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DSP Group, Inc. Reports Second Quarter 2005 Earnings

Record High Revenues and 11% Revenue Increase YoY

SANTA CLARA, Calif., July 20 /PRNewswire-FirstCall/ -- DSP Group, Inc. (Nasdaq: DSPG), a worldwide leader in developing and providing chip-set solutions for residential wireless connectivity announced today its results for the second quarter of 2005.

Revenues for the second quarter of 2005 were $49,047,000, an increase of 11% from revenues of $44,016,000 for the second quarter of 2004. Net income for the second quarter of 2005 decreased 12% to $8,248,000, as compared to $9,371,000 for the second quarter of 2004. Diluted earnings per share (EPS) for the second quarter of 2005 decreased 7% to $0.28, as compared to $0.30 for the second quarter of 2004.

Results for the second quarter of 2004 included a capital gain of $7,671,000 resulting from the sale of 801,000 shares of AudioCodes Ltd. and a one-time goodwill impairment charge of $4,304,000 arising from the GAAP-required re-evaluation of the remaining goodwill associated with the acquisition of VoicePump Inc. in March 2000.

Pro-forma net income and diluted EPS for the second quarter of 2004, excluding the effects of the capital gain and related taxes of $3,068,000 as well as the impairment of VoicePump goodwill, would have been $9,072,000 and $0.29, respectively.

The company believes that the above pro forma presentation of net income and diluted EPS is useful to investors in comparing results for the quarter ended June 30, 2005 to the same period during 2004, because it excludes items that management does not consider meaningful for purposes of analyzing the company's core operating results and making budget-planning decisions.

Eli Ayalon, Executive Chairman of DSP Group, stated: "In keeping with the company's policy of maintaining high levels of operating profitability even while increasing investment in research and development to strengthen our product offerings, we achieved a strong operating profit level of 15% of revenues, despite a significant increase in research and development expenses in the second quarter of 2005 as compared to the second quarter of 2004. This higher level of research and development expenses reflect an increase of resources dedicated to developing multimedia over Wi-Fi products from technologies acquired from Bermai, Inc. in October 2004. We believe that this combined approach will continue to benefit our stockholders and increase our competitive edge."

Inon Beracha, CEO of DSP Group, stated: "Record high revenues were achieved by the company in the second quarter of 2005, reflecting increased demand and market share in North America for our products. This together with a strong flow of orders during the quarter improves our revenue visibility for the third quarter and fiscal year 2005 and continues to validate our business strategy."

About DSP Group

DSP Group, Inc. is a fabless semiconductor company, offering advanced chip-set solutions for a variety of applications. DSP Group is a worldwide leader in the short-range wireless communication market, enabling home networking convergence for voice, video & data. By combining its in-house technologies of Digital Signal Processors (DSPs), portfolio of wireless communication protocols, including DECT, Bluetooth and Wi-Fi, most advanced Radio Frequency CMOS and SiGe, as well as VoIP ICs, DSP Group is a worldwide leader and a one-stop-shop for a wide range of applications. These applications include ISM band digital 900MHz, 2.4GHz and 5.8GHz telephony, European DECT (1.9GHz) telephony, Bluetooth systems for voice, data and video communication and deployment in residential, SOHO, SME, enterprise and automotive applications. DSP Group ICs provide solutions for MP3 players, VoIP Phones, Gateways, and Integrated Access Devices and are widely used in Digital Voice Recorders. More information about DSP Group is available at www.dspg.com.

This press release may contain statements that qualify as "forward-looking statements" under the Private Securities Litigation Reform Act of 1995, including statements made by Mr. Ayalon about the benefits of increased investment in research and development and Mr. Beracha about revenue visibility for the third quarter and fiscal year 2005. These forward-looking statements are based on current expectations and DSP Group assumes no obligation to update this information. In addition, the events described in these forward-looking statements may not actually arise. DSP Group's actual results could differ materially from those described in this press release as a result of various factors, including unexpected delays in the introduction of new products; failure to achieve broad market acceptance of existing and new products by existing and potential OEM customers; DSP Group's inability to add new customers and develop and produce new products at competitive costs and in a timely manner; decline or fluctuations in gross margins and the effect on revenues and profitability; and general market demand for products that incorporate DSP Group's technology in the market. These factors and other factors which may affect future operating results or DSP Group's stock price are discussed under "RISK FACTORS" in the Form 10-K for fiscal 2004 as well as other reports DSP Group has filed with the Securities and Exchange Commission and which are available on DSP Group's Web site (www.dspg.com) under Investor Relations.

Earnings conference call

DSP Group has scheduled a conference call for 8:30 a.m. EDT today to discuss the financial results for the second quarter of 2005 and invites you to listen to a live broadcast over the Internet. The broadcast can be accessed by all interested parties through the Investor Relations section (investor message board) of DSP Group's Web site at www.dspg.com or link to: http://ir.dspg.com./phoenix.zhtml?c=101665&p=irol-calendar .

If you cannot join the call, please listen to the replay, which will be available for approximately two weeks after the call on DSP Group's Web site or by calling the following numbers:

-- US Dial-In # 888-286-8010 (passcode: 97349393)

-- International Dial-In # 617-801-6888 (passcode: 97349393)

For more information, please contact Yaniv Arieli, President of US Operations, Investor Relations, DSP Group Inc. at +1-408-986-4423; or e-mail: yarieli@dspg.com


                               DSP GROUP, INC.
                 CONSOLIDATED STATEMENTS OF INCOME - US GAAP
                   (In thousands, except per share amounts)

                                      Three Months Ended   Six Months Ended
                                           June 30,            June 30,
                                       2005       2004       2005      2004
                                        (Unaudited)           (Unaudited)

    Product revenues and other       $49,047    $44,016    $89,210   $82,724
    Cost of product revenues
     and other                        25,990     22,918     48,234    42,776

    Gross profit                      23,057     21,098     40,976    39,948
    Operating expenses:
     Research and development         10,542      7,310     19,941    14,864
     Sales and marketing               3,290      3,282      6,176     6,085
     General and administrative        1,783      1,734      3,648     3,540
     Impairment of goodwill               --      4,304         --     4,304

     Total operating expenses         15,615     16,630     29,765    28,793

    Operating income                   7,442      4,468     11,211    11,155
    Other income:
     Interest and other income, net    2,499      2,159      4,771     4,284
     Capital gains                        --      7,671         --    28,988

    Income before provision for
     income taxes                      9,941     14,298     15,982    44,427
    Provision for income taxes         1,693      4,927      2,727    14,942

    Net income                        $8,248     $9,371    $13,255   $29,485


    Net earnings per share:
      Basic                            $0.29      $0.32      $0.47     $1.02
      Diluted                          $0.28      $0.30      $0.45     $0.96

    Weighted average number of
     shares of Common Stock used
     in the computation of:
      Basic                           28,328     29,159     28,221    28,963
      Diluted                         29,718     30,957     29,662    30,827


                               DSP GROUP, INC.
                 CONSOLIDATED PRO-FORMA STATEMENTS OF INCOME
                   (In thousands, except per share amounts)

                                     Three Months Ended    Six Months Ended
                                          June 30,             June 30,
                                       2005       2004       2005      2004
                                        (Unaudited)           (Unaudited)

    Product revenues and other       $49,047    $44,016    $89,210   $82,724
    Cost of product revenues
     and other                        25,990     22,918     48,234    42,776

    Gross profit                      23,057     21,098     40,976    39,948
    Operating expenses:
     Research and development         10,542      7,310     19,941    14,864
     Sales and marketing               3,290      3,282      6,176     6,085
     General and administrative        1,783      1,734      3,648     3,540

     Total operating expenses         15,615     12,326     29,765    24,489

    Operating income                   7,442      8,772     11,211    15,459
    Other income:
     Interest and other income, net    2,499      2,159      4,771     4,284

    Income after financial and
     other income                      9,941     10,931     15,982    19,743

    Provision for income taxes         1,693      1,859      2,727     3,357

    Net income                        $8,248     $9,072    $13,255   $16,386

    Net earnings per:
      Basic                            $0.29      $0.31      $0.47     $0.57
      Diluted                          $0.28      $0.29      $0.45     $0.53

    Weighted average number of
     shares of Common Stock used
     in computing of:
      Basic                           28,328     29,159     28,221    28,963
      Diluted                         29,718     30,957     29,662    30,827

    The above pro forma consolidated
     statements of income have
     been adjusted to exclude
     following items to US GAAP
     reported net income:
    Reported net income per US GAAP   $8,248     $9,371    $13,255   $29,485
    Adjustments:
     Impairment of goodwill               --      4,304         --     4,304
     Capital gains                        --     (7,671)        --  (28,988)
     Tax expenses                         --      3,068         --    11,585

    Pro forma net income              $8,248     $9,072    $13,255   $16,386


                               DSP GROUP, INC.
                         CONSOLIDATED BALANCE SHEETS
                                (In thousands)

                                                   June 30,     December 31,
                                                     2005             2004
                                                 (Unaudited)       (Audited)
    Assets
    Current assets:
     Cash and cash equivalents                     $44,362          $60,827
     Marketable securities and cash deposits        71,907           74,497
     Trade receivables, net                         18,837            5,976
     Inventories                                    12,539            9,469
     Other accounts receivable                       1,267            2,213
     Deferred income taxes                           1,168            1,168

    Total current assets                           150,080          154,150

    Property and equipment, net                     11,484            6,683

    Long term marketable securities                212,206          195,671
    Severance pay fund                               3,920            3,437
    Long term pre-paid expenses and lease deposits     670              628
    Goodwill                                         1,500            1,500
    Deferred income taxes                            1,410            1,410
    Other intangible assets                          2,911            3,482

    Total assets                                  $384,181         $366,961

    Liabilities and Stockholders' Equity
    Current liabilities:
     Trade payable                                 $15,486           $7,830
     Other current liabilities                      29,221           39,857

    Total current liabilities                       44,707           47,687

     Accrued severance pay                           4,110            3,784

    Stockholders' equity:
     Common Stock                                       28               28
     Additional paid-in capital                    187,569          187,471
     Accumulated other comprehensive income            (67)              65
     Retained earnings                             169,029          157,723
    Less -- Cost of treasury stock                 (21,195)         (29,797)
    Total stockholders' equity                     335,364          315,490

    Total liabilities and stockholders' equity    $384,181         $366,961

SOURCE
DSP Group, Inc.
07/20/2005

CONTACT:
Yaniv Arieli,
President of US Operations, Investor Relations,
DSP Group Inc.,
1-408-986-4423, or yarieli@dspg.com
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