msystems Reports $219 Million in Revenues and Pro Forma Earnings Per Share of 21 Cents for the First Quarter of 2006

Company expects revenues to approach 1 billion dollars in 2006

KFAR-SABA, Israel, April 26, 2006, msystems™ (Nasdaq: FLSH), a leader in smart personal storage, today announced financial results for the first quarter ended March 31, 2006.
GAAP financial highlights for the first quarter:
• Revenues were $219.1 million, an 87 percent increase compared with the first quarter of 2005
• Gross margins were 20.4 percent
• Net income was $7.1 million, or $0.17 per share on a fully diluted basis

Pro forma financial highlights for the first quarter, excluding the effects of stock based compensation expenses, amortization of intangible assets related to an acquisition, a one time gain from the sale of an investment and the related tax effects:
• Revenues were $219.1 million
• Gross margins were 20.6 percent
• Net income was $8.7 million, or $0.21 per share on a fully diluted basis

As a result of the consolidation of the venture with a flash partner, first quarter revenues, cost of goods sold and operating income increased by $24 million, $15 million and $9 million, respectively, which were off-set by a minority interest of $9 million, resulting in the consolidation having no effect on net income or earnings per share.

Commenting on the results, Dov Moran, President and Chief Executive Officer of msystems, said, “We are very pleased with our results for the first quarter of 2006, in which we achieved revenues and net income well above our initial expectations despite difficult market conditions and seasonal weakness. This quarter we demonstrated the strength of our business model, which enables us to show strong performance even in a challenging environment through the effective use of our sales channels and our supply agreements, which provide us access to flash capacity at competitive prices, as well as the effective management of our inventory.”

He continued, “We remain focused on our two primary target markets – the USB Flash Drive (UFD) and mobile markets. In the UFD market, U3 continues to gain traction worldwide as evidenced by our recent launch of U3 Smart Drives in Japan. In the first quarter, we also saw our first sales of mTrust (formerly Xkey) to Fortune 500 companies. In the mobile market, we are receiving positive feedback from customers for our new multi-sourced H3 mDOC and are beginning to see our first design wins. We also announced at 3GSM the commercial launch of 512 megabyte high density SIM cards with Orange and Oberthur.”

Mr. Moran concluded, “As evidenced by the results of the first quarter, the demand for our products continues to be strong and we remain very optimistic that 2006 will be another successful year of exceptional growth for msystems. We believe that our people, technology, products and strategy position us well, and will drive our revenues in 2006 to approach the one billion dollar mark.”

msystems will host a conference call to discuss its financial results and other matters discussed in this press release, as well as provide an update on the Company’s outlook for 2006, at 10:00 a.m. EST today, April 26, 2006. The call will be available live on the Internet at www.m-systems.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, April 26, 2006, until May 1, 2006 at 11:59 p.m. To access the replay, please call +1-973-341-3080; ID Code: 7251964.

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 www.m-systems.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 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, including statements about our business outlook for the year 2006, 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: the effect of global economic conditions in general and conditions in M-Systems’ 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 M-Systems’ 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 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 msystems’ 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.

Click here to view P&L and Balance Sheet in PDF format: www.m-sys.com/NR/rdonlyres/B6EFD464-338C-4712-B703-0970D182AAE2/0/
Q106NMBR.pdf

Contact Information

David Coates

Media Contact for North America

Brodeur Worldwide for M-Systems

Contact via E-mail