The pro forma net loss for the quarter excludes an inventory charge of $18.8 million. Including the current quarter’s inventory charge, the net loss was $22.3 million, or $(0.83) per share. This compares to net earnings of $3.5 million, or $0.12 per share (fully diluted), for the second quarter of 2000.

For the six-month period ended June 30, 2001, revenues were $24.6 million, compared to revenues of $36.9 million in the corresponding period of 2000. On a pro forma basis, the Company reported a net loss of $5.2 million, or $(0.20) per share for the period ended June 30, 2001, which excludes an inventory charge of $30.2 million, and a capital loss of $1.2 million. Including the inventory charge and the capital loss, the net loss was $36.6 million, or $(1.38) per share. This compared to net income of $4.6 million, or $0.17 per share (fully diluted), for the six months ended June 30, 2000. Pro forma Gross margins for the six months ended June 30, 2001 increased to 31 percent from 30 percent in the corresponding period of 2000.

Dov Moran, president and Chief Executive Officer of M-Systems, commenting on the second quarter results, said, While the slowdown in both the Internet Appliance and telecom markets has continued, we are nonetheless persisting in our efforts to increase revenues and to return to the type of growth we previously experienced. These efforts include aggressively entering into and becoming a major player in the mobile market, as well as securing new sources of business through our relationship with our partners, such as AMD.

We are very encouraged by the acceptance of our DiskOnKey product line, the sales of which increased four-fold from the first to the second quarter this year. The second quarter also saw the Company establish several new marketing channels and significant partners for DiskOnKey, namely, new OEMs such as Dell and Compaq, and retail channels such as I-O Data in Japan. We are likewise encouraged by new design wins for DiskOnChip and the early acceptance of DiskOnChip Millennium Plus in the market.

Mr. Moran continued, We are committed to success. While evaluating our expenses carefully and eliminating any non-essential expenses, the Company is fully committed to the continued development and enhancement of our product offerings, as well as to identifying and taking advantage of new and exciting opportunities.

SOURCE: COMPANY PRESS RELEASE