July 19, 2004
M-Systems Reports Record Second Quarter 2004 Results
Company Increases 2004 Guidance to Revenues of At Least $325 Million and EPS At or Above $0.55
Second Quarter 2004 Revenues $86.1 Million; 237% Increase Over Second Quarter 2003 Revenues

M-Systems (Nasdaq: FLSH) today announced financial results for the second quarter ended June 30, 2004.

For the second quarter of 2004, revenues were $86.1 million, representing an increase of 237 percent compared to revenues of $25.6 million in the second quarter of 2003, and an increase of 34 percent compared to revenues of $64.2 million in the first quarter of 2004. Gross margins for the second quarter of 2004 were 24 percent, compared to 26 percent in the first quarter of 2004 and 32 percent in the second quarter of 2003. The change in gross margins as compared to the first quarter was attributable principally to product mix, as a result of greater than anticipated DiskOnKey sales. The Company reported operating income of $4.6 million for the second quarter of 2004, an increase of 56 percent compared to operating income of $3.0 million in the first quarter of 2004 and compared to an operating loss of $1.0 million in the second quarter of 2003. The Company also reported a net profit for the second quarter of 2004 of $5.4 million, or $0.14 per share, compared to a net profit of $3.7 million, or $0.11 per share, in the first quarter of 2004, and a net loss of $0.4 million, or $(0.01) per share, in the second quarter of 2003.

Commenting on the results, Dov Moran, President and Chief Executive Officer of M-Systems, said, "We are extremely pleased with our results for the second quarter of 2004, which exceeded our expectations and represent the 12th consecutive quarter of sequential growth. Our revenues increased by 34% quarter over quarter, approximately twice the rate at which our operating expenses grew, enabling us to increase our operating income by 56% over the first quarter.

As we look ahead to the second half of 2004 and beyond, we are excited about the opportunities that lie ahead of us. We are entering the third quarter with a strong DiskOnKey customer list that continues to grow, an increasing number of design-wins for our Mobile DiskOnChip, and a number of new, exciting products and technologies including our recently announced next-generation DiskOnKey T5 controller and Xkey, an application targeted at the enterprise market that enables users of Microsoft® Exchange to work securely from any PC. Our achievements during the first half of 2004 leave us very well positioned to capitalize on the many opportunities to continue growing the Company in the second half of the year and into 2005."

Mr. Moran concluded, "Our current projections for the third quarter of 2004 are for revenues of at least $86 million, with earnings per share at or above $0.14. For the full year, we are increasing our guidance for revenues from $275 million to at least $325 million, and from earnings per share of $0.45 to earnings per share of at or above $0.55."

M-Systems will host a conference call to discuss its financial results and other matters discussed in this press release at 10:00 a.m. U.S. EDT today, July 19, 2004. The call can be accessed by dialing +1 (973) 582-2776 approximately ten minutes before the call. There will be a replay available from approximately 12:00 p.m. EDT, July 19, 2004, until July 23, 2004 at 11:59 p.m. EDT. To listen to the replay, please call (973) 341-3080. To access the replay, users will need to enter the following code: 4938071. The call will also be available live on the Internet at www.kcsa.com and www.m-systems.com. Following the call, the webcast will be archived for a period of 30 days.

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 product and the multimedia mobile handset market with its Mobile DiskOnChip products. For more information, please contact M-Systems at www.m-sys.com.

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