DSP Group, Inc. Reports Third Quarter 2006 Earnings

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 http://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 http://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 (http://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