**ExecutionCopy**

M-Systems FlashDisk Pioneers Ltd.

U.S. $75,000,000 1.0%Convertible Senior Notes Due 2035

REGISTRATIONRIGHTS AGREEMENT

March 23, 2005

Citigroup Global Markets Inc.CIBC World Markets Corp.

C.E. Unterberg, Towbin

Thomas Weisel Partners LLC

WR Hambrecht + Co. LLC

As Representatives of the Initial Purchasersc/o Citigroup Global Markets Inc.  388 Greenwich Street  New York, New York 10013

Ladies and Gentlemen:

M-Systems Finance Inc., an exempted company limited byshares organized under the laws of the Cayman Islands (the "Company") and adirect wholly owned subsidiary of M-Systems Flash Disk Pioneers Ltd., a companyorganized under the laws of the State of Israel (the "Guarantor"), proposes toissue and sell to certain purchasers (the "Initial Purchasers"), for whom you(the "Representatives") are acting as representatives, U.S.$75,000,000principal amount of its 1.0% Convertible Notes Due 2035 (the "Notes"), whichare to be unconditionally guaranteed by the Guarantor (the "Guarantee"), uponthe terms set forth in the Purchase Agreement among the Company, the Guarantor,M-Systems, Inc. ("MSI") (solely in respect to Section 14 thereof) and theRepresentatives dated March 17, 2005 (the "Purchase Agreement") relating to theinitial placement (the "Initial Placement") of the Notes and the Guarantee.  TheNotes are convertible into ordinary shares, par value NIS 0.001 per share (the"Ordinary Shares" and together with each of the Notes and the Guarantees, the"Securities"), of the Guarantor at the conversion price set forth in theIndenture (as defined below).  To induce the Initial Purchasers toenter into the Purchase Agreement and to satisfy a condition to yourobligations thereunder, the Company and the Guarantor agree with you for yourbenefit and the benefit of the holders from time to time of the Securities(including the Initial Purchasers) (each a "Holder" and, collectively, the"Holders"), as follows:

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1.*                 *Definitions.  Capitalized termsused herein without definition shall have their respective meanings set forthin the Purchase Agreement.  As used in this Agreement, the followingcapitalized defined terms shall have the following meanings:

"Act" shall mean the Securities Act of 1933, as amended,and the rules and regulations of the Commission promulgated thereunder.

"Affiliate" shall have the meaning specified in Rule 405under the Act and the terms "controlling" and "controlled" shall have meaningscorrelative thereto.

"Broker-Dealer" shall mean any broker or dealerregistered as such under the Exchange Act.

"Business Day" shall mean any day other than a Saturday,a Sunday or a legal holiday or a day on which banking institutions or trustcompanies are authorized or obligated by law to close in New York City.

"Closing Date" shall mean the date of the first issuanceof the Notes and the Guarantees.

"Commission" shall mean the Securities and ExchangeCommission.

"Deferral Period" shall have the meaning indicated inSection 3(i) hereof.

"Exchange Act" shall mean the Securities Exchange Act of1934, as amended, and the rules and regulations of the Commission promulgatedthereunder.

"Final Memorandum" shallmean the offering memorandum, dated March 17, 2005, relating to the Securities, including anyand all exhibits thereto and any information incorporated by reference thereinas of such date.

"Holder" shall have the meaning set forth in the preamble hereto.

"Indenture" shallmean the Indenture relating to the Securities, dated as of March 23, 2005, among the Company, the Guarantor, MSI (solely withrespect to Section 14.12 thereof) and TheBank of New York, as trustee, as the same maybe amended from time to time in accordance with the terms thereof.

"Initial Placement" shallhavethe meaning set forth in the preamble hereto.

"Initial Purchaser" shall have the meaning set forth inthe preamble hereto.

"Losses" shall have the meaning set forth in Section 5(d)hereof.

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"Majority Holders" shallmean, on any date, Holders of a majority of the aggregate principalamount of Notes registered under a registration statement; provided, that, forthe purposes of this definition, Holders of Ordinary Shares issued uponconversion of the Notes shall be deemed to hold a principal amount of Notes (inaddition to the principal amount of Notes held by such Holders) equal to theproduct of (x) the number of such Ordinary Shares and (y) the prevailingconversion price as determined in accordance with the Indenture.

"Managing Underwriters" shallmean the investment banker or investmentbankers and manager or managers that administer an underwritten offering,if any, conducted pursuant to Section 6 hereof.

"NASD Rules" shall mean the Conduct Rules and the By-Lawsof the National Association of Securities Dealers, Inc.

"Notice and Questionnaire" shall mean a written noticedelivered to the Company or the Guarantor substantially in the form attached asAnnex A to the Final Memorandum.

"Notice Holder" shall mean, on any date, any Holder ofRegistrable Securities that has delivered a completed and executed Notice andQuestionnaire to the Company or the Guarantor on or prior to such date.

"Prospectus" shallmean a prospectus included in the ShelfRegistration Statement (including, without limitation, a prospectus thatdiscloses information previously omitted from a prospectus filed as part of aneffective registration statement in reliance upon Rule 430A under the Act), asamended or supplemented by any prospectus supplement, with respect to the termsof the offering of any portion of the Securities covered by the ShelfRegistration Statement, and all amendments and supplements thereto,including any and all exhibits thereto and any information incorporated byreference therein.

"Purchase Agreement" shall have the meaning set forth inthe preamble hereto.

"Registrable Securities" shall mean Securitiesoutstanding as of the date of determination other than those that have been (i)registered under the Shelf Registration Statement and disposed of in accordancetherewith,  or (ii) distributed to the public pursuant to Rule 144 (orare saleable by non-Affiliates of the Company or the Guarantor pursuant to Rule144(k) under the Act) under the Act or any successor rule or regulation theretothat may be adopted by the Commission.

"Registration Default Damages" shall have the meaning setforth in Section 7 hereof.

"Securities" shallhavethe meaning set forth in the preamble hereto.

"Shelf RegistrationPeriod" shall have the meaning setforth in Section 2(c) hereof.

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"Shelf RegistrationStatement" shall mean a "shelf"registration statement of the Company and the Guarantor pursuant to the provisions of Section 2 hereofwhich covers some or all of the Securities on an appropriate form underRule 415 under the Act, or any similar rule that may be adopted by theCommission, amendments and supplements to such registration statement,including post‐effective amendments, in each case including theProspectus contained therein, all exhibits thereto and all materialincorporated by reference therein.  

"Trustee" shall mean the trustee with respect to the Securitiesunder the Indenture.

"Trust Indenture Act" shall mean the Trust Indenture Actof 1939, as amended, and the rules and regulations of the Commissionpromulgated thereunder.

"underwriter" shallmean any underwriter of Securities inconnection with an offering thereof under the Shelf Registration Statement.

2.*                 *ShelfRegistration.  (a) TheCompany and the Guarantor shall as promptly aspracticable (but in no event more than 120 days after the Closing Date) use its bestefforts to file with the Commission a Shelf Registration Statement providingfor the registration of, and the sale on a continuous or delayed basis by theHolders of, all of the Registrable Securities, from time to time in accordance with the methods ofdistribution elected by such Holders as described in the the form ofNotice and Questionaire, pursuant to Rule 415 under the Act or any similar rulethat may be adopted by the Commission. 

(a)*               *Each of the Company and the Guarantor shall use itsbest efforts to cause the Shelf Registration Statement to become or be declaredeffective under the Act no later than 210 days after the Closing Date.

(b)*              *Each of the Company andthe Guarantor shall use its best efforts tokeep the Shelf Registration Statement continuously effective,supplemented and amended as required by the Act, in order to permit the Prospectus forming partthereof to be usable by Holders for a period (the "Shelf Registration Period") from the date the Shelf Registration Statement isdeclared effective by the Commission until the earlier of (i) the secondanniversary thereof or (ii) the dateupon which there are no Registrable Securitiesoutstanding.  The Company and the Guarantor shall be deemed not to have used their best efforts to keep the Shelf RegistrationStatement effective during the Shelf Registration Period if either voluntarilytakes any action that would result in Holders of Registrable Securities not being able to offer and sell suchSecurities at any time during theShelf Registration Period, unless suchaction is (x) required by applicablelaw or otherwise undertaken by the Company or the Guarantor in goodfaith and for valid business reasons (not including avoidance of the Company`sand the Guarantor`s obligations hereunder), including the acquisition ordivestiture of assets, and (y) permitted by Section 3(i) hereof.

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(c)*               *Each of the Company and the Guarantor shall cause theShelf Registration Statement and the related Prospectus and any amendment orsupplement thereto, as of the effective date of the Shelf Registration Statementor such amendment or supplement, (i) to comply in all material respects withthe applicable requirements of the Act; and (ii) not to contain any untruestatement of a material fact or omit to state a material fact required to bestated therein or necessary in order to make the statements therein (in the case of the Prospectus, in the light of the circumstances under which they weremade) not misleading.

(d)*              *Each Holder of Registrable Securities agrees to deliver aNotice and Questionnaire (and such other information as is required pursuant toSection 3(m) hereof) to the Guarantor at least ten Business Days prior to anydistribution by it of Registrable Securities under the Shelf RegistrationStatement.  From and after the date the Shelf Registration Statementis declared effective until the end of the Shelf Registration Period, theCompany and the Guarantor shall, as promptly as is practicable after the date aNotice and Questionnaire (and such other information as is required pursuant toSection 3(m) hereof) is delivered, and in any event within ten Business Daysafter such date, (i) if required by applicable law, file with the Commission apost-effective amendment to the Shelf Registration Statement or prepare and, ifrequired by applicable law, file a supplement to the related Prospectus or anamendment or supplement to any document incorporated therein by reference orfile any other required document so that the Holder delivering such Notice andQuestionnaire is named as a selling holder in the Shelf Registration Statementand the related Prospectus and so that such Holder is permitted to deliver suchProspectus to purchasers of the Registrable Securities in accordance withapplicable law and, if the Company and the Guarantor shall file apost-effective amendment to the Shelf Registration Statement, use best effortsto cause such post-effective amendment to be declared effective under the Actas promptly as is practicable, provided that neither the Company nor theGuarantor shall be required under this Section 2(e) to file more than onepost-effective amendment to the Shelf Registration Statement in any 45-dayperiod; (ii) provide such Holder copies of any documents filed pursuant toSection 2(e)(i) hereof; and (iii) notify such Holder as promptly as practicableafter the effectiveness under the Act of any post-effective amendment filedpursuant to Section 2(e)(i) hereof; provided, that if such Notice andQuestionnaire is delivered during a Deferral Period, the Company and theGuarantor shall so inform the Holder delivering such Notice and Questionnaireand shall take the actions set forth in clauses (i), (ii) and (iii) above uponexpiration of the Deferral Period in accordance with Section 3(i) hereof.  Notwithstandinganything contained herein to the contrary, neither the Company nor theGuarantor shall be under any obligation to name any Holder that is not a NoticeHolder as a selling holder in the Shelf Registration Statement or relatedProspectus; provided, however, that any Holder that becomes aNotice Holder pursuant to the provisions of this Section 2(e) (whether or notsuch Holder was a Notice Holder at the time the Shelf Registration Statementwas declared effective) shall be named as a selling holder in the ShelfRegistration Statement or related Prospectus in accordance with therequirements of this Section 2(e).

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3.*                 *RegistrationProcedures.  The following provisions shall apply inconnection with the Shelf Registration Statement.

(a)*               *Each of the Company andthe Guarantor shall:

(i)*                *shall furnish to the Representatives, not less than three BusinessDays prior to the filing thereof with the Commission, a copy of the ShelfRegistration Statement or Prospectus and any amendments or supplements (otherthan supplements solely for the purpose of naming one or more Notice Holders asselling securityholders) and shall use reasonable best efforts to reflect ineach such document when so filed with the Commission such comments as theRepresentatives reasonably shall propose.

(ii)*              *include information regarding the Notice Holders andthe methods of distribution they have elected for their Registrable Securitiesprovided to the Guarantor in Notices and Questionnaires as necessary to permitsuch distribution by the methods specifiedtherein.

(b)*              *Each of the Companyand the Guarantor shall ensure that:

(i)*                *the Shelf RegistrationStatement and any amendment thereto and any Prospectus forming part thereof andany amendment or supplement thereto complies in all material respects with theAct; and

(ii)*              *the ShelfRegistration Statement and any amendment thereto does not, when it becomeseffective, contain an untrue statement of a material fact or omit to state amaterial fact required to be stated therein or necessary to make the statementstherein not misleading.

(c)*               *The Company and the Guarantor shall advise the Representatives, the NoticeHolders and any underwriter that has provided in writing to the Guarantor atelephone or facsimile number and address for notices, and confirm such adviceby notice in writing (which notice pursuant to clauses (ii)-(v) hereof shall beaccompanied by an instruction to suspend the use of the Prospectus until theCompany and the Guarantor shall have remedied the basis for such suspension):

(i)*                *when the ShelfRegistration Statement and any amendment thereto has been filed with theCommission and when the Shelf Registration Statement or any post‐effectiveamendment thereto has become effective;

(ii)*              *of any request by theCommission for any amendment orsupplement to the Shelf Registration Statement or the Prospectus or foradditional information;

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(iii)*            *of the issuance bythe Commission of any stop order suspending the effectiveness of the ShelfRegistration Statement or the institution or threatening of any proceeding for that purpose;

(iv)*            *of the receipt bythe Company of any notification with respect to the suspension of thequalification of the Securities included therein for sale in any jurisdictionor the institution or threatening of anyproceeding for such purpose; and

(v)*              *of the happeningof any event that requires any change in the Shelf Registration Statement orthe Prospectus so that, as of such date, they (A) do not contain anyuntrue statement of a material fact and (B)do not omit to state a material fact requiredto be stated therein or necessary to make the statements therein (in the caseof the Prospectus, in the light of thecircumstances under which they were made) not misleading.

(d)*              *Each of theCompany and the Guarantor shall use itsbest efforts to prevent the issuance of any order suspending the effectiveness of the ShelfRegistration Statement or the qualification of the securities thereinfor sale in any jurisdiction and, if issued, toobtain as soon as possible the withdrawal thereof.

(e)*               *The Companyand the Guarantor shall furnish to each NoticeHolder, without charge, at least one copy of the Shelf Registration Statementand any post-effective amendment thereto, including all materialincorporated therein by reference, and, if aNotice Holder so requests in writing, all exhibits thereto (including exhibits incorporated by reference therein).

(f)*               *During the ShelfRegistration Period, the Company and the Guarantor shall promptly deliver to each InitialPurchaser, each Notice Holder, and anysales or placement agents or underwriters acting on their behalf, without charge, as many copies of the Prospectus(including the preliminary Prospectus)included in the Shelf Registration Statement and any amendment or supplementthereto as any such person mayreasonably request.  Each of the Company and the Guarantor consents to the use of the Prospectus or anyamendment or supplement thereto by each of the foregoing in connection with theoffering and sale of the Securities.

(g)*              *Prior to any offering ofSecurities pursuant to the Shelf Registration Statement, each of the Company and the Guarantor shall use their best efforts to arrange for the qualification of the Securities forsale under the laws of such jurisdictions as any Notice Holder shall reasonably request and shall maintain suchqualification in effect so long as required; provided that in no event shall the Company or theGuarantor be obligated to qualify to do business in any jurisdiction where itis not then so qualified or to take any action that would subject it to serviceof process in suits, other than those arising out of the InitialPlacement or any offering pursuant to the Shelf Registration Statement, or taxation in any jurisdiction where it is not then so subject.

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(h)*              *Upon the occurrence ofany event contemplated by subsections (c)(ii)through (v) above, the Company and theGuarantor shall promptly (or within thetime period provided for by Section 3(i) hereof, if applicable) prepare a post-effective amendment to the ShelfRegistration Statement or an amendment or supplement to the related Prospectusor file any other required document so that, as thereafter delivered to InitialPurchasers of the securities included therein, the Prospectus will not includean untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in thelight of the circumstances under which they were made, not misleading.

(i)*                *In the event that (i) the Company and the Guarantor, intheir reasonable judgment, believe that they possess material non-publicinformation the disclosure of which would be seriously detrimental to theCompany and the Guarantor and their respective subsidiaries, taken as a wholeor (ii) the Propsectus would, in the reasonable judgment of the Company and theGuarantor contain a material misstatement or omission as the result of an eventthat has occurred or is continuing, the Company and the Guarantor shall givenotice (without notice of the nature or details of such events) to the NoticeHolders that the availability of the Shelf Registration is suspended and, uponactual receipt of any such notice, each Notice Holder agrees not to sell anyRegistrable Securities pursuant to the Shelf Registration until such NoticeHolder`s receipt of copies of the supplemented or amended Prospectus providedfor in Section 3(i) hereof, or until it is advised in writing by the Company orthe Guarantor that the Prospectus may be used, and has received copies of anyadditional or supplemental filings that are incorporated or deemed incorporatedby reference in such Prospectus.  The period during which theavailability of the Shelf Registration and any Prospectus is suspended (the"Deferral Period") shall not exceed 60 days in any 90-day period or 90 days inany twelve-month period.  The Holders shall keep all such noticesprovided pursuant to this Section 3(i) in confidence.

(j)*                *Not later than theeffective date of the Shelf Registration Statement, the Company or theGuarantor shall provide a CUSIP number for theSecurities registered under the Shelf Registration Statement and provide the Trustee with printedcertificates for such Securities, free of any restrictive legends, in a form eligible for deposit with The DepositoryTrust Company.

(k)*              *Each of theCompany and the Guarantor shall complywith all applicable rules and regulations of the Commission and shall make generally available to its security holders anearnings statement satisfying the provisions of Section 11(a) of the Actas soon as practicable after the effectivedate of the Shelf Registration Statement and in any event no later than45 days after the end of a 12-month period (or 90 days, if such period is afiscal year) beginning with the first month of each of the Company`s and theGuarantor`s first fiscal quarter commencing after the effective date of theShelf Registration Statement.

(l)*                *Each of the Companyand the Guarantor shall cause the Indenture tobe qualified under the Trust Indenture Act in a timely manner.

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(m)*            *The Companyand the Guarantor may require each Holder ofSecurities to be sold pursuant to the Shelf Registration Statement to furnishto the Company or the Guarantor suchinformation regarding the Holder andthe distribution of such Securities as the Company or Guarantor may from time to time reasonably require forinclusion in the Shelf Registration Statement.  The Companyand the Guarantor may exclude from the Shelf Registration Statement (or anyamendment or supplement) the Securities of any Holder that unreasonably failsto furnish such information within a reasonable time after receiving suchrequest and in any event within the time periods provided under Section 2(e)hereof.

(n)*              *Each of theCompany and the Guarantor and  shall enter into customary agreements(including, subject to Section 6 hereof, if requested, an underwritingagreement in customary form) and take allother appropriate actions in order toexpedite or facilitate the registration or the disposition of the Securities,and in connection therewith, if an underwriting agreement is entered into,cause the same to contain indemnification provisions and procedures no less favorablethan those set forth in Section 5 hereof.

(o)*              *In connection with underwritten offerings of theSecurities included in the Shelf Registration Statement, to the extent requiredby the managing underwriter, each of theCompany and Guarantor shall:

(i)*                *make reasonablyavailable for inspection by the Holders of Securities to be registeredthereunder, any underwriter participating in any disposition pursuant to theShelf Registration Statement, and any attorney, accountant or other agentretained by the Holders or any such underwriter all relevant financial andother records and pertinent corporate documents of the Company and theGuarantor and their respective subsidiaries as is customary for similar duediligence examinations;

(ii)*              *cause theCompany`s and the Guarantor`s respective officers, directors, employees, accountantsand auditors to supply all relevantinformation reasonably requested by the Holders or any such underwriter,attorney, accountant or agent in connection with any the Shelf RegistrationStatement as is customary for similar due diligence examinations;providedthat the inspection and information gathering pursuant to clause (i) and (ii)of this paragraph (o) shall be coordinated by a single party (or a singlecounsel (which shall be counsel to the Notice Holders) on behalf of the partiesso inspecting and gathering);

(iii)*            *make such representationsand warranties to the Holders of Securities registered thereunder and theunderwriters, if any, in form, substance and scope as are customarily made byissuers to underwriters in primary underwritten offerings and covering mattersincluding, but not limited to, those set forth in the Purchase Agreement;

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(iv)*            *obtain opinions ofcounsel to the Company and the Guarantor and updates thereof (which counsel and opinions (inform, scope and substance) shall be reasonably satisfactory to the ManagingUnderwriters, if any) addressed to each selling Holder and the underwriters, ifany, covering such matters as are customarily covered in opinions requested inunderwritten offerings and such other matters as may be reasonably requested bysuch Holders and underwriters;

(v)*              *obtain "comfort"letters and updates thereof from the independent certified public accountantsof the Company and the Guarantor (and,if necessary, any other independent certified public accountants of anysubsidiary of the Company or the Guarantor or of any business acquired by the Companyor the Guarantor for which financialstatements and financial data are, or are required to be, included in the ShelfRegistration Statement), addressed to each selling Holder of Securitiesregistered thereunder and the underwriters, if any, in customary form andcovering matters of the type customarily covered in "comfort" letters inconnection with primary underwritten offerings; and

(vi)*            *deliver suchdocuments and certificates as may be reasonably requested by theMajority Holders or the Managing Underwriters,if any, including those to evidence compliance with Section 3(i) hereof and with any customary conditions contained in the underwritingagreement or other agreement entered into by the Company and theGuarantor. 

The actions set forth inthis paragraph (o) shall be performed onlyin connection with an underwritten offering of the Securities included in theRegistration Statement and clauses (iii), (iv), (v) and (vi) of thisparagraph (o) shall be performed at the times specified in the underwritingagreement relating to such underwritten offering, to the extent such actions are required thereunder.

(p)*              *In the event that any Broker-Dealer shall underwrite anySecurities or participate as a member of an underwriting syndicate or sellinggroup or "assist in the distribution" (within the meaning of the NASD Rules)thereof, whether as a Holder of such Securities or as an underwriter, a placementor sales agent or a broker or dealer in respect thereof, or otherwise, theCompany and the Guarantor shall use their reasonable efforts to assist suchBroker-Dealer in complying with the NASD Rules.

(q)*              *Each of the Company and the Guarantor shall use its bestefforts to take all other steps necessary to effect the registration of theSecurities covered by the Shelf Registration Statement.

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4.*                 *RegistrationExpenses.  The Company and the Guarantor, jointly andseverally, shall bear all expenses incurred inconnection with the performance of its obligations under Sections 2 and 3hereof and shall reimburse the Holdersfor the reasonable fees and disbursements of one firm or counsel (whichshall initially be Kramer Levin Naftalis & Frankel LLP**,** but whichmay be another nationally recognized law firm experienced in securities mattersdesignated by the Majority Holders) toact as counsel for the Holders in connection therewith.  Subjectto the foregoing, the Holders shall pay any underwriting or brokerage discountsor commissions, taxes relating to the sale of the Securities and the fees anylegal or financial advisors retained by such Holders.

5.*                 *Indemnificationand Contribution.  (a)  Eachof the Company and the Guarantor,jointly and severally, agrees to indemnify andhold harmless each Holder of Securities covered by the Shelf Registration Statement, each Initial Purchaser, the directors, officers,employees, Affiliates and agents of each such Holder or Initial Purchaser andeach person who controls any such Holder or Initial Purchaser within themeaning of either the Act or the Exchange Act against any and all losses,claims, damages or liabilities, joint or several, to which they or any of themmay become subject under the Act, the Exchange Act or other federal or state statutory law or regulation, atcommon law or otherwise, insofar as such losses, claims, damages or liabilities(or actions in respect thereof) arise out of or are based upon any untruestatement or alleged untrue statement of a material fact contained in the ShelfRegistration Statement as originally filed or in any amendment thereof, or inany preliminary Prospectus or the Prospectus,or in any amendment thereof or supplement thereto, or arise out of or are basedupon the omission or alleged omission to state therein a material fact requiredto be stated therein or necessary to make the statements therein (in thecase of any preliminary Prospectus or the Prospectus, in the light of thecircumstances under which they were made) notmisleading, and agrees to reimburse each such indemnified party, as incurred,for any legal or other expenses reasonably incurred by it in connection withinvestigating or defending any such loss, claim, damage, liability or action; provided,however, that neither theCompany nor the Guarantor will beliable in any such case to the extentthat any such loss, claim, damage or liability arises out of or is based uponany such untrue statement or alleged untrue statement or omission or allegedomission made therein in reliance upon and in conformity with writteninformation furnished to the Company or the Guarantor by or on behalf of the party claimingindemnification specifically for inclusion therein; provided, further,that with respect to any untrue statement or omission of material fact made inany preliminary Prospectus, the indemnity agreement contained in this Section8(a) shall not inure to the benefit of any Holder from whom the personasserting any such loss, claim, damage or liability purchased the Securitiesconcerned, to the extent that any such loss, claim, damage or liability of suchHolder occurs under the circumstances where it shall have been determined by acourt of competent jurisdiction by final judgment that (w) the Company and theGuarantor had previously furnished copies of the Prospectus to the Holders, (x)delivery of the Prospectus was required by the Act to be made to such person,(y) the untrue statement or omission of a material fact contained in thepreliminary Prospectus was corrected in the Prospectus and (z) there was notsent or given to such person, at or prior to the written confirmation of thesale of such securities to such person, a copy of the Prospectus;

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provided, furtherthat the foregoing indemnity agreement of the Company and the Guarantor shallnot inure to any Holder (or the directors,officers, employees, Affiliates and agents of such Holder, or any personwho controls such Holder) to the extent that any such Holder effects any saleof Registrable Securities during a Deferral Period, provided that the Companyand the Guarantor had provided notice of the commencement of such DeferralPeriod in accordance with Section 3(i) hereof.  This indemnity agreement shall be in addition to anyliability that the Company or the Guarantor may otherwise have.

The Company andthe Guarantor also jointly andseverally agree to indemnify asprovided in this Section 5(a) or contribute asprovided in Section 5(d) hereof toLosses of each underwriter, ifany, of Securities registered under the Shelf Registration Statement,its directors, officers, employees,Affiliates or agents and each personwho controls such underwriter on substantially the same basis as that of theindemnification of the Initial Purchasers and the selling Holders provided in this paragraph(a) and shall, if requested by any Holder, enter into an underwriting agreementreflecting such agreement, as provided in Section 3(n) hereof.

(a)*               *Each Holder ofsecurities covered by the Shelf Registration Statement (including each InitialPurchaser that is a Holder, in such capacity) severally and not jointly agrees to indemnify and hold harmless each ofthe Company, the Guarantor, each of their respective directors,each of their officers who signs theShelf Registration Statement and each person who controls the Company orthe Guarantor within the meaning of either theAct or the Exchange Act, to the sameextent as the foregoing indemnity from the Company and the Guarantor to each such Holder, but only with reference towritten information relating to such Holder furnished to the Company orthe Guarantor by or on behalf of such Holderspecifically for inclusion in the documents referred to in the foregoingindemnity.  This indemnity agreement shall be acknowledged byeach Notice Holder that is not an Initial Purchaser in such Notice Holder`sNotice and Questionnaire and shall be inaddition to any liability that any such Notice Holder may otherwise have.

(b)*              *Promptly after receipt byan indemnified party under this Section 5 or notice of the commencement of anyaction, such indemnified party will, if a claim in respect thereof is to bemade against the indemnifying party under this Section 5, notify the indemnifying party in writing of thecommencement thereof; but the failure so to notify the indemnifying party(i) will not relieve it from liability under paragraph (a) or (b)above unless and to the extent it did not otherwise learn of such action andsuch failure results in the forfeiture by the indemnifying party of substantialrights and defenses; and (ii) willnot, in any event, relieve the indemnifying party from any obligations to anyindemnified party other than the indemnification obligation provided inparagraph (a) or (b) above.  The indemnifying party shall beentitled to appoint counsel (including local counsel) of the indemnifying party`s choice at theindemnifying party`s expense to represent the indemnified party in any actionfor which indemnification is sought (in which case the indemnifying party shallnot thereafter be responsible for the fees and expenses of any separate counsel,other than local counsel if not appointed by the indemnifying party, retained by the indemnified party or parties exceptas set forth below); provided, however, that such counsel shall be satisfactoryto the indemnified party. 

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 Notwithstandingthe indemnifying party`s election to appoint counsel (including localcounsel) to represent the indemnified party inan action, the indemnified party shall have the right to employ separatecounsel (including local counsel), and the indemnifying party shall bear thereasonable fees, costs and expenses of such separate counsel if (i) theuse of counsel chosen by the indemnifying party to represent the indemnifiedparty would present such counsel with a conflict of interest; (ii) theactual or potential defendants in, or targets of, any such action include boththe indemnified party and the indemnifying party and the indemnified partyshall have reasonably concluded that there may be legal defenses available toit and/or other indemnified parties that are different from or additional tothose available to the indemnifying party; (iii) the indemnifying partyshall not have employed counsel satisfactory to the indemnified party torepresent the indemnified party within a reasonable time after notice of theinstitution of such action; or(iv) the indemnifying party shall authorize the indemnified party toemploy separate counsel at the expense of the indemnifying party.  Anindemnifying party will not, without the prior written consent of theindemnified parties, settle or compromise or consent to the entry of anyjudgment with respect to any pending or threatened claim, action, suit orproceeding in respect of which indemnification or contribution may be soughthereunder (whether or not the indemnified parties are actual or potentialparties to such claim or action) unless such settlement, compromise or consentincludes an unconditional release of each indemnified party from all liabilityarising out of such claim, action, suit or proceeding.

* *

(c)*               *In the event that theindemnity provided in paragraph (a) or (b) of this Section 5 is unavailable to or insufficient to hold harmlessan indemnified party for any reason, then each applicable indemnifying partyshall have a joint and several obligation to contribute to the aggregatelosses, claims, damages and liabilities (including legal or other expensesreasonably incurred in connection with investigating or defending loss, claim,liability, damage or action) (collectively "Losses") to which such indemnifiedparty may be subject in such proportion as is appropriate to reflect therelative benefits received by such indemnifying party, on the one hand, andsuch indemnified party, on the other hand, from the Initial Placement and theShelf Registration Statement which resulted in such Losses; provided, however,that in no case shall any Initial Purchaser be responsible, in the aggregate,for any amount in excess of the purchase discount or commission applicable tosuch Security, as calculated inaccordance with the Purchase Agreement, nor shall any underwriter be responsible for anyamount in excess of the underwriting discount or commission applicable to thesecurities purchased by such underwriter under the Shelf Registration Statementwhich resulted in such Losses.  If the allocation provided by theimmediately preceding sentence is unavailable for any reason, the indemnifyingparty and the indemnified party shall contribute in such proportion as isappropriate to reflect not only such relative benefits but also the relativefault of such indemnifying party, on the one hand, and such indemnified party,on the other hand, in connection with the statements or omissions whichresulted in such Losses as well as any other relevant equitable considerations.  Benefitsreceived by the Company and the Guarantor shall be deemed to be equal to the total netproceeds from the Initial Placement (before deducting expenses) as set forth inthe Final Memorandum.  Benefits received by the Initial Purchasers shall be deemed to be equal to the totalpurchase discounts and commissions as calculated in accordance with the Purchase Agreement, and benefits received by any other Holders shallbe deemed to be equal to the value of receiving Securities registered under theAct.  

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Benefitsreceived by any underwriter shall be deemed to be equal to the totalunderwriting discounts and commissions, as set forth on the cover page of theProspectus forming a part of the Shelf Registration Statement which resulted insuch Losses.  Relative fault shall be determined by reference to,among other things, whether any untrue or any alleged untrue statement of a material fact or omission or alleged omission to state amaterial fact relates to information providedby the indemnifying party, on the one hand, or by the indemnified party, on theother hand, the intent of the parties and their relative knowledge,access to information and opportunity to correct or prevent such untruestatement or omission.  The partiesagree that it would not be just and equitable if contribution were determinedby pro rata allocation (even if the Holders were treated as one entityfor such purpose) or any other method ofallocation which does not take account of the equitable considerations referredto above.  Notwithstanding the provisions of this paragraph (d),no person guilty of fraudulent misrepresentation (within the meaning ofSection 11(f) of the Act) shall be entitled to contribution from anyperson who was not guilty of such fraudulent misrepresentation.  Forpurposes of this Section 5, each personwho controls a Holder within the meaning of either the Act or the Exchange Actand each director, officer, employee and agent of such Holder shall have thesame rights to contribution as such Holder, and each person who controls theCompany or the Guarantor within themeaning of either the Act or the Exchange Act, each officer of the Companyor the Guarantor who shall have signed theShelf Registration Statement and each director of the Company or theGuarantor shall have the same rights tocontribution as the Company and the Guarantor, subject in each case to the applicable terms andconditions of this paragraph (d).

(d)*              *The provisions of thisSection 5 shall remain in full forceand effect, regardless of any investigation made by or on behalf of any Holderor the Company and the Guarantor or anyof the indemnified persons referred to in this Section 5,and shall survive the sale by a Holder of securities covered by the ShelfRegistration Statement.

6.*                 *Underwritten Registrations.  (a)  Ifany of the Securities covered by the Shelf Registration Statement are to besold in an underwritten offering, the Managing Underwriters shall be selectedby the Majority Holders, subject to theapproval by the Company and the Guarantor; such approval by the Company and theGuarantor shall not be unreasonably delayed, withheld or conditioned.

(a)*               *No person may participate in any underwrittenoffering pursuant to the Shelf Registration Statement unless such person (i)agrees to sell such person`s Securities on the basis reasonably provided in anyunderwriting arrangements approved by the persons entitled hereunder to approvesuch arrangements; and (ii) completes and executes all questionnaires, powersof attorney, indemnities, underwriting agreements and other documentsreasonably required under the terms of such underwriting arrangements.

7.*                 *Registration Defaults. If any of thefollowing events shall occur, then the Company and the Guarantor, jointly andseverally, shall pay (in accordance with the Indenture) liquidated damages (the"Registration Default Damages") to the Holders of Securities in respect of theSecurities as follows:

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(a)*               *if the Shelf Registration Statement is not filed with theCommission on or prior to the 120th day following the Closing Date,then commencing on the 121st day after the Closing Date,Registration Default Damages shall accrue on the Registrable Securities at arate of .25% per annum of the principal amount of the Notes (or, with respectto Holders of Ordinary Shares issued upon conversion of the Notes, theprincipal amount of the Notes converted into such Ordinary Shares) for thefirst 90 days from and including such 121st day and .50% per annumof the principal amount of the Notes (or, with respect to Holders of OrdinaryShares issued upon conversion of the Notes, the principal amount of the Notesconverted in such Ordinary Shares) thereafter; or

(b)*              *if the Shelf Registration Statement is not declaredeffective by the Commission on or prior to the 210thday followingthe Closing Date, then commencing on the 211st day after the ClosingDate, Registration Default Damages shall accrue on the Registrable Securitiesat a rate of .25% per annum of the principal amount of the Notes (or, with respectto Holders of Ordinary Shares issued upon conversion of the Notes, theprincipal amount of the Notes converted into such Ordinary Shares) for thefirst 90 days from and including such 211st day and .50% per annumof the principal amount of the Notes (or, with respect to Holders of OrdinaryShares issued upon conversion of the Notes, the principal amount of the Notesconverted in such Ordinary Shares) thereafter; or

(c)*               *if the Shelf Registration Statement has been declaredeffective but ceases to be effective (other than (i) pursuant to Section 3(i)hereof or (ii) as a result of the need to file an amendment or supplement tothe Shelf Registration Statement for the sole purpose of adding to or modifyingHolder information contained in the Shelf Registration Statement) for more thanfive Business Days at any time during the Shelf Registration Period, thencommencing on the sixth Business Day after the Shelf Registration Statementceases to be effective, Registration Default Damages shall accrue on theRegistrable Securities at a rate of .25% per annum of the principal amount ofthe Notes (or, with respect to Holders of Ordinary Shares issued uponconversion of the Notes, the principal amount of the Notes converted into suchOrdinary Shares) for the first 90 days from and including such date on whichthe Shelf Registration Statement ceases to be effective and .50% per annum ofthe principal amount of the Notes (or, with respect to Holders of OrdinaryShares issued upon conversion of the Notes, the principal amount of the Notesconverted into such Ordinary Shares) thereafter; or

(d)*              *if the aggregate duration of Deferral Periods in anyperiod exceeds the number of days permitted in respect of such period pursuantto Section 3(i) hereof, then commencing on the day the aggregate duration ofDeferral Periods in any period exceeds the number of days permitted in respectof such period, Registration Default Damages shall accrue on the RegistrableSecurities at a rate of .25% per annum of the principal amount of the Notes (or,with respect to Holders of Ordinary Shares issued upon conversion of the Notes,the principal amount of the Notes converted into such Ordinary Shares) for thefirst 90 days from and including such date and .50% per annum of the principalamount of the Notes (or, with respect to Holders of Ordinary Shares issued uponconversion of the Notes, the principal amount of the Notes converted into suchOrdinary Shares) thereafter; 

provided, however, that (1) upon the filingof the Shelf Registration Statement (in the case of paragraph (a) above), (2)upon the effectiveness of the Shelf Registration Statement (in the case ofparagraph (b) above), (3) upon the effectiveness of the Shelf RegistrationStatement which had ceased to remain effective (in the case of paragraph (c)above), or (4) upon the termination of the Deferral Period that caused thelimit on the aggregate duration of Deferral Periods in a period set forth inSection 3(i) to be exceeded (in the case of paragraph (d) above), RegistrationDefault Damages shall cease to accrue; provided, further, thatthe Company and the Guarantor shall make any payment required to be made underthis Section 7 to Holders of Ordinary Shares issued upon conversion of theNotes on the same basis and at the same time as payments are made under thisSection 7 to Holders of the Notes pursuant to the Indenture.

8.*                 *No InconsistentAgreements.  Neither theCompany nor the Guarantor has notentered into, and agrees not to enter into,any agreement with respect to its securities that is inconsistent with therights granted to the Holders herein or that otherwise conflicts with the provisions hereof.

9.*                 *Amendmentsand Waivers.  The provisions of this Agreement may not beamended, qualified, modified or supplemented, and waivers or consents to departuresfrom the provisions hereof may not be given, unless the Company and theGuarantor have obtained the written consent ofthe Holders of a majority of the aggregate principal amount of****theRegistrable****Securities outstanding; provided that for the purposesof this Section 9, Holders of Ordinary Shares issued upon conversion of theNotes shall be deemed to hold a principal amount of Notes (in addition to theprincipal amount of Notes held by such Holders) equal to the product of (x) thenumber of such Ordinary Shares and (y) the prevailing conversion price asdetermined in accordance with the Indenture; provided, further that,with respect to any matter that directly or indirectly affects the rights ofany Initial Purchaser hereunder, the Company and the Guarantor shall obtain the written consent of each suchInitial Purchaser against which such amendment, qualification, supplement,waiver or consent is to be effective; provided,further, that no amendment,qualification, supplement, waiver or consent with respect to Section 7hereof shall be effective as against any Holder of Registered Securities unlessconsented to in writing by such Holder; and provided,further, that the provisions of this Article 9 may not be amended, qualified, modified or supplemented, andwaivers or consents to departures from the provisions hereof may not be given,unless the Company and the Guarantorhas obtained the written consent of the Initial Purchasers and each Holder.

10.*             *Notices.  Allnotices and other communications provided for or permitted hereunder shall bemade in writing by hand-delivery, first-class mail, telex, telecopier or aircourier guaranteeing overnight delivery:

(a)*               *if to a Holder, at themost current address given by such holder to the Company or Guarantor in accordance with the provisions of the Notice andQuestionnaire , which address initiallyis, with respect to each Holder, the address of such Holder maintained by theRegistrar under the Indenture; 

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(b)*              *if to theInitial Purchasers or the Representatives,initially at the address or addresses setforth in the Purchase Agreement; and

(c)*               *if to the Companyor the Guarantor, initially as set forth inthe Purchase Agreement.

All such notices andcommunications shall be deemed to have been duly given when received.

The Initial Purchasersor the Company and the Guarantor bynotice to the other parties maydesignate additional or different addresses for subsequent notices orcommunications.

11.*             *Remedies.  EachHolder, in addition to being entitled to exercise all rights provided to itherein, in the Indenture****or inthe Purchase Agreement or granted by law, including recovery of liquidated orother damages, will be entitled to specific performance of its rights underthis Agreement. Each of the Company and the Guarantor agrees that monetarydamages would not be adequate compensation for any loss incurred by reason of abreach by it of the provisions of this Agreement and hereby agrees to waive inany action for specific performance the defense that a remedy at law would beadequate.

12.*             *Successors.  This Agreement shall inure to thebenefit of and be binding upon the parties hereto, their respective successors and assigns, including, without the needfor an express assignment or any consent by the Company or the Guarantorthereto, subsequent Holders of Securities,and the indemnified persons referred to in Section 5 hereof.  Each of the Company and the Guarantor hereby agrees to extend the benefits of thisAgreement to any Holder of Securities,and any such Holder may specifically enforce the provisions of this Agreementas if an original party hereto.  

13.*             *Consent to Service, Submission to Jurisdictionand Related Matters.

(a)*               *Each of the Company and the Guarantor, by the executionand delivery of this Agreement, designates and appoints M-Systems, Inc., 8371Central Avenue, Newark, CA 94560, as the authorized agent of each of theCompany and the Guarantor for as long as any of the Securities are outstanding****from the date of this Agreement upon whom process may be served in anysuit, proceeding or other action against the Company or the Guarantorinstituted by any Holder, Initial Purchaser, the directors, officers, employeesand agents of any Initial Purchaser, or by any person controlling an InitialPurchaser as to which such Initial Purchaser, the directors, officers,employees and agents of any Initial Purchaser, or any such controlling personis a party and based upon this Agreement, the Indenture or the PurchaseAgreement, or in any other action against the Company or the Guarantor in any Federalor state court sitting in the State of New York, arising out of the offeringmade by the Final Memorandum or any purchase or sale of securities inconnection therewith, and each of the Company and the Guarantor expresslyaccepts jurisdiction of any such court in respect of any such suit, proceedingor other action and, without limiting other methods of obtaining jurisdiction,expressly submits to nonexclusive personal jurisdiction of any such court inrespect of any such suit, proceeding or other action. 

**____ 16 ____** 

Such designation and appointmentshall be irrevocable, unless and until a successor authorized agent in theUnited States reasonably acceptable to the Representatives shall have beenappointed by each of the Company and the Guarantor, such successor shall haveaccepted such appointment, and written notice thereof shall have been given tothe Representatives. Each of the Company and Guarantor further agree thatservice of process upon its authorized agent or successor (and written noticeof said service to the Guarantor, mailed by certified mail or sent by telex ordelivered, as provided in Section 12 above) shall be deemed in every respectpersonal service of process upon each of the Company and the Guarantor in anysuch suit, proceeding or other action. In the event that service of any processor notice or motion or other application to any such court in connection withany such action or proceeding cannot be made in the manner described above,such service may be made in the manner set forth in conformance with the Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents ofCivil and Commercial Matters or any successor convention or treaty.  Eachof the Company and the Guarantor hereby irrevocably waives any objection thatit may have or hereafter have to the laying of venue of any such action orproceeding arising out of or based on the Securities, this Agreement, theIndenture or the Purchase Agreement, or otherwise relating to the offering,issuance and sale of the Securities in any Federal or state court sitting inthe State of New York, and hereby further irrevocably waives any claim that anysuch action or proceeding in any such court has been brought in an inconvenientforum. Each of the Company and the Guarantor agrees that any final judgmentafter exhaustion of all appeals or the expiration of time to appeal in anyappeals or proceeding arising out of the sale of the Securities, thisAgreement, the Indenture or the Purchase Agreement rendered by any such Federalcourt or state court shall be conclusive and, except as prohibited byapplicable law, may be enforced in any other jurisdiction by suit on thejudgment or in any other manner provided by law. Nothing contained in thisAgreement, the Indenture or the Purchase Agreement shall affect or limit theright of the Holders or the Initial Purchasers to serve any process or noticeof motion or other application in any other manner permitted by law or limit oraffect the right of the Holders or the Initial Purchasers to bring any actionor proceeding against the Company or the Guarantor or any of their respectiveproperty in the courts of any other jurisdiction.  Each of theCompany and the Guarantor further agrees to take any and all action, includingthe execution and filing of all such instruments and documents, as may benecessary to continue such designation and appointment or such substitutedesignation and appointment in full force and effect. Each of the Company andthe Guarantor hereby agrees to the exclusive jurisdiction of the courts of theState of New York, or the Federal courts sitting in the State of New York, in connection with any action brought by them relating to or arising out of thisAgreement, the Indenture, the Purchase Agreement or the sale of the Securities.

**____ 17 ____** 

 

(b)*              *Each of the Company and the Guarantor agrees that in anysuit (whether in a court in the United States, Israel, the Cayman Islands orelsewhere) seeking enforcement of this Agreement, the Indenture, the PurchaseAgreement or any provisions of such agreements (i) no defense (other than aprocedural defense) given or allowed by the laws of any other state or countryshall be interposed by the Company or the Guarantor in any such suit, action orproceeding unless such defense is also given or allowed by the laws of theState of New York or of the United States, (ii) if the plaintiffs therein seeka judgment in either United States dollars, currency of Israel or currency ofthe Cayman Islands, subject to foreign currency control regulations of Israelor the Cayman Islands, as the case may be, neither the Company nor theGuarantor will interpose any defense or objection to or otherwise opposejudgment, if any, being awarded in such currencies except to the extent thatsuch a judgment would violate the laws of Israel or the Cayman Islands, as thecase may be, and (iii) if the plaintiffs therein seek to have any judgment (orany aspect thereof) awarded in the currency of Israel or the Cayman Islandslinked, for the period from entry of such judgment until actual payment thereofin full has been made, to either or both of the consumer price index of Israelor of the Cayman Islands, as the case may be, and changes in the exchange rateof the currency of Israel or the Cayman Islands, as the case may be, intoUnited States Dollars, neither the Company nor the Guarantor will interpose anydefense or objection to or otherwise oppose inclusion of such linkage in anysuch judgment except to the extent that such a judgment would violate the lawsof Israel or the laws of the Cayman Islands. Each of the Company and theGuarantor agrees that it will not initiate or seek to initiate any action, suitor proceeding, in Israel, the Cayman Islands or in any other jurisdiction otherthan in the United States, seeking damages in respect of or for the purpose ofobtaining any injunction or declaratory judgment against the enforcement of, ora declaratory judgment concerning any alleged breach by the Company or otherclaim by the Holders or the Initial Purchasers in respect of this Agreement orany of the Initial Purchasers` rights under this Agreement, the Indenture orthe Purchase Agreement, including without limitation any action, suit orproceeding challenging the enforceability of or seeking to invalidate in anyrespect the submission by the Company or the Guarantor hereunder to thejurisdiction of the courts or the designation of the laws as the law applicableto this Agreement, the Indenture or the Purchase Agreement, in each case as setforth herein.

(c)*               *The Company and the Guarantor, jointly and severally,agree that if any payment of any sum due under this Agreement, the Indenture orthe Purchase Agreement from the Company or the Guarantor is made to or receivedby the Initial Purchasers or any controlling person of any Initial Purchaser ina currency other than freely transferable United States dollars, whether byjudicial judgment or otherwise, the obligations of the Company or the Guarantorunder this Agreement, the Indenture or the Purchase Agreement shall bedischarged only to the extent of the net amount of freely transferable UnitedStates dollars that the Holders or the Initial Purchasers, or such controllingpersons of the Initial Purchasers, as the case may be, in accordance withnormal bank procedures, are able to lawfully purchase with such amount of suchother currency. To the extent that the Holders or Initial Purchasers or suchcontrolling persons of the Initial Purchasers are not able to purchasesufficient United States dollars with such amount of such other currency to dischargethe obligations of the Company or the Guarantor to the Holders or InitialPurchasers or such controlling persons of the Initial Purchasers, as the casemay be, 

**____ 18 ____** 

the obligations of the Company orthe Guarantor, as the case may be, to the Holders or the Initial Purchasers orsuch controlling persons of the Initial Purchasers, as the case may be, shallnot be discharged with respect to such difference, and any such undischargedamount will be due as a separate obligation and shall not be affected by paymentof or judgment being obtained for any other sums due under or in respect ofthis Agreement, the Indenture or the Purchase Agreement. To the extent that theInitial Purchasers or such controlling persons receive any payment with respectto such separate obligation in freely transferable United States dollars (orcurrency which can be used to purchase freely transferable United Statesdollars in the manner set forth above), the Holders or the Initial Purchasersor such controlling persons, as the case may be, will return to the Company orthe Guarantor, as the case may be, a corresponding amount of the othercurrency.

15.       Waiver of Immunity.  To theextent that the Company or the Guarantor has or hereafter may acquire anyimmunity (sovereign or otherwise) from any legal action, suit or proceeding,from jurisdiction of any court or from set-off or any legal process (whetherservice or notice, attachment in aid or otherwise) with respect to itself orany of its property, each of the Company and the Guarantor hereby irrevocablywaives and agrees not to plead or claim such immunity in respect of itsobligations under this Agreement.

14.*             *Counterparts.  ThisAgreement may be signed in one or more counterparts, each of which shallconstitute an original and all of which together shall constitute one and thesame agreement.

15.*             *Headings.  Thesection headings used herein are for convenience only and shall not affect theconstruction hereof.

16.*             *ApplicableLaw.  This Agreement shall be governed by and construed inaccordance with the laws of the State of New York applicable to contracts madeand to be performed in the State of New York.  The parties heretoeach hereby waive any right to trial by jury in any action, proceeding orcounterclaim arising out of or relating to this Agreement.

17.*             *Severability.  Inthe event that any one of more of the provisions contained herein, or theapplication thereof in any circumstances, is held invalid, illegal orunenforceable in any respect for any reason, the validity, legality andenforceability of any such provision in every other respect and of theremaining provisions hereof shall not be in any way impaired or affectedthereby, it being intended that all of the rights and privileges of the partiesshall be enforceable to the fullest extent permitted by law.

18.*             *SecuritiesHeld by the Company, etc.  Whenever the consent or approval ofHolders of a specified percentage of principal amount of Securities is requiredhereunder, Securities held by the Company, the Guarantor or any of their respective Affiliates (other than subsequent Holders ofSecurities if such subsequent Holders are deemed to be Affiliates solely byreason of their holdings of such Securities) shall not be counted indetermining whether such consent or approval was given by the Holders of suchrequired percentage.

**____ 19 ____** 

If the foregoing is in accordance with your understandingof our agreement, please sign and return to us the enclosed duplicate hereof,whereupon this letter and your acceptance shall represent a binding agreementbetween the Company, the Guarantor and the several Initial Purchasers.

Verytruly yours,

M-Systems FINANCE Inc.

 

By:___________________________

Name:Title:

 

M-Systems Flash Disk Pioneers Ltd.

 

By:___________________________

Name:Title:

 

M-Systems, Inc.(solely in respect of Section 13 hereof)By:Name: Title:

 

 

 

 

 

 

**____ 20 ____** 

The foregoing Agreement is hereby confirmed andaccepted as of the date first above written.

Citigroup Global Markets Inc.CIBC World Markets Corp.

C.E. Unterberg, Towbin

Thomas Weisel Partners LLC

WR Hambrecht + Co. LLC

 

By:  Citigroup Global Markets Inc.

By       ____________________Name:Title:

For themselves and the other severalInitial Purchasers named in Schedule Ito the Purchase Agreement.

 

**____ 21 ____** 

 

 

**____ 22 ____**