan of Merger among MTS Systems Corporation, Badger Merger Corp.
and DSP Technology Inc.

39
<PAGE>

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE II

To the Board of Directors and Stockholders of DSP Technology Inc.:

In connection with our audits of the consolidated financial statements of DSP
Technology Inc. and subsidiary companies referred to in our report dated March
12, 1999, except for Note N as to which date is March 23, 1999, which is
included in Part II of this form, we have also audited Schedule II for each of
the three years in the period ended January 31, 1999. In our opinion, this
schedule presents fairly the information required to be set forth therein.

San Jose, California
March 12, 1999

40
<PAGE>

Schedule II

DSP TECHNOLOGY Inc.
Valuation and Qualifying Accounts
(Thousands)

Additions
Balance at Charged to Balance
Beginning Costs and at End
of Year Expenses Deductions of Year
------- -------- ---------- -------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended:
January 31, 1997 50 0 0(1) 50
January 31, 1998 50 100 0(1) 150
January 31, 1999 150 35 0(1) 185

Reserve for inventory obsolescence:
Year ended:
January 31, 1997 291 0 (133) 158
January 31, 1998 158 309 0 467
January 31, 1999 467 94 (101) 460

</TABLE>

(1) Uncollectible accounts written off, net of recoveries

41
<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, this 27th day of April
1999.

DSP TECHNOLOGY INC.

By: /s/ Jose M. Millares
--------------------
JOSE M. MILLARES
Chief Financial Officer

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints F. Gil Troutman, Jr. and Jose M. Millares, Jr.,
or either of them, his attorneys-in-fact, each with power of substitution, for
him in any and all capacities, to sign this Annual Report on Form 10-K, and any
amendments thereto, and to file the same, with Exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.

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, in the capacities and on the dates indicated.

Signatures Title Date

/s/ Howard O. Painter, Jr. Chairman of the Board April 27, 1999
- -------------------------
Howard O. Painter, Jr.

/s/ F. Gil Troutman, Jr. Director, Chief Executive April 27, 1999
- ------------------------- Officer and President (Principal
F. Gil Troutman, Jr. Executive Officer)

/s/ Jose M. Millares Vice President, Finance April 27, 1999
- ------------------------- (Principal Financial and
Jose M. Millares Accounting Officer and Secretary)

/s/ J. Scott Kamsler Director April 27, 1999
- -------------------------
J. Scott Kamsler

/s/ Michael A. Ford Director April 27, 1999
- -------------------------
Michael A. Ford

42
<PAGE>

EXHIBIT INDEX

Ex. No. Description
- ------- -----------

2.1 Agreement and Plan of Merger among MTS Systems Corporation, Badger
Merger Corp. and DSP Technology Inc. (1)

3.1 Certificate of Incorporation (2)

3.2 Amendment to Restated By-laws (2)

10.1 Profit Sharing Plan Employees' Retirement Trust (3) **

10.2 Non-Qualified Unfunded Deferred Compensation Plan (3) **

10.3 1991 Directors Stock Option Plan, as amended (5) **

10.4 Form of 1991 Directors Stock Option Plan Agreement (4) **

10.5 1991 Stock Option Plan , as amended (5) **

10.6 Form of 1991 Stock Option Plan Agreement (4) **

10.7 Lease Agreement dated July 15, 1992 between Varsity Drive Company Inc.
and DSP Technology Inc. (5)

10.8 Lease Agreement dated August 2, 1993 between Minos Management Company
and DSP Technology Inc. (6)

10.9 Strategic Alliance Agreement By and Between FEV Motorentechnik GmbH &
Co. KG and DSP Technology Inc. dated February 26, 1995. (6) +

10.10 Form of Indemnity Agreement (6)

10.11 Retention Agreement By and Between DSP Technology Inc. and Larry
Moulton dated January 18, 1999.

10.12 Retention Agreement By and Between DSP Technology Inc. F. Gil Troutman
dated January 18, 1999.

10.13 Separation Agreement and General Release of Claims By and Between DSP
Technology Inc. and Jose M. Millares dated January 29, 1999.

21.1 Subsidiaries of Registrant (7)

23.1 Consent of independent Certified Public Accountants (to incorporate
report on consolidated financial statements into Company's Form S-8
Registration Statements)

24.1 Power of Attorney (8)

27.1 Financial Data Schedule

- ----------

** Compensatory plan or arrangement.

+ Confidential treatment has been granted for certain portions of this
exhibit.

(1) Incorporated by reference to the corresponding Exhibit filed as part of
DSPT's Current Report on Form 8-K filed March 26, 1999.

(2) Incorporated by reference to the corresponding Exhibit filed as part of
the DSPT Quarterly Report on Form 10-Q (File No. 0-13677) on December
18, 1997.

(3) Incorporated by reference to the corresponding Exhibit filed as part of
the Company's Annual Report on Form 10-K (File No. 0-14677) on April
24, 1987.

(4) Incorporated by reference to the corresponding Exhibit filed as part of
the Company's Annual Report on Form 10-K (File No. 0-14677) on April
27, 1992.

(5) Incorporated by reference to the corresponding Exhibit filed as part of
the Company's Annual Report on Form 10-K (File No. 0-14677) on April
27, 1993.

43
<PAGE>

(6) Incorporated by reference to the corresponding Exhibit filed as part of
the Company's Annual Report on Form 10-K (File No. 0-14677) on April
21, 1994.

(7) Incorporated by reference to the corresponding Exhibit filed as part of
the Company's Annual Report on Form 10-K (File No. 0-14677) on April
22, 1994.

(8) Included on page 42 to this Report.

(B) REPORTS ON FORM 8-K

Current Report on Form 8-K filed March 26, 1999 relating to the
Agreement and Plan of Merger among MTS Systems Corporation, Badger Merger Corp.
and DSP Technology Inc.

<PAGE>

EXHIBIT 10.11

RETENTION AGREEMENT

This Employment Agreement (the "Agreement") is made and entered into as
of January 18, 1999 (the "Effective Date"), by and between DSP Technology, Inc.
(the "Company") and Larry Moulton ("Executive").

RECITALS

The Company recognizes that the possibility of a change of control or
other event which may change the nature and structure of the Company and that
uncertainty regarding the consequences of such events may adversely affect the
Company's ability to retain its key employees. The Company also recognizes that
the Executive possesses an intimate and essential knowledge of the Company upon
which the Company may need to draw for objective advice and continued services
in connection with any acquisition of the Company or other change of control
that is potentially advantageous to the Company's stockholders. The Company
believes that the existence of this Agreement will serve as an incentive to
Executive to remain in the employ of the Company and will enhance its ability to
call on and rely upon the Executive in connection with a change of control.

The Company and the Executive desire to enter into this Agreement in
order to provide additional compensation and benefits to the Executive and to
encourage Executive to continue to devote his full attention and dedication to
the Company and to continue his employment with the Company.

1. DEFINITIONS. As used in this Agreement, unless the context
requires a different meaning, the following terms shall have the meanings set
forth herein:

(a) "CAUSE" means:

(i) theft, dishonesty, misconduct or
falsification of any employment or Company records;

(ii) improper disclosure of the Company's
confidential or proprietary information by the Executive;

(iii) any action by the Executive which has a
material detrimental effect on the Company's reputation or business;

(iv) any material breach of this Agreement by the
Executive; or

(v) The Executive's conviction (including any
plea of guilty or no contest) for any criminal act that impairs Executive's
ability to perform his or her duties under this Agreement.

(b) "CHANGE OF CONTROL" means:

(i) any "person" (as such term is used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")), other than a trustee or other fiduciary holding securities of
the Company under an employee benefit plan of the Company, becomes the
"beneficial owner" (as defined in Rule 13d-3 promulgated under the Exchange
Act), directly or indirectly, of securities of the Company representing 50% or
more of (A) the outstanding shares of common stock of the Company or (B) the
combined voting power of the Company's then-outstanding securities;

(ii) the Company is party to a merger or
consolidation which results in the holders of voting securities of the Company
outstanding immediately prior thereto failing to continue to represent (either
by remaining outstanding or by being converted into voting securities of the
surviving entity) at least 51% of the

45
<PAGE>

combined voting power of the voting securities of the Company or such surviving
entity outstanding immediately after such merger or consolidation;

(iii) there occurs a change in the composition of
the Board of Directors of the Company within a two-year period, as a result of
which fewer than a majority of the directors are Incumbent Directors. Incumbent
Directors shall mean directors who either (A) are directors of the Company as of
the date hereof or (b) are elected, or nominated for election, to the Board of
Directors of the Company with the affirmative votes of at least a majority of
the Incumbent Directors at the time of such election or nomination (but shall
not include an individual whose election or nomination is in connection with an
actual or threatened proxy contest relating to the election of directors to the
Company;

(iv) the sale or disposition of all or
substantially all of the Company's assets (or any transaction having similar
effect is consummated); or

(v) the dissolution or liquidation of the
Company.

(c) "GOOD REASON" means the occurrence of any of the
following conditions, without Executive's written consent, which condition(s)
remain(s) in effect 20 days after written notice to the Board from Executive of
such condition(s):

(i) a decrease in Executive's base salary and/or
a material decrease in Executive's Management Bonus Plan participation or
employee benefits following a Change of Control;

(ii) a material adverse alteration in the nature
or status of the Executive's responsibilities or duties, as measured against
Executive's responsibilities or duties immediately prior to such change;

(iii) the relocation of Executive's principal
worksite to a location more than fifty (50) miles from Ann Arbor, Michigan; or

(iv) any material breach of this Agreement by the
Company.

(d) "PERMANENT DISABILITY" means that:

(i) the Executive has been incapacitated by
bodily injury or disease so as to be prevented thereby from engaging in the
performance of the Executive's duties;

(ii) such total incapacity shall have continued
for a period of six consecutive months; and

(iii) such incapacity will, in the opinion of a
qualified physician, be permanent and continuous during the remainder of the
Executive's life.

(e) "Termination Upon a Change of Control" means:

(i) any termination of the employment of the
Executive by the Company without Cause within twelve (12) months after the date
of a Change of Control; or

(ii) any resignation by the Executive for Good
Reason within twelve (12) months after the occurrence of any Change of Control.

"Termination Upon Change of Control" shall not include any termination
of the employment of the Executive (a) by the Company for Cause; (b) by the
Company as a result of the Permanent Disability of the

46
<PAGE>

Executive; (c) as a result of the death of the Executive; or (d) as a result of
the voluntary termination of employment by the Executive for reasons other than
Good Reason.

(f) "Total Annual Earnings" means the sum of the
Executive's annual salary and targeted annual incentive bonus, as in effect
immediately prior to the Change of Control.

2. POSITION AND DUTIES. Executive shall continue to be an at-will
Executive of the Company employed in his/her current position at his/her then
current salary rate. Executive shall also be entitled to continue to participate
in and to receive benefits on the same basis as other executives or senior staff
members under any of the Company's employee benefit plans as in effect from time
to time. In addition, Executive shall be entitled to the benefits afforded to
other employees similarly situated under the Company's vacation, holiday and
business expense reimbursement policies. Executive agrees to devote his/her full
business time, energy and skill to his/her duties at the Company. These duties
shall include, but not be limited to, any duties consistent with his/her
position which may be assigned to Executive from time to time.

3. TERMINATION UPON CHANGE OF CONTROL.

(a) SEVERANCE BENEFITS. In the event of the Executive's
Termination Upon Change of Control, Executive shall be entitled to the following
separation benefits:

(i) all salary, accrued but unused vacation
earned through the date of Executive's termination and Executive's target bonus
for the year in which termination occurs, pro rated through the date of
Executive's termination;

(ii) twelve (12) months' of Executive's Total
Annual Earnings as in effect as of the date of such termination, all less
applicable withholding, paid in a lump sum within thirty (30) days of
termination of employment;

(iii) within fourteen (14) days of submission of
proper expense reports by the Executive, the Company shall reimburse the
Executive for all expenses reasonably and necessarily incurred by the Executive
in connection with the business of the Company prior to his/her termination of
employment;

(iv) reimbursement of Executive's COBRA premiums
for twelve (12) months if Executive elects to purchase continued group health
insurance coverage; thereafter, Executive will be able to purchase coverage at
Executive's own expense in accordance with COBRA; and

(v) Executive shall receive the benefits, if
any, under the Company's 401(k) Plan and other Company benefit plans to which he
may be entitled pursuant to the terms of such plans.

4. LIMITATION OF PAYMENTS AND BENEFITS.

(a) To the extent that any of the payments and benefits
provided for in this Agreement or otherwise payable to the Executive constitute
"parachute payments" within the meaning of Section 280G of the Internal Revenue
Code of 1986, as amended (the "Code"), and, but for this Section 4, would be
subject to the excise tax imposed by Section 4999 of the Code or any similar or
successor provision, the aggregate amount of such payments and benefits shall be
reduced, but only to the extent necessary so that none of such payments and
benefits are subject to excise tax pursuant to Section 4999 of the Code.

(b) Within sixty (60) days after the later of termination
of employment or the related Change in Control event, the Company shall notify
the Executive in writing if it believes that any reduction in the payments and
benefits that would otherwise be paid or provided to the Executive under the
terms of this Agreement is required to comply with the provisions of Subsection
4(a). If the Company determines that any such reduction is required, it will
provide the Executive with copies of the information used and calculations made
by the Company to determine the amount of such reduction. The Company shall
determine, in a fair and equitable manner after

47
<PAGE>

consultation with the Executive, which payments and benefits are to be reduced
so as to result in the maximum benefit for the Executive.

(c) Within thirty (30) days after the Executive's receipt
of the Company's notice pursuant to Subsection 4(b), the Executive shall notify
the Company in writing if the Executive disagrees with the amount of reduction
determined by the Company, or the selection of the payments and the benefits to
be reduced. As part of such notice, the Executive shall also advise the Company
of the amount of reduction, if any, that the Executive has, in good faith,
determined to be necessary to comply with the provisions of Subsection 4(a)
and/or the payments and benefits to be reduced. Failure by the Executive to
provide this notice within the time allowed will be treated by the Company as
acceptance by the Executive of the amount of reduction determined by the Company
and/or the payments and benefits to be reduced. If any differences regarding the
amount of the reduction and/or the payments and benefits to be reduced have not
been resolved by mutual agreement within sixty (60) days after the Executive's
receipt of the Company's notice pursuant to Subsection 4(b), the amount of
reduction and/or the payments and benefits to be reduced as determined by the
Executive will be conclusive and binding on both parties unless, prior to the
expiration of such sixty (60) day period, the Company notifies the Executive in
writing of the Company's intention to have the matter submitted to arbitration
for resolution and proceeds to do so promptly. If the Company gives no notice to
the Executive of a required reduction as provided in Subsection 4(b), the
Executive may unilaterally determine the amount of reduction required, if any,
and/or the payments and benefits to be reduced, and, upon written notice to the
Company, the amount and/or the payments and benefits to be reduced will be
conclusive and binding on both parties.

(d) If, as a result of the reductions required by
Subsection 4(a), the amounts previously paid to the Executive exceed the amount
to which the Executive is entitled, the Executive will promptly return the
excess amount to the Company.

5. PAYMENT OF TAXES. All payments made to Executive under this
Agreement shall be subject to all applicable federal and state income,
employment and payroll taxes.

6. EXCLUSIVE REMEDY. Under any claim for breach of this Agreement
or wrongful termination, the payments and benefits provided for in Section 3
shall constitute the Executive's sole and exclusive remedy for any alleged
injury or other damages arising out of the cessation of the employment
relationship between the Executive and the Company in the event of Executive's
termination. Except as expressly set forth herein, the Executive shall be
entitled to no other compensation, benefits, or other payments from the Company
as a result of any termination of employment.

7. PROPRIETARY AND CONFIDENTIAL INFORMATION. The Executive agrees
to continue to abide by the terms and conditions of the Company's
confidentiality and/or proprietary rights agreement between the Executive and
the Company.

8. ARBITRATION. In the event of any dispute or claim relating to
or arising out of Executive's employment relationship with the Company, this
Agreement, or the termination of Executive's employment with the Company for any
reason (including, but not limited to, any claims of breach of contract,
wrongful termination or age, disability, sex, race or other discrimination or
harassment), Executive and the Company agree that all such disputes shall be
fully, finally and exclusively resolved by binding arbitration conducted by the
American Arbitration Association in Santa Clara County, California. Executive
and the Company hereby knowingly and willingly waive their respective rights to
have any such disputes or claims tried to a judge or jury. Provided, however,
that this arbitration provision shall not apply to any disputes or claims
relating to or arising out of the actual or alleged misuse or misappropriation
of the Company's property, including, but not limited to, its trade secrets or
proprietary information.

9. INTERPRETATION. Executive and the Company agree that this
Agreement shall be interpreted in accordance with and governed by the laws of
the State of California.

48
<PAGE>

10. CONFLICT IN BENEFITS. This Agreement shall supersede all prior
arrangements, whether written or oral, and understandings regarding the subject
matter of this Agreement and shall be the exclusive agreement for the
determination of any payments due upon Executive's termination of employment or
a Change of Control; provided, however, that this Agreement is not intended to
and shall not affect, limit or terminate (i) any plans, programs, or
arrangements of the Company that are regularly made available to a significant
number of employees of the Company, (ii) any agreement or arrangement with the
Executive that has been reduced to writing and which does not relate to the
subject matter hereof, (iii) any indemnification rights described below, or (iv)
any agreements or arrangements hereafter entered into by the parties in writing,
except as otherwise expressly provided herein.

11. RELEASE OF CLAIMS. No severance benefits shall be paid to
Executive under this Agreement unless and until the Executive shall, in
consideration of the payment of such severance benefit, execute a release of
claims in a form satisfactory to the Company; provided, however, that such
release shall not apply to any right of Executive to be indemnified by the
Company.

12. SUCCESSORS AND ASSIGNS.

(a) SUCCESSORS OF THE COMPANY. The Company will require
any successor or assign (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business and/or
assets of the Company, expressly, absolutely and unconditionally to assume and
agree to perform this Agreement in the same manner and to the same extent that
the Company would be required to perform it if no such succession or assignment
had taken place. As used in this Agreement, "Company" shall mean the Company as
defined above and any successor or assign to its business and/or assets as
aforesaid which executes and delivers the agreement provided for in this Section
12 or which otherwise becomes bound by all the terms and provisions of this
Agreement by operation of law.

(b HEIRS OF EXECUTIVE. This Agreement shall inure to the
benefit of and be enforceable by the Executive's personal and legal
representatives, executors, administrators, successors, heirs, distributes,
devises and legatees.

13. NOTICES. For purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, as follows:

if to the Company: President and Chief Executive Officer
DSP Technology Inc.
48500 Kato Road
Fremont, CA 94538

cc: Diane Frankle, Esq
Gray Cary Ware & Freidenrich LLP
400 Hamilton Avenue
Palo Alto, CA 94301-1809

and if to the Executive at the address specified at the end of this Agreement.
Notice may also be given at such other address as either party may have
furnished to the other in writing in accordance herewith, except that notices of
change of address shall be effective only upon receipt.

14. NO REPRESENTATIONS. Executive acknowledges that he/she is not
relying and has not relied on any promise, representation or statement made by
or on behalf of the Company which is not set forth in this Agreement.

15. Validity. If any one or more of the provisions (or any part
thereof) of this Agreement shall be held invalid, illegal or unenforceable in
any respect, the validity, legality and enforceability of the remaining
provisions (or any part thereof) shall not in any way be affected or impaired
thereby.

49
<PAGE>

16. MODIFICATION. This Agreement may only be modified or amended
by a supplemental written agreement signed by Executive and the Company.

IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the date set forth above.

DSP TECHNOLOGY, INC.

By: /s/ Jose M. Millares, Jr.

Title: CFO

EXECUTIVE:

/s/ Larry Moulton
Executive's Signature

Address for Notice:

5956 Oakwood Circle
- -------------------------------------
Long Grove, IL
- -------------------------------------
60047
- -------------------------------------

<PAGE>

EXHIBIT 10.12

RETENTION AGREEMENT

This Employment Agreement (the "Agreement") is made and entered into as
of January 18, 1999 (the "Effective Date"), by and between DSP Technology, Inc.
(the "Company") and F. Gil Troutman ("Executive").

RECITALS

1. DEFINITIONS. As used in this Agreement, unless the context
requires a different meaning, the following terms shall have the meanings set
forth herein:

(a) "CAUSE" means:

(i) theft, dishonesty, misconduct or
falsification of any employment or Company records;

(ii) improper disclosure of the Company's
confidential or proprietary information by the Executive;

(iii) any action by the Executive which has a
material detrimental effect on the Company's reputation or business;

(iv) any material breach of this Agreement by the
Executive; or

(v) The Executive's conviction (including any
plea of guilty or no contest) for any criminal act that impairs Executive's
ability to perform his or her duties under this Agreement.

(b) "CHANGE OF CONTROL" means:

51
<PAGE>

combined voting power of the voting securities of the Company or such surviving
entity outstanding immediately after such merger or consolidation;

(iv) the sale or disposition of all or
substantially all of the Company's assets (or any transaction having similar
effect is consummated); or

(v) the dissolution or liquidation of the
Company.

(i) a decrease in Executive's base salary and/or
a material decrease in Executive's Management Bonus Plan participation or
employee benefits following a Change of Control;

(ii) a material adverse alteration in the nature
or status of the Executive's responsibilities or duties, as measured against
Executive's responsibilities or duties immediately prior to such change;

(iii) the relocation of Executive's principal
worksite to a location more than fifty (50) miles from Ann Arbor, Michigan; or

(iv) any material breach of this Agreement by the
Company.

(d) "PERMANENT DISABILITY" means that:

(i) the Executive has been incapacitated by
bodily injury or disease so as to be prevented thereby from engaging in the
performance of the Executive's duties;

(ii) such total incapacity shall have continued
for a period of six consecutive months; and

(iii) such incapacity will, in the opinion of a
qualified physician, be permanent and continuous during the remainder of the
Executive's life.

(e) "TERMINATION UPON A CHANGE OF CONTROL" means:

(i) any termination of the employment of the
Executive by the Company without Cause within twelve (12) months after the date
of a Change of Control; or

(ii) any resignation by the Executive for Good
Reason within twelve (12) months after the occurrence of any Change of Control.

52
<PAGE>

Executive; (c) as a result of the death of the Executive; or (d) as a result of
the voluntary termination of employment by the Executive for reasons other than
Good Reason.

(f) "TOTAL ANNUAL EARNINGS" means the sum of the
Executive's annual salary and targeted annual incentive bonus, as in effect
immediately prior to the Change of Control.

3. TERMINATION UPON CHANGE OF CONTROL.

(a) SEVERANCE BENEFITS. In the event of the Executive's
Termination Upon Change of Control, Executive shall be entitled to the following
separation benefits:

(ii) eighteen (18) months' of Executive's Total
Annual Earnings as in effect as of the date of such termination, all less
applicable withholding, paid in a lump sum within thirty (30) days of
termination of employment;

(iv) reimbursement of Executive's COBRA premiums
for eighteen (18) months if Executive elects to purchase continued group health
insurance coverage; thereafter, Executive will be able to purchase coverage at
Executive's own expense in accordance with COBRA; and

(v) Executive shall receive the benefits, if
any, under the Company's 401(k) Plan and other Company benefit plans to which he
may be entitled pursuant to the terms of such plans.

4. LIMITATION OF PAYMENTS AND BENEFITS.

53
<PAGE>

consultation with the Executive, which payments and benefits are to be reduced
so as to result in the maximum benefit for the Executive.

5. PAYMENT OF TAXES. All payments made to Executive under this
Agreement shall be subject to all applicable federal and state income,
employment and payroll taxes.

9. INTERPRETATION. Executive and the Company agree that this
Agreement shall be interpreted in accordance with and governed by the laws of
the State of California.

54
<PAGE>

12. SUCCESSORS AND ASSIGNS.

(b) HEIRS OF EXECUTIVE. This Agreement shall inure to the
benefit of and be enforceable by the Executive's personal and legal
representatives, executors, administrators, successors, heirs, distributes,
devises and legatees.

if to the Company: President and Chief Executive Officer
DSP Technology Inc.
48500 Kato Road
Fremont, CA 94538

cc: Diane Frankle, Esq
Gray Cary Ware & Freidenrich LLP
400 Hamilton Avenue
Palo Alto, CA 94301-1809

15. VALIDITY. If any one or more of the provisions (or any part
thereof) of this Agreement shall be held invalid, illegal or unenforceable in
any respect, the validity, legality and enforceability of the remaining
provisions (or any part thereof) shall not in any way be affected or impaired
thereby.

55
<PAGE>

16. MODIFICATION. This Agreement may only be modified or amended
by a supplemental written agreement signed by Executive and the Company.

IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the date set forth above.

DSP TECHNOLOGY, INC.

By: /s/ Jose M. Millares, Jr.
----------------------------------------------

Title: CFO
--------------------------------------------

EXECUTIVE:

/s/ F. Gil Troutman, Jr.
Executive's Signature

Address for Notice:

13070 Reisan Ln.
- ------------------------------------
Saratoga, CA 95070
- ------------------------------------

- ------------------------------------

<PAGE>

EXHIBIT 10.13

SEPARATION AGREEMENT
AND GENERAL RELEASE OF CLAIMS

JANUARY 29, 1999

1. The Company is relocating its corporate headquarters to Ann
Arbor, Michigan from Fremont, California. Jose M. Millares ("Employee") has
chosen not to relocate and therefore his employment with DSP Technology Inc.
(the "Company") will be terminated effective June 30, 1999 (the "Termination or
Separation Date"). Employee will remain employed by the Company and will
continue to perform such work for the Company as is consistent with his present
duties or as may be reasonably assigned to him and not materially inconsistent
with his position with the Company and his responsibilities in effect as of the
date of this Agreement to the extent requested by the Company until the
Resignation Date. Employee further agrees to cooperate with the Company in the
orderly transition of his duties in connection with his separation and the
Company's relocation.

2. In consideration of the Employee's 14 years of service, except
as provided below, the Company agrees to provide Employee with the following
benefits, to which Employee would not otherwise be entitled:

(a) continued payment of Employee's salary through the
Termination or Separation Date, even if the Company elects to terminate his
employment prior to the Termination or Separation Date; and

(b) in effect as of the Terminate Date continued payment
of Employee's salary at his base salary, less applicable withholding, in
accordance with Company's normal payroll practices, for twelve (12) months after
his Termination Date.

(c) if Employee elects to obtain continued group health
insurance coverage in accordance with federal law (COBRA) following June 30,
1999, the Company will reimburse Employee for the premiums for such coverage
through the earlier of September 30, 1999, or the date on which Employee first
obtains other group health insurance coverage; thereafter, Employee may elect to
purchase continued group health insurance coverage at his own expense in
accordance with COBRA.

However, if prior to the Resignation Date Employee voluntarily
terminates his employment with the Company or is terminated by the Company for
Cause as defined below, then he shall be entitled only to payment for all wages
and accrued but unused vacation that he has earned through his last day of
employment.

For purposes of this Agreement, a termination "for Cause" occurs if the
Employee is terminated for any of the following reasons: (i) Employee's material
failure to satisfactorily perform any of his duties for the Company or to follow
the good faith instructions of the Board of Directors of the Company or any
successor thereto (other than any such failure resulting from Employee's serious
health condition, as defined in the federal Family and Medical Leave Act, which
does not last longer than twelve (12) weeks) within ten (10) days after receipt
of written notification from the Company of such failure; (ii) any willful
conduct by the Employee that has a material detrimental effect on the Company's
reputation or business, specifically including, but not limited to,
falsification of employment or company records or improper disclosure of Company
confidential or proprietary information; or (iii) Employee's conviction (or plea
of nolo contendre) for any felony or any crime involving fraud or embezzlement.

3. In exchange for the benefits described in Paragraph 2 above,
Employee and his successors and assigns release and absolutely discharge the
Company and its parents, subsidiaries, affiliates, shareholders, directors,
employees, agents, attorneys, legal successors and assigns of and from any and
all claims, actions and causes of action, whether now known or unknown, which
Employee now has, or at any other time had, or shall or may have against the
released parties based upon or arising out of any matter, cause, fact, thing,
act or omission whatsoever occurring or existing at any time to and including
the date hereof, including, but not limited to, any claims of breach of
contract, wrongful termination or national origin, race, age, sex, sexual
orientation, disability or other discrimination under the Civil Rights Act of
1964, the Age Discrimination In Employment Act of 1967, the

57
<PAGE>

Americans With Disabilities Act, the Fair Employment and Housing Act or any
other applicable law, all as they have or may be amended.

4. Employee acknowledges that he has read section 1542 of the
Civil Code of the State of California which states:

A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR
DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF
EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE
MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.

Employee hereby waives any right or benefit which he has or may have under
section 1542 of the Civil Code of the State of California, or any similar law of
any other jurisdiction, to the full extent that he may lawfully waive such
rights and benefits pertaining to the subject matter of this general release of
claims.

5. As further consideration for the benefits described in
paragraph 2 above, Employee also agrees that on or within seven (7) days after
his last day of employment with Company, he will sign a further release of
claims in substantially the form attached hereto as "Exhibit A."

6. In the event of any dispute or claim relating to or arising
out of the parties' employment relationship, its termination, or this Agreement
(including, but not limited to, any claims of breach of contract, wrongful
termination or age, sex, race or other discrimination or harassment under any
state or federal statute or common law), Employee and the Company agree that all
such disputes shall be fully and finally resolved by binding arbitration
conducted by the American Arbitration Association ("AAA") in Santa Clara County,
California, in accordance with the AAA's National Rules for the Resolution of
Employment Disputes. Company and Employee specifically agree that an arbitrator
may be appointed under an expedited process and shall have full authority to
order injunctive relief in the event of a claim relating to the misappropriation
or misuse of the Company's intellectual property. By signing this Agreement,
Employee and the Company each understand and acknowledge they are each waiving
the right to a judicial forum, including the right to a jury trial. In the event
that arbitration is commenced under this paragraph, the prevailing party shall
be entitled to recover from the losing party its attorneys' fees and costs
incurred in that action.

7. Employee acknowledges and agrees that he shall continue to be
bound by and comply with the terms of any proprietary rights or confidentiality
agreements between the Company and Employee.

8. If any one or more of the provisions (or any part thereof) of
this Agreement shall be held invalid, illegal or unenforceable in any respect,
such provision(s) shall be modified to permit enforcement to the maximum extent
permitted by law and the validity, legality and enforceability of the remaining
provisions (or any part thereof) shall not in any way be affected or impaired
thereby.

9. This Agreement shall be interpreted in accordance with and
governed by the laws of the State of California.

10. The Company will require any successor or assign (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company, expressly,
absolutely and unconditionally to assume and agree to perform this Agreement in
the same manner and to the same extent that the Company would be required to
perform it if no such succession or assignment had taken place. As used in this
Agreement, "Company" shall mean the Company as defined above and any successor
or assign to its business and/or assets as aforesaid which executes and delivers
the agreement provided for in this Section 10 or which otherwise becomes bound
by all the terms and provisions of this Agreement by operation of law.

11. In view of the personal nature of the services to be performed
under this Agreement by Employee, Employee cannot assign or transfer any of his
rights or obligations under this Agreement.

58
<PAGE>

12. EMPLOYEE UNDERSTANDS THAT HE SHOULD CONSULT WITH AN ATTORNEY
PRIOR TO SIGNING THIS AGREEMENT AND THAT HE IS GIVING UP ANY LEGAL CLAIMS HE HAS
AGAINST THE PARTIES RELEASED ABOVE BY SIGNING THIS AGREEMENT. EMPLOYEE FURTHER
UNDERSTANDS THAT HE MAY HAVE UP TO 21 DAYS TO CONSIDER THIS AGREEMENT, THAT HE
MAY REVOKE IT AT ANY TIME DURING THE 7 DAYS AFTER HE SIGNS IT, AND THAT IT SHALL
NOT BECOME EFFECTIVE UNTIL THAT 7-DAY PERIOD HAS PASSED (the "Effective Date").
EMPLOYEE ACKNOWLEDGES THAT HE IS SIGNING THIS AGREEMENT KNOWINGLY, WILLINGLY AND
VOLUNTARILY IN EXCHANGE FOR THE BENEFITS DESCRIBED HEREIN.

13. This Agreement constitutes the entire agreement between the
parties with respect to the subject matter hereof and supersedes all prior
negotiations and agreements, whether written or oral (except with regard to any
agreements regarding proprietary rights), including, but not limited to, that
certain confidential Separation Agreement dated as of January 18, 1999 between
Company and Employee. This Agreement may not be altered or amended except by a
written document signed by the Company and Employee.

IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of January 29, 1999.

/s/ Jose M. Millares, Jr.
Jose M. Millares

DSP Technology Inc.

By: /s/ F. Gil Troutman, Jr.

59
<PAGE>

EXHIBIT A

1. As further consideration for the benefits described in the
Separation Agreement and General Release of Claims between Jose Millares
("Employee") and DSP Technology Inc. ("Company") dated January 29, 1999,
Employee and his successors and assigns release and absolutely discharge the
Company and its stockholders, directors, employees, agents, attorneys, legal
successors and assigns of and from any and all claims, actions and causes of
action, whether now known or unknown, which Employee now has, or at any other
time had, or shall or may have against the released parties based upon or
arising out of any matter, cause, fact, thing, act or omission whatsoever
occurring or existing at any time to and including the date hereof, including,
but not limited to, any claims of breach of contract, wrongful termination or
national origin, race, age, sex, sexual orientation, disability or other
discrimination under the Civil Rights Act of 1964, the Age Discrimination In
Employment Act of 1967, the Americans With Disabilities Act, the Fair Employment
and Housing Act or any other applicable law, all as they have or may be amended.

2. Employee acknowledges that he has read section 1542 of the
Civil Code of the State of California which states:

Employee hereby waives any right or benefit which he has or may have
under section 1542 of the Civil Code of the State of California to the full
extent that he may lawfully waive such rights and benefits pertaining to the
subject matter of this general release of claims.

3. EMPLOYEE UNDERSTANDS THAT HE SHOULD CONSULT WITH AN ATTORNEY
PRIOR TO SIGNING THIS AGREEMENT AND THAT HE IS GIVING UP ANY LEGAL CLAIMS HE HAS
AGAINST THE PARTIES RELEASED ABOVE BY SIGNING THIS AGREEMENT. EMPLOYEE FURTHER
UNDERSTANDS THAT HE MAY HAVE UP TO 21 DAYS TO CONSIDER THIS AGREEMENT, THAT HE
MAY REVOKE IT AT ANY TIME DURING THE 7 DAYS AFTER HE SIGNS IT, AND THAT IT SHALL
NOT BECOME EFFECTIVE UNTIL THAT 7-DAY PERIOD HAS PASSED (THE "EFFECTIVE DATE").
EMPLOYEE ACKNOWLEDGES THAT HE IS SIGNING THIS AGREEMENT KNOWINGLY, WILLINGLY AND
VOLUNTARILY IN EXCHANGE FOR THE BENEFITS DESCRIBED HEREIN.

Dated: January 29, 1999 /s/ Jose M. Millares, Jr.
-------------------------------------------
Jose M. Millares

Dated: January 29, 1999 DSP Technology, Inc.

By: /s/ F. Gil Troutman
----------------------------------------

<PAGE>

EXHIBIT 23.1

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

We have issued our reports dated March 12, 1999, except for Note N as
to which date is March 23, 1999, accompanying the consolidated financial
statements and schedule included in the annual report of DSP Technology Inc. and
subsidiaries on Form 10-K for the year ended January 31, 1999. We hereby consent
to the incorporation by reference of said reports in the Registration Statements
of DSP Technology Inc. and subsidiaries on Forms S- 8, (File No. 33-6994,
effective July 13, 1990, File No. 33-43163 and File No. 33-43164, effective
October 4, 1991, and File No. 33-85554, File No. 33- 85540, effective October
24, 1994, File No. 33-26493, effective May 5, 1997, and File No. 33-70389,
effective January 11, 1999.

/s/ GRANT THORNTON LLP

GRANT THORNTON LLP

San Jose, California
April 27, 1999

<PAGE>
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