M-Systems Reports $106 Million in Revenues and Earning Per Share of 19 Cents for Second Quarter of 2005

Business Wire, July 25, 2005

KFAR SABA, Israel -- M-Systems (Nasdaq: FLSH) today announced financial results for the second quarter ended June 30, 2005.

For the second quarter of 2005, revenues were $105.7 million, representing an increase of 25.5 percent compared to revenues of $84.2 million for the second quarter of 2004, and an increase of 10.2 percent compared to revenues of $95.9 million for the first quarter of 2005. Gross margins for the second quarter of 2005 were 24.8 percent, a slight improvement compared to 24.6 percent in the first quarter of 2005 and 24.3 percent in the second quarter of 2004. M-Systems reported net income for the quarter ended June 30, 2005 of $7.6 million, or $0.19 per share, compared to net income of $6.1 million, or $0.16 per share, in the first quarter of 2005, and net income of $5.4 million, or $0.14 per share, in the second quarter of 2004.

Commenting on the results, Dov Moran, President and Chief Executive Officer of M-Systems, said: "I am very pleased with our second quarter results, as we posted solid top and bottom line growth, both sequentially and on a year-over-year basis."

He continued, "During the quarter we further strengthened the foundation for M-Systems' future growth. U3 is gaining momentum, as more third party software application developers express their support for the U3 platform. Our OEM partners have also recognized the added value and competitive advantages the U3 platform offers them and we are scheduled to begin shipping U3 smart devices toward the end of the third quarter. We believe the potential for this initiative is tremendous."

"In the mobile market, we continue to make progress toward our stated goal of penetrating the high-volume high-end feature phone segment of the market, as handset manufacturers recognize the value of Mobile DiskOnChip as the embedded flash drive (EFD) of choice for an increasing variety of handsets. We are designed into a number of very exciting phones which we expect will begin shipping during the second half of the year. With the commercial launch of MegaSIM, scheduled for the beginning of 2006, we remain extremely optimistic with respect to M-Systems' opportunity in the mobile market."

Mr. Moran concluded, "With respect to guidance for the second half of the year, we anticipate that the third quarter will see top and bottom line growth over the second quarter, and expect to experience further acceleration in growth in the seasonally strong fourth quarter. We reiterate our full-year 2005 projections for revenues of at least $450 million and earnings per share at or above $1.00."

Following the earnings announcement, M-Systems will host a conference call at 10:00 a.m. EDT. The call can be accessed by dialing: +1 (973) 582-2776. The call will also be available live on the company's website at www.m-systems.com. Following the call, the webcast will be archived for a period of 90 days. A replay of the call will be available beginning at approximately 12:00 p.m. EDT, July 25, 2005, until July 30, 2005 at 11:59 p.m. To listen to the replay, please call +1 (973) 341-3080. To access the replay, users will need to enter the following code: 6247989.

About M-Systems

M-Systems designs, develops and markets innovative flash data storage solutions for digital consumer electronics markets. M-Systems primarily targets two fast-growing digital consumer electronics markets: the USB (universal serial bus) flash drive market with its DiskOnKey(R) product and the multimedia mobile handset market with its Mobile DiskOnChip(R) products and MegaSIM(TM) technology. M-Systems also sells data storage products to the embedded systems market, including for digital set-top boxes and thin client computers. For more information, please contact M-Systems at www.m-systems.com.

NOTE: This press release includes forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Readers are cautioned not to place undue reliance on these forward-looking statements, as they are subject to various risks and uncertainties which may cause actual results to vary significantly. These risks include, but are not limited to, risks related to: the effect of global economic conditions in general and conditions in the company's industry and target markets in particular, shifts in supply and demand, market acceptance, the impact of competitive products and pricing, product development, commercialization and technological difficulties, and capacity and supply constraints including dependence on flash component suppliers; changes in the company's and its customers' inventory levels and in inventory valuations; timely product and technology development/upgrades and the ability to manage changes in market conditions as needed; market acceptance of new products and continuing product demand; the impact of competitive products and pricing on the company's and its customers' products and markets; development, release and sales of new products by strategic suppliers and customers; development and growth of anticipated markets for the company's and its customers' products; and other risk factors detailed in the company's most recent annual report and its other filings with the Securities and Exchange Commission. All forward-looking statements included in this release are based upon information available to the company as of the date hereof. The company assumes no obligation to update the information in this release and disclaims any obligation to publicly update or revise any such forward-looking statements to reflect any change in its expectations or in events, conditions, or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements. Reference to the company's website above does not constitute incorporation of any of the information thereon into this press release.