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DSP Group, Inc. Reports Fourth Quarter and 2005 Earnings

Quarterly and Annual Revenues Increased 48% YoY and 19% YoY Respectively

SANTA CLARA, Calif., Jan. 25 /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 fourth quarter and year ended December 31, 2005.

Fourth Quarter Results:

Revenues for the fourth quarter of 2005 were $42,401,000, an increase of 48% from revenues of $28,555,000 for the fourth quarter of 2004. Net income for the fourth quarter was $5,708,000, an increase of 364% from net income of $1,229,000 for the fourth quarter of 2004. Diluted earnings per share (EPS) for the fourth quarter of 2005 were $0.19, an increase of 375% from $0.04 for the fourth quarter of 2004. Results for the fourth quarter of 2004 included a one-time write-off in the amount of $2,682,000 for in-process research and development related to the acquisition of Bermai Inc.'s Wi-Fi assets in October 2004. The related tax benefit on the one-time write-off was $939,000.

Year End Results:

Revenues for the year ended December 31, 2005, were $187,225,000, an increase of 19% over 2004 revenues of $157,511,000. Net income for 2005 was $29,473,000, a decrease of 42% from $51,094,000 for 2004. Diluted EPS for 2005 was $0.99, a decrease of 42% from $1.70 for 2004.

Results for 2004 included an aggregate capital gain of $44,448,000, resulting from the sale of all of our holdings of AudioCodes Ltd. ordinary shares and the Tomen Corporation common stock. The tax effect of these capital gains was $16,450,000. Financial results for 2004 also included the one-time write-off of in-process research and development related to the Bermai acquisition and related tax benefit as discussed above, as well as 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. The capital gains are included in the Company's statements of income as "Other income," and the write-off and impairment charge are included as "Operating expenses."

Pro Forma Results:

Pro forma net income and diluted EPS for the fourth quarter of 2004, excluding the one-time write-off of in-process research and development related to the Bermai acquisition and related tax benefit, as stated above, were $2,972,000 and $0.10, respectively.

Pro forma net income and diluted EPS for year 2004, excluding the effects of the aforementioned capital gains, as well as the write-off and impairment charge and related tax benefit, was $29,143,000 and $0.97, respectively.

Eli Ayalon, Chairman of DSP Group, stated: "2005 was another very good year for DSP Group. Our revenues increased by 19% as compared to 2004, and the overall financial results of the Company reflect the continued strength of our business. Strong demand for our products during both the course of the year and the fourth quarter resulted in strong bookings and an increased backlog at the end of 2005, as compared to the end of 2004 and the end of the third quarter of 2005."

Mr. Ayalon added: "A series of new and fascinating products driven by DSPG chip sets were launched by our OEM customers at the CES (Consumer Electronics Show) earlier this month in Las Vegas. As a result of our calculated increased investment in R&D and the quality of our engineering staff, we are at the forefront of the revolution in the home communications domain, which includes the wireless transmission of video in addition to voice, full cordless VoIP connecting wirelessly to the PC, and the ongoing convergence of cellular and fixed line networks in the home. With good visibility into the first quarter of 2006 and strong forecasts from our customers, we look forward to another a year of growth and profitability."

Mr. Zelnik, CFO of DSP Group, stated: "During the fourth quarter of 2005, the Company repurchased 297,000 shares of its common stock at an average price of $25.31 per share, at a cost of approximately $7.5 million, bringing the total number of shares repurchased in year 2005 to 682,200 shares at an average price of $24.98 per share for approximately $17.0 million. As of December 31, 2005, approximately 3.0 million shares remain available for repurchase from previous board authorizations. Our cash position at year end, consisting of cash, cash equivalents and marketable securities, reached a level of approximately $345 million. We generated $25.2 million of cash from operating activities in 2005."

The Company believes that the pro forma presentation of net income and diluted EPS presented in this press release is useful to investors in comparing results for the quarter and year ended December 31, 2005 to the same periods during 2004, because it excludes items that management does not consider meaningful for purposes of analyzing the Company's 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 DSP Group's leadership in the revolution in the home communications domain, visibility into the first quarter of 2006, forecasts from our customers, and growth and profitability during 2006. 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 slower than expected change in the nature of the home communications domain, 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 fourth 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: 70149272)

-- International Dial-In # 617-801-6888 (passcode: 70149272)

For more information, please contact Ofer Elyakim, Director of Investor Relations, DSP Group Inc. at (408) 986-4421; or e-mail: ofere@dsp.co.il

    (Logo:  http://www.newscom.com/cgi-bin/prnh/20020715/SFM118LOGO )


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

                               Three Months Ended           Year Ended
                                  December 31,              December 31,
                               2005         2004         2005         2004
                           (Unaudited)  (Unaudited)  (Unaudited)   (Audited)

    Product revenues
     & other                 $42,401       $28,555     $187,225    $157,511
    Cost of product
     revenues & other         23,420        14,191      101,074      80,368

    Gross profit              18,981        14,364       86,151      77,143

    Operating expenses:
     Research and development  9,862         8,820       40,290      32,147
     Sales and marketing       3,237         2,278       13,119      11,292
     General and
      administrative           1,846         1,854        7,398       7,112
     Impairment of goodwill       --            --           --       4,304
     In-process research
      and development
     write-off                    --         2,682           --       2,682

    Total operating expenses  14,945        15,634       60,807      57,537

    Operating income (loss)    4,036       (1,270)       25,344      19,606
    Other income
     Interest & other
      income, net              2,830         2,169       10,166       8,522
    Capital gains                 --            --           --      44,448

    Income before
     provision for
     Income taxes              6,866           899       35,510      72,576
    Provision (benefit)
     for income taxes          1,158         (330)        6,037      21,482

    Net income                $5,708        $1,229      $29,473     $51,094

    Net earnings per share:
     Basic                     $0.20         $0.04        $1.04       $1.79
     Diluted                   $0.19         $0.04        $0.99       $1.70

    Weight average number
     of shares of
     Common Stock used in
     the computation of
      Basic                   28,636        27,959       28,435      28,574
      Diluted                 29,970        29,092       29,843      30,026



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

                             Three Months Ended            Year Ended
                                December 31,              December 31,
                              2005       2004           2005         2004
                               (Unaudited)                (Unaudited)

    Product revenues
     & other               $42,401      $28,555     $187,225     $157,511
    Cost of product
     revenues & other       23,420       14,191      101,074       80,368

    Gross profit            18,981       14,364       86,151       77,143
    Operating expenses:
     Research and
      development            9,862        8,820       40,290       32,147
     Sales and marketing     3,237        2,278       13,119       11,292
     General and
      administrative         1,846        1,854        7,398        7,112

    Total operating
     expenses               14,945       12,952       60,807       50,551

    Operating income         4,036        1,412       25,344       26,592
    Other income:
     Interest & other
      income, net            2,830        2,169       10,166        8,522

    Income before
     provision for
      Income taxes           6,866        3,581       35,510       35,114

    Provision for
     income taxes            1,158          609        6,037        5,971

    Net income              $5,708       $2,972      $29,473      $29,143
    Net earnings
     per share:
      Basic                  $0.20        $0.11        $1.04        $1.02
      Diluted                $0.19        $0.10        $0.99        $0.97
    Weight average number
     of shares of
      Common Stock used in
       the computation of:
        Basic               28,636       27,959       28,435       28,574
        Diluted             29,970       29,092       29,843       30,026
    The above pro forma
    consolidated statements
    of income have been
    adjusted to exclude
    the following to US
    GAAP reported net income:
    Reported net incomer
     per US GAAP            $5,708       $1,229      $29,473      $51,094
    Adjustments:
     Impairment of goodwill     --           --           --        4,304
     In-process research &
      development write-off     --        2,682           --        2,682
     Capital gains              --           --           --     (44,448)
     Tax expenses (benefit)     --        (939)           --       15,511
    Pro forma net income    $5,708       $2,972      $29,473      $29,143



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

                                                  December 31,  December 31,
                                                      2005            2004
                                                   (Unaudited)     (Audited)

    Assets
     Current assets:
     Cash and cash equivalents                       $50,460        $60,827
     Marketable securities and cash deposits         108,928         74,497
     Trade receivables, net                           16,991          5,976
     Inventories                                      12,686          9,469
     Other accounts receivables                        1,617          2,213
     Deferred income taxes                             1,227          1,168
    Total current assets                             191,909        154,150

    Property and equipment, net                       11,704          6,683
    Long term marketable securities                  185,828        195,671
    Severance pay fund                                 4,419          3,437
    Long term pre-paid expenses                          670            628
    Goodwill                                           1,500          1,500
    Deferred income taxes                              1,638          1,410
    Other intangible assets                            2,337          3,482

    Total assets                                    $400,005       $366,961

    Liabilities and Stockholders' Equity
    Current liabilities:
     Trade payable                                   $12,753         $7,830
     Other current liabilities                        33,411         39,857

    Total current liabilities                         46,164         47,687
    Long term liabilities:
    Accrued severance pay                              4,707          3,784

    Stockholders' equity:
     Common stock                                         29             28
     Additional paid-in capital                      188,539        187,471
     Accumulated other comprehensive income               45             65
     Retained earnings                               179,968        157,723
     Less -- Cost of treasury stock                 (19,447)       (29,797)
     Total stockholders' equity                      349,134        315,490

    Total liabilities and stockholders' equity      $400,005       $366,961

SOURCE
DSP Group Inc.
01/25/2006

CONTACT:
Ofer Elyakim,
Director of Investor Relations of DSP Group Inc.,
1-408-986-4421, or ofere@dsp.co.il