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		Per Share				Total
Public Offering Price		$	30.250			$	115,559,477
Underwriting Discount		$	1.603			$	6,123,697
Proceeds to Saifun Semiconductors (before expenses)		$	28.647			$	9,739,980
Proceeds to Selling Shareholders (before expenses)		$	28.647			$	99,695,800

Lehman Brothers	Deutsche Bank Securities	Citigroup

Sole Book-Running Manager	Joint Lead Manager	Joint Lead Manager

	William Blair & Company

	Raymond James

	WR Hambrecht + Co

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		Page
Prospectus Summary			1
Risk Factors			7
Special Note Regarding Forward-Looking Statements			20
Use of Proceeds			21
Market Price of Ordinary Shares			21
Dividend Policy			21
Capitalization			22
Selected Consolidated Financial Data			23
Management’s Discussion and Analysis of Financial Condition and Results of Operations			27
Business			45
Management			61
Certain Relationships and Related Party Transactions			75
Principal and Selling Shareholders			78
Description of Share Capital			82
Ordinary Shares Eligible for Future Sale			87
Taxation			90
Underwriting			99
Legal Matters			105
Experts			105
Enforceability of Civil Liabilities			105
Where You Can Find Additional Information			107

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	Our historical financial data may be of limited value in evaluating our future prospects.

	We depend on a small number of licensees for our revenues and if we lose any of these licensees our revenues may decrease substantially.

		Year ended
		December 26,				December 31,
		2004				2005
Macronix International Co., Ltd.			37	%			18	%
Infineon Technologies AG			28	*			57
Spansion LLC			25				12

*	Includes revenues from Infineon Technologies Flash Israel, the Israeli entity in our former joint venture which we exited in December 2004.

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	Our reputation and revenues could be adversely affected if our licensees do not successfully implement our NROM technology in a wide range of their products.

	Our growth and future prospects could be harmed if we are unable to enter into favorable agreements to license our NROM technology to other semiconductor manufacturers.

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	If we are unable to successfully protect our inventions through the issuance and enforcement of patents, our business could be significantly harmed.

	•	current or future U.S. or foreign patent applications will be approved;
	•	our issued patents will protect our intellectual property and not be challenged by third parties;
	•	the validity of our patents will be upheld;
	•	the patents of others will not have an adverse effect on our ability to do business; or
	•	others will not independently develop similar or competing products or methods or design around any patents that may be issued to us.

	Our failure to protect the intellectual property created by us would cause our business to suffer.

	Potential intellectual property claims by and against us and resulting litigation could subject us to significant costs and could invalidate our proprietary rights.

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	The timing and amount of our revenues from new license agreements and the amount of our revenues from royalties is difficult to predict and may fluctuate.

	Our licensees may be subject to intellectual property infringement claims by third parties or other licensees of our technology.

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	Our difficulties in verifying royalty amounts and other payments owed to us under our license and other agreements may cause us to lose revenues.

	A decrease in the demand for consumer electronic, communications, automotive and industrial products may significantly decrease the demand for the products sold by our licensees and reduce our revenues and profitability.

	Our revenues and business will be harmed if we do not develop new innovations in a timely and cost-effective manner.

	•	increased memory and features on same size or smaller chip;
	•	migration to smaller process technologies;
	•	faster read and write speeds, which allow a system’s microprocessor to access data without having to wait;
	•	lower power consumption to allow for longer operating times using the same power source;
	•	ability to withstand extreme temperature fluctuations; and
	•	the ability to read and modify data many times without adversely impacting reliability.

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	Cyclicality in the semiconductor industry may affect our revenues and, as a result, our operating results could be adversely affected.

	The average selling prices of non-volatile memory devices has tended to decrease historically and this trend may negatively impact our revenue and gross margins.

	The semiconductor memory market in which we participate is highly competitive and, if we do not compete effectively, our operating results would be harmed.

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	If we fail to support our growth in operations, particularly by enhancing our sales and marketing, and internal controls systems, our business could suffer.

	We depend on our ability to attract and retain our key management and technical personnel.

	The international nature of our business exposes us to financial and regulatory risks and we may have difficulty protecting our intellectual property in some foreign countries.

	•	laws and business practices favoring local companies;
	•	withholding tax obligations on license revenues that we may not be able to offset fully against our tax obligations, including the further risk that foreign tax authorities may re-characterize license fees or increase tax rates, which could result in increased tax withholdings and penalties;
	•	less effective protection of intellectual property than is afforded to us in the United States, or other developed countries;
	•	technology export license requirements and trade restrictions;
	•	imposition of or increases in tariffs; and
	•	changes in regulatory requirements.

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	Our international operations expose us to the risk of fluctuations in currency exchange rates.

	If our prototypes or products based on our designs are used in defective products, we may be subject to product liability or other claims.

	We may need to raise additional capital in the future and may be unable to do so on acceptable terms. This could limit our ability to grow and carry out our business plan.

	Under current U.S. and Israeli law, we may not be able to enforce covenants not to compete and therefore may be unable to prevent our competitors from benefiting from the expertise of some of our former employees.

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	Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States.

	We may become subject to a claim by Tower Semiconductor Ltd. that we breached provisions of our license agreement with it.

	Our quarterly financial performance is likely to vary in the future, and may not meet our guidance or the expectations of analysts or investors, which may lead to additional volatility in our share price.

	•	announcements or introductions of technological innovations or new products, or product enhancements or pricing policies by us or our competitors;
	•	disputes or other developments with respect to our or our competitors’ intellectual property rights;
	•	announcements of strategic partnerships, joint ventures or other agreements by us or our competitors;
	•	recruitment or departure of key personnel;
	•	the gain or loss of licensees;
	•	regulatory developments in the United States, Israel and abroad;
	•	our sale of ordinary shares or other securities in the future;
	•	changes in the estimation of the future size and growth of our markets; and
	•	market conditions in our industry, the industries of our customers and the economy as a whole.

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	Our Chief Executive Officer and Chairman, Dr. Boaz Eitan, has significant influence over matters requiring shareholder approval, which could delay or prevent a change of control.

	•	the composition of our board of directors, which has the authority to direct our business and to appoint and remove our officers;
	•	approving or rejecting a merger or other business combination;
	•	raising future capital; and
	•	amending our Articles of Association, which govern the rights attached to our ordinary shares.

	This offering and substantial future sales of our ordinary shares in the public market may cause the price of our shares to decline.

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	If you acquire more than 9.9% of our shares, your voting rights will be limited with respect to those shares.

	Our U.S. shareholders may suffer adverse tax consequences if we are characterized as a Passive Foreign Investment Company.

	Conditions in Israel could adversely affect our business.

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	Our operations could be disrupted as a result of the obligation of key personnel in Israel to perform military service.

	We have recently applied to the Office of the Chief Scientist for government grants for research and development expenditures. If our application is approved, it will limit our ability to manufacture products and transfer technologies outside of Israel and will require us to satisfy specified conditions.

	We receive tax benefits that may be reduced or eliminated in the future.

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	It may be difficult to enforce a U.S. judgment against us, our officers and directors and the Israeli experts named in this prospectus in Israel or the United States, or to assert U.S. securities laws claims in Israel or serve process on our officers and directors and these experts.

	Provisions of Israeli law and our Articles of Association may delay, prevent or make undesirable an acquisition of all or a significant portion of our shares or assets.

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	•	the amount and timing of the recognition of deferred revenue and of additional license fees from our current licensees and the impact of adding additional licenses;
	•	statements as to the timing of our future research and development expenses;
	•	statements as to our discontinued operations;
	•	statements as to the future technological innovations, including the implementation of our NROM technology with multi-level cell functionality;
	•	statements as to our ability to meet anticipated cash needs based on our current business plan;
	•	statements as to the impact of timing of integrating additional manufacturers or subcontractors;
	•	expectations as to any increase in the amount and proportion of our revenues derived from royalties and the timing of recognition of these revenues; and
	•	statements as to the impact of the rate of inflation and the political and security situation on our business.

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Most Recent Five Months		High				Low
March 2006 (through March 30, 2006)		$	31.06			$	27.86
February 2006		$	33.81			$	28.93
January 2006		$	37.90			$	33.77
December 2005		$	31.47			$	27.69
November 2005		$	35.38			$	29.00

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	•	on an actual basis; and
	•	on an as adjusted basis to give effect to (1) the issuance by us of 340,000 ordinary shares in this offering at the offering price and the receipt by us of estimated net proceeds of approximately $9.4 million, after deducting underwriting discounts and commissions and the estimated offering expenses; and (2) the issuance of 409,702 ordinary shares pursuant to the exercise by certain selling shareholders of options prior to the closing of this offering and the receipt of $2.2 million therefrom.

			As of
			February 28, 2006
			Actual				As adjusted
			(unaudited)
			(in thousands)
Shareholders’ equity:
Ordinary shares: NIS 0.01 par value; 200,000,000 shares authorized, actual and as adjusted; 30,335,847 shares issued and 29,607,722 shares outstanding, actual; 30,675,847 shares issued and 30,357,424 outstanding as adjusted			$	121			$	123
Additional paid-in capital				215,447				227,017
Accumulated other comprehensive income				(46	)			(46	)
Accumulated deficit				(31,332	)			(31,332	)
	Total shareholders’ equity		$	184,190			$	195,762
	Total capitalization		$	184,190			$	195,762

	•	728,125 issued ordinary shares that are unpaid, are held in trust by the trust company of our Israeli counsel for delivery to the Company’s employees upon exercise of options outstanding under our share option plans and carry no voting rights;
	•	5,684,390 ordinary shares reserved for issuance under our share option plans (which includes the 728,125 ordinary shares referred to above), of which options to purchase 4,609,441 ordinary shares at a weighted average exercise price of $11.73 per share had been granted; and
	•	30,800 ordinary shares issuable upon the exercise of options granted outside of our share option plans at a weighted average exercise price of $3.14.

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				Year ended
				December 31,				December 31,				December 28,				December 26,				December 31,
				2001				2002				2003(3)				2004(3)				2005
				(in thousands, except share and per share data)
Statements of operations data:
Revenues:(1)
	Licenses			$	2,468			$	3,170			$	7,817			$	22,640			$	65,790
	Services				1,914				3,438				6,639				7,926				12,811
		Total revenues			4,382				6,608				14,456				30,566				78,601
Cost of services(2)					1,146				2,086				4,147				7,084				12,048
Gross profit					3,236				4,522				10,309				23,482				66,553
Operating expenses:
	Research and development(2)				7,022				6,583				9,132				6,792				7,427
	Marketing and selling(2)				967				920				2,543				2,914				4,889
	General and administrative(2)				783				3,426				1,779				2,115				6,216
Total operating expenses					8,772				10,929				13,454				11,821				18,532
Operating income (loss)					(5,536	)			(6,407	)			(3,145	)			11,661				48,021
Financial income, net					2,209				1,030				1,137				1,699				1,749
Equity in losses of equity method investees					(3,468	)			(6,851	)			(12,820	)			(26,172	)			—
Compensation expense related to issuance of options to employees of equity method investees					—				—				(206	)			(569	)			—
Capital loss from sale of equity method investees					—				—				—				(17,334	)			—
Income (loss) from continuing operations					(6,795	)			(12,228	)			(15,034	)			(30,715	)			49,770
Loss from discontinued operations(2)(3)					—				—				(156	)			(7,189	)			(5,263	)
Net income (loss)				$	(6,795	)		$	(12,228	)		$	(15,190	)		$	(37,904	)		$	44,507

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		Year ended
		December 31,				December 31,				December 28,				December 26,				December 31,
		2001				2002				2003(3)				2004(3)				2005
		(in thousands, except share and per share data)
Basic earnings (loss) from continuing operations per ordinary share		$	(0.44	)		$	(0.76	)		$	(0.89	)		$	(1.81	)		$	0.46
Basic loss from discontinued operations per ordinary share			—				—			$	(0.01	)		$	(0.43	)		$	(0.29	)
Basic net earnings (loss) per ordinary share		$	(0.44	)		$	(0.76	)		$	(0.90	)		$	(2.24	)		$	0.17
Weighted average number of ordinary shares used in computing net earnings (loss) per share — basic			15,479,375				16,102,326				16,896,134				16,927,087				29,452,828
Diluted earnings (loss) from continuing operations per ordinary share		$	(0.44	)		$	(0.76	)		$	(0.89	)		$	(1.81	)		$	0.36
Diluted loss from discontinued operations per ordinary share			—				—			$	(0.01	)		$	(0.43	)		$	(0.20	)
Diluted net earnings (loss) per ordinary share		$	(0.44	)		$	(0.76	)		$	(0.90	)		$	(2.24	)		$	0.16
Weighted average number of ordinary shares used in computing net earnings (loss) per share — diluted			15,479,375				16,102,326				16,896,134				16,927,087				31,947,043

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		Year ended
		December 31,				December 31,				December 28,				December 26,				December 31,
		2001				2002				2003(3)				2004(3)				2005
		(in thousands, except share and per share data)
Pro forma basic earnings from continuing operations per ordinary share(4)																		$	2.06
Pro forma basic loss from discontinued operations per ordinary share(4)																		$	(0.22	)
Pro forma basic net earnings per ordinary share(4)																		$	1.84
Weighted average number of ordinary shares used in computing pro forma net earnings per share — basic																			24,154,318
Pro forma diluted earnings from continuing operations per ordinary share(4)																		$	1.90
Pro forma diluted loss from discontinued operations per ordinary share(4)																		$	(0.20	)
Pro forma diluted net earnings per ordinary share(4)																		$	1.70
Weighted average number of ordinary shares used in computing pro forma net earnings per share — diluted																			26,240,525

		As of
		December 31,				December 31,				December 28,				December 26,				December 31,
		2001				2002				2003(3)				2004(3)				2005
		(in thousands)
Balance sheet data:
Cash and cash equivalents		$	12,290			$	40,576			$	29,384			$	27,228			$	100,327
Short-term investments			25,769				771				514				161				—
Held-to-maturity marketable securities			—				—				10,868				17,065				81,496
Working capital(5)			36,075				36,894				25,499				(2,433	)			166,487
Total assets			52,166				50,211				51,894				64,934				193,738
Total liabilities			9,960				16,087				22,038				59,996				17,665
Capital stock			58				60				60				60				120
Accumulated deficit			(14,976	)			(27,204	)			(42,394	)			(80,298	)			(35,791	)
Total shareholders’ equity			42,206				34,124				29,856				4,938				176,073

(1)	Includes revenues from related parties, principally from design and product development services provided to our former joint venture, consisting of $3.2 million for 2002, $6.4 million for 2003, and $8.4 million for 2004. License revenues for 2005 include non-cash revenues of $19.2 million resulting from the termination of our former joint venture.

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(2)	Expenses include stock-based compensation related to options granted to employees and others as follows:

		Year ended				Year ended
		December 26,				December 31,
		2004				2005
		(in thousands)
Cost of services		$	175			$	834
Research and development			220				330
Marketing and selling			87				667
General and administrative			96				2,410
Loss from discontinued operations			23				54
Total		$	601			$	4,295

During the third quarter of 2004, we adopted the fair value recognition provisions of FAS 123, as amended by FAS 148 for stock-based employee compensation. Effective December 29, 2003, we elected to apply the Modified Prospective Method under FAS 148. Accordingly, unvested options were accounted for under the fair value recognition provision of FAS 123 from December 29, 2003 as if the fair value method had been applied since the date of grant.

(3)	We decided to discontinue product sales in the second quarter of 2005. During the quarter ended September 25, 2005, we began accounting for products sales operations as discontinued operations and prior year financial information has been reclassified.
(4)	Pro forma basic and diluted net earnings (loss) per ordinary share gives effect to the automatic conversion of all of our issued and outstanding convertible preferred shares and options into ordinary shares at a ratio of 1:1 that occurred prior to the completion of our initial public offering on November 8, 2005, as if the conversion occurred at the beginning of the fiscal year ended December 31, 2005. We apply the two-class method as required by EITF No. 03-6, “Participating Securities and the Two-Class Method under FASB Statement No. 128, Earnings per Share”. EITF No. 03-6 requires earnings per share for each class of shares (ordinary shares and preferred shares) to be calculated assuming 100% of our earnings were distributed as dividends to each class of shares based on their contractual rights. The numerator of the pro forma basic and diluted net earnings (loss) per ordinary share excludes $39,259 of the allocation of undistributed earnings related to convertible preferred shares. Since all the preferred shares were converted as a result of our initial public offering, the pro forma presentation provides a better comparison of the earnings per share data following our initial public offering.
(5)	Current assets less current liabilities.

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	•	license revenues, which consist of license fees for our intellectual property and license royalties paid by licensees that sell products incorporating our intellectual property; and
	•	service revenues, from design and product development services that we provide to our licensees.

	Exit from Joint Venture with Infineon Technologies

	Termination arrangements

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	Impact of joint venture on historical results of operations

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	Revenues

	License revenues

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	Service revenues

	Revenue breakdown

		Year ended
		December 28,				December 26,				December 31,
		2003				2004				2005
License revenues			54	%			74	%			84	%
Service revenues			46				26				16

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	Customers and customer concentration

		Year ended
		December 28,				December 26,				December 31,
		2003				2004				2005
Macronix International Co., Ltd.			36	%			37%				18	%
Infineon Technologies AG			45	(1)			28	(1)			57
Spansion LLC			18				25				12

(1)	Includes revenues from Infineon Technologies Flash Israel, the Israeli entity in our former joint venture which we exited in December 2004.

	Geographical breakdown

		Year ended
		December 28,				December 26,				December 31,
		2003				2004				2005
Germany			—	%			4	%			57	%
Taiwan			36				37				18
United States			18				25				12
Japan			1				10				12
Israel(1)			45				24				—
Other			—				—				1

(1)	Consists primarily of revenues from design and product development services provided to the Israeli entity in our former joint venture, Infineon Technologies Flash Israel, which we exited in December 2004.

	Cost of revenues and gross profit

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	Operating expenses

	Discontinued Operations

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		Year ended
		December 28,				December 26,				December 31,
		2003				2004				2005
		(in thousands)
Revenues		$	—			$	1,673			$	4,495
Cost of revenues			—				5,894				8,458
Gross loss			—				(4,221	)			(3,963	)
Research and development			156				1,732				568
Marketing and selling			—				1,160				684
General and administrative			—				76				48
Loss from discontinued operations		$	(156	)		$	(7,189	)		$	(5,263	)

	Taxes

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	Year Ended December 31, 2005 compared to Year Ended December 26, 2004

	Revenues

	Cost of revenues and gross margin

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	Operating expenses

	Financial income, net

	Year Ended December 26, 2004 compared to Year Ended December 28, 2003

	Revenues

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	Cost of revenues and gross margin

	Operating expenses

	Financial income, net

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	Equity in losses of equity method investees

	Loss from discontinued operations

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				Three months ended
				March 28,				June 27,				Sept. 26,				Dec. 26,				March 27,				June 26,				Sept. 25,				Dec. 31,
				2004				2004				2004				2004				2005				2005				2005				2005
				(unaudited)
				(in thousands)
Statements of operations data:
Revenues:
	Licenses(*)			$	3,116			$	5,037			$	6,847			$	7,640			$	18,881			$	18,560			$	15,343			$	13,006
	Services				1,907				1,963				2,253				1,803				3,333				3,197				2,597				3,684
		Total revenues			5,023				7,000				9,100				9,443				22,214				21,757				17,941				16,690
	Cost of services:				1,294				1,436				1,856				2,498				2,634				2,512				3,079				3,823
Gross profit					3,729				5,564				7,244				6,945				19,580				19,245				14,862				12,867
Operating expenses:
	Research and development				1,902				1,647				1,486				1,757				1,520				1,708				2,253				1,946
	Marketing and selling				504				505				879				1,026				1,430				1,227				1,264				968
	General and administrative				422				391				650				652				1,737				924				859				2,696
Total operating expenses					2,828				2,543				3,015				3,435				4,687				3,859				4,376				5,610
Operating income					901				3,021				4,229				3,510				14,893				15,386				10,486				7,257
Financial income (expenses), net					(1	)			359				590				751				155				(117	)			543				1,168
Equity in losses of equity method investees					(5,937	)			(5,324	)			(7,059	)			(7,852	)			—				—				—				—
Compensation income (expense) related to issuance of options to employees of equity method investees					(176	)			(326	)			(131	)			64				—				—				—				—
Capital loss from sale of equity method investees					—				—				—				(17,334	)			—				—				—				—
Income (loss) from continuing operations					(5,213	)			(2,270	)			(2,371	)			(20,861	)			15,048				15,269				11,029				8,425
Income (loss) from discontinued operations					(613	)			(954	)			(2,046	)			(3,576	)			(3,224	)			(1,999	)			(230	)			190
Net income (loss)				$	(5,826	)		$	(3,224	)		$	(4,417	)		$	(24,437	)		$	11,824			$	13,270			$	10,799			$	8,615
Basic earnings (loss) per Ordinary share from continuing operations				$	(0.31	)		$	(0.13	)		$	(0.14	)		$	(1.23	)			—				—				—			$	0.16
Basic loss per Ordinary share from discontinued operations				$	(0.03	)		$	(0.06	)		$	(0.12	)		$	(0.21	)			—				—				—				—
Basic net earnings (loss) per Ordinary share				$	(0.34	)		$	(0.19	)		$	(0.26	)		$	(1.44	)			—				—				—			$	0.16
Diluted earnings (loss) per Ordinary share from continuing operations				$	(0.31	)		$	(0.13	)		$	(0.14	)		$	(1.23	)			—				—				—			$	0.14
Diluted earnings (loss) per Ordinary share from discontinued operations				$	(0.03	)		$	(0.06	)		$	(0.12	)		$	(0.21	)			—				—				—			$	0.01
Diluted net earnings (loss) per Ordinary share				$	(0.34	)		$	(0.19	)		$	(0.26	)		$	(1.44	)			—				—				—			$	0.15

(*)	License revenues include non-cash revenues resulting from the termination of our former joint venture of $9.6 million, $6.8 million, $2.4 million, and $0.4 million for the three months ended March 27, 2005, June 26, 2005, September 25, 2005 and December 31, 2005, respectively.

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	Risk of Interest Rate Fluctuation

	Foreign Currency Exchange Risk

	Impact of Inflation

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Contractual and other obligations		Total				2006				2007				2008				2009				2010 and subsequent periods
		(in thousands)
Operating leases(1)		$	2,992			$	1,591			$	848			$	361			$	123			$	69
Software lease			4,901				1,823				1,811				1,267				—				—
Severance pay(2)			2,655				—				—				—				—				2,655
Total		$	10,548			$	3,414			$	2,659			$	1,628			$	123			$	2,724

(1)	Consists of an operating lease for our facilities in Netanya, Israel, and Santa Clara, California, and operating leases for vehicles.
(2)	Severance pay relates to accrued severance obligations to our Israeli employees as required under Israeli labor laws. These obligations are payable only upon the termination of the respective employee and may be reduced if the employee’s termination is voluntary. As of December 31, 2005, the severance pay funds were $2.1 million.

		Year ended
		December 28,				December 26,				December 31,
		2003				2004				2005
Net cash provided by operating activities		$	2,318			$	17,964			$	14,116
Net cash used in investing activities			(17,371	)			(20,376	)			(66,068	)
Net cash provided by financing activities			3,861				256				125,051
Increase (decrease) in cash and cash equivalents		$	(11,192	)		$	(2,156	)		$	73,099

	Operating activities

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	Investing activities

	Financing activities

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	•	Code flash. Code flash is typically used to store executable code, such as the operating system software of a cellular phone. One of our licensees is Spansion (formerly known as Fujitsu AMD Semiconductor LLC), the largest global vendor of code flash in 2004 with total sales of $2.4 billion representing 24.3% of the total code flash market, according to Web-Feet Research. In 2005, we derived license fees of $7.7 million from Spansion, which we believe relate primarily to sales of code flash memory devices.
	•	Data flash. Data flash is used for high density storage of information, such as in memory cards for digital cameras. One of our licensees targeting the data flash market is Infineon Technologies (with which we formerly had a joint venture with respect to data flash that we exited in 2004). According to Gartner, Infineon Technologies was the seventh largest vendor of semiconductors globally in 2005. In January 2004, Infineon Technologies launched its TwinFlash technology, which incorporates our NROM technology. Infineon Technologies is currently marketing 512 megabit and 1 gigabit data flash devices.
	•	Embedded flash. Embedded flash combines non-volatile memory and programmable logic on a single chip for use in applications such as smart cards. One of our licensees targeting the embedded flash market is Matsushita, one of the world’s largest vendors of consumer electric and electronic products and, according to Gartner, the 16th largest semiconductor manufacturer in 2005, with revenues of $3.8 billion from semiconductor sales. To date, we have derived limited revenues from Matsushita which have not constituted a significant part of our total revenues.

	Another one of our licensees in this segment is Sony Corporation, one of the world’s largest vendors of consumer electronic and electronic products. Gartner ranks Sony Corporation as the 15th largest

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	semiconductor manufacturer with revenues of $4.3 billion from semiconductor sales in 2005. To date, we have derived limited revenues from Sony Corporation, which have not constituted a significant portion of our total revenues.

	•	Serial flash. Serial flash is characterized as small, low-power flash memory that uses a serial interface for data access used in applications such as computer graphic cards, hard disk drives, cordless phones and set top boxes. We are targeting this market through our collaboration with Spansion, pursuant to which Spansion shares with us the profits from sales of agreed-upon serial flash products.

	•	ROM. Read Only Memory is programmed once during manufacture and cannot subsequently be reprogrammed by the user. As a result of this limitation, ROM-device sales have declined substantially in recent years.
	•	PROM. Programmable Read Only Memory is programmed once during manufacture and can then be reprogrammed once by the user. A major drawback to PROM devices is that they require special equipment to reprogram the PROM. As a result of this limitation, PROM has been discontinued.
	•	EPROM. In 1971, the first Erasable Programmable Read Only Memory device was introduced. EPROM devices can be reprogrammed by the user a limited number of times by removing the device from the circuit board and erasing it using ultraviolet light. As a result of this complexity of reprogramming, EPROM is rarely used today.
	•	EEPROM. Electrically Erasable Programmable Read Only Memory was introduced in 1983 and overcomes some of the limitations of EPROM because it can be reprogrammed by applying an electrical voltage. EEPROM is erased and reprogrammed at the individual cell level. While this results in high functionality which makes it well suited to particular applications, such as smart cards, EEPROM devices are generally less cost-effective and are slower to program and erase than flash memory devices.
	•	Flash. Flash memory was invented in 1984. Flash memory is the largest segment of the non-volatile memory market and is similar to EEPROM in that it can also be erased and reprogrammed repeatedly through the application of an electrical voltage. Unlike EEPROM, flash memory cells can be erased in blocks by a single action or “flash,” and unlike EEPROM, flash memory does not require two transistors per cell. This enables flash memory devices to be more cost-effective and to have faster program and erase speeds than EEPROM devices.

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	Flash Memory Applications

														Projected
										Projected				compound
										global				annual growth
						Global sales				sales in				rate from 2005
Segment		Characteristics		Applications		in 2005				2010				to 2010
						(millions)				(millions)
Code flash(1)		• Used to store executable code, such as operating system software of a device		• Communications products (e.g., cellular telephones)		$	8,040			$	11,723				7.8	%
		• Characterized by random access to stored information and fast read speeds		• Consumer electronics products (e.g., DVD players, computers, tv set-top boxes)
Data flash		• Used for high-density data storage		• Memory cards for digital cameras, USB flash drives and MP3 players		$	11,896			$	34,809				24.0	%
		• Characterized by sequential access and fast write speeds
Embedded flash		• Combines flash memory and programmable logic on a single chip		• Microcontroller embedded with memory (e.g., smart cards)		$	3,295	(2)		$	6,301	(2)			13.8	%
		• Characterized by fast access, low power consumption and increased security

(1)	Includes the serial flash market.
(2)	Excludes revenue attributable to the microcontroller, digital signal processor and/or programmable logic components of an embedded flash device.

	Trends in the Flash Memory Market

	•	Higher volumes and densities. According to Web-Feet Research, total demand measured in bits of information stored in code and data flash memory devices is expected to grow by 132.1% from 2005 to 2006, where one bit is the smallest unit of data stored with a value of either 0 or 1. This growth is a result of an increase in average bit density per device, representing the average number of bits

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		available in a memory device, or average bit density, of 79.2% for code flash and 46.5% for data flash from 2005 to 2006, according to Web-Feet Research.
	•	Demand for greater performance and reliability. Product manufacturers are demanding faster read and write speeds which allow a system’s microprocessor to access data and execute program code faster, the ability to read and modify stored information repeatedly without adversely impacting reliability, and the ability to retain stored information for an extended period. In addition, product manufacturers are requiring devices with lower power consumption to allow for longer operating times using the same power source and the ability to operate devices under extreme environmental conditions.
	•	Constant price pressure and demand for device shrink. At the same time as demand has increased for higher density and higher performance memory devices, the price for flash memory products, measured on a per bit basis, has decreased. According to Web-Feet Research, the average selling price per megabyte is forecasted to decline from 2005 to 2006 by 37.6% in a data flash device and by 41.0% in a code flash device. In order to achieve profitability, semiconductor manufacturers must continually reduce their unit and per bit costs by reducing the size of the individual transistors that make up a memory chip. The process of reducing the size of the individual transistor is commonly referred to as device shrink and results in an increase in the number of transistors per wafer.
	•	Greater design and manufacturing challenges. The demand for higher density and enhanced performance, at a reduced cost, has resulted in continual design and manufacturing challenges for semiconductor manufacturers. As a consequence, semiconductor manufacturers are continuously seeking advancements to existing technologies, mainly through migration to smaller manufacturing process geometries, and exploring new technologies and materials in order to address the demanding market requirements.

	•	Barriers to device shrink. Floating gate technology faces significant challenges in reducing cell size and packing cells into smaller spaces on the wafer, referred to as device shrink. As floating gate cell size is reduced, a thinner isolating layer may lead to poorer reliability due to potential leakage of charge from the floating gate. This is referred to as the problem of the “erratic bit” and is more prevalent at smaller cell sizes. Floating gate manufacturers, such as Samsung, have stated that they believe these limitations will become a substantial technology barrier to device shrink in the future.
	•	Complicated manufacturing process. Semiconductor manufacturing requires the replication onto a silicon wafer of a series of patterns contained on a glass slide, referred to as a mask, on which an integrated circuit’s design is laid out. Floating gate technology requires a high number of these replications, referred to as masking steps, which results in high manufacturing costs and a long manufacturing cycle, and may also result in lower yields. As cell size decreases, the need to move to more advanced manufacturing processes and to develop error-free masks has increased the cost of manufacturing floating gate devices.
	•	Different design and manufacturing process for each market segment. Floating gate devices require different cell and array architectures, and thus different manufacturing processes for each type of non-

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		volatile memory device. As a result, most manufacturers of non-volatile memory devices concentrate in a particular segment, such as code or data flash, due to the high cost and technical challenges associated with implementing different manufacturing processes.

	•	Increased storage capacity. Our NROM technology doubles the storage capacity of each memory cell by enabling the storage of two physically distinct and independent charges, each representing one bit of information, within a single memory cell. This significantly reduces the amount of silicon wafer required for each non-volatile memory device, resulting in a significant cost reduction to semiconductor manufacturers. In addition, our next generation NROM technology, “QUAD NROM”, which enables the storage of four bits per cell. We believe that our QUAD NROM technology will increase storage capacity and further lower the cost per bit.
	•	Device shrink. Due to a simpler cell architecture than floating gate technology, we believe that devices based on our NROM technology are easier to migrate to smaller manufacturing process geometries, enabling them to be highly scalable and allowing semiconductor manufacturers to continue to be cost competitive. To date, some of our licensees have sold devices based on our NROM technology down to 110 nanometer process geometries and are also sampling products based on 90 nanometer processes and one licensee has announced plans for products based on 65 nanometer processes. Based on our advanced research and development program, we are confident that further device shrink will be possible using our NROM technology.
	•	Simple, low cost manufacturing process. Non-volatile memory devices that incorporate our NROM technology require fewer masking and processing steps than floating gate devices. For example, Spansion has stated that its MirrorBit products, which incorporate our NROM technology, eliminate 10 percent of the total manufacturing steps and 40 percent of the most critical manufacturing steps, compared to code flash devices based on multi-level floating gate technology. The reduction in the number of manufacturing steps leads to higher yields, shorter silicon cycles and lowers overall manufacturing costs for devices based on our NROM technology.
	•	High performance and reliability. Each cell in a device incorporating our NROM technology stores the trapped charge in a non-conducting material, thereby preventing the charge from moving within the trapping layer and “leaking” out through a point defect. Such point defects may result in device failure for floating gate device. In addition, the relatively thick oxide layers surrounding the trapping layer of the NROM cell prevent the trapped charge from leaking-out of the cell. This enhances the reliability of the NROM cells at smaller process geometries when compared to floating gate devices. A reliability study conducted by Spansion in November 2002 determined that its MirrorBit products,

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		which incorporate our NROM technology, exhibit at least the same level of reliability and data retention as its comparable floating gate products.
	•	Same platform for all primary segments of non-volatile memory market. In contrast to floating gate technology, where each segment of the non-volatile memory market requires a different floating gate device structure, our NROM technology uses the same manufacturing process, and cell and array architecture for all primary segments of the non-volatile memory market, such as code, data, and embedded flash. This allows us to leverage our research and development across all segments and allows our licensees to compete in all segments without the need for separate manufacturing lines for each segment.

	•	Accelerate implementation of NROM technology by our licensees. We seek to accelerate implementation of our NROM technology in a broad range of our licensees’ products and reduce their time to market by providing them with design and product development services. In particular, our services are designed to enable our licensees to incorporate our NROM technology into their products using their existing manufacturing facilities. For example, as of the date of this prospectus, Infineon Technologies offers 512 megabit and 1 gigabit data flash devices incorporating our NROM technology.
	•	Continue to direct licensing efforts of our NROM technology at market-leaders. We believe that our NROM technology will appeal to semiconductor manufacturers in all segments of the non-volatile memory market because it allows them to be more competitive and potentially address segments in which they are not currently active. We intend to continue licensing our NROM technology selectively to market leaders. Due to the concentrated nature of the code and data flash markets, we believe that the addition of any single licensee could significantly impact the penetration of our NROM technology and provide a future source of licensing revenues. For example, we recently signed a license agreement with Semiconductor Manufacturing International Corporation. We believe that our licensing

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		strategy enables us to achieve maximum market penetration while maintaining low capital requirements and strong gross margins.
	•	Continue to innovate. We believe that we can further develop and enhance our NROM technology. For example, we have provided engineering samples to several of our licensees of a product implementing four bits per cell using our QUAD NROM technology. We also have programs with several of our licensees implementing our QUAD NROM technology. We believe that our QUAD NROM technology is currently the only technology that is suited to mass production of four-bit-per-cell devices.
	•	Enhance our existing technology portfolio. We believe that our strong patent portfolio and intellectual property position, with over 65 issued U.S. patents (including 10 co-owned U.S. patents) and seven non-U.S. patents, and over 55 pending U.S. patent applications and over 100 pending non-U.S. patent applications, will allow us to maintain our competitive position. We are committed to investing in research and development and to continuing to expand and broaden our patent portfolio in key jurisdictions. For example, we are currently developing a multi-level-cell device based on our NROM technology and we are developing technology that will permit portable electronic devices to operate with lower power consumption, allowing for longer operating times.

	Infineon Technologies

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	Macronix International Co., Ltd.

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	Matsushita Electric Industrial Co., Ltd.

	Semiconductor Manufacturing International Corporation (SMIC)

	Sony Corporation

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	Spansion LLC

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	Tower Semiconductor Ltd.

	Floating Gate Devices

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	NROM Devices

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	•	fast programming methodologies in all flash memory segments, with particular focus on the data flash segment;
	•	smart programming algorithms in our QUAD NROM architecture, as well as in the code flash and EEPROM segments; and
	•	a single device containing a combination of data flash, code flash and EEPROM.

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	•	Improving the functionality and features of our NROM technology. We, together with our licensees, seek to develop innovative solutions based on our NROM technology to maintain our advantage. We are developing our QUAD NROM technology that enables storage of four bits per cell with a few of our licensees.
	•	Services for licensees. We work closely with our licensees to assist them in incorporating our NROM technology into their products. We are currently working with licensees to develop advanced manufacturing technologies for products incorporating our NROM technology using smaller process geometries.

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		December 31,				December 28,				December 26,				December 31,
Department		2002				2003				2004				2005
Research and development(1)(2)			94				121				165				206
Sales and marketing			4				9				9				12
Management and administration			5				7				11				18
Total			103				137				185				236

(1)	Research and development personnel are engaged in internal research and development efforts and in providing design and product development services to our licensees.
(2)	Includes employees temporarily loaned to our former joint venture, Infineon Technologies Flash in 2003 and 2004.

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Name		Age				Position
Executive Officers
Dr. Boaz Eitan			57			Chief Executive Officer, Chairman and Director
Kobi Rozengarten			49			President and Director
Igal Shany			34			Chief Financial Officer
Ramy Langer			52			Vice President — Business Development
Eduardo Maayan			45			Vice President — Product Development
Dr. Meir Janai			58			Vice President — Quality and Reliability
Dr. Guy Cohen			44			Vice President — Technology Development and Productization
Directors
Kenneth Levy(1)(3)			62			Director
Matty Karp(1)(2)			55			Director
Dr. Shlomo Kalish(1)(4)			53			Director
Yossi Sela(1)(3)			53			Director
George Hervey(1)(2)(5)			59			Director
Ida Keidar-Malits(1)(2)(3)(5)			58			Director

(1)	Independent director under The Nasdaq National Market rules
(2)	Member of our audit committee
(3)	Member of our compensation, nominating and governance committee
(4)	Mr. Kalish will cease to be a director following the 2006 annual general meeting of shareholders at which time his term as a director will expire
(5)	Outside director under the Israeli Companies Law

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	Qualifications of Outside Directors

	•	an employment relationship;
	•	a business or professional relationship maintained on a regular basis;
	•	control; and
	•	service as an office holder, excluding service as a director in a private company prior to the first offering of its shares to the public if such director was appointed as a director of the private company in order to serve as an outside director following the public offering.

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	Election of Outside Directors

	•	the majority of shares voted at the meeting (not including abstentions), including at least one-third of the shares of non-controlling shareholders voted at the meeting, vote in favor of the election of the outside director; or
	•	the total number of shares held by non-controlling shareholders and voted against the election of the outside director does not exceed one percent of the aggregate voting rights in the company.

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	Nasdaq Requirements

	Companies Law Requirements

	•	chairman of the board of directors;
	•	general manager;
	•	chief executive officer;
	•	controlling shareholder; and
	•	any director employed by the company or who provides services to the company on a regular basis.

	Nasdaq Requirements

	Approval of Transactions with Office Holders and Controlling Shareholders

	Audit Committee Role

	•	retaining and terminating the company’s independent accountants, subject to shareholder ratification;
	•	pre-approval of audit and non-audit services provided by the independent accountants; and
	•	approval of transactions with office holders and controlling shareholders, as described above, and other related-party transactions.

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	•	determining the compensation of our Chief Executive Officer and other executive officers;
	•	granting options to our employees and the employees of our subsidiaries;
	•	recommending candidates for nomination as members of our board of directors; and
	•	developing and recommending to the board corporate governance guidelines and a code of business ethics and conduct in accordance with applicable laws.

	Fiduciary Duties of Office Holders

	•	information on the appropriateness of a given action brought for his or her approval or performed by virtue of his or her position; and
	•	all other important information pertaining to these actions.

	•	refrain from any conflict of interest between the performance of his or her duties in the company and his or her personal affairs;

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	•	refrain from any activity that is competitive with the company;
	•	refrain from exploiting any business opportunity of the company to receive a personal gain for himself or herself or others; and
	•	disclose to the company any information or documents relating to a company’s affairs which the office holder received as a result of his or her position as an office holder.

	Disclosure of Personal Interests of an Office Holder

	•	the office holder’s spouse, siblings, parents, grandparents, descendants, spouse’s descendants and the spouses of any of these people; or
	•	any corporation in which the office holder is a 5.0% or greater shareholder, director or general manager or in which he has the right to appoint at least one director or the general manager.

	•	other than in the ordinary course of business;
	•	that is not on market terms; or
	•	that is likely to have a material impact on the company’s profitability, assets or liabilities.

	Disclosure of Personal Interests of a Controlling Shareholder

	•	at least one-third of the shares owned by shareholders who have no personal interest in the transaction and are voted, in person, by proxy or by written ballot, at the meeting must be voted in favor of approving the transaction; or

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	•	the shareholders who have no personal interest in the transaction who vote against the transaction may not represent more than 1.0% of the voting rights in the company.

	•	an amendment to the Articles of Association;
	•	an increase in the company’s authorized share capital;
	•	a merger; and
	•	approval of related party transactions that require shareholder approval.

	•	reasonable litigation expenses, including attorneys’ fees, incurred by the office holder as a result of an investigation or proceeding instituted against him or her by an authority authorized to conduct such investigation or proceeding, provided that (i) no indictment was filed against such office holder as a result of such investigation or proceeding; and (ii) no financial liability, such as a criminal penalty, was imposed upon him or her as a substitute for the criminal proceeding as a result of such investigation or proceeding or, if such financial liability was imposed, it was imposed with respect to an offense that does not require proof of criminal intent; and
	•	reasonable litigation expenses, including attorneys’ fees, incurred by the office holder or imposed by a court in proceedings instituted against him or her by the company, on its behalf or by a third party or in connection with criminal proceedings in which the office holder was acquitted or as a result of a conviction for a crime that does not require proof of criminal intent.

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	•	a breach of duty of loyalty to the company, to the extent that the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company;
	•	a breach of duty of care to the company or to a third party, including a breach arising out of the negligent conduct of the office holder; and
	•	a financial liability imposed on the office holder in favor of a third party.

	•	a breach of duty of loyalty, except to the extent that the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company;
	•	a breach of duty of care committed intentionally or recklessly, excluding a breach arising out of the negligent conduct of the office holder;
	•	an act or omission committed with intent to derive illegal personal benefit; or
	•	a fine levied against the office holder.

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	2003 Share Option Plan

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	2001 Share Option Plan

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	1997 Share Option Plan

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	Demand registration rights

	•	before we become eligible under applicable securities laws to file a registration statement on Form F-3, which will not be until at least 12 months after the closing of our initial public offering, we are required to effect up to two such registrations, but only if the minimum aggregate offering price of the shares to be registered, net of underwriting discounts and commissions, exceeds $5.0 million; and
	•	after we become eligible under applicable securities laws to file a registration statement on Form F-3, we are required to effect an unlimited number of registrations, but only (1) if the minimum aggregate offering price of the shares to be registered, net of underwriting discounts and commissions, exceeds $500,000, and (2) if we have not effected an offering pursuant to a demand registration or a “piggy back registration” within the preceding six-month period in which all requesting shareholders were able to sell the number of ordinary shares they requested to include.

	Piggyback registration rights

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	Cutback

	Termination

	Expenses

	Employment agreements

	Loan agreements

Principal

and accrued

interest as of

Date of

Nature of

December 31,

Name

loan

Terms

transaction

2005

Repayment

Eduardo Maayan Vice President — Product Development

June 2001

Loan in the amount of $125,000 bearing interest which accrues annually at a rate of 4% plus applicable Israeli value added tax.

$

154,842

Will be repaid following the completion of this offering.*

*	In addition, at our option, the loan is repayable prior to a merger or acquisition or sale of substantially all of our assets or any similar transactions.

	Exculpation, indemnification and insurance

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	•	each person who we know beneficially owns 5.0% or more of the outstanding ordinary shares;
	•	each selling shareholder in this offering;
	•	each of our directors individually;
	•	each of our executive officers individually; and
	•	all of our directors and executive officers as a group.

																						Number of
																						ordinary
																						shares being				Percentage of
		Before offering												After offering								offered				shares owned
										Number of												pursuant to				assuming
		Number of				Percentage				ordinary				Number of				Percentage				an option				exercise of an
		shares				of shares				shares				shares				of shares				granted to				option granted
		beneficially				beneficially				being				beneficially				beneficially				the				to the
Name and address		owned				owned				offered				owned				owned				underwriters				underwriters
Principal and selling shareholders:
Dr. Boaz Eitan(l)			11,527,415				38.9	%			425,000				11,102,415				36.5	%			75,000				36.1	%
IDB Holding Corporation Ltd(2)			2,833,859				9.6				125,000				2,708,859				8.9				—				8.9
Entities affiliated with Gemini Israel Funds(3)			2,027,957				6.8				811,183				1,216,774				4.0				—				4.0
Entities affiliated with Concord Ventures(4)			1,674,940				5.7				669,975				1,004,965				3.3				—				3.3
Argos Capital Appreciation Master Fund LP(5)			1,589,891				5.4				—				1,589,891				5.2				—				5.2
FMR Corp.			1,499,903				5.1				—				1,499,903				4.9				—				4.9
Spansion LLC			938,470				3.2				638,470				300,000				1.0				300,000				—
Morgan Stanley Dean Witter Equity Funding Inc.(6)			167,032				*				119,532				47,500				*				47,500				—
Other shareholders(17)			227,509				*				177,526				49,983				*				35,834				*
Employees, former employees and consultants			151,243				*				85,843				65,400				*				19,174				*

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																						Number of
																						ordinary
																						shares being				Percentage of
		Before offering												After offering								offered				shares owned
										Number of												pursuant to				assuming
		Number of				Percentage				ordinary				Number of				Percentage				an option				exercise of an
		shares				of shares				shares				shares				of shares				granted to				option granted
		beneficially				beneficially				being				beneficially				beneficially				the				to the
Name and address		owned				owned				offered				owned				owned				underwriters				underwriters
Directors and executive officers:
Dr. Boaz Eitan(l)			11,527,415				38.9	%			425,000				11,102,415				36.5	%			75,000				36.1	%
Kobi Rozengarten(7)			550,610				1.9				122,613				427,997				1.4				27,387				1.3
Ramy Langer(8)			90,000				*				73,568				16,432				*				16,432				—
Igal Shany(9)			86,000				*				70,297				15,703				*				15,703				—
Eduarado Maayan(10)			147,000				*				120,161				26,839				*				26,839				—
Dr. Meir Janai(11)			84,000				*				22,888				61,112				*				5,112				*
Dr. Guy Cohen			22,400				*				13,733				8,667				*				3,067				*
Kenneth Levy(12)			101,333				*				—				101,333				*				—				*
Matty Karp(13)			1,703,273				5.8				669,975				1,033,298				3.4				—				3.4
Dr. Shlomo Kalish(14)			28,333				*				—				28,333				*				—				*
Yossi Sela(15)			2,056,290				6.9				815,542				1,240,748				4.1				974				4.1
George Hervey(16)			30,000				*				—				30,000				*				—				*
All directors and executive officers as a group			16,426,654				55.5	%			2,333,777				14,092,877				45.9	%			170,514				45.1	%

	*	Less than 1.0%

	(1)	Based on a Schedule 13G filed on February 14, 2006 and on other information provided to us, the number of shares beneficially owned before this offering consists of 5,503,774 ordinary shares and options to purchase 22,523 ordinary shares held directly by Dr. Eitan, 1,905,780 ordinary shares held by Adi & Gal Ltd., 1,429,336 ordinary shares held by Sharon & Yoav Ltd., 1,200,000 ordinary shares held by Shikmat Eitan Ltd., 952,892 ordinary shares held by Yonatan & Maya Ltd., 476,444 ordinary shares held by Batya and Yoseph Ltd. and 10,000 ordinary shares held by MIRAGE BVBA. Each of these entities is jointly owned and controlled by Dr. Eitan and his wife. This number also includes 26,666 ordinary shares owned by Dr. Eitan’s wife. Dr. Eitan disclaims beneficial ownership of the shares held by the foregoing except to the extent of his pecuniary interest therein.
	(2)	Based on a Schedule 13G filed on February 6, 2006 and on other information provided to us, the number of shares beneficially owned before this offering consists of 2,833,859 ordinary shares held by Clal Electronic Industries Ltd. Clal Electronic Industries is indirectly controlled by IDB Holding Corporation Ltd. (“IDBH”). IDBH is a public company traded on the Tel Aviv Stock Exchange. Approximately 52.0% of the outstanding share capital of IDBH is owned by a group comprised of (i) Ganden Investments I.D.B. Ltd., or Ganden, a private Israeli company controlled by Nochi Dankner and his sister, Shelly Bergman, which holds 31.02% of the equity of and voting power in IDBH; (ii) Manor Investments-IDB Ltd., or “Manor,” a private Israeli company controlled by Ruth Manor, which holds 10.34% of the equity of and voting power in IDBH; and (iii) Avraham Livnat Investments (2002) Ltd., or Livnat, a private Israeli company controlled by Avraham Livnat, which holds 10.34% of the equity of and voting power in IDBH. Ganden, Manor and Livnat, owning in the aggregate approximately 51.7% of the equity of and voting power in IDBH, entered into a Shareholders Agreement relating, among other things, to their joint control of IDBH, the term of which is until May 19, 2023. In addition, Shelly Bergman beneficially holds approximately 7.3% of the equity of and voting power in IDBH. The address of Nochi Dankner is The Triangular Tower, 44th Floor, 3 Azrieli Center, Tel Aviv 67023, Israel. The address of Shelly Bergman is 12 Recanati Street, Ramat Aviv

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		Gimmel, Tel Aviv, Israel. The address of Ruth Manor is 26 Hagderot Street, Savyon, Israel. The address of Mr. Avraham Livnat is Taavura Junction, Ramle, Israel. These individuals disclaim beneficial ownership of the shares owned by the foregoing entities except to the extent of their pecuniary interest therein.

	(3)	Based on a Schedule 13G filed on February 10, 2006 and on other information provided to us, the number of shares beneficially owned before this offering consists of 816,095 ordinary shares held by Gemini Israel II Parallel Fund L.P., 610,686 ordinary shares held by Gemini Israel II L.P., 334,628 ordinary shares held by Gemini Israel III L.P., 77,844 ordinary shares held by Advent PGGM Gemini L.P., 61,009 ordinary shares held by Gemini Israel III Parallel Fund L.P., 15,790 ordinary shares held by Gemini Partner Investors L.P. and 111,905 ordinary shares held by Gemini Israel III Overflow Fund L.P. Yossi Sela is managing partner and a shareholder of Gemini Israel Funds Ltd., the sole general partner or the sole general partner of the general partner of Gemini Israel II L.P., Gemini Israel II Parallel Fund L.P., Advent PGGM Gemini L.P., Gemini Partner Investors L.P., Gemini Israel III L.P. and Gemini Israel III Parallel Fund L.P. The board of directors of Gemini Israel Funds Ltd. has sole investment control with respect to these entities and is comprised of Steve Kahn, Amram Rasiel, Dr. A.I. (Ed) Mlavsky, Yossi Sela and David Cohen. These individuals share voting power over the shares and or options held by the Gemini entities and may be deemed to be the beneficial owners of the securities held thereby. Each individual disclaims beneficial ownership of these securities except to the extent of his pecuniary interest therein. The address of the Gemini entities is 9 Hamenofim Street, Herzliya Pituach, Israel. The number of ordinary shares being offered consists of 326,438 shares by Gemini Israel II Parallel Fund L.P., 244,274 shares by Gemini Israel II L.P., 31,138 shares by Advent PGGM Gemini L.P., 6,316 shares by Gemini Partners Investors L.P., 133,851 shares by Gemini Israel III LP, 44,762 shares by Gemini Israel III Overflow Fund LP and 24,404 shares by Gemini Israel III Parallel Fund LP.
	(4)	Based on a Schedule 13G filed on February 14, 2006 and on other information provided to us, the number of ordinary shares beneficially owned before this offering consists of 1,217,906 ordinary shares held by K.T. Concord Venture Fund (Cayman) L.P. and 243,463 ordinary shares held by K.T. Concord Venture Fund (Israel) L.P. and 213,571 ordinary shares held by Concord Venture I Annex-B L.P. Matty Karp is managing partner and a shareholder of Concord K.T. Investment Partner Ltd., which is the sole general partner of K.T. Concord Venture Fund (Cayman) L.P., K.T. Concord Venture Fund (Israel) L.P., and Concord Venture I Annex-B L.P. As a result Matty Karp may be deemed to be the beneficial owner of the securities held thereby. Matty Karp disclaims beneficial ownership of these securities except to the extent of his pecuniary interest therein. The address of Concord Ventures is 85 Medinat Hayehudim Street, 7th Floor, Herzliyah, Israel. The number of ordinary shares being offered consists of 487,162 shares by K.T. Concord Venture Fund (Cayman) L.P., 85,428 shares by Concord Venture I Annex-B L.P. and 97,385 shares by K.T. Concord Venture Fund (Israel) L.P.
	(5)	Based on a Schedule 13G filed on January 31, 2006 and on other information provided to us, the number of ordinary shares beneficially owned before this offering consists of 1,589,891 ordinary shares. The general partner of Argos Appreciation Master Fund LP is Argo Capital Management, Inc. which is wholly-owned by Ephraim Gildor. The address of Argos Capital Appreciation Master Fund LP is 211 West 61st Street, New York, New York.
	(6)	Morgan Stanley Dean Witter Equity Funding, Inc., is an affiliate of a registered-broker dealer and may be deemed to be an underwriter. The ordinary shares were acquired in the ordinary course of the selling shareholder’s investment business and not for the purpose of resale or distribution. Morgan Stanley Dean Witter Equity Funding, Inc. has not participated in the distribution of the shares on our behalf.
	(7)	The number of ordinary shares beneficially owned before this offering consists of 493,610 ordinary shares and options to purchase 57,000 ordinary shares.
	(8)	The number of ordinary shares beneficially owned before this offering consists of options to purchase 90,000 ordinary shares.

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	(9)	The number of ordinary shares beneficially owned before this offering consists of options to purchase 86,000 ordinary shares.

(10)	The number of ordinary shares beneficially owned before this offering consists of options to purchase 147,000 ordinary shares.
(11)	The number of ordinary shares beneficially owned before this offering consists of options to purchase 84,000 ordinary shares.
(12)	The number of ordinary shares beneficially owned before this offering consists of 83,000 ordinary shares and options to purchase 18,333 ordinary shares.
(13)	Based on a Schedule 13G filed on February 14, 2006 and on other information provided to us, the number of shares beneficially owned before this offering consists of 1,217,906 ordinary shares held by K.T. Concord Venture Fund (Cayman) L.P. and 243,463 ordinary shares held by K.T. Concord Venture Fund (Israel) L.P. and 213,571 ordinary shares held by Concord Venture I Annex-B L.P. and options to purchase 28,333 ordinary shares held by Mr. Karp. Mr. Karp is a managing partner of Concord Ventures and, by virtue of his position, may be deemed to have voting and investment power, and thus beneficial ownership, with respect to the shares held by these entities. Mr. Karp disclaims such beneficial ownership except to the extent of his pecuniary interest therein.
(14)	The number of ordinary shares beneficially owned before this offering consists of options to purchase 28,333 ordinary shares.
(15)	Based on a Schedule 13G filed on February 9, 2006 and on other information provided to us, the number of ordinary shares beneficially owned before this offering consists of 2,027,957 ordinary shares held by the Gemini entities and options to purchase 28,333 ordinary shares held by Mr. Sela. Mr. Sela is a managing partner of Gemini Israel Funds and, by virtue of his position, may be deemed to have voting and investment power, and thus beneficial ownership, with respect to the shares held by the Gemini entities. Mr. Sela disclaims such beneficial ownership except to the extent of his pecuniary interest therein.
(16)	The number of ordinary shares beneficially owned before this offering consists of options to purchase 30,000 ordinary shares.
(17)	Includes Poalim Capital Markets Ltd., Leon Recanti, Avhshalom Hershocovich, Lorentech Technologies Ltd., Doron Latzer, Zeev Pearl, Originators Investment Plan L.P. and Samro N.V. Poalim Capital Markets Ltd. is an affiliate of a registered-broker dealer and may be deemed to be an underwriter. The ordinary shares held by Poalim Capital Markets Ltd. were acquired in the ordinary course of the selling shareholder’s investment business and not for the purpose of resale or distribution. Poalim Capital Markets Ltd. has not participated in the distribution of the shares on our behalf.

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	•	prior to that date, the board of directors of the corporation approved either the business combination or the transaction that resulted in the shareholder becoming an interested shareholder; or
	•	upon consummation of the transaction that resulted in the shareholder becoming an interested shareholder, the interested shareholder owned at least 75% of the voting share of the corporation outstanding at the time the transaction commenced, excluding, for purposes of determining the number of shares outstanding, unissued shares of the company which may be issued pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise.

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	•	any merger or consolidation involving the corporation and the interested shareholder;
	•	any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested shareholder;
	•	subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any shares of the corporation to the interested shareholder;
	•	any transaction involving the corporation that has the effect of increasing the proportionate share of the shares of any class or series of the corporation beneficially owned by the interested shareholder; or
	•	the receipt by the interested shareholder or the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation.

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	•	approximately 1.8 million shares beginning on May 8, 2006, unless earlier released by the underwriters of our initial public offering;
	•	approximately 16.8 million shares beginning 90 days after the date of this prospectus, approximately 13.7 million of which are subject to volume limitations under Rule 144, unless earlier released by the underwriters of this offering; and
	•	approximately 1.6 million shares more than 90 days after the date of this prospectus pursuant to lock-up agreements with us or other restrictions.

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	•	1.0% of the number of ordinary shares then outstanding, which is expected to equal approximately 304,180 ordinary shares immediately after this offering; or
	•	the average weekly trading volume of the ordinary shares on The Nasdaq National Market during the four calendar weeks preceding the filing of a notice on Form 144 in connection with the sale.

	•	who is not considered to have been one of our affiliates at any time during the 90 days preceding a sale; and
	•	who has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner other than an affiliate

	•	by persons other than affiliates subject only to the manner of sale provisions of Rule 144; and
	•	by affiliates under Rule 144 without compliance with its one year minimum holding period requirement.

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	General

	Taxation of Companies

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	•	deduction of purchases of know-how and patents over an eight-year period for tax purposes;
	•	expenses involved with the issuance and listing of shares on The Tel Aviv Stock Exchange or on a recognized stock market outside of Israel, are deductible over a three-year period;
	•	the right to elect, under specified conditions, to file a consolidated tax return with other related Israeli industrial companies; and
	•	accelerated depreciation rates on equipment and buildings.

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	•	its major activity is in the field of biotechnology or nano-technology;
	•	its revenues during the applicable tax year from any single market (i.e. country or a separate customs territory) do not exceed 75% of the privileged enterprise’s aggregate revenues during such year; or
	•	25% or more of its revenues during the applicable tax year are generated from sales into a single market (i.e. country or a separate customs territory) with a population of at least 12 million residents.

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	•	When the value of a company’s equity, as calculated under the Inflationary Adjustments Law, exceeds the depreciated cost of its fixed assets (as defined in the Inflationary Adjustments Law), a deduction from taxable income is permitted equal to the excess multiplied by the applicable annual rate of inflation. The maximum deduction permitted in any single tax year is 70% of taxable income, with the unused portion permitted to be carried forward, linked to the increase in the consumer price index.
	•	If the depreciated cost of the company’s fixed assets exceeds its equity, then the excess multiplied by the applicable annual rate of inflation is added to taxable income.
	•	Subject to certain limitations, depreciation deductions on fixed assets and losses carried forward are adjusted for inflation based on the increase in the Israeli consumer price index.

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	Taxation of our Shareholders

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	•	financial institutions or insurance companies;
	•	real estate investment trusts, regulated investment companies or grantor trusts;
	•	dealers or traders in securities or currencies;
	•	tax-exempt entities;
	•	persons that received our shares as compensation for the performance of services;
	•	persons that will hold our shares as part of a “hedging” or “conversion” transaction or as a position in a “straddle” for United States federal income tax purposes;
	•	certain former citizens or residents of the United States;
	•	persons whose “functional currency” is not the United States dollar; or
	•	holders that own directly, indirectly or through attribution 10% or more, of the voting power or value, of our shares.

	•	a citizen or resident of the United States;
	•	a partnership or corporation created or organized in or under the laws of the United States or any state thereof, including the District of Columbia;
	•	an estate the income of which is subject to United States federal income taxation regardless of its source; or
	•	a trust if such trust has validly elected to be treated as a United States person for United States federal income tax purposes or if (1) a court within the United States is able to exercise primary supervision

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		over its administration and (2) one or more United States persons have the authority to control all of the substantial decisions of such trust.

	Distributions

	Sale or Exchange of Ordinary Shares

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	•	such gain is effectively connected with your conduct of a trade or business in the United States; or
	•	you are an individual and have been present in the United States for 183 days or more in the taxable year of such sale or exchange and certain other conditions are met.

	Passive Foreign Investment Company Considerations

	•	at least 75 percent of its gross income is “passive income”; or
	•	at least 50 percent of the average value of its gross assets is attributable to assets that produce “passive income” or are held for the production of passive income.

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	Backup Withholding Tax and Information Reporting Requirements

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			Number of
Underwriters			Shares
Lehman Brothers Inc.				1,528,059
Citigroup Global Markets Inc.				764,029
Deutsche Bank Securities Inc.				553,921
CIBC World Markets Corp.				401,115
William Blair & Company, L.L.C.				191,008
Raymond James & Associates, Inc.				191,008
WR Hambrecht + Co., LLC				191,008
	Total			3,820,148

	•	the obligation to purchase all of the ordinary shares offered hereby, if any of the ordinary shares are purchased;
	•	the representations and warranties made by the selling shareholders and us to the underwriters are true;
	•	there is no material change in the financial markets; and
	•	we deliver customary closing documents to the underwriters.

		Paid by Saifun								Paid by Selling Shareholders
		No Exercise				Full Exercise				No Exercise				Full Exercise
Per share		$	1.603				1.603				1.603				1.603
Total		$	545,020				545,020				5,578,677				6,497,232

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	•	during the last 17 days of the 90-day restricted period we issue an earnings release or announces material news or a material event; or
	•	prior to the expiration of the 90-day restricted period, we announce that the Company will release earnings results during the 16-day period beginning on the last day of the 90-day period;

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	(1) to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities;
	(2) to any legal entity which has two or more of (i) an average of at least 250 employees during the last financial year; (ii) a total balance sheet of more than €43,000,000; and (iii) an annual net turnover of more than € 50,000,000, as shown in its last annual or consolidated accounts; or
	(3) in any other circumstances which do not require the publication by the issuer of a prospectus pursuant to Article 3 of the Prospectus Directive.

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	(1) made by an investment firm, bank or financial intermediary permitted to conduct such activities in the Republic of Italy in accordance with Legislative Decree No. 385 of September 1, 1993 (Decree No. 385), Legislative Decree No. 58 of February 24, 1998, CONSOB Regulation No. 11971 or May 14, 1999 and any other applicable laws and regulations;
	(2) made (i) to professional investors (operatori qualificati) as defined in Article 31, second paragraph of CONSOB Regulation No. 11422 of July 1, 1998, as amended, or Regulation No. 11522, (ii) in circumstances where an exemption from the rules governing solicitations to the public at large applies pursuant to Article 100 of Legislative Decree No. 58 of February 24, 1998 and Article 33, first paragraph, of CONSOB Regulation No. 11971 of May 14, 1999, as amended or (iii) to persons located in the Republic of Italy who submit an unsolicited request to purchase shares; and
	(3) in compliance with all relevant Italian securities and tax laws and regulations.

	(1) it has not offered or sold and, prior to the expiry of a period of six months from the closing date, will not offer or sell any shares included in this offering to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995;
	(2) it has only communicated, caused to be communicated and will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000, or FSMA) received by it in connection with the issue or sale of any shares included in this offering in circumstances in which section 21(1) of the FSMA does not apply to the Issuer; and
	(3) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the shares included in this offering in, from or otherwise involving the United Kingdom.

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	•	Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum.
	•	A short position involves a sale by the underwriters of ordinary shares in excess of the number of ordinary shares the underwriters are obligated to purchase in the offering, which creates the syndicate short position. This short position may be either a covered short position or a naked short position. In a covered short position, the number of shares involved in the sales made by the underwriters in excess of the number of shares they are obligated to purchase is not greater than the number of shares that they may purchase by exercising their option to purchase additional shares. In a naked short position, the number of shares involved is greater than the number of shares in their option to purchase additional shares. The underwriters may close out any short position by either exercising their option to purchase additional shares and/or purchasing shares in the open market. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through their option to purchase additional shares. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering.
	•	Syndicate covering transactions involve purchases of the ordinary shares in the open market after the distribution has been completed in order to cover syndicate short positions.
	•	Penalty bids permit the representative to reclaim a selling concession from a syndicate member when the ordinary shares originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions.

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	•	the judgments are obtained after due process before a court of competent jurisdiction, according to the laws of the state in which the judgment is given and the rules of private international law currently prevailing in Israel;
	•	the foreign court is not prohibited by law from enforcing judgments of Israeli courts;
	•	adequate service of process has been effected and the defendant has had a reasonable opportunity to be heard and to present his or her evidence;
	•	the judgments and the enforcement of the civil liabilities are not contrary to the law, public policy, security or sovereignty of the State of Israel;
	•	the judgments were not obtained by fraud and do not conflict with any other valid judgment in the same matter between the same parties;
	•	an action between the same parties in the same matter is not pending in any Israeli court at the time the lawsuit is instituted in the foreign court; and
	•	the obligations under the judgment are enforceable according to the laws of the State of Israel.

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			Page
SAIFUN SEMICONDUCTORS LTD. AND ITS SUBSIDIARIES
	Consolidated Financial Statements
	Report of Independent Registered Public Accounting Firm			F-2
	Consolidated Balance Sheets as of December 26, 2004 and December 31, 2005			F-3
	Consolidated Statements of Operations for the years ended December 28, 2003, December 26, 2004 and December 31, 2005			F-5
	Statements of Changes in Shareholders’ Equity for the years ended December 28, 2003, December 26, 2004 and December 31, 2005			F-6
	Consolidated Statements of Cash Flows for the years ended December 28, 2003, December 26, 2004 and December 31, 2005			F-8
	Notes to the Consolidated Financial Statements			F-9
INFINEON TECHNOLOGIES FLASH LTD.
	Financial Statements
	Report of Independent Registered Public Accounting Firm			F-33
	Net Assets in Liquidation as of December 23, 2004			F-34
	Statements of Operations for the year ended December 31, 2003 and for the period from January 1, 2004 to December 23, 2004			F-35
	Statement of Changes in Net Assets in Liquidation for the period from December 23, 2004 to December 23, 2004			F-36
	Statements of Changes in Shareholders’ Equity for the years ended December 31, 2003 and for the period from January 1, 2004 to December 23, 2004			F-37
	Statements of Cash Flows for the year ended December 31, 2003 and for the period from January 1, 2004 to December 23, 2004			F-38
	Notes to the Financial Statements			F-39
INFINEON TECHNOLOGIES FLASH GMBH & CO. KG, DRESDEN
	Financial Statements
	Report of Independent Registered Public Accounting Firm			F-52
	Statements of Operations for the period ended December 23, 2004 and the year ended December 26, 2003			F-53
	Balance Sheet as of December 23, 2004			F-54
	Statement of Partners’ Equity for the period ended December 23, 2004 and the year ended December 26, 2003			F-55
	Statements of Cash Flows for the period ended December 23, 2004 and the year ended December 26, 2003			F-56
	Notes to the Financial Statements			F-57

F-1

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	/s/ Kost Forer Gabbay & Kaisierer
	KOST FORER GABBAY & KASIERER
	A Member of Ernst & Young Global

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							December 26,				December 31,
			Note				2004*				2005
ASSETS
CURRENT ASSETS:
	Cash and cash equivalents						$	27,228			$	100,327
	Short-term investments							161				—
	Held-to-maturity marketable securities			3				14,662				75,501
	Trade receivables							7,471				2,663
	Loans to employees			5				—				613
	Other accounts receivable and prepaid expenses							880				2,181
	Total assets attributed to discontinued operations			9				5,151				212
Total current assets								55,553				181,497
Held-to-maturity marketable securities				3				2,403				5,995
Property and equipment, net				6				1,910				2,668
Loans to employees				5				2,714				1,097
Severance pay fund								1,549				2,122
Lease deposits								245				289
Other assets				4				560				70
								9,381				12,241
Total assets							$	64,934			$	193,738

*	Reclassified, see Note 9.

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								December 26,				December 31,
				Note				2004*				2005
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
	Trade payables							$	1,412			$	1,165
	Accrued expenses and other liabilities				7				5,548				9,913
	Deferred revenues				4				47,222				3,786
	Total liabilities attributed to discontinued operations				9				3,804				146
Total current liabilities									57,986				15,010
ACCRUED SEVERANCE PAY									2,010				2,655
COMMITMENTS AND CONTINGENT LIABILITIES					8
SHAREHOLDERS’ EQUITY:					10
	Share capital —
		Class A Convertible Preferred shares of NIS 0.01 par value: Authorized: 4,000,000 and zero shares at December 26, 2004 and December 31, 2005, respectively; Issued and outstanding: 2,288,092 and zero shares at December 26, 2004 and December 31, 2005, respectively							5				—
		Class B Convertible Preferred shares of NIS 0.01 par value: Authorized: 2,400,000 and zero shares at December 26, 2004 and December 31, 2005, respectively; Issued and outstanding: 2,327,324 and zero shares at December 26, 2004 and December 31, 2005, respectively							6				—
		Ordinary shares of NIS 0.01 par value: Authorized: 193,600,000 and 200,000,000 shares at December 26, 2004 and December 31, 2005, respectively; Issued: 18,852,057 and 30,251,247 shares at December 26, 2004 and December 31, 2005, respectively; Outstanding: 16,937,421 and 29,456,722 shares at December 26, 2004 and December 31, 2005, respectively							49				120
	Additional paid-in capital								85,426				211,706
	Subscription receivables								(250	)			—
	Accumulated other comprehensive income								—				38
	Accumulated deficit								(80,298	)			(35,791	)
Total shareholders’ equity									4,938				176,073
Total liabilities and shareholders’ equity								$	64,934			$	193,738

*	Reclassified, see Note 9.

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							Year ended
							December 28,				December 26,				December 31,
			Note				2003*				2004*				2005
Revenues**:				13,4c
	Licenses						$	7,817			$	22,640			$	65,790
	Services							6,639				7,926				12,811
								14,456				30,566				78,601
Cost of revenues:
	Services***							4,147				7,084				12,048
Gross profit								10,309				23,482				66,553
Operating expenses:
	Research and development***							9,132				6,792				7,427
	Marketing and selling***							2,543				2,914				4,889
	General and administrative***							1,779				2,115				6,216
Total operating expenses								13,454				11,821				18,532
Operating income (loss)								(3,145	)			11,661				48,021
Financial income, net				14				1,137				1,699				1,749
Equity in losses of equity method investees				4				(12,820	)			(26,172	)			—
Compensation expense related to issuance of options to employees of equity method investees				4				(206	)			(569	)			—
Capital loss from sale of equity method investees				4				—				(17,334	)			—
Income (loss) from continuing operations								(15,034	)			(30,715	)			49,770
Loss from discontinued operations***				9				(156	)			(7,189	)			(5,263	)
Net income (loss)							$	(15,190	)		$	(37,904	)		$	44,507
Net earnings (loss) per share:				15
Basic earnings (loss) per Ordinary share from continuing operations							$	(0.89	)		$	(1.81	)		$	0.46
Basic loss per Ordinary share from discontinued operations							$	(0.01	)		$	(0.43	)		$	(0.29	)
Basic net earnings (loss) per Ordinary share							$	(0.90	)		$	(2.24	)		$	0.17
Diluted earnings (loss) per Ordinary share from continuing operations							$	(0.89	)		$	(1.81	)		$	0.36
Diluted loss per Ordinary share from discontinued operations							$	(0.01	)		$	(0.43	)		$	(0.20	)
Diluted net earnings (loss) per Ordinary share							$	(0.90	)		$	(2.24	)		$	0.16

	*	Reclassified, see Note 9.

	**	Includes revenues from related parties (principally service revenues from the Company’s joint venture) for the periods ended December 28, 2003 and December 26, 2004 in the amount of $6,440 and $8,425, respectively.

***	Expenses include stock-based compensation related to options granted to employees and others as follows:

		Year ended
		December 28,				December 26,				December 31,
		2003				2004				2005
Cost of services		$	—			$	175			$	834
Research and development			—				220				330
Marketing and selling			—				87				667
General and administrative			—				96				2,410
Loss from discontinued operations			—				23				54
		$	—			$	601			$	4,295

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																											Accumulated
			Number of shares												Additional								Deferred				other												Total				Total
											Share				paid-in				Subscription				stock				comprehensive				Accumulated				Treasury				comprehensive				shareholders’
			Preferred				Ordinary				capital				capital				receivables				compensation				income				deficit				shares				income (loss)				equity
Balance as of January 1, 2003				4,609,686				16,875,301			$	60			$	78,658			$	(11,175	)		$	—			$	508			$	(27,204	)		$	(6,723	)						$	34,124
Receipts on account of shares				—				—				—				—				3,800				—				—				—				—								3,800
Options exercised				—				45,960				—	*			61				—				—				—				—				—								61
Deferred stock compensation				—				—				—				367				—				(367	)			—				—				—								—
Gain on issuance of shares by development stage entities accounted for by the equity method				—				—				—				4,370				—				—				—				—				2,607								6,977
Compensation expense related to issuance of options to an employee of an equity method investee				—				—				—				206				—				—				—				—				—								206
Comprehensive loss:
	Foreign currency translation adjustments			—				—				—				—				—				—				(122	)			—				—			$	(122	)			(122	)
	Net loss			—				—				—				—				—				—				—				(15,190	)			—				(15,190	)			(15,190	)
Total comprehensive loss																																							$	(15,312	)
Balance as of December 28, 2003				4,609,686				16,921,261				60				83,662				(7,375	)			(367	)			386				(42,394	)			(4,116	)							29,856
Receipts on account of shares				—				—				—				—				845				—				—				—				—								845
Options exercised				5,730				16,160				—	*			130				—				—				—				—				—								130
Compensation expense related to issuance of options to employees of equity method investees				—				—				—				813				—				—				—				—				—								813
Amortization of deferred stock compensation				—				—				—				(367	)			—				367				—				—				—								—
Stock-based compensation related to options issued to employees and others				—				—				—				1,539				—				—				—				—				—								1,539
Reissuance of treasury shares				—				—				—				871				6,280				—				—				—				4,116								11,267
Deferred costs relating to initial public offering				—				—				—				(1,222	)			—				—				—				—				—								(1,222	)
Comprehensive loss:
	Foreign currency translation adjustments			—				—				—				—				—				—				(386	)			—				—			$	(386	)			(386	)
	Net loss			—				—				—				—				—				—				—				(37,904	)			—				(37,904	)			(37,904	)
Total comprehensive loss																																							$	(38,290	)
Balance as of December 26, 2004				4,615,416				16,937,421				60				85,426				(250	)			—				—				(80,298	)											4,938

	*	Represents an amount lower than $1.

**	Net of issuance expenses of $13,050, see Note 10a.

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																											Accumulated
			Number of shares												Additional								Deferred				other												Total				Total
											Share				paid-in				Subscription				stock				comprehensive				Accumulated				Treasury				comprehensive				shareholders’
			Preferred				Ordinary				capital				capital				receivables				compensation				income				deficit				shares				income (loss)				equity
Balance as of December 26, 2004				4,615,416				16,937,421				60				85,426				(250	)			—				—				(80,298	)			—								4,938
Issuance of share capital upon initial public offering, net				—				5,750,000				12				122,063	**			—				—				—				—				—								122,075
Options exercised				984,283				1,140,111				48				488				—				—				—				—				—								536
Conversion of Convertible Preferred shares				(5,599,699	)			5,599,699				—				—				—				—				—				—				—								—
Warrants exercised				—				29,491				—	*			550				—				—				—				—				—								550
Receipts on account of shares				—				—				—				—				250				—				—				—				—								250
Stock-based compensation related to options issued to employees and others				—				—				—				3,179				—				—				—				—				—								3,179
Comprehensive income:
	Changes in fair value of cash flow derivative			—				—				—				—				—				—				38				—				—			$	38				38
	Net income			—				—				—				—				—				—				—				44,507				—				44,507				44,507
Total comprehensive income																																							$	44,545
Balance as of December 31, 2005				—				29,456,722			$	120			$	211,706			$	—			$	—			$	38			$	(35,791	)		$	—							$	176,073

	*	Represents an amount lower than $1.

**	Net of issuance expenses of $13,050, see Note 10a.

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			Year Ended
			December 28,				December 26,				December 31,
			2003*				2004*				2005
Cash flows from operating activities:
Net income (loss)			$	(15,190	)		$	(37,904	)		$	44,507
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
	Equity in losses of equity method investees			12,820				26,172				—
	Compensation expense related to issuance of options to employees of equity method investees			206				569				—
	Depreciation			1,656				1,070				1,195
	Stock-based compensation related to options issued to employees and others			—				601				4,295
	Non-cash deferred revenues (see Note 4c)			—				19,182				(19,182	)
	Capital loss from sale of equity method investees			—				17,334				—
	Accrued severance pay, net			130				185				72
	Amortization of premium, net and accrued interest on held-to-maturity marketable securities			8				546				889
	Amortization and impairment of other assets			—				—				490
	Accrued interest on loans to employees			(104	)			(136	)			(84	)
	Increase in accrued interest on loans granted to equity method investees			(62	)			(149	)			—
	Decrease (increase) in trade receivables			(2,064	)			(2,228	)			4,808
	Decrease (increase) in other accounts receivable and prepaid expenses			350				(407	)			(1,263	)
	Decrease (increase) in total assets attributed to discontinued operations			(255	)			(4,776	)			4,939
	Increase (decrease) in trade payables			279				(396	)			(458	)
	Increase in accrued expenses and other liabilities			1,731				625				1,820
	Increase (decrease) in deferred revenues			2,813				(6,128	)			(24,254	)
	Increase (decrease) in total liabilities attributed to discontinued operations			—				3,804				(3,658	)
Net cash provided by operating activities				2,318				17,964				14,116
Cash flows from investing activities:
Collection of short-term bank deposits, net				257				353				161
Purchase of held-to-maturity marketable securities				(10,876	)			(12,471	)			(85,934	)
Proceeds from maturity of held-to-maturity marketable securities				—				5,727				20,614
Investment in equity method investees				(2,025	)			—				—
Loans granted to equity method investees				(3,244	)			(13,104	)			—
Lease deposits				(43	)			(57	)			(44	)
Purchase of property and equipment				(1,041	)			(765	)			(1,953	)
Loans granted to employees				(399	)			(241	)			(154	)
Loans repaid by employees				—				182				1,242
Net cash used in investing activities				(17,371	)			(20,376	)			(66,068	)
Cash flows from financing activities:
Issuance of Ordinary shares in respect of Company’s initial public offering, net				—				—				125,666
Issuance costs in respect of the Company’s initial public offering				—				(719	)			(1,951	)
Proceeds from issuance of shares				3,800				845				250
Proceeds from options and warrants exercised				61				130				1,086
Net cash provided by financing activities				3,861				256				125,051
Increase (decrease) in cash and cash equivalents				(11,192	)			(2,156	)			73,099
Cash and cash equivalents at beginning of year				40,576				29,384				27,228
Cash and cash equivalents at end of year			$	29,384			$	27,228			$	100,327
Non-cash transactions — see Note 4c

*	Reclassified, see Note 9.

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NOTE 1:	GENERAL

NOTE 2:	SIGNIFICANT ACCOUNTING POLICIES

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		%
Laboratory equipment		15 – 33
Computers and software		33
Furniture and fixtures		6 – 33
Leasehold improvements		20 – 95

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		December 28,				December 26,				December 31,
		2003				2004				2005
Dividend yield			0%				0%				0%
Expected volatility			0%				0-45%				45%
Risk-free interest			2.6-3.3%				2.6-3.3%				2.6-4.4%
Expected life of			3.2-5 years				3.2-5 years				1-5 years

			Year ended
			December 28,
			2003
Net loss as reported			$	(15,190	)
	Add: stock-based employee compensation determined under intrinsic value method			—
	Deduct: stock-based employee compensation determined under fair value method			(403	)
	Pro forma net loss		$	(15,593	)
Basic and diluted net loss per share:
As reported			$	(0.90	)
Pro forma			$	(0.92	)

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	License revenues

	Service revenues

	Discontinued operations — Product revenues

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NOTE 3:	HELD-TO-MATURITY MARKETABLE SECURITIES

		December 26,				December 31,
		2004				2005
First year		$	14,662			$	75,501
Second year			2,403				4,138
Third year			—				1,857
		$	17,065			$	81,496

NOTE 4:	OBLIGATION TO FINANCE EQUITY METHOD INVESTEES

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		December 23,
		2004
Investment in shares		$	18,556
Gain on issuance of shares			4,370
Options issued to employees of equity method investee (Note 10d)			246
Less — equity loss(*)			(49,311	)
Currency translation adjustments			(2,463	)
			(28,602	)
Loans(**)			24,440
			(4,162	)
Less — treasury shares(***)			(4,116	)
Less — subscription receivable(***)			(6,280	)
		$	(14,558	)
Sale of the Joint Venture interest (see c below):
Re-issuance of treasury shares (including $871 increase in additional paid-in capital — see Note 10e)		$	4,987
Assignment of subscription receivable			6,280
Write-off of interest receivables on loans granted to the Joint Venture			275
Realization of comprehensive income (see Note 2b)			651
			(2,365	)
Less — fair value of the Company’s interest in the Joint Venture			(19,699	)
Capital loss		$	17,334

	(*)	In addition to the above equity losses, the Company recorded a non-cash compensation expense related to options issued to employees of the Company’s equity method investees, in the amount of $206 and $569 for the years ended December 28, 2003 and December 26, 2004, respectively.

	(**)	As of December 23, 2004, the loans were comprised of a loan of $6,280 for a 36-month period ending in October 2004, which bore interest at an annual rate of 4.0%, and from additional loans of € 13,410 thousand ($18,160) as of December 23, 2004, for a period of less than one year, which bore interest at an annual average rate of 4.6%. The loans have been forgiven as part of the sale of the Company’s interest in the Joint Venture (see c below).

(***)	See c below.

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		Year ended
		December 28,				December 26,
		2003				2004
Revenues		$	39,732			$	58,111
Gross profit (loss)		$	1,129			$	(23,488	)
Loss from continuing operations		$	(41,012	)		$	(86,906	)
Net loss		$	(41,012	)		$	(86,906	)

	1. Termination of the Joint Venture and related transactions (“the Agreement”) was signed by the two parties, whereby in accordance with the Agreement:

	a)	All former agreements signed by the two parties were terminated,
	b)	Both parties’ rights and obligations in respect of financing arrangements were terminated, releasing them from any past, present or future obligations to provide further financing to the Joint Venture,
	c)	The Company’s right to receive repayment of the subscription receivable of $6,280 was assigned to Infineon,
	d)	The Company was obligated to offer employment to certain of IFL Ltd.’s employees (“workforce”), valued at $560,
	e)	The Company undertook certain liabilities relating to the Stock Appreciation Rights Plan of IFL Ltd. (“the SARP”), valued at $1,140 (see Note 7).

	2. License agreement:
	In addition to the termination of the Joint Venture, the Company entered into an Amended License Agreement (“the License Agreement”) with Infineon. Under the agreement, in consideration of a new license that was granted, the Company will receive: (1) nonrefundable license fees payable in quarterly installments over 10 years from the date of the License Agreement pursuant to a fixed payment schedule, (2) additional, nonrefundable license fees capped at a certain amount of the proceeds received by Infineon from the sale of the Company’s treasury shares (that were reissued to Infineon), payable over

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	eight quarters following the sale of the shares and (3) running royalties based on Infineon sales. Infineon may terminate the license at any time, and Saifun will not receive any additional consideration, beyond payments already received or due on the termination date. On June 28, 2005, Infineon exercised its cancellation privileges for certain of the licensed technologies, thereby reducing its maximum remaining obligation to Saifun.
	3. Development services agreement:
	Under the development services agreement, the Company will provide development services to Infineon in accordance with a basic agreement on development orders.

	Interest in the Joint Venture

	Development services

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NOTE 5:	LOANS TO EMPLOYEES

2006		$	613
2007			384
2008			307
2009			260
2010			146
		$	1,710

NOTE 6:	PROPERTY AND EQUIPMENT, NET

			December 26,				December 31,
			2004				2005
Cost:
	Laboratory equipment		$	2,522			$	3,594
	Computers and software			4,327				4,981
	Furniture and fixtures			296				387
	Leasehold improvements			736				872
				7,881				9,834
Accumulated depreciation:
	Laboratory equipment			1,926				2,307
	Computers and software			3,556				4,112
	Furniture and fixtures			106				132
	Leasehold improvements			383				615
				5,971				7,166
Depreciated cost			$	1,910			$	2,668

NOTE 7:	ACCRUED EXPENSES AND OTHER LIABILITIES

			December 26,				December 31,
			2004				2005
	Payroll and related expenses(*)		$	2,459			$	3,434
	Accrued issuance expenses			426				(**)1,859
	Other accrued expenses			1,523				2,369
	SARP liability(***)			1,140				2,251
			$	5,548			$	9,913
(*)   Includes accrued vacation pay			$	795			$	853

(**)	Includes a stamp tax provision in the amount of $1,351.

(***)	See Note 4c.

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NOTE 8:	COMMITMENTS AND CONTINGENT LIABILITIES

	Commitments:

Year ended December 31,
2006		$	3,414
2007			2,659
2008			1,628
2009			123
2010			69
		$	7,893

	Contingencies:

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NOTE 9:	DISCONTINUED OPERATIONS

		Year ended
		December 28,				December 26,				December 31,
		2003				2004				2005
Revenues		$	—			$	1,673			$	4,495
Cost of revenues			—				5,894				8,458
Gross loss			—				(4,221	)			(3,963	)
Research and development expenses			156				1,732				568
Marketing and selling expenses			—				1,160				684
General and administrative expenses			—				76				48
Loss from discontinued operations		$	(156	)		$	(7,189	)		$	(5,263	)

			December 26,				December 31,
			2004				2005
Assets:
	Trade receivables		$	633			$	212
	Inventories			2,231				—
	Other accounts receivable and prepaid expenses			2,034				—
	Property and equipment, net			253				—
			$	5,151			$	212
Liabilities:
	Trade payables		$	3,411			$	55
	Accrued expenses and other liabilities			313				91
	Deferred revenues			80				—
			$	3,804			$	146

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NOTE 10:	SHAREHOLDERS’ EQUITY

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		Year ended
		December 28, 2003								December 26, 2004								December 31, 2005
						Weighted								Weighted								Weighted
						average								average								average
		Amount of				exercise				Amount of				exercise				Amount of				exercise
		options				price				options				price				options				price
Outstanding — beginning of the year			3,296,399			$	2.91				4,192,548			$	4.96				5,096,494			$	7.66
Granted			1,385,974	*		$	9.00				1,312,776	**		$	13.97				1,045,013			$	21.49
Exercised			(45,960	)		$	1.31				(16,160	)		$	6.93				(1,140,111	)		$	0.50
Forfeited			(443,865	)		$	2.80				(392,670	)		$	8.05				(296,380	)		$	10.23
Outstanding — end of the year			4,192,548			$	4.96				5,096,494			$	7.66				4,705,016			$	11.61
Options exercisable at the end of the year			1,730,103			$	1.12				2,189,428			$	2.15				1,805,251			$	6.51

	*	Includes 50,000 options granted to employees of the Company’s equity method investees during the year ended December 28, 2003. These options were accounted for in accordance with EITF 00-12, “Accounting by an Investor for Stock-Based Compensation Granted to Employees of an Equity Method Investee” (see Note 4a), SFAS 123 and EITF 96-18, based on the fair value of the options granted. Fair value was measured based on the Black-Scholes pricing model assuming a risk free interest rate of 2.5%, a volatility factor of 40%, dividend yield of 0% and a contractual life of ten years.

**	Includes immediately vested 94,260 options granted to former IFL Ltd. employees subsequent to the termination of the Joint Venture (see Note 4c).

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Options outstanding														Options exercisable
		Amount				Weighted								Amount
		outstanding				average				Weighted				outstanding				Weighted
		as of				remaining				average				as of				average
		December 31,				contractual				exercise				December 31,				exercise
Exercise price		2005				life				price				2005				price
						(years)
$0.09			16,000				1.38			$	0.09				16,000			$	0.09
$0.44 - $0.88			167,400				2.28			$	0.81				167,400			$	0.81
$1.25 - $1.69			368,020				3.70			$	1.41				368,020			$	1.41
$3.75			6,000				2.99			$	3.75				6,000			$	3.75
$6.25			931,149				6.09			$	6.25				562,080			$	6.25
$8.12 - $9.00			1,082,748				7.50			$	8.99				438,620			$	8.98
$13.00			389,675				8.24			$	13.00				126,749			$	13.00
$15.00 - $5.50			868,891				8.97			$	15.50				98,650			$	15.50
$18.75			4,400				6.47			$	18.75				2,400			$	18.75
$20.75 - $21.50			681,470				9.56			$	20.83				19,332			$	20.75
$29.59			189,263				6.89			$	29.59				—				—
			4,705,016				7.32			$	11.61				1,805,251			$	6.51

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		December 26,				December 31,
		2004				2005
Loan to employee (shareholder)(3)		$	207			$	—
Loan to director(4)		$	250			$	—
Other accounts receivable and prepaid expenses (shareholder)(2)		$	221			$	—
Trade payables and accrued expenses (related party)(1)(2)		$	885			$	328

(1)	One of the related parties is a legal firm that provides services to the Company, and in which a senior partner of the firm is an immediate family member of one of the Company’s shareholders.
(2)	The above balances are derived from services provided or received in the ongoing course of business. Accordingly, these balances have normal credit terms.
(3)	The loan was repaid during 2005.
(4)	See Note 10f above.

		Year ended
		December 28,				December 26,				December 31,
		2003				2004				2005
Revenues (shareholder and Joint Venture)		$	6,440			$	8,425			$	—
Sales and marketing expenses (shareholder and related party)		$	529			$	925			$	86
General and administrative expenses (related party)		$	536			$	612			$	586
Interest income (Joint Venture)		$	272			$	604			$	—
Issuance expenses (recorded in shareholders’ equity)		$	—			$	195			$	220

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F-28

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		Year ended
		December 28,				December 26,				December 31,
		2003				2004				2005
Israel*		$	(14,483	)		$	(36,824	)		$	45,356
Foreign			(707	)			(1,080	)			(849	)
		$	(15,190	)		$	(37,904	)		$	44,507

*	Includes loss attributed to Saifun BVI (Limited).

		December 26,				December 31,
		2004				2005
Operating loss carryforwards (Saifun Semiconductors USA, Inc. and Saifun BVI (Limited))		$	432			$	1,848
Valuation allowance			(432	)			(1,848	)
Net deferred tax asset		$	—			$	—

		Year ended
		December 28,				December 26,				December 31,
		2003				2004				2005
Taiwan		$	5,168			$	11,417			$	14,047
Israel			6,440	*			7,276	*			32
United States			2,656				7,701				9,265
Japan			192				3,022				9,793
Germany			—				1,150				44,796
Other			—				—				668
		$	14,456			$	30,566			$	78,601

*	Includes mainly services provided to the Joint Venture through IFL Ltd.

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			Year ended
			December 28,				December 26,				December 31,
			2003				2004				2005
Licensing and services:
	Customer A			36	%			37	%			18	%
	Customer B			18	%			25	%			12	%
	Customer C			45	%			28	%			57	%

			Year ended
			December 28,				December 26,				December 31,
			2003				2004				2005
Income:
	Interest on cash equivalents, marketable securities and premium on held-to-maturity marketable securities		$	677			$	555			$	2,163
	Foreign currency exchange differences			148				487				—
	Interest from loans issued to equity method investees			251				604				—
	Interest from loans to employees			99				120				108
Expenses:
	Bank commissions			(38	)			(67	)			(46	)
	Foreign currency exchange differences			—				—				(476	)
			$	1,137			$	1,699			$	1,749

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		Year ended
		December 28,				December 26,				December 31,
		2003				2004				2005
Numerator:
Net earnings (loss)		$	(15,190	)		$	(37,904	)		$	44,507
Allocation of undistributed earnings to Convertible Preferred shares			—				—				(39,529	)
Numerator attributed to Ordinary shares after allocation of undistributed earnings		$	(15,190	)		$	(37,904	)		$	4,978
Denominator:
Weighted average number of Ordinary shares outstanding during the year used to compute basic net earnings (loss) per share (in thousands)			16,896				16,927				29,453	*
Incremental shares attributable to exercise of outstanding options and warrants (in thousands)			—				—				2,494
Weighted average number of Ordinary shares outstanding during the year used to compute diluted net earnings (loss) per share (in thousands)			16,896				16,927				31,947
Basic earnings (loss) per Ordinary share from continuing operations		$	(0.89	)		$	(1.81	)		$	0.46
Basic loss per Ordinary share from discontinued operations		$	(0.01	)		$	(0.43	)		$	(0.29	)
Basic net earnings (loss) per Ordinary share		$	(0.90	)		$	(2.24	)		$	0.17
Diluted earnings (loss) per Ordinary share from continuing operations		$	(0.89	)		$	(1.81	)		$	0.36
Diluted loss per Ordinary share from discontinued operations		$	(0.01	)		$	(0.43	)		$	(0.20	)
Diluted net earnings (loss) per Ordinary share		$	(0.90	)		$	(2.24	)		$	0.16

*	The sum of the proportionate weighted average of Ordinary shares outstanding was calculated separately for the two periods (from December 27, 2004 until the IPO Date (November 8, 2005) and from the IPO Date until December 31, 2005). Prior to the IPO, all of the Company’s earnings were allocated to the convertible Preferred shares.

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		Year ended
		December 31,
		2005
Numerator:
Net earning		$	44,507
Denominator:
Weighted average number of Ordinary shares outstanding during the year used to compute pro forma basic net earnings per share (in thousands)			24,154
Incremental shares attributable to exercise of outstanding options and warrants (in thousands)			2,087
Weighted average number of Ordinary shares outstanding during the year used to compute pro forma diluted net earnings per share (in thousands)			26,241
Pro forma basic earnings per Ordinary share from continuing operations		$	2.06
Pro forma basic loss per Ordinary share from discontinued operations		$	(0.22	)
Pro forma basic net earnings per Ordinary share		$	1.84
Pro forma diluted earnings per Ordinary share from continuing operations		$	1.90
Pro forma diluted loss per Ordinary share from discontinued operations		$	(0.20	)
Pro forma diluted net earnings per Ordinary share		$	1.70

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						As of
						December 23,
		Note				2004
						US$ thousands
Assets
Cash and cash equivalents							1,736
Accounts receivable — related party			3				5,766
Other current assets			4				132
Investment in Saifun Semiconductors held for sale			5				15,014
Restricted assets for employee termination benefits			11				99
Furniture and equipment, held for sale			7				740
Total assets							23,487
Liabilities
Current maturities of long-term loans with related parties			10				6,280
Accounts payable			8				4,631
Accounts payable to related parties							6
Other current liabilities			9				264
Liability for employee termination benefits			11				124
Total current liabilities							11,305
Net assets in liquidation							12,182

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						For the year				For the period
						ended				ended
						December 31,				December 23,
		Note				2003				2004
						US$ thousands
Revenue from research and development agreement with related party							11,407				12,563
							11,407				12,563
Research and development expenses							10,901				13,676
Selling expenses							29				—
General and administrative expenses							475				660
Other expenses			5				—				4,986
Total operating expenses							11,405				19,322
Operating (loss) income							2				(6,759	)
Interest expense, net			14				385				26
Loss before income taxes							(383	)			(6,785	)
Income taxes			6				—				—
Net loss							(383	)			(6,785	)

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		For the period
		from December 23,
		2004 to
		December 23,
		2004
		US$ thousands
Stockholders’ equity at December 23, 2004			12,182
Liquidation basis adjustments:			—
Net assets in liquidations on December 23, 2004			12,182
Distribution to stockholders			—
Net assets in liquidations on December 23, 2004			12,182

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		Issued Ordinary Shares
										Additional				Accumulated
		Shares				Amount				paid-in capital				deficit				Total
		NIS 0.01
		per share				US$ thousands
Balance as of December 31, 2002			1,000,000				2				23,718				(10,376	)			13,344
Issuance of ordinary shares			634,000				2				4,000				—				4,002
Net loss			—				—				—				(383	)			(383	)
Balance as of December 31, 2003			1,634,000				4				27,718				(10,759	)			16,963
Balance as of December 31, 2003			1,634,000				4				27,718				(10,759	)			16,963
Capital contribution			—				—				1,908				—				1,908
Net loss			—				—				—				(6,785	)			(6,785	)
Stock based compensation			—				—				96				—				96
Balance as of December 23, 2004			1,634,000				4				29,722				(17,544	)			12,182

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		For the year				For the period
		ended				ended
		December 31,				December 23,
		2003				2004
		US$ thousands				US$ thousands
Cash flows from operating activities:
Net loss			(383	)			(6,785	)
Adjustments required to reconcile net loss to net cash from operating activities:
Depreciation			341				352
Severance benefits, net			2				11
Stock based compensation			—				96
SAR compensation expense			—				1,908
Impairment of investment			—				4,986
Increase in accounts receivable — related parties			(3,275	)			(2,467	)
Decrease (increase) in other assets			(173	)			274
Increase (decrease) in accounts payable			(37	)			4,576
Increase (decrease) in other liabilities			595				(1,915	)
Net cash (used in) provided by operating activities			(2,930	)			1,036
Cash flows from investing activities:
Acquisitions of equipment			(265	)			(486	)
Issuance of short-term loan to related party			—				(500	)
Repayment of loan to related party			—				500
Net cash used in investing activities			(265	)			(486	)
Cash flows from financing activities:
Proceeds from (payment of) long-term loan from shareholders			(525	)			—
Proceeds from the issuance of ordinary shares			4,002				—
Net cash provided by financing activities			3,477				—
Change in cash and cash equivalents			282				550
Cash and cash equivalents at beginning of period			904				1,186
Cash and cash equivalents at end of period			1,186				1,736
Supplemental cash flow information
Cash paid for interest			418				126

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A.	Basis of presentation

B.	Use of estimates

C.	Functional and reporting currency

		Exchange rate
		of US$1
December 23, 2004			NIS 4.336
December 31, 2003			NIS 4.379

D.	Cash and cash equivalents

E.	Investment in Saifun Semiconductor Ltd.

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F.	Furniture and equipment

Computers, software and auxiliary equipment			33	%
Furniture and office equipment			6 - 10	%
Lab equipment			33	%
Leasehold improvements			10	%

G.	Impairment of long-lived assets

H.	Financial instruments

I.	Revenue recognition

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J.	Income taxes

K.	Research and development costs

L.	Stock compensation plans

(1)	Stock appreciation rights plan

(2)	Stock-based compensation plan to employees granted by Saifun

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M.	Other comprehensive income (loss)

N.	Recent accounting pronouncements

a.	FASB Statement No. 123 (Revision 2004), Share-Based Payment

b.	EITF 03-1 The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments

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		December 23,
		2004
Government institutions — VAT			125
Government institutions — tax			—
Prepaid expenses			—
Advances to services providers and others			7
			132

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A.	Loss before income taxes is attributable to the following geographic locations for the year ended December 31, 2003, and the period from January 1, 2004 to December 23, 2004:

		For the year				For the period
		ended				ended
		December 31,				December 23,
		2003				2004
Israel			(383	)			(4,877	)
Foreign			—				—
			(383	)			(4,877	)

B.	Reconciliation of income tax expense:

		For the year				For the period
		ended				ended
		December 31,				December 23,
		2003				2004
Loss before income taxes			(383	)			(4,877	)
Israel corporate tax rate			36	%			35	%
Expected benefit at the statutory tax rate			138				1,707
Decrease in tax loss resulting from non-deductible expenses			(33	)			(59	)
Effect of change in tax rates			—				(108	)
Increase in tax loss resulting from other			28				1
Valuation allowance			(133	)			(1,541	)
Income tax			—				—

C.	Components of deferred income tax

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		December 23,
		2004
Net operating loss carryforward			5,371
Accrued employee rights			38
Deferred tax asset			5,409
Valuation allowance			(5,409	)
Net deferred tax asset			—

D.	Change in tax rates

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			Computers,
			software and				Furniture
			auxiliary				and office				Lab				Leasehold
			equipment				equipment				equipment				improvements				Total
Cost:
December 31, 2003				455				76				586				121				1,238
Additions				82				8				365				31				486
December 23, 2004				537				84				951				152				1,724
Accumulated depreciation:
December 31, 2003				247				10				352				23				632
Depreciation				142				8				188				14				352
December 23, 2004				389				18				540				37				984
Furniture and equipment, net
	December 23, 2004			148				66				411				115				740

*	Property, plant and equipment, net, intended for sale is presented as current assets. According to the Termination Agreement, the Company will sell and transfer to Flash Germany its tangible assets at their net book value.

		December 23,
		2004
Trade payables — invoiced			4,601	*
Trade payables — accrued			30
			4,631

*	Including $4,560 payable to Saifun (former shareholder), (see Note 1), which was paid in January 2005.

		December 23,
		2004
Employees and payroll accruals			207
Liability for vacation and recreation pay			57
			264

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		December 23,
		2004
Loans from related parties — current Loan from shareholder(1)			6,280
Loans from related parties — long term Loan from shareholder(1)			—

(1)	The Company received an unsecured loan from Saifun in May 2001 in the amount of $6,280 for 36 months. The loan bore interest at an annual rate of 4%. On February 20, 2004, Saifun agreed to extend the maturity of the loan until October 2004.

	Pursuant to the terms of the Termination Agreement, Saifun assigned the loan to Infineon. The loan was repaid during 2005.
	Interest expense for the year ended December 31, 2003 and for the period from January 1, 2004 to December 23, 2004 were $377 and $123, respectively.

A.	Commitments

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B.	Contingencies

Portion of grants		Vesting (in months)
40%			24
20%			36
20%			48
20%			60

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						Weighted
		Number of				average
		SARs				exercise price
		US$				US$
Balance at December 31, 2002			872,650				3.27
Granted			50,000				3.12
Forfeited			(196,700	)			3.23
Balance at December 31, 2003			725,950				3.27
Granted			—				—
Forfeited, including terminated (see above)			(725,950	)			3.27
Balance at December 23, 2004			—				—

		For the year				For the period
		ended				ended
		December 31,				December 23,
		2003				2004
Interest expense on loans from related parties*			377				123
Exchange rate differential on short-term bank deposits			17				(91	)
Interest income on short-term bank deposits			(26	)			(19	)
Other			17				13
			385				26

*	See also Note 15B.

A.	Related party balances arise from the ordinary course of business and are as follows:

		December 23,
		2004
Accounts receivable (Note 3)			5,766
Accounts payable			6
Loans (Note 10)			6,280

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B.	Related party transactions were reflected in the statements of operations as follows:

		For the year				For the period
		ended				ended
		December 31,				December 23,
		2003				2004
Revenues Flash Germany			11,407				12,563
Expenses associated with related parties:
Research and development costs:
Infineon			203				20
Saifun			6,746				7,435
			6,949				7,455
General and administrative expenses:
Infineon			—				—
Saifun			97				51
			97				51
Interest expenses:
Infineon			126				—
Saifun			251				123
			377				123

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			For the period				For the year
			ended				ended
			December 23,				December 26,
			2004				2003
	1. Net sales			46,839				35,133
	2. Cost of goods sold			(60,021	)			(33,434	)
	3. Gross profit (loss)			(13,182	)			1,699
	4. Research and development expenses			(44,016	)			(31,550	)
	5. Selling expenses			(6,948	)			(3,588	)
	6. General and administrative expenses			(6,040	)			(4,534	)
	7. Other operating income			23,136				3,346
	8. Other operating expenses			(9	)			(2	)
	9. Other interest and similar income — thereof from affiliated parties: € 26 (2003: € 48)			65				96
10. Interest and similar expenses — thereof to affiliated parties: € 1,862 (2003: € 26)				(2,480	)			(82	)
11. Net loss				(49,474	)			(34,615	)

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						December 23,
						2004
Assets
A.		Fixed assets
		I.		Intangible assets			82
		II.		Property, plant and equipment, net
				1.  Plant and machinery			10
				2.  Technical and office equipment			15,450
				3.  Construction in progress			745
							16,287
B.		Current assets
		I.		Inventories			3,565
		II.		Receivables and other assets
				1.  Receivables due from affiliated companies			35,416
				— thereof from partners: € 35,416
				2.  Other assets			5,998
							41,414
		III.		Cash and cash equivalents			1,737
							46,716
C.		Deficit not covered by partners’ equity					61,697
							124,700
Liabilities
A.		Partners’ equity
		I.		Equity shares of limited partners			817
		II.		Reserves			32,751
		III.		Accumulated deficit			(95,265	)
		IV.		Loss not covered by partners’ equity			61,697
							—
B.		Provisions
				1.  Provisions for pensions and similar obligations			476
				2.  Other provisions			5,249
							5,725
C.		Liabilities
				1.  Trade accounts payable			2,657
				2.  Accounts payable due to affiliated companies — thereof due to partners: € 110,014			115,526
				3.  Other liabilities			792
				— thereof taxes: € 183
				— thereof for social security: € 172
							118,975
							124,700

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																		Annual
																		net loss				Transfer between
																		before				partners
																		transfer				(Termination
		December 27,								Annual				December 26,				between				Agreement, see				December 23,
		2002				Paid in				net loss				2003				partners				note 1)				2004
Infineon Technologies AG
Capital account I (capital contribution)			255				317				—				572				—				245				817
Capital account II (capital contribution)			5,709				19,762				—				25,471				—				7,280				32,751
Capital account III (earnings reserves/accumulated deficit)			—				—				—				—				—				—				—
Capital account IV (clearing account)			(5,700	)			—				(24,130	)			(29,830	)			(44,255	)			(21,180	)			(95,265	)
			264				20,079				(24,130	)			(3,787	)			(44,255	)			(13,655	)			(61,697	)
Saifun
Capital account I (capital contribution)			245				—				—				245				—				(245	)			—
Capital account II (capital contribution)			5,480				1,800				—				7,280				—				(7,280	)			—
Capital account III (earnings reserves/accumulated deficit)			—				—				—				—				—				—				—
Capital account IV (clearing account)			(5,476	)			—				(10,485	)			(15,961	)			(18,967	)			34,928				—
			249				1,800				(10,485	)			(8,436	)			(18,967	)			27,403				—
Total			513				21,879				(34,615	)			(12,223	)			(63,222	)			13,748				(61,697	)

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			For the period ended				For the year ended
			December 23, 2004				December 26, 2003
Net loss				(49,474	)			(34,615	)
Adjustments to reconcile net loss to cash used in operating activities:
	Depreciation and amortization			2,311				679
	Income of tax free subsidies (Investitionszulage)			(3,610	)			(849	)
	Book losses from deposition of fixed assets			6				—
Changes in operating assets and liabilities:
	Accounts receivable related party			(32,547	)			831
	Inventories			(2,459	)			2,516
	Other assets			(760	)			(764	)
	Provisions			2,235				2,823
	Trade accounts payable			(1,674	)			1,244
	Accounts payable related party			18,469				5,377
	Other liabilities			268				246
Net cash used in operating activities				(67,235	)			(22,512	)
Cash flows from investing activities:
	Purchase of intangible assets			(4	)			(100	)
	Purchase of property, plant and equipment			(12,545	)			(5,463	)
	Proceeds from sales of property, plant and equipment			—				16
Net cash used in investing activities				(12,549	)			(5,547	)
Cash flows from financing activities:
	Proceeds from issuance of partners’ equity			—				21,879
	Proceeds from related party loans			79,400				7,550
Net cash provided by financing activities				79,400				29,429
Net change in cash and cash equivalents				(384	)			1,370
Cash and cash equivalents at beginning of period				2,121				751
Cash and cash equivalents at end of period				1,737				2,121

*	Net of liabilities due to banks of € 11.

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1.	Description of Business, Formation and Basis of Presentation

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2.	Accounting and Valuation Methods

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3.	Comments on the Balance Sheets

		December 23, 2004
						Thereof
		Total				Infineon
Trade accounts receivable			31,985				31,985
Other receivables			3,431				3,430
			35,416				35,415

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		December 23,
		2004
Litigation matters			2,530
Royalty accruals			1,462
Bonus and extra payments			655
Vacation provision			325
Mark-to-market losses on derivatives			151
Other			126
			5,249

		December 23, 2004
						Thereof				Thereof IFL
		Total				Infineon				GmbH*
Trade accounts payable			29,138				23,693				—
Other liabilities			86,388				86,308				13
			115,526				110,001				13

*	Infineon Technologies Geschäftsführungs GmbH, Dresden

		Amount
		€
November 10, 2006			3,150
April 1, 2007			4,500
June 9, 2007			3,800
			11,450

4.	Comments on the Statements of Operations

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		For the period ended				For the year ended
		December 23, 2004				December 26, 2003
Cost of raw materials and supplies and goods purchased for resale			52,438				29,628
			52,438				29,628

		For the period ended				For the year ended
		December 23, 2004				December 26, 2003
Wages and salaries			6,890				3,550
Social security contributions and staff welfare costs			788				295
			7,678				3,845

5.	Other Information

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	•	the managing partner,
	•	board of directors and
	•	the partners’ assembly

	•	Mr. Dr. Peter Kücher (from February 26, 2003 to October 1, 2004)
	•	Mr. Ramy Langer (from February 26, 2003 to February 15, 2005)
	•	Mr. Frank Tillner (since October 1, 2004)
	•	Mr. Dr. Michael Majerus (from February 25, 2005 to May 31, 2005)

	•	Thomas Seifert (Chairman), Group Vice President and General Manager Memory Products Group of Infineon, was appointed member of the board of directors, effective as of July 20, 2004
	•	Dr. Michael Majerus, Group Vice President Finance and Business Administration Memory Products Group of Infineon, was appointed member of the board of directors, effective as of February 19, 2003
	•	Dr. Harald Eggers, former Chief Executive Officer Memory Products Group of Infineon, was appointed member of the board of directors, effective as of February 19, 2003 and belonged to the board until July 20, 2004
	•	Michael Buckermann, General Manager Business Unit Computing, Memory Products Group of Infineon, was appointed member of the board of directors, effective as of February 19, 2003 and belonged to the board until May 20, 2005

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	•	Dr. Boaz Eitan (Deputy Chairman) Founder and Chief Executive Officer, Saifun Semiconductors, was elected member of the board of directors by a partner’s resolution, as of May 21, 2001 and belonged to the board until December 23, 2004
	•	Kobi Rozengarten, President, Saifun Semiconductors, was elected member of the board of directors by a partner’s resolution, as of May 21, 2001 and belonged to the board until the December 23, 2004

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6.	Summary of Significant Differences between Accounting Principles Followed by the Company and Generally Accepted Accounting Principles in the United States

US GAAP

German HGB

Years of

Depreciation

Years of

Depreciation

useful life

method

useful life

method

Technical equipment

5

Straight-line

10

Straight-line*

Office and general equipment

3

Straight-line

8

Straight-line*

Testing machinery

3

Straight-line

8

Straight-line*

Communication equipment

3

Straight-line

6

Straight-line*

*	since January 1, 2004 for all new purchased fixed assets. For the fixed assets purchased until December 31, 2003 the initial depreciation method was maintained.

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e)	Stock-based compensation and contribution by partner

h)	Unrealized exchange gains on foreign currency translations from monetary balance sheet items

i)	Waiving of loans of Saifun Semiconductors

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			For the period				For the year
			ended				ended
			December 23,				December 26,
			2004				2003
Net loss
Net loss based on German HGB				(49,474	)			(34,615	)
Adjustments:
	a. Depreciation			(1,902	)			(253	)
	b. License amortization			(2,341	)			(4,551	)
	c. Grant recognition			(3,610	)			(849	)
	d. Pension obligation			225				(46	)
	e. Stock-based compensation			(553	)			(164	)
	g. Tax effect			—				—
	h. Unrealized exchange gains on foreign currency translations from monetary balance sheet items			434				—
	i. waiving of loans of Saifun Semiconductors			(13,748	)			—
Net increase in net loss				(21,495	)			(5,863	)
Approximate — net loss based on U.S. GAAP				(70,969	)			(40,478	)
Partners’ capital (deficit)
Partners capital (deficit) based on German HGB				(61,697	)			(12,223	)
Adjustments:
	a. Depreciation			(3,004	)			(403	)
	b. License amortization			(6,892	)			(4,551	)
	c. Grant recognition			(3,702	)			(791	)
	d. Pension obligation			32				(193	)
	g. Tax effect			—				—
	h. Unrealized exchange gains on foreign currency translations from monetary balance sheet items			434				—
	j. APIC from Goodwill recognition			4,465
Net decrease in partners’ capital				(8,667	)			(5,938	)
Approximate — partners’ capital based on U.S. GAAP				(70,364	)			(18,161	)
Changes in partners’ capital based on U.S. GAAP
Balance, beginning of period				(18,161	)			338
Increase Partners’ Capital/ APIC				—				21,879
Contribution by Partner (see note 6e)				553				164
Waiving of loans of Saifun Semiconductors (see note 6i)				13,748				—
Distribution to Partner (see note 6f)				—				(64	)
APIC from Goodwill recognition (see note 6j)				4,465
Net loss				(70,969	)			(40,478	)
Balance, end of period				(70,364	)			(18,161	)

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			December 23,
			2004
Assets:
Current assets:
	Cash and cash equivalents			1,737
	Receivables related parties, net			35,416
	Inventories			3,565
	Other current assets			5,998
Total current assets				46,716
Property, plant and equipment, net				13,202
Other assets				1,220
Goodwill				4,465
Total assets				65,603
Liabilities and stockholders’ equity (deficit):
Current liabilities:
	Trade accounts payable			34,012
	Loans from affiliated companies			82,940
	Accrued liabilities			13,724
	Other current liabilities			1,589
Total current liabilities				132,265
Other non-current liabilities				3,702
Total liabilities				135,967
Stockholders’ equity (deficit):
	Ordinary share capital			817
	Additional paid-in capital			51,602
	Accumulated deficit			(122,783	)
Total stockholders’ equity (deficit)				(70,364	)
Total liabilities and stockholders’ equity (deficit)				65,603

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			Cost of Acquisition																				Depreciation																Net Book Value
			December 27,																December 23,				December 27,												December 23,				December 23,				December 26,
			2003				Additions				Disposals				Transfer				2004				2003				Additions				Disposals				2004				2004				2003
I. Intangible Assets
	Software			212				4				—				—				216				62				72				—				134				82				150
II. Tangible Assets
	1. Plant and machinery			14				—				—				—				14				2				2				—				4				10				12
	2. Technical and office equipment			5,324				11,800				58				1,580				18,646				1,011				2,237				52				3,196				15,450				4,313
	3. Payments on account			1,580				745				0				(1,580	)			745				—				—				—				—				745				1,580
				6,918				12,545				58				—				19,405				1,013				2,239				52				3,200				16,205				5,905
				7,130				12,549				58				—				19,621				1,075				2,311				52				3,334				16,287				6,055

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