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DSP Group, Inc. Reports Third Quarter 2005 Earnings

Record High Revenues and 20% Revenue Increase YoY

SANTA CLARA, Calif., Oct. 27 /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 third quarter of 2005.

Revenues for the third quarter of 2005 were $55,614,000, an increase of 20% from revenues of $46,232,000 for the third quarter of 2004. Net income for the third quarter of 2005 decreased 48% to $10,510,000, as compared to $20,380,000 for the third quarter of 2004. Diluted earnings per share (EPS) for the third quarter of 2005 decreased 49% to $0.35, as compared to $0.69 for the third quarter of 2004.

Results for the third quarter of 2004 included a capital gain of $15,460,000 resulting from the sale of 1,650,000 shares of AudioCodes Ltd.

Pro-forma net income and diluted EPS for the third quarter of 2004, excluding the effects of the capital gain and related taxes of $4,865,000, would have been $9,785,000 and $0.33, respectively.

Net income and diluted EPS for the third quarter of 2005, in accordance with US GAAP, increased 7% and 6%, respectively, as compared to the pro-forma net income and diluted EPS for the third quarter of 2004.

Eli Ayalon, Executive Chairman of DSP Group, stated: "We are very pleased with our third quarter results. Our decision last year to expand our long term R&D activities in order to secure our future growth, coupled with our traditional tight management control of expenses and top line growth, enabled us to increase our operating profit compared to the third quarter of 2004."

Inon Beracha, CEO of DSP Group, stated: "Record high revenues were achieved by the company in the third quarter of 2005, reflecting increased demand and market share in North America for our products as well as a ramp up in our shipments of DECT products and products targeted at the Japanese domestic market. During the third quarter of 2005 we also delivered commercial shipments to our second DECT customer. These trends in the third quarter of 2005 provide us with good visibility into the last quarter of 2005."

Moshe Zelnik, CFO of DSP Group, stated: "In the third quarter of 2005 the Company repurchased 385,200 shares of its Common Stock, at an average price of $24.72 per share, for an aggregate price of approximately $9.5 million. We have strong confidence in our future business prospects and our ability to capitalize on new market opportunities. We believe that the buyback program that we have in place, with 3.3 million shares that remain authorized for future repurchase, is a wise use of our cash and a good return on investment to our shareholders."

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 September 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.

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, Mr. Beracha's statements about revenue visibility for the last quarter of 2005 and Mr. Zelnik's statements about management's confidence in DSP Group's business prospects and ability to capitalize on new market opportunities and the merits of DSP Group's share buy-back program. 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 third 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 # 1-888-286-8010 (passcode: 96472796)

-- International Dial-In # 617-801-6888 (passcode: 96472796)

For more information, please contact Moshe Zelnik, CFO, Investor Relations, DSP Group Inc. at 408-986-4421; or e-mail: mosheze@dsp.co.il


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


                                 Three Months Ended      Nine Months Ended
                                    September 30,           September 30,
                                  2005        2004        2005        2004
                                    (Unaudited)             (Unaudited)

    Product revenues and other  $55,614    $46,232     $144,824  $ 128,956
    Cost of product revenues
     and other                   29,420     23,401       77,654     66,177

    Gross profit                 26,194     22,831       67,170     62,779

    Operating expenses:
      Research and development   10,487      8,463       30,428     23,327
      Sales and marketing         3,706      2,929        9,882      9,014
      General and administrative  1,904      1,718        5,552      5,258
      Impairment of goodwill                    --                   4,304

      Total operating expenses   16,097     13,110       45,862     41,903

    Operating income             10,097      9,721       21,308     20,876
    Other income :
      Interest and other income,
       net                        2,565      2,069        7,336      6,353
      Capital gains                  --     15,460           --     44,448

    Income before provision
     for income taxes            12,662     27,250       28,644     71,677
    Provision for income taxes    2,152      6,870        4,879     21,812

    Net income                 $ 10,510   $ 20,380      $23,765    $49,865

    Net earnings per share:
      Basic                       $0.37     $ 0.72        $0.84     $ 1.73
      Diluted                     $0.35     $ 0.69        $0.80     $ 1.64

    Weighted average number of
     shares of Common Stock
     used in the computation of:
      Basic                      28,663     28,411       28,368     28,779
      Diluted                    30,079     29,358       29,801     30,337


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


                                 Three Months Ended      Nine Months Ended
                                    September 30,           September 30,
                                   2005       2004         2005       2004
                                     (Unaudited)             (Unaudited)

    Product revenues and other   $55,614   $46,232     $144,824  $ 128,956
    Cost of product revenues
     and other                    29,420    23,401       77,654     66,177

    Gross profit                  26,194    22,831       67,170     62,779
    Operating expenses:
      Research and development    10,487     8,463       30,428     23,327
      Sales and marketing          3,706     2,929        9,882      9,014
      General and administrative   1,904     1,718        5,552      5,258

      Total operating expenses    16,097    13,110       45,862     37,599

    Operating income              10,097     9,721       21,308     25,180
    Other income :
      Interest and other income,
       net                         2,565     2,069        7,336      6,353

    Income before provision for
     income taxes                 12,662    11,790       28,644     31,533
    Provision for income taxes     2,152     2,005        4,879      5,362

    Net income                  $ 10,510    $9,785      $23,765   $ 26,171
    Net earnings per share:
      Basic                        $0.37    $ 0.34        $0.84     $ 0.91
      Diluted                      $0.35    $ 0.33        $0.80     $ 0.86

    Weighted average number of
     shares of Common Stock used
     in the computation of:
      Basic                       28,663    28,411       28,368     28,779
      Diluted                     30,079    29,358       29,801     30,337
    The above pro forma
     consolidated statements of
     income have been adjusted
     to exclude the following
     items to US GAAP reported
     net income:

    Reported net income per
     US GAAP                     $10,510  $ 20,380      $23,765   $ 49,865
    Adjustments:
      Impairment of goodwill          --        --           --      4,304
    Capital gains                     --  (15,460)           --   (44,448)
    Tax expenses                      --     4,865           --     16,450

     Pro forma net income        $10,510   $ 9,785      $23,765    $26,171


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


                                                  September 30,   December 31,
                                                      2005            2004
                                                   (Unaudited)     (Audited)
    Assets
    Current assets:
      Cash and cash equivalents                     $ 61,019       $ 60,827
      Marketable securities and cash deposits         75,216         74,497
      Trade receivables, net                          21,567          5,976
      Inventories                                     11,795          9,469
      Other accounts receivable                        1,515          2,213
      Deferred income taxes                            1,168          1,168

    Total current assets                             172,280        154,150

    Property and equipment, net                       12,225          6,683

    Long term marketable securities                  203,400        195,671
    Severance pay fund                                 4,117          3,437
    Long term pre-paid expenses and lease deposits       674            628
    Goodwill                                           1,500          1,500
    Deferred income taxes                              1,410          1,410
    Other intangible assets                            2,625          3,482

    Total assets                                    $398,231       $366,961

    Liabilities and Stockholders' Equity
    Current liabilities:
      Trade payable                                  $18,811         $7,830
      Other current liabilities                       30,941         39,857

    Total current liabilities                         49,752         47,687

    Accrued severance pay                              4,461          3,784

    Stockholders' equity:
      Common Stock                                        28             28
      Additional paid-in capital                     187,642        187,471
      Accumulated other comprehensive income            (20)             65
      Retained earnings                              176,997        157,723
    Less - Cost of treasury stock                   (20,629)       (29,797)
    Total stockholders' equity                       344,018        315,490

    Total liabilities and stockholders' equity     $ 398,231      $ 366,961

SOURCE
DSP Group, Inc.
10/27/2005

CONTACT:
Moshe Zelnik, CFO,
Investor Relations of DSP Group Inc.,
1-408-986-4421, or mosheze@dsp.co.il
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