##### Table of Contents



As filed with the Securities Exchange Commission on
    April 11, 2006
     SECURITIES AND EXCHANGE
    COMMISSION
 Washington, D.C.
    20549
      Form 20-F
  o

REGISTRATION STATEMENT PURSUANT
    TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT
    OF 1934ORþ

ANNUAL REPORT PURSUANT TO
    SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF
    1934For the Fiscal Year Ended
    December 31, 2005ORo

TRANSITION REPORT PURSUANT TO
    SECTION 13 OR 15(d)   OF THE SECURITIES EXCHANGE ACT OF
    1934o

SHELL COMPANY REPORT PURSUANT
    TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934       SAIFUN SEMICONDUCTORS
    LTD.
 (Exact name of Registrant as
    specified in its charter)
 Israel
 (Jurisdiction of incorporation or organization)
 ELROD Building
 45 Hamelacha Street
 Sappir Industrial Park
 Netanya 42504
 Israel
 (Address of principal executive offices)
 Securities registered or to be registered pursuant to
    Section 12(b) of the Act:
 None.
 Securities registered or to be registered pursuant to
    Section 12(g) of the Act:
 Ordinary Shares, par value NIS 0.01 per share
 Securities for which there is a reporting obligation pursuant
    to Section 15(d) of the Act:
 None.
 The number of outstanding shares of each of the issuers
    classes of capital or
 common stock as of December 31, 2005:
 29,456,722 Ordinary Shares, par value NIS 0.01 per
    share
      o þ
  o þ
  þ o
  Rule 12b-2
 o o þ
  o  þ
  Rule 12b-2 o þ




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##### 



TABLE OF
    CONTENTS
  PagePART IItem 1.


Identity of
    Directors, Senior Management and Advisers


3Item 2.


Offer Statistics
    and Expected Timetable


3Item 3.


Key Information


3Item 4.


Information on the
    Company


20Item 4A.


Unresolved Staff
    Comments


34Item 5.


Operating and
    Financial Review and Prospects


35Item 6.


Directors, Senior
    Management and Employees


52Item 7.


Major Shareholders
    and Related Party Transactions


63Item 8.


Financial
    Information


67Item 9.


The Offer and
    Listing


68Item 10.


Additional
    Information


69Item 11.


Quantitative and
    Qualitative Disclosures about Market Risk


83Item 12.


Description of
    Securities other than Equity Securities


84PART IIItem 13.


Defaults, Dividend
    Arrearages and Delinquencies


85Item 14.


Material
    Modifications to the Rights of Security Holders and Use of
    Proceeds


85Item 15.


Controls and
    Procedures


85Item 16.


[Reserved]


86Item 16A.


Audit Committee
    Financial Expert


86Item 16B.


Code of Ethics


86Item 16C.


Principal
    Accountants Fees and Services


86Item 16D.


Exemptions from the
    Listing Standards for Audit Committees


86Item 16E.


Purchases of Equity
    Securities by the Issuer and Affiliated Purchasers


86PART IIIItem 17.


Financial
    Statements


87Item 18.


Financial
    Statements


87Item 19.


Exhibits


87EX-11.1: CODE OF ETHICSEX-12.1: CERTIFICATIONEX-12.2: CERTIFICATIONEX-13.1: CERTIFICATIONEX-13.2: CERTIFICATION     2




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##### Table of Contents



PART I  ITEM 1.
    IDENTITY
    OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS    ITEM 2.
    OFFER
    STATISTICS AND EXPECTED TIMETABLE    ITEM 3.
    KEY
    INFORMATION  A.  SELECTED
    FINANCIAL DATA
  52-week
  Year endedDecember 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


$
65,790Services


1,914



3,438



6,639



7,926



12,811Total revenues


4,382



6,608



14,456



30,566



78,601Cost of services(2)


1,146



2,086



4,147



7,084



12,048Gross profit


3,236



4,522



10,309



23,482



66,553Operating expenses:Research and development(2)


7,022



6,583



9,132



6,792



7,427Marketing and selling(2)


967



920



2,543



2,914



4,889General and administrative(2)


783



3,426



1,779



2,115



6,216Total operating expenses


8,772



10,929



13,454



11,821



18,532Operating income (loss)


(5,536
)


(6,407
)


(3,145
)


11,661



48,021Financial income, net


2,209



1,030



1,137



1,699



1,749Equity in losses of equity method
    investees


(3,468
)


(6,851
)


(12,820
)


(26,172
)


 3




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##### Table of Contents



Year endedDecember 31,


December 31,


December 28,


December 26,


December 31,2001


2002


2003(3)


2004(3)


2005(in thousands, except share and
    per share data)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
)


49,770Loss from discontinued
    operations(2)(3)










(156
)


(7,189
)


(5,263
)Net income (loss)

$
(6,795
)

$
(12,228
)

$
(15,190
)

$
(37,904
)

$
44,507Basic earnings (loss) from
    continuing operations per ordinary share

$
(0.44
)

$
(0.76
)

$
(0.89
)

$
(1.81
)

$
0.46Basic 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
)

$
0.17Weighted 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



29,452,828Diluted earnings (loss) from
    continuing operations per ordinary share

$
(0.44
)

$
(0.76
)

$
(0.89
)

$
(1.81
)

$
0.36Diluted 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
)

$
0.16Weighted 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 4




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##### Table of Contents



Year endedDecember 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)

















$
2.06Pro forma basic loss from
    discontinued operations per ordinary share(4)

















$
(0.22
)Pro forma basic net earnings per
    ordinary share(4)

















$
1.84Weighted average number of
    ordinary shares used in computing pro forma net earnings per
    share  basic


















24,154,318Pro forma diluted earnings from
    continuing operations per ordinary share(4)

















$
1.90Pro forma diluted loss from
    discontinued operations per ordinary share(4)

















$
(0.20
)Pro forma diluted net earnings per
    ordinary share(4)

















$
1.70Weighted average number of
    ordinary shares used in computing pro forma net earnings per
    share  diluted


















26,240,525    As ofDecember 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


$
100,327Short-term investments


25,769



771



514



161



Held-to-maturity
    marketable securities










10,868



17,065



81,496Working capital(5)


36,075



36,894



25,499



(2,433
)


166,487Total assets


52,166



50,211



51,894



64,934



193,738Total liabilities


9,960



16,087



22,038



59,996



17,665Capital stock


58



60



60



60



120Accumulated deficit


(14,976
)


(27,204
)


(42,394
)


(80,298
)


(35,791
)Total shareholders equity


42,206



34,124



29,856



4,938



176,073   5




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##### Table of Contents



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


Year endedDecember 26,


December 31,2004


2005(in thousands)Cost of services

$
175


$
834Research and development


220



330Marketing and selling


87



667General and administrative


96



2,410Loss from discontinued operations


23



54Total

$
601


$
4,295     (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. 6




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CAUTIONARY
    LANGUAGE REGARDING FORWARD-LOOKING STATEMENTS
    
    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.    B.  CAPITALIZATION
    AND INDEBTEDNESS
    C.  REASON
    FOR THE OFFER AND USE OF PROCEEDS
   7




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D.  RISK
    FACTORS
  Risks
    Related to Our Business
  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 endedDecember 26,


December 31,2004


2005Macronix International Co.,
    Ltd.


37
%


18
%Infineon Technologies AG


28
*


57Spansion LLC


25



12     *
    Includes revenues from Infineon Technologies Flash Israel, the
    Israeli entity in our former joint venture which we exited in
    December 2004.    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.   8




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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.    If we
    are unable to successfully protect our inventions through the
    issuance and enforcement of patents, our business could be
    significantly harmed.  non-U.S. patents, non-U.S. patent
 9




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
    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.   10




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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.    Our
    difficulties in verifying royalty amounts and other payments
    owed to us under our license and other agreements may cause us
    to lose revenues.   11




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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.    Cyclicality
    in the semiconductor industry may affect our revenues and, as a
    result, our operating results could be adversely
    affected.   12




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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.    If we
    fail to support our growth in operations, particularly by
    enhancing our sales and marketing, and internal controls
    systems, our business could suffer.   13




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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.    Our
    international operations expose us to the risk of fluctuations
    in currency exchange rates.   14




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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.    Our
    reported financial results may be adversely affected by changes
    in accounting principles generally accepted in the United
    States.   15




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We may
    become subject to a claim by Tower Semiconductor Ltd. that we
    breached provisions of our license agreement with
    it.
    Risks
    Relating to our Ordinary Shares
  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.    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.   16




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
    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.    Substantial
    future sales of our ordinary shares in the public market may
    cause the price of our shares to decline.
      
    approximately 1.8 million shares beginning on May 8,
    2006, unless earlier released from lock-up agreements entered
    into with the underwriters of our initial public offering in
    November 2005;
    approximately 16.3 million shares beginning June 28,
    2006, approximately 13.6 million of which are subject to
    volume limitations under Rule 144, unless earlier release
    from lock-up agreements entered into with the underwriters of
    our follow-on public offering in April 2006; and
    approximately 1.6 million shares after June 28, 2006
    pursuant to lock-up agreements with us or other restrictions.    Any
    shareholder that acquires more than 9.9% of our shares will have
    limited voting rights with respect to those
    shares.
  non-U.S. corporation non-U.S. corporation
 17




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Our
    U.S. shareholders may suffer adverse tax consequences if we
    are characterized as a Passive Foreign Investment
    Company.    Risks
    Relating to our Location in Israel
  Conditions
    in Israel could adversely affect our business.    Our
    operations could be disrupted as a result of the obligation of
    key personnel in Israel to perform military
    service.   18




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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.    change-of-control
    We
    receive tax benefits that may be reduced or eliminated in the
    future.   19




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It may
    be difficult to enforce a U.S. judgment against us, our
    officers and directors in Israel or the United States, or to
    assert U.S. securities laws claims in Israel or serve
    process on our officers and directors.    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.    ITEM 4.
    INFORMATION
    ON THE COMPANY  A.
    HISTORY
    AND DEVELOPMENT OF THE COMPANY  51-239733-2. (9) 892-8444.
 20




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B.
    BUSINESS
    OVERVIEW  Overview
      
    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. 21




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
    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.  co-owned non-U.S. patents,
  Industry
    Overview
      
    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. 22




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Flash
    Memory Applications    ProjectedProjected


compoundglobal


annual growthGlobal sales


sales in


rate from 2005Segment

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 speedsEmbedded 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 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. 23




---



##### Table of Contents




    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.  Prevailing
    Non-Volatile Semiconductor Memory Technology
    
    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-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.   24




---



##### Table of Contents



Our
    Solution
    
    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, 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 25




---



##### Table of Contents



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.        Our NROM technology has some limitations.
  Our
    Strategy
    
    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
    Annual Report, 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 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. 26




---



##### Table of Contents




    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.  Licensees
    Infineon
    Technologies       27




---



##### Table of Contents



Macronix
    International Co., Ltd.        Matsushita
    Electric Industrial Co., Ltd.   28




---



##### Table of Contents



Semiconductor
    Manufacturing International Corporation (SMIC)  8-inch
    Sony
    Corporation      Spansion
    LLC   29




---



##### Table of Contents



30




---



##### Table of Contents



90-days
  Tower
    Semiconductor Ltd.    Design
    and Product Development Services
    Technology
  Floating
    Gate Devices    
     31




---



##### Table of Contents



NROM
    Devices      
    Program and erase.
    Array architecture and operation.
 32




---



##### Table of Contents



Process technology.
  Application-specific implementations of our
    technology.
  
    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.  Multi-level cell.
  Patents
    and Intellectual Property
    non-U.S. patents. non-U.S. patent
     33




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##### Table of Contents



Competition
        Sales and
    Marketing
    C.
    ORGANIZATIONAL
    STRUCTURE    Name of Subsidiary

Country of
    Incorporation

Percentage OwnershipSaifun Semiconductors USA,
    Inc.

USA


100
%Saifun (BVI) Limited

British Virgin Islands


100
%Tulip Semiconductor L.P.

Israel


100
%Tulip Semiconductor Holdings
    (2005) Ltd.

Israel


100
%Tulip Semiconductor Ltd.

Israel


100
%   D.
    PROPERTY,
    PLANTS AND EQUIPMENT   ITEM
    4A.  UNRESOLVED STAFF COMMENTS   34




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##### Table of Contents



ITEM 5.
    OPERATING
    AND FINANCIAL REVIEW AND PROSPECTS  A.
    OPERATING
    RESULTS  Overview
        
    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     35




---



##### Table of Contents



Impact of
    joint venture on historical results of operations     36




---



##### Table of Contents



Revenues  License
    revenues  License fees.
    License royalties.
       37




---



##### Table of Contents



Service
    revenues      Revenue
    breakdown    Year endedDecember 28,


December 26,


December 31,2003


2004


2005License revenues


54
%


74
%


84
%Service revenues


46



26



16       Customers
    and customer concentration    Year endedDecember 28,


December 26,


December 31,2003


2004


2005Macronix International Co.,
    Ltd.


36
%


37
%


18
%Infineon Technologies AG


45
(1)


28
(1)


57Spansion 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.   38




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##### Table of Contents



Geographical
    breakdown    Year endedDecember 28,


December 26,


December 31,2003


2004


2005Germany



%


4
%


57
%Taiwan


36



37



18United States


18



25



12Japan


1



10



12Israel(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  Services.
    Operating
    expenses    Research and development.
 39




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##### Table of Contents



Marketing and selling.
  General and administrative.
  Financial income, net.
  Equity in losses of equity method
    investees.
  Discontinued
    Operations      Year endedDecember 28,


December 26,


December 31,2003


2004


2005(in thousands)Revenues

$



$
1,673


$
4,495Cost of revenues






5,894



8,458Gross loss






(4,221
)


(3,963
)Research and development


156



1,732



568Marketing and selling






1,160



684General and administrative






76



48Loss from discontinued operations

$
(156
)

$
(7,189
)

$
(5,263
)   Taxes   40




---



##### Table of Contents



Critical
    Accounting Policies and Estimates
    Revenue recognition  license
    fees. No. 00-21
  Revenue
    recognition  services.
   41




---



##### Table of Contents



Accounting for income taxes.
  Valuation of stock-based awards.
       42




---



##### Table of Contents



Results
    of Operations
  Year
    Ended December 31, 2005 compared to Year Ended
    December 26, 2004  Revenues  Licenses.
  Services.
  Cost of
    revenues and gross margin  Services.
    Operating
    expenses  Research and development.
  Marketing and selling.
  General and administrative.
 43




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##### Table of Contents



Financial
    income, net  held-to-maturity held-to-maturity
  Loss from discontinued operations
  Year
    Ended December 26, 2004 compared to Year Ended
    December 28, 2003  Revenues  Licenses.
  Services.
  Cost of
    revenues and gross margin  Services.
    Operating
    expenses  Research and development.
 44




---



##### Table of Contents



Marketing and selling.
  General and administrative.
  Financial
    income, net    Equity in
    losses of equity method investees    Loss from
    discontinued operations   45




---



##### Table of Contents



Quarterly
    Results of Operations
    Three months endedMarch 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



13,006Services


1,907



1,963



2,253



1,803



3,333



3,197



2,597



3,684Total revenues


5,023



7,000



9,100



9,443



22,214



21,757



17,941



16,690Cost of services:


1,294



1,436



1,856



2,498



2,634



2,512



3,079



3,823Gross profit


3,729



5,564



7,244



6,945



19,580



19,245



14,862



12,867Operating expenses:Research and development


1,902



1,647



1,486



1,757



1,520



1,708



2,253



1,946Marketing and selling


504



505



879



1,026



1,430



1,227



1,264



968General and administrative


422



391



650



652



1,737



924



859



2,696Total operating expenses


2,828



2,543



3,015



3,435



4,687



3,859



4,376



5,610Operating income


901



3,021



4,229



3,510



14,893



15,386



10,486



7,257Financial income (expenses), net


(1
)


359



590



751



155



(117
)


543



1,168Equity 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



8,425Income (loss) from discontinued
    operations


(613
)


(954
)


(2,046
)


(3,576
)


(3,224
)


(1,999
)


(230
)


190Net income (loss)

$
(5,826
)

$
(3,224
)

$
(4,417
)

$
(24,437
)

$
11,824


$
13,270


$
10,799


$
8,615Basic earnings (loss) per Ordinary
    share from continuing operations

$
(0.31
)

$
(0.13
)

$
(0.14
)

$
(1.23
)













$
0.16Basic 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
)













$
0.16Diluted earnings (loss) per
    Ordinary share from continuing operations

$
(0.31
)

$
(0.13
)

$
(0.14
)

$
(1.23
)













$
0.14Diluted earnings (loss) per
    Ordinary share from discontinued operations

$
(0.03
)

$
(0.06
)

$
(0.12
)

$
(0.21
)













$
0.01Diluted 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. 46




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##### Table of Contents



B.
    LIQUIDITY
    AND CAPITAL RESOURCES     2010andsubsequentContractual and other
    obligations

Total


2006


2007


2008


2009


periods(in thousands)Operating leases(1)

$
2,992


$
1,591


$
848


$
361


$
123


$
69Software lease


4,901



1,823



1,811



1,267







Severance pay(2)


2,655



















2,655Total

$
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.   47




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##### Table of Contents



Year endedDecember 28,


December 26,


December 31,2003


2004


2005Net cash provided by operating
    activities

$
2,318


$
17,964


$
14,116Net cash used in investing
    activities


(17,371
)


(20,376
)


(66,068
)Net cash provided by financing
    activities


3,861



256



125,051Increase (decrease) in cash and
    cash equivalents

$
(11,192
)

$
(2,156
)

$
73,099     Operating
    activities  non-cash non-cash
          Investing
    activities   48




---



##### Table of Contents



held-to-maturity
  held-to-maturity
  Financing
    activities    Corporate
    Tax
       49




---



##### Table of Contents



pre-ruling
      Recent
    Accounting Pronouncements
       50




---



##### Table of Contents



No. 03-1,
  C.
    RESEARCH
    AND DEVELOPMENT    
    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.    D.
    TREND
    INFORMATION    E.  OFF-BALANCE
    SHEET ARRANGEMENTS
    F.  TABULAR
    DISCLOSURE OF CONTRACTUAL OBLIGATIONS
   51




---



##### Table of Contents



G.  SAFE
    HARBOR
    ITEM 6.
    DIRECTORS,
    SENIOR MANAGEMENT AND EMPLOYEES  A.  DIRECTORS
    AND SENIOR MANAGEMENT
    Name

Age


PositionExecutive OfficersDr. Boaz Eitan


57


Chief Executive Officer, Chairman
    and DirectorKobi Rozengarten


49


President and DirectorIgal Shany


34


Chief Financial OfficerRamy Langer


52


Vice
    President  Business DevelopmentEduardo Maayan


45


Vice
    President  Product DevelopmentDr. Meir Janai


58


Vice
    President  Quality and ReliabilityDr. Guy Cohen


44


Vice
    President  Technology Development and
    ProductizationDirectorsKenneth Levy(1)(3)


62


DirectorMatty Karp(1)(2)


55


DirectorDr. Shlomo Kalish(1)(4)


53


DirectorYossi Sela(1)(3)


53


DirectorGeorge Hervey(1)(2)(5)


59


DirectorIda 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  Dr. Boaz Eitan non-U.S. patents non-U.S. patent
  Kobi Rozengarten
 52




---



##### Table of Contents



Igal Shany
  Ramy Langer
  Eduardo Maayan
  Dr. Meir Janai
  Dr. Guy Cohen
  Kenneth Levy KLA-Tencor KLA-Tencor.
 53




---



##### Table of Contents



KLA-Tencor.
  Matty Karp
  Dr. Shlomo Kalish
  Yossi Sela
  George Hervey
 54




---



##### Table of Contents



Ms. Ida Keidar-Malits
  B.
    COMPENSATION  stock-based
  C.
    BOARD
    PRACTICES  Board of
    Directors and Officers
     55




---



##### Table of Contents



Outside
    Directors
  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.     56




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##### Table of Contents



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.     57




---



##### Table of Contents



Nasdaq
    Requirements    Audit
    Committee
  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.   58




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##### Table of Contents



Compensation,
    Nominating and Governance Committee
    
    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.  Internal
    Auditor
    D.
    EMPLOYEES    December 31,


December 28,


December 26,


December 31,Department

2002


2003


2004


2005Research and
    development(1) (2)


94



121



165



206Sales and marketing


4



9



9



12Management and administration


5



7



11



18Total


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.   59




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E.
    SHARE
    OWNERSHIP  Share
    Ownership by Directors and Executive Officers
    Share
    Option Plans
    2003 Share
    Option Plan       60




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2001 Share
    Option Plan         61




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1997 Share
    Option Plan          Employee
    Stock Purchase Plan
       62




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ITEM 7.
    MAJOR
    SHAREHOLDERS AND RELATED PARTY TRANSACTIONS  A.
    MAJOR
    SHAREHOLDERS    
    each person who we know beneficially owns 5.0% or more of the
    outstanding ordinary shares;
    each of our directors individually;
    each of our executive officers individually; and
    all of our directors and executive officers as a group.       Percentage ofNumber of Shares


Shares BeneficiallyName and Address

Beneficially Owned


OwnedPrincipal
    shareholders:Dr. Boaz Eitan(1)


11,027,415



36.1
%IDB Holding Corporation Ltd.(2)


2,708,859



8.9Argos Capital Appreciation Master
    Fund LP(3)


1,589,891



5.2Directors and executive
    officers:Dr. Boaz Eitan(1)


11,027,415



36.1
%Kobi Rozengarten(4)


400,610



1.3Ramy Langer






Igal Shany






Eduardo Maayan






Dr. Meir Janai(5)


56,000



*Dr. Guy Cohen(6)


5,600



*Kenneth Levy(7)


105,083



*Matty Karp(8)


1,037,048



3.4Dr. Shlomo Kalish(9)


32,083



*Yossi Sela(10)


1,243,524



4.1George Hervey(11)


33,750



*Ida Keidar-Malits






All directors and executive
    officers as a group


13,941,113



45.3
%     *
    
    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 consists of 5,003,774 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. 63




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(2)
    
    Based on a Schedule 13G filed on February 6, 2006 and
    on other information provided to us, the number of shares
    beneficially owned consists of 2,708,859 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 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 January 31, 2006 and
    on other information provided to us, the number of shares
    beneficially owned 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.(4)
    
    The number of shares beneficially owned consists of 389,850
    ordinary shares and options to purchase 10,760 ordinary shares.(5)
    
    The number of shares beneficially owned consists of options to
    purchase 56,000 ordinary shares.(6)
    
    The number of shares beneficially owned consists of options to
    purchase 5,600 ordinary shares.(7)
    
    The number of shares beneficially owned consists of 83,000
    ordinary shares and options to purchase 22,083 ordinary shares.(8)
    
    Based on a Schedule 13G filed on February 14, 2006 and
    on other information provided to us, the number of shares
    beneficially owned consists of 730,744 ordinary shares held by
    K.T. Concord Venture Fund (Cayman) L.P. and
    146,051 ordinary shares held by K.T. Concord Venture Fund
    (Israel) L.P. and 128,143 ordinary shares held by Concord
    Venture I Annex-B L.P. and options to purchase 32,083 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.(9)
    
    The number of shares beneficially owned consists of options to
    purchase 32,083 ordinary shares.(10)
    
    Based on a Schedule 13G filed on February 9, 2006 and
    on other information provided to us, the number of shares
    beneficially owned consists of 1,216,774 ordinary shares held by
    entities affiliated with Gemini Israel Funds Ltd., which include
    Gemini Israel II Parallel Fund L.P., Gemini Israel II L.P.,
    Gemini Israel III L.P., Advent PGGM Gemini L.P., Gemini Israel
    III Parallel Fund L.P., Gemini Partner Investors L.P., and
    Gemini Israel III Overflow Fund L.P., and options to purchase
    26,750 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.(11)
    
    The number of shares beneficially owned consists of options to
    purchase 33,750 ordinary shares. 64




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B.
    RELATED
    PARTY TRANSACTIONS    Sale of
    Shares to Argos Capital Appreciation Master Fund
      Registration
    Rights
  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.   65




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Piggyback
    registration rights
    Termination
    Expenses
    Agreements
    with Directors and Officers
  Employment
    agreements
      Loan
    agreements
    Principaland accruedinterest as ofDate of




Nature of


December 31,Name

loan


Terms

transaction


2005


RepaymentEduardo 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 a proposed follow-on 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
   66




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Legal
    Services
    C.
    INTERESTS
    OF EXPERTS AND COUNSEL    ITEM 8.
    FINANCIAL
    INFORMATION  A.
    CONSOLIDATED
    STATEMENTS AND OTHER FINANCIAL INFORMATION  Financial
    Statements
    Legal
    Proceedings
  Former CEO of Ingentix Ltd
  Tower Semiconductor Ltd
   67




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Dividend
    Policy
    B.  SIGNIFICANT
    CHANGES
    ITEM 9.
    THE
    OFFER AND LISTING  A.
    OFFER AND
    LISTING DETAILS    Most Recent Five
    Months

High


LowMarch 2006 (through April 10,
    2006)

$
33.14


$
27.86February 2006

$
33.81


$
28.93January 2006

$
37.90


$
33.77December 2005

$
31.47


$
27.69November 2005

$
35.38


$
29.00     B.
    PLAN OF
    DISTRIBUTION    C.
    MARKETS    D.
    SELLING
    SHAREHOLDERS    E.
    DILUTION   68




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F.
    EXPENSES
    OF THE ISSUE    ITEM 10.
    ADDITIONAL
    INFORMATION  A.
    SHARE
    CAPITAL    B.
    MEMORANDUM
    AND ARTICLES OF ASSOCIATION  is 51-239733-2
  Objects
    Transfer
    of Shares and Notices
    Election
    of Directors
    Dividend
    and Liquidation Rights
    Shareholder
    Meetings
   69




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Quorum
  1 3
  Voting
    Limitations
    on Voting
   70




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Resolutions
      Access to
    Corporate Records
    Acquisitions
    under Israeli Law
  Tender Offer.
   71




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Merger.
  Anti-Takeover
    Measures
  Undesignated preferred stock.
  Transactions with interested shareholders.
  
    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;
    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. 72




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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.    Supermajority voting.
  Classified board of directors.
  Transfer
    Agent and Registrar
  (212) 936-5100.
  C.
    MATERIAL
    CONTRACTS    Material Contract

LocationTermination of Joint Venture
    Agreement and Related Transactions with Infineon Technologies

Item 5:
    Operating and Financial Review and
    Prospects  Part A: Operating
    Results  Exit From Joint Venture with Infineon
    Technologies.License Agreement with Infineon
    Technologies

Item 4.B:
    Information on the Company  Part B:
    Business Overview  Licensees.License Agreement with Macronix

Item 4.B:
    Information on the Company  Part B:
    Business Overview  Licensees.License Agreement with Spansion

Item 4.B:
    Information on the Company  Part B:
    Business Overview  Licensees.   D.
    EXCHANGE
    CONTROLS   73




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E.
    TAXATION  Israeli
    Tax Considerations and Government Programs
  General        Taxation
    of Companies  General Corporate Tax Structure.
  Tax Benefits and Grants for Research and
    Development.
    Tax Benefits Under the Law for the Encouragement of Industry
    (Taxes), 1969.
  
    deduction of purchases of know-how and patents over an
    eight-year period for tax purposes; 74




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
    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.      Law for the Encouragement of Capital Investments,
    1959.
       75




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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.       76




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pre-ruling
    paid-up
    Special Provisions Relating to Taxation Under Inflationary
    Conditions.
  
    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.     77




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Taxation
    of our Shareholders  Taxation of Non-Israeli Shareholders on Receipt of
    Dividends.
    U.S.-Israel U.S.-Israel U.S.-Israel
    Capital Gains Taxes Applicable to Non-Israeli
    Shareholders.
    U.S.-Israel U.S.-Israel 12-month
 78




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U.S.-Israel U.S.-Israel
  United
    States Federal Income Taxation
    
    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 over its administration and
    (2) one or more United States persons have the authority to
    control all of the substantial decisions of such trust.  Non-U.S. Holder
 79




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You should consult your tax advisor with respect to the
    United States federal, state, local and foreign tax consequences
    of acquiring, owning or disposing of our ordinary shares.
  Distributions      Non-U.S. Holder,
  Sale
    or Exchange of Ordinary Shares   80




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Non-U.S. Holder,
  
    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  non-U.S. corporation
  
    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.      Controlled
    Foreign Corporation Considerations
  non-U.S. corporation
 81




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
    the total combined voting power of all classes of stock of such
    corporation entitled to vote, or
    the total value of the stock of such corporation        Backup
    Withholding Tax and Information Reporting
    Requirements        The above description is not intended to constitute a
    complete analysis of all tax consequences relating to
    acquisition, ownership and disposition of our ordinary shares.
    You should consult your tax advisor concerning the tax
    consequences of your particular situation.
 82




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F.
    DIVIDENDS
    AND PAYING AGENTS    G.
    STATEMENTS
    BY EXPERTS    H.
    DOCUMENTS
    ON DISPLAY  1-800-SEC-0330
    I.
    SUBSIDIARY
    INFORMATION    ITEM 11.
    QUANTITATIVE
    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      Risk
    of Interest Rate Fluctuation   83




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Foreign
    Currency Exchange Risk        Impact
    of Inflation    ITEM 12.
    DESCRIPTION
    OF SECURITIES OTHER THAN EQUITY SECURITIES   84




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PART II  ITEM 13.
    DEFAULTS,
    DIVIDEND ARREARAGES AND DELINQUENCIES    ITEM 14.
    MATERIAL
    MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
    PROCEEDS    333-129-167)
  Use of Proceeds

Description

Amount(In thousands)Construction of plant, buildings
    and facilities




Purchase and installation of
    machinery and equipment




Purchase of real estate




Repayment of indebtedness




Working capital




Temporary investments

Cash equivalents
    and marketable
    securities

$
120,853Any other use involving $100,000
    of the proceeds




Total



$
120,853      ITEM 15.
    CONTROLS
    AND PROCEDURES     85




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ITEM 16.
    [RESERVED] ITEM 16A.  AUDIT
    COMMITTEE FINANCIAL EXPERT   ITEM 16B.  CODE
    OF ETHICS   ITEM 16C.  PRINCIPAL
    ACCOUNTANT FEES AND SERVICES    2004


2005(Unaudited)Audit fees

$
33,548


$
66,381Audit-related fees(1)


160,003



316,508Tax fees(2)


3,730



29,419All other fees






Total

$
197,281


$
412,308     (1)
    
    Audit-related fees includes fees for services
    performed in connection with our registration statement on
    Form F-1
    for our initial public offering and our Annual Report on
    Form 20-F.(2)
    
    Tax fees includes fees for professional services
    rendered by our auditors for tax compliance and tax advice on
    actual or contemplated transactions.   ITEM 16D.  EXEMPTIONS
    FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES    ITEM 16E.
    PURCHASES
    OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
    PURCHASERS   86




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PART III  ITEM 17.
    FINANCIAL
    STATEMENTS    ITEM 18.
    FINANCIAL
    STATEMENTS   ITEM 19.  EXHIBITS  Exhibit

Description1
.1

Articles of Association
    (incorporated by reference to Exhibit 3.4 of the
    Registration Statement on
    Form F-1
    (File
    No. 333-129167)
    filed with the Commission on October 21, 2005)2
.1

Registration Rights Agreement,
    dated October 2, 2000, by and among the Registrant and the
    parties thereto (incorporated by reference to Exhibit 10.2
    of the Registration Statement on
    Form F-1
    (File
    No. 333-129167)
    filed with the Commission on October 21, 2005)2
.2

Amendment to Registration Rights
    Agreement and Shareholder Rights Agreement, dated as of
    September 29, 2005, by and among the parties thereto and
    the Registrant (incorporated by reference to Exhibit 10.2
    of the Registration Statement on
    Form F-1
    (File
    No. 333-129167)
    filed with the Commission on October 21, 2005)4
.1

Technology Agreement, dated
    May 4, 2000, by and between Macronix International Co.,
    Ltd. and the Registrant (incorporated by reference to
    Exhibit 10.7 of the Registration Statement on
    Form F-1
    (File
    No. 333-129167)
    filed with the Commission on October 21, 2005)4
.2

Amendment to the Technology
    Agreement, dated April 10, 2003, by and between Macronix
    International Co., Ltd. and the Registrant (incorporated by
    reference to Exhibit 10.8 of the Registration Statement on
    Form F-1
    (File
    No. 333-129167)
    filed with the Commission on October 21, 2005)4
.3

Second Addendum to the Technology
    Agreement, dated April 22, 2004, by and between Macronix
    International Co., Ltd. and the Registrant (incorporated by
    reference to Exhibit 10.9 of the Registration Statement on
    Form F-1
    (File
    No. 333-129167)
    filed with the Commission on October 21, 2005)4
.4

Termination of Joint Venture
    Agreement and Related Transactions, dated December 20,
    2004, by and among Infineon Technologies AG, Saifun Ventures
    Ltd. and the Registrant (incorporated by reference to
    Exhibit 10.10 of the Registration Statement on
    Form F-1
    (File
    No. 333-129167)
    filed with the Commission on October 21, 2005)4
.5

Settlement and License Agreement,
    dated July 1, 2002, by and between Advanced Micro Devices,
    Inc., Fujitsu Limited and the Registrant (incorporated by
    reference to Exhibit 10.11 of the Registration Statement on
    Form F-1
    (File
    No. 333-129167)
    filed with the Commission on October 21, 2005)4
.6

License Agreement, dated
    January 13, 2005, by and among Infineon Technologies AG and
    its subsidiaries and the Registrant and its subsidiaries
    (incorporated by reference to Exhibit 10.12 of the
    Registration Statement on
    Form F-1
    (File
    No. 333-129167)
    filed with the Commission on October 21, 2005)4
.7

Basic Agreement of Development
    Orders, dated December 20, 2004, by and between Infineon
    Technologies AG and the Registrant (incorporated by reference to
    Exhibit 10.13 of the Registration Statement on
    Form F-1
    (File
    No. 333-129167)
    filed with the Commission on October 21, 2005)4
.8

Form of Director and Officer
    Letter of Indemnification (incorporated by reference to
    Exhibit 10.18 of the Registration Statement on
    Form F-1
    (File
    No. 333-129167)
    filed with the Commission on October 21, 2005)8
.1

List of Subsidiaries of the
    Registrant (incorporated by reference to Exhibit 21.1 of
    the Registration Statement on
    Form F-1
    (File
    No. 333-129167)
    filed with the Commission on November 4, 2005)11
.1

Code of Ethics effective as of
    September 2005 87




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Exhibit

Description12
.1

Certification of Chief Executive
    Officer of the Registrant pursuant to Section 302 of the
    Sarbanes-Oxley Act of 200212
.2

Certification of Chief Financial
    Officer of the Registrant pursuant to Section 302 of the
    Sarbanes-Oxley Act of 200213
.1

Certification of Chief Executive
    Officer of the Registrant pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002*13
.2

Certification of Chief Financial
    Officer of the Registrant pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002*     *
    
    This document is being furnished in accordance with SEC Release
    Nos. 33-8212
    and 34-47551.
    
    Portions of this exhibit were omitted and have been filed
    separately with the Secretary of the Securities and Exchange
    Commission pursuant to the Registrants application
    requesting confidential treatment under Rule 406 of the
    Securities Act. 88




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SIGNATURES
  Form 20-F
    By:
    /s/  Boaz
    Eitan      BY:
    /s/  Igal
    Shany




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##### Table of Contents



SAIFUN
    SEMICONDUCTORS LTD.
  INDEX TO FINANCIAL STATEMENTS
  PageSAIFUN SEMICONDUCTORS LTD. AND
    ITS SUBSIDIARIESConsolidated Financial
    StatementsReport of
    Independent Registered Public Accounting Firm


F-2Consolidated
    Balance Sheets as of December 26, 2004 and
    December 31, 2005


F-3Consolidated
    Statements of Operations for the years ended December 28,
    2003, December 26, 2004 and December 31, 2005


F-5Statements of
    Changes in Shareholders Equity for the years ended
    December 28, 2003, December 26, 2004 and
    December 31, 2005


F-6Consolidated
    Statements of Cash Flows for the years ended December 28,
    2003, December 26, 2004 and December 31, 2005


F-8Notes to the
    Consolidated Financial Statements


F-9INFINEON TECHNOLOGIES FLASH
    LTD.Financial StatementsReport of
    Independent Registered Public Accounting Firm


F-33Net Assets in
    Liquidation as of December 23, 2004


F-34Statements of
    Operations for the year ended December 31, 2003 and for the
    period from January 1, 2004 to December 23, 2004


F-35Statement of
    Changes in Net Assets in Liquidation for the period from
    December 23, 2004 to December 23, 2004


F-36Statements 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-37Statements of Cash
    Flows for the year ended December 31, 2003 and for the
    period from January 1, 2004 to December 23, 2004


F-38Notes to the
    Financial Statements


F-39INFINEON TECHNOLOGIES FLASH
    GMBH & CO. KG, DRESDENFinancial StatementsReport of
    Independent Registered Public Accounting Firm


F-51Statements of
    Operations for the period ended December 23, 2004 and the
    year ended December 26, 2003


F-52Balance Sheet as of
    December 23, 2004


F-53Statement of
    Partners Equity for the period ended December 23,
    2004 and the year ended December 26, 2003


F-54Statements of Cash
    Flows for the period ended December 23, 2004 and the year
    ended December 26, 2003


F-55Notes to the
    Financial Statements


F-56  F-1




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  To the Shareholders of
  SAIFUN SEMICONDUCTORS LTD.
   52-week
      52-week
     Kost
    Forer Gabbay & Kaisierer
      F-2




---



##### Table of Contents



SAIFUN
    SEMICONDUCTORS LTD. AND ITS SUBSIDIARIES
  CONSOLIDATED BALANCE SHEETS
 U.S. dollars in thousands
  December 26,


December 31,Note


2004*


2005ASSETSCURRENT ASSETS:Cash and cash equivalents





$
27,228


$
100,327Short-term investments






161



Held-to-maturity
    marketable securities


3



14,662



75,501Trade receivables






7,471



2,663Loans to employees


5







613Other accounts receivable and
    prepaid expenses






880



2,181Total assets attributed to
    discontinued operations


9



5,151



212Total current assets






55,553



181,497Held-to-maturity
    marketable securities


3



2,403



5,995Property and equipment, net


6



1,910



2,668Loans to employees


5



2,714



1,097Severance pay fund






1,549



2,122Lease deposits






245



289Other assets


4



560



709,381



12,241Total assets





$
64,934


$
193,738    *
    Reclassified, see Note 9.   F-3




---



##### Table of Contents



SAIFUN
    SEMICONDUCTORS LTD. AND ITS SUBSIDIARIES
  CONSOLIDATED BALANCE SHEETS
 U.S. dollars in thousands, except share and per share
    data
  December 26,


December 31,Note


2004*


2005LIABILITIES AND SHAREHOLDERS
    EQUITYCURRENT LIABILITIES:Trade payables





$
1,412


$
1,165Accrued expenses and other
    liabilities


7



5,548



9,913Deferred revenues


4



47,222



3,786Total liabilities attributed to
    discontinued operations


9



3,804



146Total current liabilities






57,986



15,010ACCRUED SEVERANCE PAY






2,010



2,655COMMITMENTS AND CONTINGENT
    LIABILITIES


8SHAREHOLDERS EQUITY:


10Share 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



120Additional paid-in capital






85,426



211,706Subscription receivables






(250
)


Accumulated other comprehensive
    income










38Accumulated deficit






(80,298
)


(35,791
)Total shareholders equity






4,938



176,073Total liabilities and
    shareholders equity





$
64,934


$
193,738    *
    Reclassified, see Note 9.   F-4




---



##### Table of Contents



SAIFUN
    SEMICONDUCTORS LTD. AND ITS SUBSIDIARIES
  CONSOLIDATED STATEMENTS OF OPERATIONS
 U.S. dollars in thousands, except share and per
    share data
  Year endedDecember 28,


December 26,


December 31,Note


2003*


2004*


2005Revenues**:


13,4cLicenses





$
7,817


$
22,640


$
65,790Services






6,639



7,926



12,81114,456



30,566



78,601Cost of revenues:Services***






4,147



7,084



12,048Gross profit






10,309



23,482



66,553Operating expenses:Research and development***






9,132



6,792



7,427Marketing and selling***






2,543



2,914



4,889General and administrative***






1,779



2,115



6,216Total operating expenses






13,454



11,821



18,532Operating income (loss)






(3,145
)


11,661



48,021Financial income, net


14



1,137



1,699



1,749Equity 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
)


49,770Loss from discontinued operations***


9



(156
)


(7,189
)


(5,263
)Net income (loss)





$
(15,190
)

$
(37,904
)

$
44,507Net earnings (loss) per share:


15Basic earnings (loss) per Ordinary
    share from continuing operations





$
(0.89
)

$
(1.81
)

$
0.46Basic loss per Ordinary share from
    discontinued operations





$
(0.01
)

$
(0.43
)

$
(0.29
)Basic net earnings (loss) per
    Ordinary share





$
(0.90
)

$
(2.24
)

$
0.17Diluted earnings (loss) per
    Ordinary share from continuing operations





$
(0.89
)

$
(1.81
)

$
0.36Diluted 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 endedDecember 28,


December 26,


December 31,2003


2004


2005Cost of services

$



$
175


$
834Research and development






220



330Marketing and selling






87



667General and administrative






96



2,410Loss from discontinued operations






23



54$



$
601


$
4,295    F-5




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##### Table of Contents



SAIFUN
    SEMICONDUCTORS LTD. AND ITS SUBSIDIARIES
  STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
 U.S. dollars in thousands, except share data
  Accumulated








TotalAdditional





Deferred


other








comprehensive


TotalNumber of shares


Share


paid-in


Subscription


stock


comprehensive


Accumulated


Treasury


income


shareholdersPreferred


Ordinary


capital


capital


receivables


compensation


income


deficit


shares


(loss)


equityBalance as of January 1, 2003


4,609,686



16,875,301


$
60


$
78,658


$
(11,175
)

$



$
508


$
(27,204
)

$
(6,723
)





$
34,124Receipts on account of shares


















3,800























3,800Options exercised






45,960




*


61



























61Deferred stock compensation














367







(367
)


















Gain on issuance of shares by
    development stage entities accounted for by the equity method














4,370



















2,607







6,977Compensation expense related to
    issuance of options to an employee of an equity method investee














206



























206Comprehensive 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
)






29,856Receipts on account of shares


















845























845Options exercised


5,730



16,160




*


130



























130Compensation expense related to
    issuance of options to employees of equity method investees














813



























813Amortization of deferred stock
    compensation














(367
)






367



















Stock-based compensation related to
    options issued to employees and others














1,539



























1,539Reissuance of treasury shares














871



6,280















4,116







11,267Deferred 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.   F-6




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##### Table of Contents



SAIFUN
    SEMICONDUCTORS LTD. AND ITS SUBSIDIARIES
  STATEMENTS OF CHANGES IN SHAREHOLDERS
    EQUITY
 U.S. dollars in thousands, except share data
  Accumulated








TotalAdditional





Deferred


other








comprehensive


TotalNumber of shares


Share


paid-in


Subscription


stock


comprehensive


Accumulated


Treasury


income


shareholdersPreferred


Ordinary


capital


capital


receivables


compensation


income


deficit


shares


(loss)


equityBalance as of December 26, 2004


4,615,416



16,937,421



60



85,426



(250
)










(80,298
)










4,938Issuance of share capital upon
    initial public offering, net






5,750,000



12



122,063
**


























122,075Options exercised


984,283



1,140,111



48



488



























536Conversion of Convertible Preferred
    shares


(5,599,699
)


5,599,699



































Warrants exercised






29,491




*


550



























550Receipts on account of shares


















250























250Stock-based compensation related to
    options issued to employees and others














3,179



























3,179Comprehensive income:Changes in fair value of cash flow
    derivative


























38










$
38



38Net income






























44,507







44,507



44,507Total comprehensive income





































$
44,545Balance 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.   F-7




---



##### Table of Contents



SAIFUN
    SEMICONDUCTORS LTD. AND ITS SUBSIDIARIES
  CONSOLIDATED STATEMENTS OF CASH FLOWS
 U.S. dollars in thousands
  Year EndedDecember 28,


December 26,


December 31,2003*


2004*


2005Cash flows from operating
    activities:Net income (loss)

$
(15,190
)

$
(37,904
)

$
44,507Adjustments 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



1,195Stock-based compensation related to
    options issued to employees and others






601



4,295Non-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



72Amortization of premium, net and
    accrued interest on
    held-to-maturity
    marketable securities


8



546



889Amortization and impairment of
    other assets










490Accrued 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
)


4,808Decrease (increase) in other
    accounts receivable and prepaid expenses


350



(407
)


(1,263
)Decrease (increase) in total assets
    attributed to discontinued operations


(255
)


(4,776
)


4,939Increase (decrease) in trade
    payables


279



(396
)


(458
)Increase in accrued expenses and
    other liabilities


1,731



625



1,820Increase (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



14,116Cash flows from investing
    activities:Collection of short-term bank
    deposits, net


257



353



161Purchase of
    held-to-maturity
    marketable securities


(10,876
)


(12,471
)


(85,934
)Proceeds from maturity of
    held-to-maturity
    marketable securities






5,727



20,614Investment 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



1,242Net 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










125,666Issuance costs in respect of the
    Companys initial public offering






(719
)


(1,951
)Proceeds from issuance of shares


3,800



845



250Proceeds from options and warrants
    exercised


61



130



1,086Net cash provided by financing
    activities


3,861



256



125,051Increase (decrease) in cash and
    cash equivalents


(11,192
)


(2,156
)


73,099Cash and cash equivalents at
    beginning of year


40,576



29,384



27,228Cash and cash equivalents at end of
    year

$
29,384


$
27,228


$
100,327Non-cash
    transactions  see Note 4c    *
    Reclassified, see Note 9.   F-8




---



##### Table of Contents



SAIFUN
    SEMICONDUCTORS LTD. AND ITS SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands, except share data
  NOTE 1:
    GENERAL      NOTE 2:
    SIGNIFICANT
    ACCOUNTING POLICIES                  52-week
 F-9




---



##### Table of Contents



SAIFUN SEMICONDUCTORS LTD. AND ITS SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
                          g. Held-to-maturity
  held-to-maturity held-to-maturity
 F-10




---



##### Table of Contents



SAIFUN SEMICONDUCTORS LTD. AND ITS SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
           %Laboratory equipment

15  33Computers and software

33Furniture and fixtures

6  33Leasehold improvements

20  95                F-11




---



##### Table of Contents



SAIFUN SEMICONDUCTORS LTD. AND ITS SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        December 28,


December 26,


December 31,2003


2004


2005Dividend 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 endedDecember 28,2003Net 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
)            F-12




---



##### Table of Contents



SAIFUN SEMICONDUCTORS LTD. AND ITS SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   License
    revenues  No. 00-21, (EITF No. 00-21).
  No. 00-21,
      Service
    revenues      Discontinued
    operations  Product revenues       F-13




---



##### Table of Contents



SAIFUN SEMICONDUCTORS LTD. AND ITS SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Force 99-10,
            held-to-maturity
           F-14




---



##### Table of Contents



SAIFUN SEMICONDUCTORS LTD. AND ITS SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
                    EITF No. 03-6, No. 03-6). No. 03-6
  EITF No. 03-6,
   F-15




---



##### Table of Contents



SAIFUN SEMICONDUCTORS LTD. AND ITS SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
                    F-16




---



##### Table of Contents



SAIFUN SEMICONDUCTORS LTD. AND ITS SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      FAS 115-1. No. 03-1, FAS 115-1
  NOTE 3:
    HELD-TO-MATURITY
    MARKETABLE SECURITIES  held-to-maturity
  December 26,


December 31,2004


2005First year

$
14,662


$
75,501Second year


2,403



4,138Third year






1,857$
17,065


$
81,496     NOTE 4:
    OBLIGATION
    TO FINANCE EQUITY METHOD INVESTEES     F-17




---



##### Table of Contents



SAIFUN SEMICONDUCTORS LTD. AND ITS SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
       December 23,2004Investment in shares

$
18,556Gain on issuance of shares


4,370Options issued to employees of
    equity method investee (Note 10d)


246Less  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)

$
4,987Assignment of subscription
    receivable


6,280Write-off of interest receivables
    on loans granted to the Joint Venture


275Realization 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.   F-18




---



##### Table of Contents



SAIFUN SEMICONDUCTORS LTD. AND ITS SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Year endedDecember 28,


December 26,2003


2004Revenues

$
39,732


$
58,111Gross profit (loss)

$
1,129


$
(23,488
)Loss from continuing operations

$
(41,012
)

$
(86,906
)Net loss

$
(41,012
)

$
(86,906
)         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).     F-19




---



##### Table of Contents



SAIFUN SEMICONDUCTORS LTD. AND ITS SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
            Interest
    in the Joint Venture    Development
    services         F-20




---



##### Table of Contents



SAIFUN SEMICONDUCTORS LTD. AND ITS SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   NOTE 5:
    LOANS TO
    EMPLOYEES    2006

$
6132007


3842008


3072009


2602010


146$
1,710   NOTE 6:
    PROPERTY
    AND EQUIPMENT, NET  December 26,


December 31,2004


2005Cost:Laboratory equipment

$
2,522


$
3,594Computers and software


4,327



4,981Furniture and fixtures


296



387Leasehold improvements


736



8727,881



9,834Accumulated depreciation:Laboratory equipment


1,926



2,307Computers and software


3,556



4,112Furniture and fixtures


106



132Leasehold improvements


383



6155,971



7,166Depreciated cost

$
1,910


$
2,668    F-21




---



##### Table of Contents



SAIFUN SEMICONDUCTORS LTD. AND ITS SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   NOTE 7:
    ACCRUED
    EXPENSES AND OTHER LIABILITIES  December 26,


December 31,2004


2005Payroll and related expenses(*)

$
2,459


$
3,434Accrued issuance expenses


426



(**)1,859Other accrued expenses


1,523



2,369SARP 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.  NOTE 8:
    COMMITMENTS
    AND CONTINGENT LIABILITIES  Commitments:      Year ended December
    31,2006

$
3,4142007


2,6592008


1,6282009


1232010


69$
7,893         Contingencies:   F-22




---



##### Table of Contents



SAIFUN SEMICONDUCTORS LTD. AND ITS SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
          NOTE 9:
    DISCONTINUED
    OPERATIONS      Year endedDecember 28,


December 26,


December 31,2003


2004


2005Revenues

$



$
1,673


$
4,495Cost of revenues






5,894



8,458Gross loss






(4,221
)


(3,963
)Research and development expenses


156



1,732



568Marketing and selling expenses






1,160



684General and administrative expenses






76



48Loss from discontinued operations

$
(156
)

$
(7,189
)

$
(5,263
)  F-23




---



##### Table of Contents



SAIFUN SEMICONDUCTORS LTD. AND ITS SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     December 26,


December 31,2004


2005Assets:Trade receivables

$
633


$
212Inventories


2,231



Other accounts receivable and
    prepaid expenses


2,034



Property and equipment, net


253



$
5,151


$
212Liabilities:Trade payables

$
3,411


$
55Accrued expenses and other
    liabilities


313



91Deferred revenues


80



$
3,804


$
146   NOTE 10:
    SHAREHOLDERS
    EQUITY               F-24




---



##### Table of Contents



SAIFUN SEMICONDUCTORS LTD. AND ITS SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
                   Year endedDecember 28, 2003


December 26, 2004


December 31, 2005Weighted





Weighted





WeightedAmount


average


Amount


average


Amount


averageof


exercise


of


exercise


of


exerciseoptions


price


options


price


options


priceOutstanding  beginning
    of the year


3,296,399


$
2.91



4,192,548


$
4.96



5,096,494


$
7.66Granted


1,385,974
*

$
9.00



1,312,776
**

$
13.97



1,045,013


$
21.49Exercised


(45,960
)

$
1.31



(16,160
)

$
6.93



(1,140,111
)

$
0.50Forfeited


(443,865
)

$
2.80



(392,670
)

$
8.05



(296,380
)

$
10.23Outstanding  end
    of the year


4,192,548


$
4.96



5,096,494


$
7.66



4,705,016


$
11.61Options 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. F-25




---



##### Table of Contents



SAIFUN SEMICONDUCTORS LTD. AND ITS SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   **
    Includes immediately vested 94,260 options granted to former IFL
    Ltd. employees subsequent to the termination of the Joint
    Venture (see Note 4c).    Options outstanding


Options exercisableAmount








Amountoutstanding








outstandingas


Weighted





asof


average


Weighted


of


WeightedDecember


remaining


average


December


average31,


contractual


exercise


31,


exerciseExercise 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            F-26




---



##### Table of Contents



SAIFUN SEMICONDUCTORS LTD. AND ITS SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   NOTE 11:  RELATED
    PARTY BALANCES AND TRANSACTIONS
    December 26,


December 31,2004


2005Loan 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 endedDecember 28,


December 26,


December 31,2003


2004


2005Revenues (shareholder and Joint
    Venture)

$
6,440


$
8,425


$
Sales and marketing expenses
    (shareholder and related party)

$
529


$
925


$
86General and administrative
    expenses (related party)

$
536


$
612


$
586Interest income (Joint Venture)

$
272


$
604


$
Issuance expenses (recorded in
    shareholders equity)

$



$
195


$
220   NOTE 12:  TAXES
    ON INCOME
           F-27




---



##### Table of Contents



SAIFUN SEMICONDUCTORS LTD. AND ITS SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
                Year endedDecember 28,


December 26,


December 31,2003


2004


2005Israel*

$
(14,483
)

$
(36,824
)

$
45,356Foreign


(707
)


(1,080
)


(849
)$
(15,190
)

$
(37,904
)

$
44,507     *
    Includes loss attributed to Saifun BVI (Limited). F-28




---



##### Table of Contents



SAIFUN SEMICONDUCTORS LTD. AND ITS SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
       December 26,


December 31,2004


2005Operating loss carryforwards
    (Saifun Semiconductors USA, Inc. and Saifun BVI (Limited))

$
432


$
1,848Valuation allowance


(432
)


(1,848
)Net deferred tax asset

$



$
     NOTE 13:  MAJOR
    CUSTOMERS AND GEOGRAPHIC INFORMATION
      Year endedDecember 28,


December 26,


December 31,2003


2004


2005Taiwan

$
5,168


$
11,417


$
14,047Israel


6,440
*


7,276
*


32United States


2,656



7,701



9,265Japan


192



3,022



9,793Germany






1,150



44,796Other










668$
14,456


$
30,566


$
78,601     *
    Includes mainly services provided to the Joint Venture through
    IFL Ltd.        Year endedDecember 28,


December 26,


December 31,2003


2004


2005Licensing and services:Customer A


36
%


37
%


18
%Customer B


18
%


25
%


12
%Customer C


45
%


28
%


57
%  F-29




---



##### Table of Contents



SAIFUN SEMICONDUCTORS LTD. AND ITS SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   NOTE 14:  FINANCIAL
    INCOME, NET
  Year endedDecember 28,


December 26,


December 31,2003


2004


2005Income:Interest on cash equivalents,
    marketable securities and premium on
    held-to-maturity
    marketable securities

$
677


$
555


$
2,163Foreign currency exchange
    differences


148



487



Interest from loans issued to
    equity method investees


251



604



Interest from loans to employees


99



120



108Expenses:Bank commissions


(38
)


(67
)


(46
)Foreign currency exchange
    differences










(476
)$
1,137


$
1,699


$
1,749  F-30




---



##### Table of Contents



SAIFUN SEMICONDUCTORS LTD. AND ITS SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   NOTE 15:  NET
    EARNINGS (LOSS) PER SHARE
    Year endedDecember 28,


December 26,


December 31,2003


2004


2005Numerator:Net earnings (loss)

$
(15,190
)

$
(37,904
)

$
44,507Allocation of undistributed
    earnings to Convertible Preferred shares










(39,529
)Numerator attributed to Ordinary
    shares after allocation of undistributed earnings

$
(15,190
)

$
(37,904
)

$
4,978Denominator: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)










2,494Weighted average number of
    Ordinary shares outstanding during the year used to compute
    diluted net earnings (loss) per share (in thousands)


16,896



16,927



31,947Basic earnings (loss) per Ordinary
    share from continuing operations

$
(0.89
)

$
(1.81
)

$
0.46Basic loss per Ordinary share from
    discontinued operations

$
(0.01
)

$
(0.43
)

$
(0.29
)Basic net earnings (loss) per
    Ordinary share

$
(0.90
)

$
(2.24
)

$
0.17Diluted earnings (loss) per
    Ordinary share from continuing operations

$
(0.89
)

$
(1.81
)

$
0.36Diluted 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. F-31




---



##### Table of Contents



SAIFUN SEMICONDUCTORS LTD. AND ITS SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Year endedDecember 31,2005Numerator:Net earning

$
44,507Denominator:Weighted average number of
    Ordinary shares outstanding during the year used to compute pro
    forma basic net earnings per share (in thousands)


24,154Incremental shares attributable to
    exercise of outstanding options and warrants (in thousands)


2,087Weighted average number of
    Ordinary shares outstanding during the year used to compute pro
    forma diluted net earnings per share (in thousands)


26,241Pro forma basic earnings per
    Ordinary share from continuing operations

$
2.06Pro forma basic loss per Ordinary
    share from discontinued operations

$
(0.22
)Pro forma basic net earnings per
    Ordinary share

$
1.84Pro forma diluted earnings per
    Ordinary share from continuing operations

$
1.90Pro forma diluted loss per
    Ordinary share from discontinued operations

$
(0.20
)Pro forma diluted net earnings per
    Ordinary share

$
1.70  F-32




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



The
    Shareholders of Infineon Technologies Flash Ltd.                   F-33




---



##### Table of Contents



INFINEON
    TECHNOLOGIES FLASH LTD.
  NET ASSETS IN LIQUIDATION
  As ofDecember 23,Note


2004US$ thousandsAssetsCash and cash equivalents






1,736Accounts
    receivable  related party


3



5,766Other current assets


4



132Investment in Saifun
    Semiconductors held for sale


5



15,014Restricted assets for employee
    termination benefits


11



99Furniture and equipment, held for
    sale


7



740Total assets






23,487LiabilitiesCurrent maturities of long-term
    loans with related parties


10



6,280Accounts payable


8



4,631Accounts payable to related parties






6Other current liabilities


9



264Liability for employee termination
    benefits


11



124Total current liabilities






11,305Net assets in liquidation






12,182    F-34




---



##### Table of Contents



INFINEON
    TECHNOLOGIES FLASH LTD.
 STATEMENTS OF OPERATIONS (Going Concern Basis)  For the


For theyear ended


period endedDecember 31,


December 23,Note


2003


2004US$ thousandsRevenue from research and
    development agreement with related party






11,407



12,56311,407



12,563Research and development expenses






10,901



13,676Selling expenses






29



General and administrative expenses






475



660Other expenses


5







4,986Total operating expenses






11,405



19,322Operating (loss) income






2



(6,759
)Interest expense, net


14



385



26Loss before income taxes






(383
)


(6,785
)Income taxes


6







Net loss






(383
)


(6,785
)    F-35




---



##### Table of Contents



INFINEON
    TECHNOLOGIES FLASH LTD.
 STATEMENTS OF CHANGES IN NET ASSETS IN LIQUIDATION  For theperiod fromDecember 23,2004 toDecember 23,2004US$ thousandsStockholders equity at
    December 23, 2004


12,182Liquidation basis adjustments:


Net assets in liquidations on
    December 23, 2004


12,182Distribution to stockholders


Net assets in liquidations on
    December 23, 2004


12,182    F-36




---



##### Table of Contents



INFINEON
    TECHNOLOGIES FLASH LTD.
 STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (Going Concern
    Basis)  AdditionalIssued Ordinary Shares


paid-in


AccumulatedShares


Amount


capital


deficit


TotalNIS


US$ thousands0.01pershareBalance as of December 31,
    2002


1,000,000



2



23,718



(10,376
)


13,344Issuance of ordinary shares


634,000



2



4,000







4,002Net loss














(383
)


(383
)Balance as of December 31,
    2003


1,634,000



4



27,718



(10,759
)


16,963Balance as of December 31,
    2003


1,634,000



4



27,718



(10,759
)


16,963Capital contribution










1,908







1,908Net loss














(6,785
)


(6,785
)Stock based compensation










96







96Balance as of December 23,
    2004


1,634,000



4



29,722



(17,544
)


12,182    F-37




---



##### Table of Contents



INFINEON
    TECHNOLOGIES FLASH LTD.
  STATEMENTS OF CASH FLOWS (Going Concern
    Basis)
  For the


For theyear ended


period endedDecember 31,


December 23,2003


2004US$ thousands


US$ thousandsCash flows from operating
    activities:Net loss


(383
)


(6,785
)Adjustments required to reconcile
    net loss to net cash from operating activities:Depreciation


341



352Severance benefits, net


2



11Stock based compensation






96SAR compensation expense






1,908Impairment of investment






4,986Increase in accounts
    receivable  related parties


(3,275
)


(2,467
)Decrease (increase) in other assets


(173
)


274Increase (decrease) in accounts
    payable


(37
)


4,576Increase (decrease) in other
    liabilities


595



(1,915
)Net cash (used in) provided by
    operating activities


(2,930
)


1,036Cash flows from investing
    activities:Acquisitions of equipment


(265
)


(486
)Issuance of short-term loan to
    related party






(500
)Repayment of loan to related party






500Net 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



550Cash and cash equivalents at
    beginning of period


904



1,186Cash and cash equivalents at end
    of period


1,186



1,736Supplemental cash flow informationCash paid for interest


418



126    F-38




---



##### Table of Contents



INFINEON
    TECHNOLOGIES FLASH LTD.
  NOTES TO THE FINANCIAL STATEMENTS
 (US$ in thousands, except where otherwise stated)
  Note 1  Description
    of Business and Basis of Presentation
                Note 2  Significant
    Accounting Principles
   F-39




---



##### Table of Contents



INFINEON TECHNOLOGIES FLASH LTD.
  NOTES TO THE FINANCIAL
    STATEMENTS  (Continued)
 (US in thousands, except where otherwise stated)
   A.
    Basis of
    presentation      B.
    Use of
    estimates    C.
    Functional
    and reporting currency        Exchange rateof US$1December 23, 2004


NIS 4.336December 31, 2003


NIS 4.379   D.
    Cash and
    cash equivalents    E.
    Investment
    in Saifun Semiconductor Ltd.   F-40




---



##### Table of Contents



INFINEON TECHNOLOGIES FLASH LTD.
  NOTES TO THE FINANCIAL
    STATEMENTS  (Continued)
 (US in thousands, except where otherwise stated)
       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   F-41




---



##### Table of Contents



INFINEON TECHNOLOGIES FLASH LTD.
  NOTES TO THE FINANCIAL
    STATEMENTS  (Continued)
 (US in thousands, except where otherwise stated)
     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  No. 00-12
   F-42




---



##### Table of Contents



INFINEON TECHNOLOGIES FLASH LTD.
  NOTES TO THE FINANCIAL
    STATEMENTS  (Continued)
 (US in thousands, except where otherwise stated)
   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  No. 03-1, (EITF 03-1) EITF 03-1. EITF 03-1
 F-43




---



##### Table of Contents



INFINEON TECHNOLOGIES FLASH LTD.
  NOTES TO THE FINANCIAL
    STATEMENTS  (Continued)
 (US in thousands, except where otherwise stated)
  EITF 03-1. EITF 03-1 EITF 03-1 EITF 03-1
  Note 3  Accounts
    Receivable  Related Party
    Note 4  Other
    Current Assets
  December 23,2004Government
    institutions  VAT


125Government
    institutions  tax


Prepaid expenses


Advances to services providers and
    others


7132   Note 5  Investment
    in Saifun Semiconductors
         F-44




---



##### Table of Contents



INFINEON TECHNOLOGIES FLASH LTD.
  NOTES TO THE FINANCIAL
    STATEMENTS  (Continued)
 (US in thousands, except where otherwise stated)
   Note 6  Income
    Taxes
  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


For theyear ended


period endedDecember 31,


December 23,2003


2004Israel


(383
)


(4,877
)Foreign






(383
)


(4,877
)   B.
    Reconciliation
    of income tax expense:    For the


For theyear ended


period endedDecember 31,


December 23,2003


2004Loss before income taxes


(383
)


(4,877
)Israel corporate tax rate


36
%


35
%Expected benefit at the statutory
    tax rate


138



1,707Decrease 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



1Valuation allowance


(133
)


(1,541
)Income tax






   C.
    Components
    of deferred income tax    December 23,2004Net operating loss carryforward


5,371Accrued employee rights


38Deferred tax asset


5,409Valuation allowance


(5,409
)Net deferred tax asset


  F-45




---



##### Table of Contents



INFINEON TECHNOLOGIES FLASH LTD.
  NOTES TO THE FINANCIAL
    STATEMENTS  (Continued)
 (US in thousands, except where otherwise stated)
         D.
    Change in
    tax rates      Note 7  Furniture
    and Equipment, net
  Computers,software


Furnitureand


andauxiliary


office


Lab


Leaseholdequipment


equipment


equipment


improvements


TotalCost:December 31, 2003


455



76



586



121



1,238Additions


82



8



365



31



486December 23, 2004


537



84



951



152



1,724Accumulated depreciation:December 31, 2003


247



10



352



23



632Depreciation


142



8



188



14



352December 23, 2004


389



18



540



37



984Furniture and equipment, netDecember 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. F-46




---



##### Table of Contents



INFINEON TECHNOLOGIES FLASH LTD.
  NOTES TO THE FINANCIAL
    STATEMENTS  (Continued)
 (US in thousands, except where otherwise stated)
   Note 8  Accounts
    Payable
  December 23,2004Trade
    payables  invoiced


4,601
*Trade
    payables  accrued


304,631     *
    Including $4,560 payable to Saifun (former shareholder), (see
    Note 1), which was paid in January 2005.  Note 9  Other
    Current Liabilities
  December 23,2004Employees and payroll accruals


207Liability for vacation and
    recreation pay


57264   Note 10  Long-Term
    Loan From Related Parties
  December 23,2004Loans from related
    parties  current Loan from
    shareholder(1)


6,280Loans 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.      Note 11  Employee
    Benefits
       F-47




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##### Table of Contents



INFINEON TECHNOLOGIES FLASH LTD.
  NOTES TO THE FINANCIAL
    STATEMENTS  (Continued)
 (US in thousands, except where otherwise stated)
    Note 12  Commitments
    and Contingencies
  A.
    Commitments          B.
    Contingencies    Note 13  Stock
    Appreciation Rights Plan
           F-48




---



##### Table of Contents



INFINEON TECHNOLOGIES FLASH LTD.
  NOTES TO THE FINANCIAL
    STATEMENTS  (Continued)
 (US in thousands, except where otherwise stated)
     Vesting (inPortion of grants

months)40%


2420%


3620%


4820%


60         Number of


Weighted averageSARs


exercise priceUS$


US$Balance at December 31, 2002


872,650



3.27Granted


50,000



3.12Forfeited


(196,700
)


3.23Balance at December 31, 2003


725,950



3.27Granted






Forfeited, including terminated
    (see above)


(725,950
)


3.27Balance at December 23, 2004






   Note 14  Interest
    Expenses, Net
    For the


For theyear ended


period endedDecember 31,


December 23,2003


2004Interest expense on loans from
    related parties*


377



123Exchange rate differential on
    short-term bank deposits


17



(91
)Interest income on short-term bank
    deposits


(26
)


(19
)Other


17



13385



26     *
    See also Note 15B. F-49




---



##### Table of Contents



INFINEON TECHNOLOGIES FLASH LTD.
  NOTES TO THE FINANCIAL
    STATEMENTS  (Continued)
 (US in thousands, except where otherwise stated)
   Note 15  Related
    Parties
  A.
    Related
    party balances arise from the ordinary course of business and
    are as follows:      December 23,2004Accounts receivable (Note 3)


5,766Accounts payable


6Loans (Note 10)


6,280     B.
    Related
    party transactions were reflected in the statements of
    operations as follows:  For the


For theyear ended


period endedDecember 31,


December 23,2003


2004Revenues Flash Germany


11,407



12,563Expenses associated with related
    parties:Research and development costs:Infineon


203



20Saifun


6,746



7,4356,949



7,455General and administrative
    expenses:Infineon






Saifun


97



5197



51Interest expenses:Infineon


126



Saifun


251



123377



123  F-50




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                      F-51




---



##### Table of Contents



INFINEON
    TECHNOLOGIES FLASH GMBH & CO. KG, DRESDEN
  STATEMENTS OF OPERATIONS
 For the period ended December 23, 2004 and the year
    ended
 December 26, 2003
 ( in thousands)
  For the


For theperiod ended


year endedDecember 23,


December 26,2004


20031. Net sales


46,839



35,1332. Cost of goods sold


(60,021
)


(33,434
)3. Gross profit (loss)


(13,182
)


1,6994. 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



3,3468. Other operating expenses


(9
)


(2
)9. Other interest and similar
    income  thereof from affiliated parties:
     26 (2003:  48)


65



9610. Interest and similar
    expenses  thereof to affiliated parties:
     1,862 (2003:  26)


(2,480
)


(82
)11. Net loss


(49,474
)


(34,615
)    F-52




---



##### Table of Contents



INFINEON
    TECHNOLOGIES FLASH GMBH & CO. KG, DRESDEN
  BALANCE SHEET
 As of December 23, 2004 ( in thousands)
  December 23,2004AssetsA.

Fixed assetsI.

Intangible assets


82II.

Property, plant and equipment, net1.  Plant and machinery


102.  Technical and office
    equipment


15,4503.  Construction in
    progress


74516,287B.

Current assetsI.

Inventories


3,565II.

Receivables and other assets1.  Receivables due from
    affiliated companies


35,416 thereof
    from partners:  35,4162.  Other assets


5,99841,414III.

Cash and cash equivalents


1,73746,716C.

Deficit not covered by
    partners equity


61,697124,700LiabilitiesA.

Partners equityI.

Equity shares of limited partners


817II.

Reserves


32,751III.

Accumulated deficit


(95,265
)IV.

Loss not covered by partners
    equity


61,697B.

Provisions1.  Provisions for
    pensions and similar obligations


4762.  Other provisions


5,2495,725C.

Liabilities1.  Trade accounts
    payable


2,6572.  Accounts payable due
    to affiliated companies   thereof due to
    partners:  110,014


115,5263.  Other liabilities


792 thereof
    taxes:  183 thereof
    for social security:  172118,975124,700    F-53




---



##### Table of Contents



INFINEON
    TECHNOLOGIES FLASH GMBH & CO. KG, DRESDEN
  STATEMENT OF PARTNERS EQUITY
 For the period ended December 23, 2004 and the
 year ended December 26, 2003
 ( in thousands)
  TransferAnnual


betweennet


partnersloss


(Terminationbefore


Agreement,December





Annual


December


transfer


see


December27,


Paid


net


26,


between


note


23,2002


in


loss


2003


partners


1)


2004Infineon
    Technologies AGCapital account I (capital
    contribution)


255



317







572







245



817Capital account II (capital
    contribution)


5,709



19,762







25,471







7,280



32,751Capital 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
)SaifunCapital 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
)    F-54




---



##### Table of Contents



INFINEON
    TECHNOLOGIES FLASH GMBH & CO. KG, DRESDEN
  STATEMENTS OF CASH FLOWS
 For the period ended December 23, 2004 and the
 year ended December 26, 2003
 ( in thousands)
  For the


For theperiod ended


year endedDecember 23,


December 26,2004


2003Net loss


(49,474
)


(34,615
)Adjustments to reconcile net loss
    to cash used in operating activities:Depreciation and amortization


2,311



679Income 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
)


831Inventories


(2,459
)


2,516Other assets


(760
)


(764
)Provisions


2,235



2,823Trade accounts payable


(1,674
)


1,244Accounts payable related party


18,469



5,377Other liabilities


268



246Net 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






16Net cash used in investing
    activities


(12,549
)


(5,547
)Cash flows from financing
    activities:Proceeds from issuance of
    partners equity






21,879Proceeds from related party loans


79,400



7,550Net cash provided by financing
    activities


79,400



29,429Net change in cash and cash
    equivalents


(384
)


1,370Cash and cash equivalents at
    beginning of period


2,121



751Cash and cash equivalents at end
    of period


1,737



2,121     *
    Net of liabilities due to banks of  11.   F-55




---



##### Table of Contents



INFINEON
    TECHNOLOGIES FLASH GMBH & CO. KG, DRESDEN
  NOTES TO THE FINANCIAL STATEMENTS
 ( in thousands, except where otherwise stated)
  1.
    Description
    of Business, Formation and Basis of Presentation                   F-56




---



##### Table of Contents



INFINEON TECHNOLOGIES FLASH GMBH & CO. KG,
    DRESDEN
  NOTES TO THE FINANCIAL
    STATEMENTS  (Continued)
      cost-of-sales
    2.
    Accounting
    and Valuation Methods  Property, plant and equipment and intangibles assets
          Inventories
  Receivables and other assets
    Cash and cash equivalents
  Provisions
  Liabilities
 F-57




---



##### Table of Contents



INFINEON TECHNOLOGIES FLASH GMBH & CO. KG,
    DRESDEN
  NOTES TO THE FINANCIAL
    STATEMENTS  (Continued)
   Revenue
  Research and development costs
  Going-concern-assumption:
  3.
    Comments
    on the Balance Sheets  Assets
        December 23, 2004Total


Thereof InfineonTrade accounts receivable


31,985



31,985Other receivables


3,431



3,43035,416



35,415     Partners
    equity
        Liabilities
   F-58




---



##### Table of Contents



INFINEON TECHNOLOGIES FLASH GMBH & CO. KG,
    DRESDEN
  NOTES TO THE FINANCIAL
    STATEMENTS  (Continued)
     December 23,2004Litigation matters


2,530Royalty accruals


1,462Bonus and extra payments


655Vacation provision


325Mark-to-market
    losses on derivatives


151Other


1265,249   Mark-to-market
    December 23, 2004Thereof IFLTotal


Thereof Infineon


GmbH*Trade accounts payable


29,138



23,693



Other liabilities


86,388



86,308



13115,526



110,001



13    *
    Infineon Technologies Geschäftsführungs GmbH, Dresden      Amount November 10, 2006


3,150April 1, 2007


4,500June 9, 2007


3,80011,450     4.
    Comments
    on the Statements of Operations  Net
    Sales
    Other
    Operating Income
   F-59




---



##### Table of Contents



INFINEON TECHNOLOGIES FLASH GMBH & CO. KG,
    DRESDEN
  NOTES TO THE FINANCIAL
    STATEMENTS  (Continued)
   Material
    Costs
    For the


For theperiod ended


year endedDecember 23,


December 26,2004


2003Cost of raw materials and supplies
    and goods purchased for resale


52,438



29,62852,438



29,628   Personnel
    Costs
    For the


For theperiod ended


year endedDecember 23,


December 26,2004


2003Wages and salaries


6,890



3,550Social security contributions and
    staff welfare costs


788



2957,678



3,845     5.
    Other
    Information  Employees
    Stock
    Options
    Financial
    Obligations and other financial commitments
       F-60




---



##### Table of Contents



INFINEON TECHNOLOGIES FLASH GMBH & CO. KG,
    DRESDEN
  NOTES TO THE FINANCIAL
    STATEMENTS  (Continued)
     Distribution
    of net income/loss
    Bodies of
    the Company
    
    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 F-61




---



##### Table of Contents



INFINEON TECHNOLOGIES FLASH GMBH & CO. KG,
    DRESDEN
  NOTES TO THE FINANCIAL
    STATEMENTS  (Continued)
   
    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    Group
    Relationship
    Risk of
    Insolvency and Financing
           F-62




---



##### Table of Contents



INFINEON TECHNOLOGIES FLASH GMBH & CO. KG,
    DRESDEN
  NOTES TO THE FINANCIAL
    STATEMENTS  (Continued)
   6.
    Summary
    of Significant Differences between Accounting Principles
    Followed by the Company and Generally Accepted Accounting
    Principles in the United States    a) Assets
    depreciation
    US GAAP

German HGBYears of


Depreciation

Years of


Depreciationuseful life


method

useful life


methodTechnical 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.    b) License
    amortization
    c) Grants
    recognition
    d) Pension
    obligations
   F-63




---



##### Table of Contents



INFINEON TECHNOLOGIES FLASH GMBH & CO. KG,
    DRESDEN
  NOTES TO THE FINANCIAL
    STATEMENTS  (Continued)
   e)
    Stock-based
    compensation and contribution by partner    f) Distribution
    to partner
    g) Tax
    effect
    h)
    Unrealized
    exchange gains on foreign currency translations from monetary
    balance sheet items    i)
    Waiving
    of loans of Saifun Semiconductors    j) Goodwill
    recognition
     F-64




---



##### Table of Contents



INFINEON TECHNOLOGIES FLASH GMBH & CO. KG,
    DRESDEN
  NOTES TO THE FINANCIAL
    STATEMENTS  (Continued)
    For the


For theperiod ended


year endedDecember 23,


December 26,2004


2003Net lossNet 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


4,465Net 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. GAAPBalance, beginning of period


(18,161
)


338Increase Partners
    Capital/APIC






21,879Contribution by Partner (see
    note 6e)


553



164Waiving of loans of Saifun
    Semiconductors (see note 6i)


13,748



Distribution to Partner (see
    note 6f)






(64
)APIC from Goodwill recognition
    (see note 6j)


4,465Net loss


(70,969
)


(40,478
)Balance, end of period


(70,364
)


(18,161
)  F-65




---



##### Table of Contents



INFINEON TECHNOLOGIES FLASH GMBH & CO. KG,
    DRESDEN
  NOTES TO THE FINANCIAL
    STATEMENTS  (Continued)
     December 23,2004Assets:Current assets:Cash and cash equivalents


1,737Receivables related parties, net


35,416Inventories


3,565Other current assets


5,998Total current assets


46,716Property, plant and equipment, net


13,202Other assets


1,220Goodwill


4,465Total assets


65,603Liabilities and stockholders
    equity (deficit):Current liabilities:Trade accounts payable


34,012Loans from affiliated companies


82,940Accrued liabilities


13,724Other current liabilities


1,589Total current liabilities


132,265Other non-current liabilities


3,702Total liabilities


135,967Stockholders equity
    (deficit):Ordinary share capital


817Additional paid-in capital


51,602Accumulated deficit


(122,783
)Total stockholders equity
    (deficit)


(70,364
)Total liabilities and
    stockholders equity (deficit)


65,603  F-66




---



##### Table of Contents



INFINEON TECHNOLOGIES FLASH GMBH & CO. KG,
    DRESDEN
  NOTES TO THE FINANCIAL
    STATEMENTS  (Continued)
   Movement
    of Fixed Assets for the period from December 27, 2003 to
    December 23, 2004
  Cost of Acquisition


Depreciation


Net Book ValueDecember











December


December








December


December


December27,











23,


27,








23,


23,


26,2003


Additions


Disposals


Transfer


2004


2003


Additions


Disposals


2004


2004


2003I. Intangible AssetsSoftware


212



4











216



62



72







134



82



150II. Tangible Assets1. Plant and machinery


14















14



2



2







4



10



122. Technical and office
    equipment


5,324



11,800



58



1,580



18,646



1,011



2,237



52



3,196



15,450



4,3133. Payments on account


1,580



745



0



(1,580
)


745



















745



1,5806,918



12,545



58







19,405



1,013



2,239



52



3,200



16,205



5,9057,130



12,549



58







19,621



1,075



2,311



52



3,334



16,287



6,055  F-67




---



##### Table of Contents



ANNUAL
    REPORT ON
    FORM 20-F
  INDEX OF EXHIBITS
  Exhibit

Description1
.1

Articles of Association
    (incorporated by reference to Exhibit 3.4 of the
    Registration Statement on
    Form F-1
    (File
    No. 333-129167)
    filed with the Commission on October 21, 2005)2
.1

Registration Rights Agreement,
    dated October 2, 2000, by and among the Registrant and the
    parties thereto (incorporated by reference to Exhibit 10.2
    of the Registration Statement on
    Form F-1
    (File
    No. 333-129167)
    filed with the Commission on October 21, 2005)2
.2

Amendment to Registration Rights
    Agreement and Shareholder Rights Agreement, dated as of
    September 29, 2005, by and among the parties thereto and
    the Registrant (incorporated by reference to Exhibit 10.2
    of the Registration Statement on
    Form F-1
    (File
    No. 333-129167)
    filed with the Commission on October 21, 2005)4
.1

Technology Agreement, dated
    May 4, 2000, by and between Macronix International Co.,
    Ltd. and the Registrant (incorporated by reference to
    Exhibit 10.7 of the Registration Statement on
    Form F-1
    (File
    No. 333-129167)
    filed with the Commission on October 21, 2005)4
.2

Amendment to the Technology
    Agreement, dated April 10, 2003, by and between Macronix
    International Co., Ltd. and the Registrant (incorporated by
    reference to Exhibit 10.8 of the Registration Statement on
    Form F-1
    (File
    No. 333-129167)
    filed with the Commission on October 21, 2005)4
.3

Second Addendum to the Technology
    Agreement, dated April 22, 2004, by and between Macronix
    International Co., Ltd. and the Registrant (incorporated by
    reference to Exhibit 10.9 of the Registration Statement on
    Form F-1
    (File
    No. 333-129167)
    filed with the Commission on October 21, 2005)4
.4

Termination of Joint Venture
    Agreement and Related Transactions, dated December 20,
    2004, by and among Infineon Technologies AG, Saifun Ventures
    Ltd. and the Registrant (incorporated by reference to
    Exhibit 10.10 of the Registration Statement on
    Form F-1
    (File
    No. 333-129167)
    filed with the Commission on October 21, 2005)4
.5

Settlement and License Agreement,
    dated July 1, 2002, by and between Advanced Micro Devices,
    Inc., Fujitsu Limited and the Registrant (incorporated by
    reference to Exhibit 10.11 of the Registration Statement on
    Form F-1
    (File
    No. 333-129167)
    filed with the Commission on October 21, 2005)4
.6

License Agreement, dated
    January 13, 2005, by and among Infineon Technologies AG and
    its subsidiaries and the Registrant and its subsidiaries
    (incorporated by reference to Exhibit 10.12 of the
    Registration Statement on
    Form F-1
    (File
    No. 333-129167)
    filed with the Commission on October 21, 2005)4
.7

Basic Agreement of Development
    Orders, dated December 20, 2004, by and between Infineon
    Technologies AG and the Registrant (incorporated by reference to
    Exhibit 10.13 of the Registration Statement on
    Form F-1
    (File
    No. 333-129167)
    filed with the Commission on October 21, 2005)4
.8

Form of Director and Officer
    Letter of Indemnification (incorporated by reference to
    Exhibit 10.18 of the Registration Statement on
    Form F-1
    (File
    No. 333-129167)
    filed with the Commission on October 21, 2005)8
.1

List of Subsidiaries of the
    Registrant (incorporated by reference to Exhibit 21.1 of
    the Registration Statement on Form F-1 filed with the
    Commission on November 4, 2005)11
.1

Code of Ethics effective as of
    September 200512
.1

Certification of Chief Executive
    Officer of the Registrant pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002




---



##### Table of Contents



Exhibit

Description12
.2

Certification of Chief Financial
    Officer of the Registrant pursuant to Section 302 of the
    Sarbanes-Oxley Act of 200213
.1

Certification of Chief Executive
    Officer of the Registrant pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002*13
.2

Certification of Chief Financial
    Officer of the Registrant pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002*     *
    
    This document is being furnished in accordance with SEC Release
    Nos. 33-8212
    and 34-47551.
    
    Portions of this exhibit were omitted and have been filed
    separately with the Secretary of the Securities and Exchange
    Commission pursuant to the Registrants application
    requesting confidential treatment under Rule 406 of the
    Securities Act.