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DSP Group, Inc. Reports Fourth Quarter and 2006 Earnings

Annual Revenues Increased 16% YoY

SANTA CLARA, Calif., Jan. 24 /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, 2006.

Fourth Quarter Results:

Revenues for the fourth quarter of 2006 were $40,383,000, a decline of 5% from revenues of $42,401,000 for the fourth quarter of 2005. Net income for the fourth quarter was $1,600,000, a decline of 72% from net income of $5,708,000 for the fourth quarter of 2005. Diluted earnings per share (EPS) for the fourth quarter of 2006 were $0.06, a decline of 68% from $0.19 for the fourth quarter of 2005.

Year End Results:

Revenues for the year ended December 31, 2006, were $216,948,000, an increase of 16% over 2005 revenues of $187,225,000. Net income for 2006 was $22,379,000, a decrease of 24% from $29,473,000 for 2005. Diluted EPS for 2006 was $0.74, a decrease of 25% from $0.99 for 2005.

Pro Forma Results:

Pro forma net income and diluted EPS for the fourth quarter of 2006, excluding the impact of equity-based compensation expense as required by SFAS 123(R), were $4,740,000 and $0.16, respectively, representing a decrease of 17% and 16%, respectively, from the fourth quarter of 2005.

Pro forma net income and diluted EPS for the full year ended December 31, 2006, excluding the impact of equity-based compensation expense as required by SFAS 123(R), were $34,013,000 and $1.13, respectively, representing an increase of 15% and 14%, respectively, from the year ended December 31, 2005.

Share Buyback:

During the fourth quarter of 2006, DSP Group repurchased 995,000 shares of its Common Stock at an average price of $21.5 per share, for an aggregate price of approximately $21.4 million.

For the full year ended December 31, 2006, DSP Group repurchased 2,242,400 shares of its Common Stock at an average price of $23.55 per share, for an aggregate price of approximately $52.8 million.

The Company announced that in light of the Company's strong cash position and its focus on shareholder value, its Board of Directors has authorized management to repurchase an additional 3.0 million shares of the Company's common stock in open-market and privately negotiated transactions.

After giving effect to the most recent repurchases and the additional 3.0 million share repurchase authorization, approximately 3.8 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: "Despite a temporary deceleration in the fourth quarter, 2006 was another year of growth for DSP Group. Our revenues increased by 16% as compared to 2005, and the overall financial results of the Company in 2006 reflect solid execution in a challenging environment."

Ayalon also stated: "We have demonstrated a series of new innovative products and platforms driven by our system-on-chip solutions at the CES (Consumer Electronics Show) earlier this month in Las Vegas. We believe that our innovative products position the company at the heart of the residential communication transformation by enabling high quality in house wireless coverage for sensitive real-time multimedia applications."

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, 2006 to the same periods during 2005, because results for the fourth quarter of and the full year 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 .

Forward Looking Statements

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 products positioning the company at the heart of the residential communication transformation. 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 residential communications domain, unexpected delays in the introduction of new products, especially DECT 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 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.

Earnings conference call

DSP Group has scheduled a conference call for 8:30 a.m. EST today to discuss the financial results for the fourth 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: 64548377)

--International Dial-In # 1-617-801-6888 (passcode: 64548377)


    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


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

                             Three Months Ended       Twelve Months Ended
                                December 31,              December 31,
                             2006         2005         2006        2005
                         (Unaudited)  (Unaudited)  (Unaudited)   (Audited)

    Revenues               $40,383      $42,401     $216,948     $187,225
    Cost of revenues        24,883       23,420      128,559      101,074
                               ---          ---          ---          ---
    Gross profit            15,500       18,981       88,389       86,151
    Operating expenses:
     Research and
      development           11,972        9,862       47,525       40,290
     Sales and marketing     4,074        3,237       16,306       13,119
     General and
      administrative         2,671        1,846       11,137        7,398
                               ---          ---          ---          ---
     Total operating
      expenses              18,717       14,945       74,968       60,807
                               ---          ---          ---          ---
    Operating income
     (loss)                 (3,217)       4,036       13,421       25,344
    Other income:
     Interest and other
      income, net            3,366        2,830       13,198       10,166
                               ---          ---          ---          ---
    Income before provision
     for income taxes          149        6,866       26,619       35,510
    Income taxes            (1,451)       1,158        4,240        6,037
                               ---          ---          ---          ---
    Net income              $1,600       $5,708      $22,379      $29,473

    Net earnings per share:
      Basic                  $0.06        $0.20        $0.76        $1.04
      Diluted                $0.06        $0.19        $0.74        $0.99

    Weighted average number
     of shares of Common Stock
     used in the computation of:
      Basic                 28,746       28,636       29,343       28,435
      Diluted               29,031       29,970       30,049       29,843


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

                             Three Months Ended       Twelve Months Ended
                                December 31,              December 31,
                             2006         2005         2006         2005
                         (Unaudited)  (Unaudited)  (Unaudited)   (Audited)

    Revenues               $40,383      $42,401     $216,948     $187,225
    Cost of revenues        24,756       23,420      128,098      101,074
                               ---          ---          ---          ---
    Gross profit            15,627       18,981       88,850       86,151
    Operating expenses:
     Research and
      development           10,197        9,862       41,172       40,290
     Sales and marketing     3,720        3,237       14,987       13,119
     General and
      administrative         1,631        1,846        7,146        7,398
                               ---          ---          ---          ---
     Total operating
      expenses              15,548       14,945       63,305       60,807
                               ---          ---          ---          ---
    Operating income            79        4,036       25,545       25,344
    Other income :
     Interest and other
      income, net            3,366        2,830       13,198       10,166
                               ---          ---          ---          ---

    Income before provision
     for income taxes        3,445        6,866       38,743       35,510
    Income taxes            (1,295)       1,158        4,730        6,037
                               ---          ---          ---          ---
    Net income              $4,740       $5,708      $34,013      $29,473

    Net earnings per share:
      Basic                  $0.16        $0.20        $1.16        $1.04
      Diluted                $0.16        $0.19        $1.13        $0.99

    Weighted average number
     of shares of Common Stock
     used in the computation of:
      Basic                 28,746       28,636       29,343       28,435
      Diluted               29,031       29,970       30,049       29,843


     The above pro forma consolidated statements of income have been adjusted
             to exclude the following to US GAAP reported net income:
                                  (In thousands)

                             Three Months Ended       Twelve Months Ended
                                December 31,              December 31,
                             2006         2005         2006         2005
                         (Unaudited)   (Unaudited)  (Unaudited)   (Audited)

    Reported net income
     per US GAAP            $1,600       $5,708      $22,379      $29,473

    Adjustments:

    Equity-based compensation
     expense included in
     cost of revenues          127           --          461           --

    Equity-based compensation
     expense included
     in research and
     development             1,775           --        6,353           --


    Equity-based compensation
     expense included in
     sales and marketing       354           --        1,319           --

    Equity-based compensation
     expense included in
     general and
     administrative          1,040           --        3,991           --

    Tax benefit resulting
     from equity-based
     compensation             (156)          --         (490)          --

    Pro forma net income    $4,740       $5,708      $34,013      $29,473


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

                                                  December 31,   December 31,
                                                      2006           2005
                                                  (Unaudited)     (Audited)
    Assets
    Current assets:
      Cash and cash equivalents                      $37,344        $50,460
      Marketable securities and cash deposits        132,170        108,928
      Trade receivables, net                          21,489         16,991
      Inventories                                     14,366         12,686
      Other accounts receivable                        4,049          1,617
      Deferred income taxes                            1,516          1,227
                                                    ________       ________
    Total current assets
                                                     210,934        191,909
    Property and equipment, net                       12,644         11,704

    Long term marketable securities                  179,368        185,828
    Severance pay fund                                 5,689          4,419
    Deferred income taxes                              1,987          1,638
    Other assets                                       3,366          4,507
                                                    ________       ________
    Total assets                                    $413,988       $400,005

    Liabilities and Stockholders' Equity
    Current liabilities:
      Accounts payable                               $12,205        $12,753
      Other current liabilities                       28,969         33,411
                                                    ________       ________
    Total current liabilities                         41,174         46,164

      Accrued severance pay                            6,065          4,707

    Stockholders' equity:
     Common Stock                                         28             29
     Additional paid-in capital                      216,041        188,539
     Accumulated other comprehensive income               28             45
     Retained earnings                               195,198        179,968
    Less - Cost of treasury stock                    (44,546)       (19,447)
                                                    ________       ________
    Total stockholders' equity                       366,749        349,134
                                                    ________       ________
    Total liabilities and
     stockholders' equity                           $413,988       $400,005

SOURCE DSP Group, Inc.
01/24/2007
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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