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DSP Group, Inc. Reports Third Quarter 2006 Earnings

Quarterly Revenues Increased 15% YoY

SANTA CLARA, Calif., Oct. 23 /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 ended September 30, 2006.

Third Quarter Results:

Revenues for the third quarter of 2006 were $63,875,000, an increase of 15% from revenues of $55,614,000 for the third quarter of 2005. Net income for the third quarter was $8,052,000, a decline of 23% from net income of $10,510,000 for the third quarter of 2005. Diluted earnings per share (EPS) for the third quarter of 2006 were $0.27, a decline of 23% from $0.35 for the third quarter of 2005.

Pro Forma Results:

Pro forma net income and diluted EPS for the third quarter of 2006, excluding the impact of equity-based compensation expense as required upon adoption of Statement of Financial Accounting Standards No. 123R, "Share Based Payment" ("SFAS 123(R)"), were $10,903,000 and $0.37, respectively, representing an increase of 4% and 6%, respectively, from the third quarter of 2005.

Share Buyback:

During the third quarter of 2006, DSP Group repurchased approximately 270,000 shares of its Common Stock at an average price of $24 per share, for an aggregate price of approximately $6.5 million.

After giving effect to the most recent repurchases, approximately 1.8 million shares of the Company's Common Stock remain authorized for repurchase under the current repurchase program approved by the Company's board of directors.

Eli Ayalon, Chairman and CEO of DSP Group, stated: "The third quarter of 2006 was another quarter of growth for DSP Group. Our revenues increased by 15% as compared to 2005, and the overall financial results of the Company for the third quarter of 2006 reflected solid execution in a challenging environment. As a result of reduced projections of revenues for the fourth quarter of 2006, the Company now expects revenues for the year to range from $213 million to $217 million, and annual growth of between 14% to 16% over 2005. We expect revenue will continue to grow during 2007."

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 ended September 30, 2006 to the same period during 2005, because results for the third quarter of 2005 did not include equity-based compensation expenses relating to SFAS 123(R). Further, the Company believes it is useful to investors to understand how the expenses associated with the application of SFAS 123(R) are reflected on its statements of income.

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.

Earnings conference call

DSP Group has scheduled a conference call for 5:00 p.m. EDT today to discuss the financial results for the third quarter of 2006 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: 16662441)

--International Dial-In # 1-617-801-6888 (passcode: 16662441)

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

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 anticipated ranges of revenues for the full year 2006 and ranges of annual growth for 2006 in comparison to 2005, as well as anticipated continued growth in 2007. 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, especially DECT products; changes in demand of existing OEM customers, 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 2005 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.

Contact: Ofer Elyakim, Director of Investor Relations & Business Development of DSP Group Inc., +1-408-986-4421, or ofere@dsp.co.il.


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


                                           Three Months        Nine Months
                                              Ended              Ended
                                           September 30,      September 30,
                                          2006      2005     2006      2005
                                                    (Unaudited)
    Product revenues and other
                                       $63,875   $55,614  $176,565  $144,824

    Cost of product revenues
     and other                          37,689    29,420   103,676    77,654

    Gross profit
                                        26,186    26,194    72,889    67,170

    Operating expenses:
     Research and development           12,242    10,487    35,553    30,428
     Sales and marketing                 4,357     3,706    12,233     9,882
     General and administrative          2,771     1,904     8,466     5,552
     Total operating expenses           19,370    16,097    56,252    45,862

    Operating income                     6,816    10,097    16,637    21,308
    Other income:
      Interest and other
       income, net                       3,372     2,565     9,832     7,336

    Income before provision for
      income taxes                      10,188    12,662    26,469    28,644
    Provision for income taxes           2,136     2,152     5,691     4,879

    Net income                          $8,052   $10,510   $20,778   $23,765

    Net earnings per share:
        Basic                            $0.28     $0.37     $0.70     $0.84
        Diluted                          $0.27     $0.35     $0.68     $0.80

    Weighted average number of
     shares of Common Stock used
     in the computation of:
        Basic                           29,279    28,663    29,543    28,368
        Diluted                         29,748    30,079    30,388    29,801



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


                                            Three Months        Nine Months
                                               Ended             Ended
                                            September 30,     September 30,
                                          2006     2005       2006      2005
                                                      (Unaudited)

    Product revenues and other         $63,875  $55,614   $176,565  $144,824
    Cost of product revenues
     and other                          37,563   29,420    103,342    77,654

    Gross profit                        26,312   26,194     73,223    67,170
    Operating expenses:
     Research and development           10,589   10,487     30,975    30,428
     Sales and marketing                 4,013    3,706     11,267     9,882
     General and administrative          1,917    1,904      5,516     5,552
    Total operating expenses            16,519   16,097     47,758    45,862

    Operating income                     9,793   10,097     25,465    21,308
    Other income:
      Interest and other
       income, net                       3,372    2,565      9,832     7,336

    Income before provision for
      income taxes                      13,165   12,662     35,297    28,644

    Provision for income taxes           2,262    2,152      6,025     4,879

    Net income                         $10,903  $10,510    $29,272   $23,765

    Net earnings per share:
        Basic                            $0.37    $0.37      $0.99     $0.84
        Diluted                          $0.37    $0.35      $0.96     $0.80

    Weighted average number of
     shares of Common Stock used
     in the computation of:
        Basic                           29,279   28,663     29,543    28,368
        Diluted                         29,748   30,079     30,388    29,801



          The above pro forma consolidated statements of income have
        been adjusted to exclude the following to US GAAP reported net
                                   income:
                                           Three Months        Nine Months
                                             Ended                 Ended
                                           September 30,        September 30,
                                          2006     2005       2006      2005
                                                     (Unaudited)
    Reported net income per US GAAP     $8,052  $10,510    $20,778   $23,765

    Adjustments:

    Equity-based compensation
     expense included in cost of
     product revenues and other            126       --        334        --

    Equity-based compensation
     expense included in
     research and development            1,653       --      4,578        --

    Equity-based compensation
     expense included in sales
     and marketing                         344       --        966        --

    Equity-based compensation
     expense included in general
     and administrative                    854       --      2,950        --

    Tax benefit resulting from
     equity-based compensation            (126)      --       (334)       --

    Pro forma net income               $10,903  $10,510    $29,272   $23,765


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


                                                September 30,     December 31,
                                                    2006             2005
                                                 (Unaudited)      (Audited)
    Assets
    Current assets:
     Cash and cash equivalents                      $36,877          $50,460
     Marketable securities and cash                 129,082          108,928
      deposits
     Trade receivables, net                          26,525           16,991
     Inventories                                     15,404           12,686
     Other accounts receivable                        2,723            1,617
     Deferred income taxes                            1,560            1,227

    Total current assets                            212,171          191,909

    Property and equipment, net                      13,578           11,704

    Long term marketable securities                 197,887          185,828
    Severance pay fund                                5,290            4,419
    Deferred income taxes                             1,638            1,638
    Other assets                                      3,690            4,507

    Total assets                                   $434,254         $400,005

    Liabilities and Stockholders' Equity
    Current liabilities:
     Accounts payable                               $18,863          $12,753
     Other current liabilities                       28,293           33,411

    Total current liabilities                        47,156           46,164

    Accrued severance pay                             5,713            4,707

    Stockholders' equity:
     Common Stock                                        29               29
     Additional paid-in capital                     212,070          188,539
     Accumulated other
      comprehensive income                              252               45
     Retained earnings                              194,071          179,968
    Less - Cost of treasury stock                   (25,037)         (19,447)

    Total stockholders' equity                      381,385          349,134

    Total liabilities and
     stockholders' equity                          $434,254         $400,005


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