msystems Reports $209 Million in Revenues and Non GAAP EPS of 26 Cents for the Second Quarter of 2006

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M Systems Flash Disk	NASDAQ:FLSH	NASDAQ	Common Stock

M Systems Flash Disk (NASDAQ:FLSH)
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msystems(TM) (Nasdaq: FLSH), a leader in smart personal storage, today announced financial results for the second quarter ended June 30, 2006. GAAP financial highlights for the second quarter: -- Revenues totaled $209.5 million, reflecting a 72 percent increase compared with revenues of $121.6 million in the second quarter of 2005 and a 4 percent decrease compared with revenues of $219.1 million in the first quarter of 2006. -- Gross margins were 23.3 percent, 2.9 percent higher than gross margins of 20.4 percent in the first quarter of 2006. -- Net income was $3.1 million, or $0.08 per share on a fully diluted basis, compared with first quarter net income of $5.7 million, or $0.14 per share on a fully diluted basis. Non GAAP financial highlights for the second quarter: -- Revenues totaled $209.5 million. -- Non GAAP gross margins were 23.4 percent, 2.8 percent higher than non GAAP gross margins of 20.6 percent in the first quarter of 2006. -- Non GAAP net income was $10.8 million, or $0.26 per share on a fully diluted basis, compared with first quarter non GAAP net income of $8.7 million, or $0.21 per share on a fully diluted basis. Non GAAP adjustments for the second quarter of 2006 (and, to the extent applicable, the first quarter of 2006) exclude the effects of stock-based compensation, amortization of intangible assets related to an acquisition, expenses attributable to the review of prior stock option grants and related withholding tax expenses, and expenses attributable to the previously planned securities offering. A reconciliation of all non GAAP results to the comparable GAAP results is set forth below. Commenting on the results, Dov Moran, President and Chief Executive Officer of msystems, said, "I am pleased with our results for the second quarter of 2006, which were better than we had anticipated. I am particularly pleased with our performance in the mobile market. The growth we are experiencing in mDOC sales reflects the considerable long term growth opportunity of the mobile market." He continued, "In early May, we announced our revolutionary x4 technology, designed to enable the utilization of 4-bit/cell NAND flash, which was previously considered to be a practical and physical impossibility. x4 is the culmination of over 15 years of work and innovation in flash memory at msystems. During this time, we consistently introduced new technologies and products, and shaped the markets in which we operate. I am confident that completion of our pending transaction with SanDisk Corporation will further strengthen our innovation, technology and product offering, and will enable us to better realize the growth potential of the flash memory market." Conference call msystems' management will host a conference call to discuss its second quarter financial results at 10:00 a.m. EDT today, August 7, 2006. In light of the pending transaction with SanDisk, there will be no question and answer session following management's prepared comments on the call. The call can be accessed by dialing: +1 (973) 582-2830. The call will also be available live on the Internet at www.msystems.com and www.kcsa.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, August 7, 2006, until August 14, 2006 at 11:59 p.m. To access the replay, please call +1 (973) 341-3080; ID Code: 7678807. About msystems msystems has been transforming raw flash material into smarter storage solutions since 1989. From embedded flash drives deployed in millions of mobile handsets to U3 USB smart drives designed for leading global brands, msystems creates, develops, manufactures and markets smart personal storage solutions for a myriad of applications targeting high growth markets. More information is available online at www.msystems.com. msystems. made smarter. All company and product names mentioned may be trademarks or registered trademarks of their respective holders and are used for identification purposes only. msystems is a trademark of msystems Ltd.; MegaSIM is a trademark of msystems Ltd. in the United States and other countries and registered in Israel and Japan. U3 is a trademark of U3, LLP. This press release includes forward-looking statements including statements regarding the proposed merger with SanDisk Corporation, the future market for the companies' products, as defined in the Private Securities Litigation Reform Act of 1995, including statements about our business outlook for the future, that our based on our current expectations. 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: that the businesses of msystems and SanDisk will not be integrated successfully and that any synergies from the transaction may not be fully realized or may take longer to realize than expected; all risk associated with the development and implementation of x4 technology , including difficulties in utilization or implementation of 4-bit/cell NAND flash, , any failure we may experience in perfecting and/or protecting our intellectual property rights related to x4 technology, and the risk that flash manufacturers may opt to utilize such other technologies and not our x4 technology; the risk that msystems business may not perform as expected, risks relating to msystems prior stock option grants, the effect of global economic conditions in general and conditions in msystems' industry and target markets in particular, shifts in supply and demand, difficulty in predicting the level of sales by our venture with a flash partner, 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 msystems' and its customers' inventory levels and 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 msystems' and its customers' products and markets; the development, release and sale of new products by strategic suppliers and customers; the development and growth of anticipated markets for msystems' and its customers' products; and other risk factors detailed from time to time in msystems' filings with the Securities and Exchange Commission. msystems assumes no obligation to update the information in this press 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 msystems' website above does not constitute incorporation of any of the information thereon into this press release. You may register to receive msystems' future press releases or to download a complete Digital Investor Kit(TM) including press releases, regulatory filings and corporate materials by clicking on the "Digital Investor Kit(TM)" icon at www.kcsa.com. -0- *T Condensed Consolidated Balance Sheet (U.S. Dollars in thousands) June 30, March 31, --------- --------- 2006 2006 --------- --------- ASSETS Cash, cash equivalents, short-term bank deposits and marketable securities 179,045 159,906 Trade receivables, net 106,052 120,869 Related party trade receivables 6,553 4,637 Inventories 84,110 75,647 Other accounts receivable and prepaid expenses 13,561 12,401 Severance pay funds 5,579 5,021 Long-term investments and long-term receivables 5,294 5,696 Property and equipment, net 35,723 31,288 Deferred purchase credits 89,658 93,715 Other assets, net 42,030 41,072 --------- --------- Total assets 567,605 550,252 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Trade payables 80,768 84,407 Excess of losses over investment in equity method affiliate 5,188 3,853 Deferred revenues 6,567 1,333 Other accounts payable and accrued expenses 35,877 28,918 --------- --------- Total current liabilities 128,400 118,511 --------- --------- LONG-TERM LIABILITIES: Convertible Senior Notes 71,431 71,401 Accrued severance pay 7,458 6,249 Other long-term liabilities 3,649 3,994 --------- --------- Total long-term liabilities 82,538 81,644 --------- --------- MINORITY INTEREST IN SUBSIDIARY 590 2,782 --------- --------- SHAREHOLDERS' EQUITY Share capital 10 10 Additional paid-in capital 341,208 335,854 Accumulated other comprehensive income 4,228 3,953 Retained earnings 10,631 7,498 --------- --------- Total shareholders' equity 356,077 347,315 --------- --------- Total liabilities and shareholders' equity 567,605 550,252 ========= ========= Condensed Consolidated Statements of Operations (U.S. dollars in thousands, except share and per share data) Three months ended Three months ended June 30, March 31, ----------------------- ----------------------- 2006 2005 2006 2005 ----------- ----------- ----------- ----------- Revenues $209,493 $121,635 $219,110 $116,995 ----------- ----------- ----------- ----------- Costs and expenses: Costs of goods sold * 160,779 87,476 174,380 85,371 Research and development, net * 12,996 9,274 11,290 8,175 Selling and marketing * 13,666 8,580 13,921 8,484 General and administrative * 9,199 4,037 4,973 2,463 ----------- ----------- ----------- ----------- Total costs and expenses 196,640 109,367 204,564 104,493 ----------- ----------- ----------- ----------- Operating income 12,853 12,268 14,546 12,502 Financial income, net 1,512 2,988 1,366 1,562 Other income, net - - 1,184 - ----------- ----------- ----------- ----------- Income before taxes on income 14,365 15,256 17,096 14,064 Taxes on income 1,112 - 1,414 - ----------- ----------- ----------- ----------- Income after taxes on income 13,253 15,256 15,682 14,064 Equity in losses of an affiliate 1,334 656 1,208 963 Minority interest in earnings of a subsidiary 8,786 7,976 8,823 8,084 ----------- ----------- ----------- ----------- Net income $3,133 $6,624 $5,651 $5,017 =========== =========== =========== =========== Basic net earnings per share $0.08 $0.18 $0.15 $0.14 =========== =========== =========== =========== Diluted net earnings per share $0.08 $0.17 $0.14 $0.13 =========== =========== =========== =========== Weighted average number of shares used in computing basic net earnings per share 37,957,382 36,039,809 37,596,152 35,748,892 =========== =========== =========== =========== Weighted average number of shares used in computing diluted net earnings per share 42,465,375 41,070,719 41,344,978 38,479,010 =========== =========== =========== =========== * Stock based compensation expense is included in the following line items: Cost of goods sold $187 $45 $204 $49 Research and development, net 726 225 821 245 Selling and marketing 691 296 978 321 General and administrative 710 156 1,014 172 ----------- ----------- ----------- ----------- Total $2,314 $722 $3,017 $787 =========== =========== =========== =========== Six months ended June 30, ----------------------- 2006 2005 ----------- ----------- Revenues $428,603 $238,630 ----------- ----------- Costs and expenses: Costs of goods sold * 335,159 172,847 Research and development, net * 24,286 17,449 Selling and marketing * 27,587 17,064 General and administrative * 14,172 6,500 ----------- ----------- Total costs and expenses 401,204 213,860 ----------- ----------- Operating income 27,399 24,770 Financial income, net 2,878 4,550 Other income, net 1,184 - ----------- ----------- Income before taxes on income 31,461 29,320 Taxes on income 2,526 - ----------- ----------- Income after taxes on income 28,935 29,320 Equity in losses of an affiliate 2,542 1,619 Minority interest in earnings of a subsidiary 17,609 16,060 ----------- ----------- Net income $8,784 $11,641 =========== =========== Basic net earnings per share $0.23 $0.32 =========== =========== Diluted net earnings per share $0.22 $0.30 =========== =========== Weighted average number of shares used in computing basic net earnings per share 37,776,767 35,894,351 =========== =========== Weighted average number of shares used in computing diluted net earnings per share 41,905,177 39,774,865 =========== =========== * Stock based compensation expense is included in the following line items: Cost of goods sold $391 $94 Research and development, net 1,547 470 Selling and marketing 1,669 617 General and administrative 1,724 328 ----------- ----------- Total $5,331 $1,509 =========== =========== Reconciliation of GAAP to Non GAAP Operating Results (U.S. dollars in thousands, except share and per share data) Three months ended Three months ended June 30, March 31, ----------------------------------------------- 2006 2005 2006 2005 ----------- ----------- ----------- ----------- GAAP costs of goods sold $160,779 $87,476 $174,380 $85,371 Stock based compensation (187) (45) (204) (49) Amortization of intangible assets (92) - (90) - Withholding taxes related to stock option grants (104) - (17) - ----------- ----------- ----------- ----------- Non GAAP costs of goods sold $160,396 $87,431 $174,069 $85,322 =========== =========== =========== =========== GAAP research and development, net $12,996 $9,274 $11,290 $8,175 Stock based compensation (726) (225) (821) (245) Withholding taxes related to stock option grants (417) - (69) - ----------- ----------- ----------- ----------- Non GAAP research and development, net $11,853 $9,049 $10,400 $7,930 =========== =========== =========== =========== GAAP selling and marketing $13,666 $8,580 $13,921 $8,484 Stock based compensation (691) (296) (978) (321) Amortization of intangible assets (329) - (322) - Withholding taxes related to stock option grants (856) (296) (440) (296) ----------- ----------- ----------- ----------- Non GAAP selling and marketing $11,790 $7,988 $12,181 $7,867 =========== =========== =========== =========== GAAP general and administrative $9,199 $4,037 $4,973 $2,463 Stock based compensation (710) (156) (1,014) (172) Certain G&A expenses * (3,176) - - - Withholding taxes related to stock option grants (515) - (85) - ----------- ----------- ----------- ----------- Non GAAP general and administrative $4,798 $3,881 $3,874 $2,291 =========== =========== =========== =========== GAAP operating income $12,853 $12,268 $14,546 $12,502 Stock based compensation 2,314 722 3,017 787 Amortization of intangible assets 421 - 412 - Certain G&A expenses * 3,176 - - - Withholding taxes related to stock option grants 1,892 296 611 296 ----------- ----------- ----------- ----------- Non GAAP operating income $20,656 $13,286 $18,586 $13,585 =========== =========== =========== =========== GAAP other income, net $0 $0 $1,184 $0 Other income - - (1,184) - ----------- ----------- ----------- ----------- Non GAAP other income, net $0 $0 $0 $0 =========== =========== =========== =========== GAAP taxes on income $1,112 $0 $1,414 $0 Amortization of intangible assets 144 - 144 - Other income - - (367) - ----------- ----------- ----------- ----------- Non GAAP taxes on income $1,256 $0 $1,191 $0 =========== =========== =========== =========== GAAP net income $3,133 $6,624 $5,651 $5,017 Stock based compensation 2,314 722 3,017 787 Amortization of intangible assets 277 - 268 - Certain G&A expenses * 3,176 - - - Withholding taxes related to stock option grants 1,892 296 611 296 Other income - - (817) - ----------- ----------- ----------- ----------- Non GAAP net income $10,792 $7,642 $8,730 $6,100 =========== =========== =========== =========== Basic net earnings per share GAAP $0.08 $0.18 $0.15 $0.14 =========== =========== =========== =========== Non GAAP $0.28 $0.21 $0.23 $0.17 =========== =========== =========== =========== Diluted net earnings per share GAAP $0.08 $0.17 $0.14 $0.13 =========== =========== =========== =========== Non GAAP $0.26 $0.19 $0.21 $0.16 =========== =========== =========== =========== Weighted average number of shares used in computing basic net earnings per share GAAP 37,957,382 36,039,809 37,596,152 35,748,892 =========== =========== =========== =========== Non GAAP 37,957,382 36,039,809 37,596,152 35,748,892 =========== =========== =========== =========== Weighted average number of shares used in computing diluted net earnings per share GAAP 42,465,375 41,070,719 41,344,978 38,479,010 =========== =========== =========== =========== Non GAAP 42,842,218 41,262,582 42,601,169 38,915,901 =========== =========== =========== =========== Six months ended June 30, ----------------------- 2006 2005 ----------- ----------- GAAP costs of goods sold $335,159 $172,847 Stock based compensation (391) (94) Amortization of intangible assets (182) - Withholding taxes related to stock option grants (121) - ----------- ----------- Non GAAP costs of goods sold $334,465 $172,753 =========== =========== GAAP research and development, net $24,286 $17,449 Stock based compensation (1,547) (470) Withholding taxes related to stock option grants (486) - ----------- ----------- Non GAAP research and development, net $22,253 $16,979 =========== =========== GAAP selling and marketing $27,587 $17,064 Stock based compensation (1,669) (617) Amortization of intangible assets (651) - Withholding taxes related to stock option grants (1,296) (592) ----------- ----------- Non GAAP selling and marketing $23,971 $15,855 =========== =========== GAAP general and administrative $14,172 $6,500 Stock based compensation (1,724) (328) Certain G&A expenses * (3,176) - Withholding taxes related to stock option grants (600) - ----------- ----------- Non GAAP general and administrative $8,672 $6,172 =========== =========== GAAP operating income $27,399 $24,770 Stock based compensation 5,331 1,509 Amortization of intangible assets 833 - Certain G&A expenses * 3,176 - Withholding taxes related to stock option grants 2,503 592 ----------- ----------- Non GAAP operating income $39,242 $26,871 =========== =========== GAAP other income, net $1,184 $0 Other income (1,184) - ----------- ----------- Non GAAP other income, net $0 $0 =========== =========== GAAP taxes on income $2,526 $0 Amortization of intangible assets 288 - Other income (367) - ----------- ----------- Non GAAP taxes on income $2,447 $0 =========== =========== GAAP net income $8,784 $11,641 Stock based compensation 5,331 1,509 Amortization of intangible assets 545 - Certain G&A expenses * 3,176 - Withholding taxes related to stock option grants 2,503 592 Other income (817) - ----------- ----------- Non GAAP net income $19,522 $13,742 =========== =========== Basic net earnings per share GAAP $0.23 $0.32 =========== =========== Non GAAP $0.52 $0.38 =========== =========== Diluted net earnings per share GAAP $0.22 $0.30 =========== =========== Non GAAP $0.47 $0.35 =========== =========== Weighted average number of shares used in computing basic net earnings per share GAAP 37,776,767 35,894,351 =========== =========== Non GAAP 37,776,767 35,894,351 =========== =========== Weighted average number of shares used in computing diluted net earnings per share GAAP 41,905,177 39,774,865 =========== =========== Non GAAP 42,721,694 40,089,242 =========== =========== * Certain G&A expenses include expenses attributable to the review of prior stock option grants and to the previously planned securities offering *T

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FLSH M Systems Flash Disk