UPDATE 3-DSP Group Q3 profit tops Street; sees weak Q4 rev

* Q3 adj EPS 18 cents, beat estimates by 7 cents

* Q3 revenue falls 25 pct

* Sees Q4 rev of $50-$56 mln

* Sees Q4 gross margins of 37-40 pct

* Shares down as much as 5 pct (Adds analyst comments, updates share movement)

By Shrutika Verma

BANGALORE, Oct 27 (Reuters) - Israeli chipmaker DSP Group Inc (DSPG.O) posted a third-quarter profit that beat Wall Street expectations, helped by lower expenses, but forecast lower-than-expected revenue for the current quarter.

Shares of the company, which makes chips used to convert audio data into digital signals for telephones and computers, pared early gains and were down 5 percent at $6.66 Tuesday afternoon on Nasdaq.

The company expects fourth-quarter revenue of $50 million to $56 million. Three analysts on average were looking for $56.5 million, according to Thomson Reuters I/B/E/S.

"The underlying fundamental drivers of the company are pretty weak. I do not see any product that they have up their sleeve to reverse that trend," RBC Capital Markets analyst Daniel Meron said.

Due to the macro economic turmoil, DSP continues to face "consumer uncertainty and lack of visibility from our customers," the company said on a conference call.

"However, we also continue to feel more confident that our business will stabilize going forward and we believe we could resume revenue growth in 2010 driven by our new line of products," a company executive said.

DSP Group, whose customers include AT&T Inc (T.N), Verizon Communications (VZ.N), Nortel Networks Corp (NRTLQ.PK) and Motorola Inc MOT.N, expects to see an improved economy and better consumer spending next year.

It also expects fourth-quarter gross margins in the range of 37 percent to 40 percent.

PROMISING Q3 RESULTS

The company posted third-quarter net income of $6.8 million, or 29 cents per share, compared with a loss of $3.0 million, or 11 cents per share, a year earlier.

DSP posted earnings of 18 cents a share, excluding items.

Revenue fell 25 percent to $65.5 million.

Analysts on average expected earnings of 11 cents a share, excluding exceptional items, on revenue of $64.7 million.

Total operating expenses fell 25 percent to $26.6 million.

Shares of the San Jose, California-based company have lost 21 percent of their value in last three months. (Reporting by Shrutika Verma in Bangalore; Editing by Vinu Pilakkott, Himani Sarkar, Unnikrishnan Nair)