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msystems Consolidates Activity of its Venture with a Flash Partner, Resulting in Increased Historical Revenues, Gross Margins and Operating Income With No Change to EPS


KFAR SABA, ISRAEL April 20, 2006 , msystems™ (NASDAQ:FLSH) today announced its decision to change the accounting treatment of its venture with a flash partner to consolidate the activities of the venture into the Company’s financial statements. Previously, the Company accounted for its investment in the venture under the equity method. The Company’s decision was made in connection with a review by the staff of the U.S. Securities and Exchange Commission (“SEC”) of the Company’s annual report on Form 20-F for 2004. As a result of this decision, the Company will restate its financial statements to consolidate the results of the venture in the Company’s statement of operations, resulting in increased revenues, gross margins and operating income as compared to previously reported results. The increased operating income is offset by the minority interest of the flash partner, and therefore there is no impact to previously reported net income or earnings per share. The Company is also reclassifying its equity interest in another affiliate, which previously was included within operating expenses, to be presented within non-operating expenses.

The change in the accounting treatment of the venture will cover the quarterly and annual periods in 2004 and 2005. Accordingly, the Company’s prior financial statements previously filed or furnished with the SEC for such periods should no longer be relied upon, including all financial statements filed or furnished on Form 6-K in 2004 and 2005.

The tables below set forth the Company’s results as previously reported and as revised for the years ended December 31, 2004 and 2005. The Company is filing with the SEC today an amended annual report on Form 20-F/A for 2004, and is furnishing its financial statements for 2005. For additional information, including quarterly results as previously reported and as revised, please refer to our reports on Forms 6-K and 6-K/A furnished today to the SEC or to our website at

The Company’s updated guidance issued on April 5, 2006 for the first quarter of 2006 did not include the effects of the consolidation and the reclassification. Consolidating the venture is expected to affect 2006 first quarter results by adding approximately $24 million to revenues, $15 million to cost of goods sold and $9 million to operating income. The reclassification is expected to affect 2006 first quarter results by moving approximately $1.3 million from operating expenses to non-operating expenses. As with 2004 and 2005 results, the consolidation and the reclassification will have no impact on net income or earnings per share for the first quarter.

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. msystems’ product lines include:

* mDrive (formerly DiskOnKey®) U3 USB smart drives for personal, portable computing
* mDOC embedded flash drives for mobile handsets and consumer electronics devices
* mSIM MegaSIM® series high-density SIM cards and mSIM M.MAR® series SIM cards and highly secure cards (available both from msystems and its subsidiary Microelectronica)
* mCard, high-quality memory cards for mobile handsets and digital cameras
* mTrust (formerly Xkey®) end-to-end enterprise access, control and management solution for USB flash drives and other removable media
* mSSD (formerly FFD™) rugged solid state disks for mission-critical applications
* mModule (formerly DiskOnChip® modular family) modular flash storage for embedded systems
* mSafe (formerly SuperMAP® family) secure hardware and software crypto cores

More information is available online at 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 incorporated as M-Systems Flash Disk Pioneers Ltd.

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: the effect of global economic conditions in general and conditions in M-Systems’ 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 M-Systems’ and its customers’ inventory levels and inventory valuations; any decline in sales or other adverse operating results of the venture with the flash partner; 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 M-Systems’ 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 M-Systems’ and its customers’ products; and other risk factors detailed from time to time in M-Systems’ filings with the Securities and Exchange Commission. M-Systems 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 M-Systems’ website above does not constitute incorporation of any of the information thereon into this press release.


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