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# UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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# FORM 20-F

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

For the fiscal year ended December 31, 2008             Commission File number: 0-24790

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TOWER SEMICONDUCTOR
LTD.(Exact
name of registrant as specified in its charter and translation of registrants name
into English)

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Israel(Jurisdiction of
incorporation or organization)

Ramat Gavriel
Industrial Park P.O. Box 619, Migdal
Haemek, Israel 23105 (Address of principal
executive offices)

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Securities registered or to be registered pursuant to Section 12(b) of the Act:

|                                       |                                          
|-------------------------------------- | -----------------------------------------
|
|
|
|
|Title of Each Class                    | Name of Each Exchange on Which Registered
|Ordinary Shares, par value New Israeli | NASDAQ Global Market                     
|Shekels 1.00 per share                
|                                      
|Convertible Debentures                 | NASDAQ Capital Market                    

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

Indicate
the number of outstanding shares of each of the issuers classes of capital or common
stock as of the close of the period covered by the annual report: 160,025,639 Ordinary
Shares

Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405
of the Securities Act.

Yes  o    No   x

If
this report is an annual or transition report, indicate by check mark if the registrant is
not required to file reports pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.

Yes o No x

Indicate
by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.

Yes x  No o

Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large
accelerated filer in Rule 12b-2 of the Exchange Act.

Large accelerated filer o    Accelerated filer o    Non-accelerated filer x

Indicate
by check mark whether the registrant has submitted electronically and posted on its
corporate website, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (section 229.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit
and post such files).

Yes o No o

Indicate
by check mark which basis of accounting the registrant has used to prepare the financial
statements included in this filing:

|          |                                                              |        
|--------- | ------------------------------------------------------------ | -------
|
|
|
|
|US GAAP x | International Financial Reporting Standards as issued by the | Other o
|          | International Accounting Standards Board o                  

If Other has been checked
in response to the previous question,

Indicate
by check mark which financial statement item the registrant has elected to follow.

Item 17 o Item 18 o

If
this is an annual report, indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).

Yes o No   x



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This
annual report on Form 20-F includes certain forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934. The use of the words
projects, expects, may, plans or
intends, or words of similar import, identifies a statement as
forward-looking. There can be no assurance, however, that actual results will
not differ materially from our expectations or projections. Factors that could cause
actual results to differ from our expectations or projections include the risks and
uncertainties relating to our business described in this annual report at Item 3.
Key Information  Risk Factors.

---

Beginning
with the fourth quarter of 2007, Tower prepares its consolidated financial statements in
United States dollars and in accordance with accounting principles generally accepted in
the United States of America (US GAAP). Tower recast the comparative amounts
included in its financial statements and in this report to US GAAP. Prior to the fourth
quarter of 2007, Tower prepared its financial reports in United States dollars and in
accordance with generally accepted accounting principles in Israel (Israeli
GAAP) and provided reconciliation to US GAAP in the notes to the financial
statements.

The
transition to US GAAP was made as a result of Israel Accounting Standard 29, which
stipulates that Israeli public companies that previously reported their financial results
based on Israeli GAAP must begin reporting their financial results in accordance with
International Financial Reporting Standards (IFRS) for periods beginning on or
after January 1, 2008. However, Israeli public companies that are also listed on NASDAQ
are allowed to report utilizing US GAAP rather than IFRS. We elected to use US GAAP to
increase transparency and comparability of our financial reports and facilitate research
and analysis by shareholders, analysts and other participants in the U.S. capital markets.

All
references herein to dollars or $ are to United States dollars,
and all references to Shekels or NIS are to New Israeli Shekels.

On
September 19, 2008, we completed the merger with Jazz Technologies, Inc. (Jazz
Technologies) in a stock for stock transaction. Jazz Technologies is the parent
company of its wholly-owned subsidiary, Jazz Semiconductor, Inc. (Jazz
Semiconductor), an independent semiconductor foundry focused on specialty process
technologies for the manufacture of analog intensive mixed-signal semiconductor devices.
As a result of this transaction, both Jazz Technologies and Jazz Semiconductor became
wholly owned subsidiaries of Tower Jazz Technologies and Jazz Semiconductor are sometimes
collectively referred to in this report as Jazz.

Following
the merger with Jazz, our financial statements include Jazzs results commencing
September 19, 2008 and our consolidated balance sheet as of December 31, 2008 includes
Jazzs balances as of such dates.

As
used in this annual report, we, us, our, the
Company and words of similar import refer to Tower Semiconductor Ltd., Jazz
Technologies, Inc. and Jazz Semiconductor, Inc. References to the Company for
dates prior to September 19, 2008 mean Tower Semiconductor Ltd. (excluding Jazz)
(Tower), which on September 19, 2008 was merged with Jazz and references to
the Company for periods on or after September 19, 2008 are references to
Tower and its wholly-owned subsidiaries.

(i)

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Manufacturing
or production capacity refers to installed equipment capacity in our facilities and is a
function of the process technology and product mix being manufactured because certain
processes require more processing steps than others. All information herein with respect
to the wafer capacity of our manufacturing facilities is based upon our estimate of the
effectiveness of the manufacturing equipment and processes in use or expected to be in use
during a period and the actual or expected process technology mix for such period. Unless
otherwise specifically stated, all references herein to wafers in the context
of capacity in Fab 1 are to 150-mm wafers and in Fab 2 and Jazz are to 200-mm wafers.

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microFLASH®
is a registered trademark of Tower

(ii)

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# TABLE OF CONTENTS

|         |           |                                                                              |   
|-------- | --------- | ---------------------------------------------------------------------------- | --
|
|
|
|
|PART I   |           |                                                                              | 1 
|        
|         | ITEM 1.   | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS                        | 1 
|         | ITEM 2.   | OFFER STATISTICS AND EXPECTED TIMETABLE                                      | 1 
|         | ITEM 3.   | KEY INFORMATION                                                              | 1 
|         | ITEM 4.   | INFORMATION ON THE COMPANY                                                   | 20
|         | ITEM 4A.  | UNRESOLVED STAFF COMMENTS                                                    | 38
|         | ITEM 5.   | OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                 | 38
|         | ITEM 6.   | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                   | 60
|         | ITEM 7.   | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                            | 70
|         | ITEM 8.   | FINANCIAL INFORMATION                                                        | 72
|         | ITEM 9.   | THE OFFER AND LISTING                                                        | 74
|         | ITEM 10.  | ADDITIONAL INFORMATION                                                       | 74
|         | ITEM 11.  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   | 83
|         | ITEM 12.  | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                       | 86
|        
|PART II  |           |                                                                              | 87
|        
|         | ITEM 13.  | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                              | 87
|         | ITEM 14.  | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 87
|         | ITEM 15.  | CONTROLS AND PROCEDURES                                                      | 87
|         | ITEM 16.  | [RESERVED]                                                                   | 88
|         | ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT                                             | 88
|         | ITEM 16B. | CODE OF ETHICS                                                               | 88
|         | ITEM 16C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                       | 89
|         | ITEM 16D. | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                   | 89
|         | ITEM 16E. | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS       | 89
|        
|PART III |           |                                                                              | 89
|        
|         | ITEM 17.  | FINANCIAL STATEMENTS                                                         | 89
|         | ITEM 18.  | FINANCIAL STATEMENTS                                                         | 90
|         | ITEM 19.  | EXHIBITS                                                                     | 90

(iii)

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# PART I

|ITEM 1. |  | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
|------- |  | -----------------------------------------------------

Not
applicable.

|ITEM 2. |  | OFFER STATISTICS AND EXPECTED TIMETABLE
|------- |  | ---------------------------------------

Not
applicable.

|ITEM |  | KEY INFORMATION
|---- |  | ---------------

# Selected Financial Data

This
section presents our selected historical financial data. You should carefully read the
financial statements included in this annual report, including the notes to the financial
statements. The selected data in this section is not intended to replace the financial
statements.

We
derived the selected statement of operations data and other financial data for the years
ended December 31, 2008, 2007 and 2006, and selected balance sheet data as of December 31,
2008 and 2007 from the audited financial statements in this annual report. Those financial
statements were audited by Brightman Almagor & Co., a member firm of Deloitte Touche
Tohmatsu, independent registered public accounting firm. We derived the selected statement
of operations data and other financial data for the years ended December 31, 2005 and 2004
and the selected balance sheet data as of December 31, 2006, 2005 and 2004 from our
audited financial statements that are not included in this annual report, which were
recast to US GAAP. Our management believes that the financial statements contain all
adjustments needed to present fairly the information included therein.

Following
the merger with Jazz, our financial statements include Jazz results commencing September
19, 2008 and our consolidated balance sheet as of December 31, 2008 includes Jazzs
balances as of such date.

|                                       | Year Ended December 31,
|-------------------------------------- | -----------------------
|
|
|
|
|Statement of Operations Data:          |                        
|Revenues                               |                        
|Cost of revenues                       |                        
|                                       |                        
|Gross loss                             |                        
|Research and development               |                        
|Marketing, general and administrative. |                        
|Write-off of in-process research and   |                        
|development                            |                        
|Merger related costs                   |                        
|Fixed assets impairment                |                        
|                                       |                        
|Operating loss                         |                        
|Financing expense, net                 |                        
|Gain on debt restructuring             |                        
|Other income (expense), net            |                        
|                                       |                        
|Loss before income tax expenses        |                        
|Income tax provision                   |                        
|                                       |                        
|Loss for the year                      |                        
|                                       |                        
|Basic loss per ordinary share          |                        
|                                       |                        
|Other Financial Data:                  |                        
|Depreciation and amortization          |                        

- 1 -

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|                                                | Year Ended December 31,
|----------------------------------------------- | -----------------------
|
|
|
|
|Selected Balance Sheet Data:                    |                        
|Cash and cash equivalents, including short-term |                        
|interest-bearing deposits and designated cash   |                        
|Working capital                                 |                        
|Total assets                                    |                        
|Current maturities of long-term bank debt and   |                        
|short-term bank debt                            |                        
|Current maturities of convertible debentures    |                        
|Long-term debt from banks                       |                        
|Debentures                                      |                        
|Long-term customers' advances                   |                        
|Shareholders' equity (deficit)                  |                        
|Weighted average number of ordinary shares      |                        
|outstanding (*)                                 |                        
|Number of shares issued and outstanding (*)     |                        

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|(*) | Net
of 1,300,000 treasury shares.
|--- | ---------------------------------

# Risk Factors

This
annual report and statements that we may make from time to time may contain
forward-looking information. There can be no assurance that actual results will not differ
materially from our expectations, statements or projections. Factors that could cause
actual results to differ from our expectations, statements or projections include the
risks and uncertainties relating to our business described below.

# Risks Affecting Our
Business

If the Investment Center will not release
to us the pending and over-due grants, we would be required to seek alternative financing
sources to fund our on-going operations, which may not be available.

In
connection with Fab 2, Tower received approval for grants and tax benefits from the
Investment Center of the Israeli Ministry of Industry, Trade and Labor (Investment Center)
under its Approved Enterprise Program. Under the terms of the approval, Tower was eligible
to receive grants equal to 20% of up to $1.25 billion invested in Fab 2 plant and
equipment, or an aggregate of up to $250 million. As of today, Tower received a cumulative
amount of approximately $165 million in grants from the Investment Center in relation to
Fab 2. Towers eligibility to receive grants was with respect to investments in Fab 2
plant and equipment made between 2001 and 2005. Any failure by Tower to meet the
conditions of its grants may result in the cancellation of all or a portion of the grants
and tax benefits and in the Investment Center requiring Tower to repay all or a portion of
grants already received. Israeli law limits the ability of the Investment Center to extend
the time for investments eligible for grants beyond a five year period, unless approved
through an expansion plan. Tower has therefore been holding discussions with the
Investment Center for approval of an expansion plan to commence as of January 1, 2006. On
numerous occasions, Tower received assurances and commitments from governmental
authorities that such an expansion plan would be approved pending positive recommendation
of an economical audit by the Industrial Bank of the Investment Center. In 2005, at the
Investment Centers request, Tower submitted a revised business plan to the
Investment Center and its Industrial Bank for the period commencing January 1, 2006. Tower
has invested from January 1, 2006 through May 31, 2009, approximately $225 million in Fab
2 plant and equipment; hence as of May 31, 2009, $45 million of cash grants are pending
and over-due. While the Industrial Bank of the Investment Center gave a positive
recommendation, the governmental approval process has been protracted and as a result, in
May 2008, Tower filed a petition with the Israeli High Court of Justice seeking an
approval certificate from the Investment Center for the expansion plan. A hearing has been
scheduled for October 2009.

- 2 -

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In
August 2008, the Investment Center rejected our expansion plan request. On November 2008,
Tower filed an appeal on this decision to the Israeli Ministerial Committee, which is
comprised of the Israeli Minister of Finance and the Israeli Minister of Industry, Trade
and Labor. No proceedings of the committee related to our appeal have been held to date.
In parallel, Tower is holding discussions with the Investment Center and senior
Governmental officials to obtain approval of the proposed expansion plan and/or find an
alternative process to release the pending and over-due $45 million of cash grants to
Tower. Currently, Tower cannot estimate when it will receive the pending and over-due
grants or when it will receive a formal response to its request for an expansion plan to
commence as of January 1, 2006 or if the Investment Center will approve its request or
release the grants. If the Investment Center does not approve our request for an expansion
plan and/or find an alternative process to release the pending and over-due grants, it
will have a material adverse effect on Towers operations and financial condition,
and Tower would likely be required to obtain financing from alternative sources, in order
to fund its on-going operations, which financing may not be available. Such financing
sources may include potential opportunities for sale and lease-back of a portion of
Towers real estate assets, sale of other fixed assets and/or intellectual property
licensing.

Our
business requires a significant amount of financing and our business may be adversely
affected if its sources of liquidity are unavailable or insufficient to fund its
operations, or if such sources will not be available.

Our
working capital requirements and cash flows are subject to quarterly and yearly
fluctuations, depending on a number of factors. If we are unable to manage fluctuations in
cash flow, our business, operating results and financial condition may be materially
adversely affected. Factors which could lead us to suffer cash flow fluctuations include:

| |  | the
level of revenue derived from sales of wafers we  manufacture,  engineering  services,
 design-related                   services and other sources of revenue;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
collection of receivables;
| | - | ------------------------------

| |  | the
timing and size of capital expenditures; and
| | - | ------------------------------------------------

| |  | the
servicing of financing obligations and other short-term and long-term liabilities.
| | - | --------------------------------------------------------------------------------------

- 3 -

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---

In
addition, current uncertainty arising from the global economic downturn, including the
recent disruption in financial and credit markets, and prevailing market conditions in the
semiconductor industry (including global decreased demand, downward price pressure, excess
inventory and unutilized capacity) pose a risk to the overall economy that could severely
impact consumer and customer demand for our and our customers products, as well as
commercial relationships with our customers, suppliers, and creditors, including our
lenders. If the current situation continues or worsens significantly, our business could
be negatively impacted.

In
order to finance our business, we expect to use available cash and existing credit
facilities as well as exploring measures to obtain funds from other sources of financing,
including potential opportunities for sale and lease-back of a portion of Towers
real estate assets, sale of other fixed assets and/or intellectual property, licensing,
receipt of all or part of the $45 million pending and over-due grants from the Israeli
Investment Center if it approves Towers expansion plan and other alternatives for
fund raising. We are also working to mitigate the potential effects of the global economic
downturn through several measures, including implementing a cost reduction plan, which is
targeted at saving approximately $80 million of costs on an annual run-rate.

However,
there is no assurance that we will be able to obtain sufficient funding from the financing
sources detailed above and/or from such cost reduction measures in a timely manner to
allow us to fully mitigate the effect of the existing economic downturn and any potential
further deterioration in market conditions and maintain our ongoing operations and/or
repay our short-term and long-term debt and other liabilities.

In
addition, if we were to incur higher levels of debt, this would require a larger
proportion of our respective operating cash flow to be used to pay principal and interest
on our respective indebtedness. The increased use of cash to pay indebtedness could leave
us with insufficient funds to finance our respective operating activities and capital
expenditures, which could adversely affect our business and on-going operations.

If Tower fails to comply with the
repayment schedule under the amended facility agreement and is unsuccessful in negotiating
a revised repayment schedule, or if it fails to meet any of the covenants and financial
ratios stipulated in its amended facility agreement and Towers banks do not waive
its noncompliance, Tower would likely be unable to fund its on-going operations.

Under
Towers amended facility agreement with Bank Hapoalim B.M. and Bank Leumi Le-Israel
B.M., in the event that Tower fails to comply with the repayment schedule and is
unsuccessful in negotiating a revised repayment schedule, or fails to meet any of the
covenants and financial ratios stipulated in the amended facility agreement and its banks
do not waive its noncompliance, its banks may require it to immediately repay all loans
made by them to Tower, plus penalties, and they would be entitled to exercise the remedies
available to them under the amended and restated credit facility, including enforcement of
their lien against Towers assets. There is no assurance that Tower would be able to
generate the cash necessary to fund the scheduled payments from increased levels of cash
from operations or from additional equity or debt financing or obtain funding from other
sources (including, for example, funds from a sale and lease-back of a portion of
Towers real estate assets and/or a sale of other fixed assets). If we are not able
to generate increased levels of revenue and cash from operations or raise sufficient funds
in a timely manner, Tower would likely be unable to comply with the repayment schedule and
Tower would likely fail to meet covenants and financial ratios under the amended facility
agreement. This would have a material adverse effect on Tower and it would likely be
unable to fund its on-going operations unless the banks agree to a revised repayment
schedule or to waive Towers non- compliance.

- 4 -

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The cyclical nature of the
semiconductor industry and the resulting periodic overcapacity may lead to erosion of sale
prices; downward price pressure may seriously harm our business.

The
semiconductor industry has historically been highly cyclical. Historically, companies in
the semiconductor industry have expanded aggressively during periods of increased demand.
This expansion has frequently resulted in overcapacity and excess inventories, leading to
rapid erosion of average sale prices. We expect this pattern to repeat itself in the
future. The overcapacity and downward price pressure characteristic of a prolonged
downturn in the semiconductor market, such as we are currently experiencing, may not allow
us to operate at a profit, even at full utilization, and could seriously harm our
financial results and business.

Our operating results fluctuate
from quarter to quarter which makes it difficult to predict our future performance.

Our
revenues, expenses and operating results have varied significantly in the past and may
fluctuate significantly from quarter to quarter in the future due to a number of factors,
many of which are beyond our control. These factors include, among others:

| |  | The
cyclical nature of both the semiconductor industry and the markets served by our
customers;
| | - | -----------------------------------------------------------------------------------------------

| |  | Changes
in the economic  conditions  of  geographical  regions  where our  customers and their
markets are               located;
| | - | ---------------------------------------------------------------------------------------------------------------------------------

| |  | Shifts
 by  integrated  device   manufacturers  (IDMs)  and  customers  between  internal  and
 outsourced               production;
| | - | ------------------------------------------------------------------------------------------------------------------------------------

| |  | Inventory
and supply chain management of our customers;
| | - | -------------------------------------------------------

| |  | The
 loss  of a key  customer,  postponement  of an  order  from a key  customer  or the
 rescheduling  or               cancellation of large orders
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
occurrence of accounts receivables write-offs, failure of a key customer to pay accounts
receivables in a timely manner or the financial condition of our customers;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
rescheduling or cancellation of planned capital expenditures;
| | - | -----------------------------------------------------------------

| |  | Our
ability to satisfy our customers' demand for quality and timely production;
| | - | -------------------------------------------------------------------------------

| |  | The
timing and volume of orders relative to our available production capacity;
| | - | ------------------------------------------------------------------------------

| |  | Our
ability to obtain raw materials and equipment on a timely and cost-effective basis;
| | - | ---------------------------------------------------------------------------------------

| |  | Environmental
events or industrial accidents such as fires or explosions;
| | - | -------------------------------------------------------------------------

| |  | Our
susceptibility to intellectual property rights disputes;
| | - | ------------------------------------------------------------

| |  | Our
ability to continue with existing and to enter into new partnerships and technology and
supply alliances on mutually beneficial terms;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------

- 5 -

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---

| |  | Actual
capital expenditures exceeding planned capital expenditures;
| | - | -------------------------------------------------------------------

| |  | Interest,
price index and currency rate fluctuations that were not hedged;
| | - | --------------------------------------------------------------------------

| |  | Technological
changes and short product life cycles;
| | - | ----------------------------------------------------

| |  | Timing
for designing and the qualification of new products; and
| | - | ---------------------------------------------------------------

| |  | New
accounting rules affecting our results including the accounting treatment of our bank
debt and debentures.
| | - | --------------------------------------------------------------------------------------------------------------

Due
to the factors noted above and other risks discussed in this section, many of which are
beyond our control, investors should not rely on quarter-to-quarter comparisons to predict
our future performance. Unfavorable changes in any of the above factors may seriously harm
our company, including our operating results, financial condition and ability to maintain
our operations.

The lack of a significant backlog
resulting from our customers not placing purchase orders far in advance makes it difficult
for us to forecast our revenues in future periods.

Our
customers generally do not place purchase orders far in advance, partly due to the
cyclical nature of the semiconductor industry. As a result, we do not typically operate
with any significant backlog. The lack of a significant backlog makes it difficult for us
to forecast our revenues in future periods. Moreover, since our expense levels are based
in part on our expectations of future revenues, we may be unable to adjust costs in a
timely manner to compensate for revenue shortfalls. We expect that in the future our
revenues in any quarter will continue to be substantially dependent upon purchase orders
received in that quarter and in the immediately preceding quarter. We cannot assure you
that any of our customers will continue to place orders with us in the future at the same
levels as in prior periods. If orders received from our customers differ adversely from
our expectations with respect to the product, volume, price or other items, our operating
results, financial condition and ability to maintain our operations may be adversely
affected.

We occasionally manufacture wafers
based on forecasted demand, rather than actual orders from customers. If our forecasted
demand exceeds actual demand, we may have obsolete inventory, which could have a negative
impact on our results of operations.

We
generally do not manufacture wafers unless we receive a customer purchase order. On
occasion, we may produce wafers in excess of customer orders based on forecasted customer
demand, because we may forecast future excess or because of future capacity constraints.
If we manufacture more wafers than are actually ordered by customers, we may be left with
excess inventory that may ultimately become obsolete and must be scrapped when it cannot
be sold. Significant amounts of obsolete inventory could have a negative impact on our
results of operations.

We have a history of operating
losses and expect to operate at a loss for the foreseeable future; our facilities must
operate at high utilization rates in order to reduce our losses.

We
have operated at a loss for the last number of years. Because fixed costs represent a
substantial portion of the operating costs of semiconductor manufacturing operations, we
must operate our facilities at high utilization rates for us to reduce our losses. We
began construction of Fab 2 in 2001 and Fab 2 operations began in 2003. Our losses since
2003 are due primarily to significant depreciation and amortization expenses related
mainly to Fab 2, as well as financing and operating expenses that have not yet been offset
by a sufficient increase in the level of our revenues. If we do not succeed in operating
our facilities at high utilization rates, we expect to continue to operate at a loss for
the foreseeable future, which may adversely affect our business and company.

- 6 -

---

---

Our sales cycles are typically
long and orders received may not meet our expectations, which may adversely affect our
operating results.

Our
sales cycles, which we measure from first contact with a customer to first shipment of
product ordered by the customer, vary substantially and may last as long as two years or
more, particularly for new technologies. In addition, even after we make initial shipments
of prototype products, it may take several more months to reach full production of the
product. As a result of these long sales cycles, we may be required to invest substantial
time and incur significant expenses in advance of the receipt of any product order and
related revenue. If orders ultimately received differ from our expectations with respect
to the product, volume, price or other items, our operating results, financial condition
and ability to maintain our operations may be adversely affected.

Demand for our foundry services is
dependent on the demand in our customers end markets.

In
order for demand for our wafer fabrication services to increase, the markets for the end
products using these services must develop and expand. For example, the success of our
imaging process technologies will depend, in part, on the growth of markets for certain
image sensor product applications. Because our services may be used in many new
applications, it is difficult to forecast demand. If demand is lower than expected, we may
have excess capacity, which may adversely affect our financial results. If demand is
higher than expected, we may be unable to fill all of the orders we receive, which may
result in the loss of customers and revenue.

If we do not maintain our current
customers and attract additional customers, our business may be adversely affected.

During
the three months ended March 31, 2009, approximately 42% of our business was generated by
four significant customers that contributed 16%, 13%, 8% and 5% of our revenue,
respectively. We expect to continue to receive a significant portion of our revenue from a
limited number of customers for the foreseeable future. Loss or cancellation of business
from, or decreases in the sales volume or sales prices to, our significant customers, or
our failure to replace them with other customers, could seriously harm our financial
results, revenue and business. Since the sales cycle for our services typically exceeds
one year, if our customers order significantly fewer wafers than forecasted, we will have
excess capacity that we may not be able to sell in a short period of time, resulting in
lower utilization of our facilities. We may have to reduce prices in order to try to sell
the excess capacity. In addition to the revenue loss that could result from unused
capacity or lower sales prices, we might have difficulty adjusting our costs to reflect
the lower revenue in a timely manner, which could harm our financial results.

We depend on a relatively small
number of products for a significant portion of our revenues.

From
time to time, a significant portion of our revenue is generated from a small number of
very high volume products that are shipped to volatile consumer-oriented markets. The
volume of orders of such products may adversely change or demand for such products may be
abruptly discontinued. We expect that for the foreseeable future we will continue to be
dependent upon a relatively limited number of products for a significant portion of our
revenue due to the nature of our business. A decrease in the price of, or demand for, any
of these products could negatively impact our financial results.

- 7 -

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If Tower does not receive orders
from its customers with whom it has signed long-term contracts, Tower may have excess
capacity.

Tower
has committed a portion of its capacity for future orders to some customers with whom
Tower has signed long-term contracts. If these parties do not place orders with Tower in
accordance with their contractual loading and purchase commitments, and if Tower is unable
to fill such unutilized capacity, Towers financial results may be adversely
affected.

If we do not maintain and develop
our technology processes and services, we will lose customers and may be unable to attract
new ones.

The
semiconductor market is characterized by rapid change, including the following:

| |  | rapid
technological developments;
| | - | ---------------------------------

| |  | evolving
industry standards;
| | - | ----------------------------

| |  | changes
in customer and product end user requirements;
| | - | ------------------------------------------------------

| |  | frequent
new product introductions and enhancements; and
| | - | --------------------------------------------------------

| |  | short
product life cycles with declining prices as products mature.
| | - | -------------------------------------------------------------------

Our
ability to maintain our current customer base and attract new customers is dependent in
part on our ability to continuously develop and introduce to production advanced
specialized manufacturing process technologies and purchase the applicable equipment.
Since the successful development and introduction to production of these processes may not
be achieved in a timely manner or at all and we may not be able to purchase the applicable
equipment required for such processes, we may be unable to maintain our current customer
base and may be unable to attract new customers.

The semiconductor foundry business
is highly competitive; our competitors may have competitive advantages over us.

The
semiconductor foundry industry is highly competitive. We compete with more than ten
independent dedicated foundries, the majority of which are located in Asia-Pacific,
including foundries based in Taiwan, China, Korea and Malaysia, and with over 20
integrated semiconductor and end-product manufacturers that allocate a portion of their
manufacturing capacity to foundry operations. The foundries with which we compete benefit
from their close proximity to other companies involved in the design and manufacture of
integrated circuits, or ICs. In addition, many of our competitors may have one or more of
the following competitive advantages over us:

| |  | greater
manufacturing capacity;
| | - | -------------------------------

| |  | multiple
and more advanced manufacturing facilities;
| | - | ----------------------------------------------------

| |  | more
advanced technological capabilities;
| | - | -----------------------------------------

- 8 -

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| |  | a
more diverse and established customer base;
| | - | ---------------------------------------------

| |  | greater
financial, marketing, distribution and other resources;
| | - | ---------------------------------------------------------------

| |  | a
better cost structure; and/or
| | - | -------------------------------

| |  | better
operational performance in cycle time and yields.
| | - | --------------------------------------------------------

If we do not compete effectively, our
business and results of operations may be adversely affected.

We have a large amount of debt
which could have significant negative consequences.

We
have a large amount of long-term debt, which could have significant negative consequences.
As of May 31, 2009, Tower had (i) approximately $208 million of bank debt under our
amended facility agreement with the banks, and (ii) approximately $132 million of debt in
respect of outstanding convertible and non-convertible debentures. As of May 31, 2009 Jazz
had (i) $27 million under its bank loan agreement, of which $7 million is presented as
short term debt and (ii) approximately $128 million of debt in respect of outstanding
convertible notes. Tower has not guaranteed any of Jazzs debt, including Jazzs
debt under its bank loan and Jazzs debt to its note holders.

Our
current and future indebtedness could have significant negative consequences, including:

| |  | requiring
the  dedication of a  substantial  portion of our expected cash flow from  operations to
service               our indebtedness;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------

| |  | increasing
our vulnerability to general adverse economic and industry conditions;
| | - | ---------------------------------------------------------------------------------

| |  | limiting
our ability to obtain additional financing;
| | - | ----------------------------------------------------

| |  | limiting
our  flexibility  in planning  for, or reacting  to,  changes in our business and the
industry in               which we compete;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------

| |  | placing
us at a competitive  disadvantage to less leveraged  competitors and competitors  that
have better               access to capital resources;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------

| |  | affecting
 our ability to make  interest  payments and other  required  debt service on our
 indebtedness;               and/or
| | - | -------------------------------------------------------------------------------------------------------------------------------

| |  | enforcement
by the banks of their liens against Towers and Jazz respective assets, as
applicable (in the event of default).
| | - | ----------------------------------------------------------------------------------------------------------------------------

# We may incur additional
indebtedness.

Although
Tower and Jazz are limited by the covenants in their respective loan facilities, either
Tower or Jazz could enter into certain transactions that would increase the amount of our
outstanding indebtedness. If new indebtedness is added to our current indebtedness levels,
the related risks, including the negative consequences associated with our increased level
of indebtedness, could intensify.

- 9 -

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If we experience difficulty in
achieving acceptable device yields, product performance and delivery times as a result of
manufacturing problems, our business could be seriously harmed.

The
process technology for the manufacture of semiconductor wafers is highly complex, requires
advanced and costly equipment and is constantly being modified in an effort to improve
device yields, product performance and delivery times. Microscopic impurities such as dust
and other contaminants, difficulties in the production process, defects in the key
materials and tools used to manufacture a wafer and other factors can cause wafers to be
rejected or individual semiconductors on specific wafers to be non-functional. We have
from time to time experienced production difficulties that have caused delivery delays or
returns and lower than expected device yields. We may also experience difficulty achieving
acceptable device yields, product performance and product delivery times in the future as
a result of manufacturing problems. Any of these problems could seriously harm our
operating results, financial condition and ability to maintain our operations.

If we are unable to purchase
equipment and raw materials, we may not be able to manufacture our products in a timely
fashion, which may result in a loss of existing and potential new customers.

To
increase the production capability of our facilities and to maintain the quality of
production in our facilities, we must procure additional equipment. In periods of high
market demand, the lead times from order to delivery of manufacturing equipment could be
as long as 12 to 18 months. In addition, our manufacturing processes use many raw
materials, including silicon wafers, chemicals, gases and various metals, and require
large amounts of fresh water and electricity. Manufacturing equipment and raw materials
generally are available from several suppliers. In many instances, however, we purchase
equipment and raw materials from a single source. Shortages in supplies of manufacturing
equipment and raw materials could occur due to an interruption of supply or increased
industry demand. Any such shortages could result in production delays that could have a
material adverse effect on our business and financial condition.

Our exposure to inflation and
currency exchange and interest rate fluctuations may increase our cost of operations.

Almost
all of our cash generated from operations and our financing and investing activities is
denominated in US dollars and New Israeli Shekels, or NIS. Our expenses and costs are
denominated in NIS, US dollars, Japanese Yen and Euros. We are, therefore, exposed to the
risk of currency exchange rate fluctuations.

The
dollar amount of our operations, which is denominated in NIS, is influenced by the timing
of any change in the rate of inflation in Israel and the extent to which such change is
not offset by the change in valuation of the NIS in relation to the US dollar. Outstanding
principal and interest on some of our debentures is linked to the Israeli consumer price
index (CPI) and therefore, our dollar costs will increase if inflation in Israel exceeds
the devaluation of the NIS against the US dollar, or if the timing of such devaluation
lags behind inflation in Israel.

Towers
and Jazzs borrowings under their respective credit facilities provide for interest
based on a floating LIBOR rate, thereby exposing us to interest rate fluctuations.
Furthermore, if Towers or Jazzs banks incur increased costs in financing the
applicable credit facility due to changes in law or the unavailability of foreign
currency, they may exercise their right to increase the interest rate on the credit
facility or require Tower or Jazz to bear such increased cost as provided for in the
respective credit facility agreement.

Tower
regularly engages in various hedging strategies to reduce its exposure to some, but not
all, of these risks and intends to continue to do so in the future. However, despite any
such hedging activity, Tower is likely to remain exposed to interest rate and exchange
rate fluctuations and inflation, which may increase the cost of its operating and
financing activities.

- 10 -

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We depend on intellectual property
rights of third parties and failure to maintain or acquire licenses could harm our
business.

We
depend on third party intellectual property in order for us to provide certain foundry and
design services to our clients. If problems or delays arise with respect to the timely
development, quality and provision of such intellectual property to us, the design and
production of our customers products could be delayed, resulting in underutilization
of our capacity. If any of our third party intellectual property vendors goes out of
business, liquidates, merges with, or is acquired by, another company that discontinues
the vendors previous line of business, or if we fail to maintain or acquire licenses
to such intellectual property for any other reason, our business may be adversely
affected. In addition, license fees and royalties payable under these agreements may
impact our margins and operating results.

Failure to comply with the
intellectual property rights of third parties or to defend our intellectual property
rights could harm our business.

Our
ability to compete successfully depends on our ability to operate without infringing on
the proprietary rights of others and defending our intellectual property rights. Because
of the complexity of the technologies used and the multitude of patents, copyrights and
other overlapping intellectual property rights, it is often difficult for semiconductor
companies to determine infringement. Therefore, the semiconductor industry is
characterized by frequent litigation regarding patent, trade secret and other intellectual
property rights. We have been subject to such claims in the past which have been resolved
through license agreements, the terms of which have not had a material effect on our
business. From time to time we are a party to various litigation matters incidental to the
conduct of our business.

Because
of the nature of the industry, we may continue to be a party to infringement claims in the
future. In the event any third party were to assert infringement claims against us or our
customers, we may have to consider alternatives including, but not limited to:

| |  | negotiating
cross-license agreements;
| | - | -------------------------------------

| |  | seeking
 to  acquire  licenses  to  the  allegedly  infringed  patents,  which  may  not be
 available  on               commercially reasonable terms, if at all;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | discontinuing
use of certain process technologies, architectures, or designs, which could cause us to
stop manufacturing certain integrated circuits if we were unable to design around the
allegedly infringed patents;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | fighting
the matter in court and paying substantial monetary damages in the event we lose; or
| | - | ---------------------------------------------------------------------------------------------

| |  | seeking
to develop non-infringing technologies, which may not be feasible.
| | - | --------------------------------------------------------------------------

Any
one or several of these alternatives could place substantial financial and administrative
burdens on us and hinder our business. Litigation, which could result in substantial costs
to us and diversion of our resources, may also be necessary to enforce our patents or
other intellectual property rights or to defend us or our customers against claimed
infringement of the rights of others. If we fail to obtain certain licenses or if
litigation relating to alleged patent infringement or other intellectual property matters
occurs, it could prevent us from manufacturing particular products or applying particular
technologies, which could reduce our opportunities to generate revenues.

- 11 -

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As
of May 31, 2009, Tower held 81 patents worldwide and Jazz held 170 patents. We intend to
continue to file patent applications when appropriate. The process of seeking patent
protection may take a long time and be expensive. We cannot assure you that patents will
be issued from pending or future applications or that, if patents are issued, they will
not be challenged, invalidated or circumvented or that the rights granted under the
patents will provide us with meaningful protection or any commercial advantage. In
addition, we cannot assure you that other countries in which we market our services and
products will protect our intellectual property rights to the same extent as the United
States. Further, we cannot assure you that we will at all times enforce our patents or
other intellectual property rights or that courts will uphold our intellectual property
rights, or enforce the contractual arrangements that we have entered into to protect our
proprietary technology, which could reduce our opportunities to generate revenues.

We could be seriously harmed by
failure to comply with environmental regulations.

Our
business is subject to a variety of laws and governmental regulations in Israel and in the
U.S. relating to the use, discharge and disposal of toxic or otherwise hazardous materials
used in Towers production processes in Israel and in Jazzs production
processes in California. If we fail to use, discharge or dispose of hazardous materials
appropriately, or if applicable environmental laws or regulations change in the future, we
could be subject to substantial liability or could be required to suspend or adversely
modify our manufacturing operations.

We are subject to the risk of loss
due to fire because the materials we use in our manufacturing processes are highly
flammable.

We
use highly flammable materials such as silane and hydrogen in our manufacturing processes
and are therefore subject to the risk of loss arising from fires. The risk of fire
associated with these materials cannot be completely eliminated. We maintain insurance
policies to reduce potential losses that may be caused by fire, including business
interruption insurance. If any of our fabs were to be damaged or cease operations as a
result of a fire, or if our insurance proves to be inadequate, it may reduce our
manufacturing capacity and revenues.

# Possible product returns
could harm our business.

Products
manufactured by us may be returned within specified periods if they are defective or
otherwise fail to meet customers prior agreed upon specifications. Product returns
in excess of established provisions, if any, may have an adverse effect on our business
and financial condition.

# We are subject to risks
related to our international operations.

We
have made substantial revenue from customers located in Asia-Pacific and in Europe.
Because of our international operations, we are vulnerable to the following risks:

| |  | we
price our products primarily in US dollars; if the Euro, Yen or other currencies weaken
relative to the US dollar, our products may be relatively more expensive in these
regions, which could result in a decrease in our revenue;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | the
burdens and costs of compliance with foreign government regulation, as well as compliance
with a variety of foreign laws;
| | - | -----------------------------------------------------------------------------------------------------------------------------

| |  | general
geopolitical risks such as political and economic instability, international terrorism,
potential hostilities and changes in diplomatic and trade relationships;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | natural
disasters affecting the countries in which we conduct our business;
| | - | ---------------------------------------------------------------------------

| |  | imposition
of regulatory requirements, tariffs, import and export restrictions and other trade
barriers and restrictions including the timing and availability of export licenses and
permits;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | adverse
tax rules and regulations;
| | - | ----------------------------------

| |  | weak
protection of our intellectual property rights;
| | - | ----------------------------------------------------

| |  | delays
in product shipments due to local customs restrictions;
| | - | --------------------------------------------------------------

| |  | laws
and business practices favoring local companies;
| | - | -----------------------------------------------------

| |  | difficulties
in collecting accounts receivable; and
| | - | ---------------------------------------------------

| |  | difficulties
and costs of staffing and managing foreign operations.
| | - | -------------------------------------------------------------------

In
addition, Israel, the United States or foreign countries may implement quotas, duties,
taxes or other charges or restrictions upon the importation or exportation of our
products, leading to a reduction in sales and profitability in that country. The
geographical distance between Israel, the United States, Asia and Europe also creates a
number of logistical and communication challenges. We cannot assure you that we will not
experience any serious harm in connection with our international operations.

Our business could suffer if we
are unable to retain and recruit qualified personnel.

We
depend on the continued services of our executive officers, senior managers and skilled
technical and other personnel. Our business could suffer if we lose the services of some
of these personnel and we cannot find and adequately integrate replacement personnel into
our operations in a timely manner. We seek to recruit highly qualified personnel and there
is intense competition for the services of these personnel in the semiconductor industry.
Competition for personnel may increase significantly in the future as new fabless
semiconductor companies as well as new semiconductor manufacturing facilities are
established. Our ability to retain existing personnel and attract new personnel is in part
dependent on the compensation packages we offer. As demand for qualified personnel
increases, we may be forced to increase the compensation levels and to adjust the cash,
equity and other components of compensation we offer our personnel.

Tower may be unable to utilize the
full benefits of our merger with Jazz

Tower
merged with Jazz in September 2008. The post merger operations involve known and unknown
risks that could adversely affect our future revenues and operating results. For example:

| |  | The
merger may result in the loss of key customers and/or personnel and may expose us to
unanticipated liabilities.
| | - | -------------------------------------------------------------------------------------------------------------------

- 13 -

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| |  | We
may fail to successfully integrate Jazz in accordance with our business strategy.
| | - | ------------------------------------------------------------------------------------

| |  | We
may be unable to retain the skilled employees and experienced management that may be
necessary to operate the business we are acquiring and, if we cannot retain such
personnel, we may be unable to attract new skilled employees and experienced management
to replace them.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | We
may be unable to achieve the full benefits of the planned $80 million cost reduction,
which might negatively affect our future financial results. Achieving the anticipated
short-term and long-term benefits of the merger depends in particular on achieving the
initially-anticipated cost synergies, the redeployment of both companies respective
support resources and the combination and integration of their significant global
activities. There can be no assurance that these objectives will be achieved
successfully.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

If Tower does not fully equip Fab
2 and complete the equipment installation, and ramp-up of production in Fab 2 to its full
capacity, Tower will not fully utilize the substantial investment made in the construction
of Fab 2.

Depending on the process technology
and product mix, when fully ramped-up, it is estimated that Fab 2 will be able to achieve
capacity levels of approximately 40,000 wafers per month. The full ramp-up of Fab 2 has
not been completed to date. Towers determination as to the timing of the
implementation of the ramp-up of Fab 2 and the increase in Fab 2s production levels
is dependent on prevailing and forecasted market conditions and its ability to fund these
increases. There can be no assurance as to the timing or Towers ability to achieve
Fab 2 capacity levels of approximately 40,000 wafers per month. The ramp-up of Fab 2 is a
substantial and complex project. If Tower cannot fund the further ramp-up of Fab 2 or
otherwise successfully complete the ramp-up of Fab 2, it may be unable to meet its
customers production demands and as a result may lose customers and may not attract
new ones. In addition, if Tower does not acquire and install the equipment necessary to
successfully complete the ramp-up of Fab 2, it will not fully utilize the substantial
investment made in constructing Fab 2, which will adversely affect its financial results.
In order to fully ramp-up Fab 2, Tower will need to continue to develop new process
technologies in order to suit its customers needs. In addition, Tower has and may in
the future experience difficulties that are customary in the installation, functionality
and operation of equipment during manufacturing. Failures or delays in obtaining and
installing the necessary equipment, technology and other resources may delay the
completion of the ramp-up of Fab 2, add to its cost and result in Tower not fully
utilizing the substantial investment made in the construction of Fab 2, which would
adversely affect Towers future financial results.

Israeli banking laws may impose
restrictions on the total debt that Tower may borrow from its banks.

Pursuant
to a directive published by the Israel Supervisor of Banks, effective March 31, 2004,
Tower may be deemed part of a group of borrowers comprised of the Ofer Brothers Group, the
Israel Corporation Ltd. (sometimes referred to herein as Israel Corp.) and other companies
which are also included in such group of borrowers pursuant to the directive, including
companies under the control or deemed control of these entities. The directive imposes
limitations on amounts that banks may lend to borrowers or groups of borrowers. Should
Towers banks exceed these limitations, they may limit Towers ability to borrow
additional money in the future and may require Tower to return some or all of our
outstanding borrowings (which, under Towers amended facility agreement with its
banks, were approximately $208 million in the aggregate as of May 31, 2009), which may
have a material adverse effect on Towers business, financial condition and results
of operations.

- 14 -

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Tower may be required to repay
grants to the Investment Center that it received in connection with Fab 1.

Tower
received grants and tax benefits for Fab 1 under the government of Israel Approved
Enterprise program. As of December 31, 2001, Tower completed its investments under the Fab
1 program and is no longer entitled to any further investment grants for future capital
investments in Fab 1. During 2002, Tower agreed with the Investment Center that if it does
not achieve Fab 1 revenues of $90 million for 2003 and $100 million for 2004 and maintains
at Fab 1 at least 600 employees for 2003 and 625 employees for 2004, subject to prevailing
market conditions, it will, if demanded by the Investment Center, be required to repay the
Investment Center up to approximately $2.5 million. Since Towers actual level of Fab
1 revenues and employees for 2003 and 2004 were lower than the above mentioned levels,
Tower may be required to repay the Investment Center up to approximately $2.5 million.

# Risks Related to Our
Securities

The repayment of Towers
outstanding debentures is subordinated to Towers indebtedness to its banks and
obligations to secured creditors and Jazzs repayment of its obligations for
convertible notes is subordinated to Jazzs secured indebtedness to its banks.

The
repayment of Towers outstanding debentures is subordinated to the prior payment of
approximately $208 million in the aggregate payable to Towers banks under
Towers amended facility agreement, to any obligations to the Investment Center of
the Israeli Ministry of Industry, Trade and Labor related to approximately $165 million in
grants received as of May 31, 2009 under the Investment Centers Approved
Enterprise program in relation to Fab 2, and to a first ranking charge in favor of
SanDisk Corporation, on approximately $10 million of equipment. Tower has not guaranteed
any of Jazzs debt, including Jazzs debt under its bank loan and Jazzs
debt to its note holders. In addition repayment of Jazzs convertible notes is
subordinated to the prior payment of approximately $27 million payable in regard to
Jazzs secured bank loans. As a result, upon any distribution to Towers or
Jazzs creditors, as applicable, in liquidation or reorganization or similar
proceedings, these secured creditors will be entitled to be paid in full before any
payment may be made with respect to Towers or Jazzs outstanding debentures or
note holders, as applicable. In any of these circumstances, Tower, or Jazz, as applicable,
may not have sufficient assets remaining to pay amounts due on any or all of their
respective debentures or notes then outstanding. In addition, neither Tower nor Jazz, as
applicable, is permitted under the terms of their respective loan agreements to make a
payment on account of their respective debentures or notes, as applicable, if on the date
of such payment an Event of Default exists under the applicable bank loan
agreement.

# Towers stock price
may be volatile in the future.

The
stock market, in general, has experienced extreme volatility that often has been unrelated
to the operating performance of particular companies. In particular, the stock prices for
many companies in the semiconductor industry have experienced wide fluctuations, which
have often been unrelated to the operating performance of such companies. These broad
market and industry fluctuations may adversely affect the market price of Towers
ordinary shares, regardless of Towers actual operating performance.

- 15 -

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In
addition, it is possible that in some future periods Towers operating results may be
below the expectations of public market analysts and investors. In this event, the price
of Towers securities may under perform or fall.

Issuance of additional shares
pursuant to Towers financing plans and arrangements and the terms of outstanding
securities which are exercisable or convertible into shares may dilute the interest of
Towers shareholders. Tower may also issue in the future additional shares and/or
securities which are exercisable or convertible into shares.

As
of May 31, 2009, Tower had approximately 160.0 million ordinary shares outstanding and has
outstanding securities convertible or exercisable into up to approximately 624.5 million
ordinary shares including: (i) up to 9.7 million ordinary shares issuable upon the
conversion of the 2005 outstanding convertible debentures held by some of Towers
major shareholders and others at a conversion rate of $1.10; (ii) 8.3 million warrants
issued to Towers banks with an exercise price of $1.21; (iii) up to 46.8 million
ordinary shares issuable upon the conversion of the 2006 outstanding convertible
debentures at a conversion rate of approximately $1.05; (iv) 17.5 million warrants with an
exercise price of $2.04; (v) 5.2 million warrants with an exercise price of approximately
$2.46; (vi) 33.3 million employee and director options with a weighted average exercise
price of $1.6; (vii) 5.5 million warrants with an exercise price of approximately $1.9;
and (viii) 7.4 million ordinary shares issuable upon the conversion of the 2007
convertible debentures, at a conversion rate of approximately $4.48; (ix) 0.9 million
warrants issued to Towers banks with an exercise price of $6.17; (x) 59.5 million
Jazz warrants with an exercise price of $2.78 and 31.5 million shares issuable upon the
conversion of Jazz outstanding convertible notes at a conversion rate of $4.07 and (xi)
approximately 192.8 million and 206.1 million shares issuable to Towers banks and
Israel Corp., respectively, upon the conversion for no additional consideration of equity
equivalent capital notes. Additionally we are obligated to issue additional shares or
convertible securities to Towers banks in January 2011 as compensation for reduced
interest payments agreed to by such banks.

In
January 2008, Tower filed a shelf registration statement on Form F-3 with the U.S.
Securities and Exchange Commission, which was declared effective in February 2008,
registering the possible offer and sale from time to time of up to $40 million of
securities.

We
may undertake additional financings in the future and in connection therewith issue shares
or securities convertible into shares, which may materially dilute the holdings of our
current shareholders.

- 16 -

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Market sales of large amounts of
Towers shares eligible for future sale, or even the perception that such sales may
occur, may lower the price of Towers ordinary shares.

Of
Towers approximately 160.0 million outstanding ordinary shares as of May 31, 2009,
approximately 102.3 million are held by non-affiliates and are freely tradable under US
securities laws. In addition, certain of Towers affiliates (Israel Corp.,
SanDisk Corporation and Macronix International) hold approximately 38.9 million of
Towers outstanding shares, of which (i) approximately 3.3 million are registered for
resale and are therefore freely tradable under US securities laws, and (ii) approximately
35.6 million are currently eligible for sale subject to the volume and manner of sale
limitations of Rule 144 promulgated under the US Securities Act of 1933, as amended
(Rule 144). As of May 31, 2009, up to approximately 9.7 million additional
shares issuable upon the conversion of the 2005 convertible debentures are beneficially
owned by non-affiliates or are registered for sale and are freely tradable under US
securities laws and approximately 5.4 million shares issuable upon exercise of warrants
issued to Israel Corp. and Towers banks will become eligible for sale commencing six
months after exercise of the warrants, subject, in the case of Israel Corp. and, if deemed
affiliates of Tower, the banks, to the volume and manner of sale limitations
of Rule 144. Approximately 206.1 million and 198.6 million shares underlying equity
equivalent convertible capital notes held by Israel Corp. and Towers banks,
respectively, are not registered and may become eligible for sale subject to the volume
and manner of sale requirements of Rule 144 or pursuant to registration if demanded by
them in accordance with registration rights agreements. In addition, (i) approximately 9.2
million shares issuable upon the exercise of warrants granted to Towers banks and
(ii) approximately 9.4 million shares issuable upon exercise of warrants issued in the
March 2007 private placement, are registered for resale and are therefore freely tradable
under US securities laws. Additionally, up to: (i) approximately 52.3 million shares
issuable upon the conversion and/or exercise of the securities sold in the June 2006
public offering in Israel, (ii) approximately 5.2 million shares issuable upon exercise of
warrants sold in private placements completed in November 2006, and (iii) up to
approximately 10.1 million ordinary shares which are issuable upon the conversion and/or
exercise of warrants sold in the June 2007 private placement and September 2007 public
offering in Israel, would be freely tradable in normal trading transactions in the United
States. The 90.9 million shares issuable upon the conversion or exercise of Jazz
convertible notes and Jazz warrants are or will covered by registration statements or are
otherwise freely tradeable. The sales of large amounts of Towers ordinary shares (or
the potential for those sales even if they do not actually occur) may depress the market
price of its ordinary shares. This could also impair Towers ability to raise capital
through the sale of our equity securities.

Towers principal
shareholders collectively own a controlling interest in Tower and will be able to exercise
their voting rights in ways which may be adverse to the interests of Towers other
shareholders.

As
of May 31, 2009, Towers major wafer partners and Israel Corp. collectively owned
approximately 24% of Towers outstanding shares. In the event Israel Corp. were to
convert its equity convertible capital notes, Towers major wafer partners and Israel
Corp. would collectively own approximately 67% of Towers outstanding shares. Under
Towers articles of association, two shareholders holding together 33% of its
outstanding shares constitute a quorum for conducting a shareholders meeting. If
Israel Corp. were to convert its equity convertible capital notes, Towers wafer
partners and Israel Corp. would constitute a quorum for purposes of conducting a
shareholders meeting. If only two large shareholders, owning collectively at least
33% of our shares, were to participate in one of Towers shareholders meetings,
these shareholders would determine the outcome of such shareholders meeting without
the benefit of the participation of the other shareholders. The interests of these
shareholders may not be consistent with the interests of Towers other shareholders.
As a result, these shareholders may exercise voting rights or otherwise influence
corporate action in ways that are adverse to the interests of Towers other
shareholders.

# Tower may experience
declines in its share price.

Following
the current downturn in the financial markets which commenced in 2008, Tower has
experienced a decrease in the trading price of its ordinary shares. There is no assurance
as to when Towers share price will recover.

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If Tower cannot meet NASDAQs
continued listing requirements, NASDAQ may delist its ordinary shares, which would have an
adverse impact on the liquidity and market price of Towers ordinary shares and limit
the ability of Tower to find available financing sources to fund Towers on-going
operations.

Towers
ordinary shares are currently listed on the Tel Aviv Stock Exchange (TASE) and on NASDAQ
Global Market. Under NASDAQ rules, shares can be delisted and not allowed to trade on
NASDAQ if the closing bid price of the stock over a 30 consecutive trading-day period is
less than $1.00. Following the financial markets downturn, which commenced during 2008, we
have experienced a decrease in the trading price of our ordinary shares. NASDAQ has
implemented a temporary suspension of the rules requiring a minimum $1.00 closing bid
price. The temporary suspension currently expires on July 19, 2009. There is no assurance
that the suspension will be extended further. If it is not extended further, the date by
which we need to comply with the $1.00 minimum bid price will be October 2009. If we do
not comply by such date, we may choose between: (i) delisting from the NASDAQ Global
Market; (ii) transferring from the NASDAQ Global Market stock exchange to the NASDAQ
Capital Market stock exchange, which will grant us with an additional 180 day period to
re-gain compliance with the $1.00 minimum bid price by no later than April 2010; or (iii)
taking other actions to avoid the de-listing of our shares, such as performing a reverse
stock split of our shares. A delisting of Towers ordinary shares could negatively
impact us by reducing our ordinary shares liquidity and market price and the number
of investors willing to hold or acquire Towers ordinary shares and our available
sources to finance our on-going operations.

If Towers share price falls
below the shares nominal value we may encounter difficulties raising funds by way of
issuance of our ordinary shares

If
Towers shares trade at a market price that is lower than the shares nominal
value of NIS 1.00 (approximately $0.25 at current exchange rates) it may be difficult to
raise funds through the issuance of ordinary shares. The Israeli Companies Law does not
allow a company to issue shares at a price lower than the shares par value unless
the company can offset the difference between the nominal value of the share and the
market price by moving a portion of its current or accumulated profits (as defined by the
Israeli Company Law) to paid-in capital to make up for such difference. Due to us not
having current or accumulated profits, we would most probably not be able to do this and
would therefore not be able to issue new ordinary shares at a price below NIS 1.00.

# Risks Related to Our
Operations in Israel

# Instability in Israel
may harm our business.

All
of Towers manufacturing facilities and most of its corporate and sales offices are
located in Israel. Accordingly, political, economic and military conditions in Israel may
directly affect our business.

Since
the establishment of the State of Israel in 1948, a number of armed conflicts have taken
place between Israel and its Arab neighbors. In addition, Israel and companies doing
business with Israel have, in the past, been the subject of an economic boycott. Although
Israel has entered into various agreements with Egypt, Jordan and the Palestinian
Authority, Israel has been and is subject to terrorist activity, with varying levels of
severity. Parties with whom we do business have sometimes declined to travel to Israel
during periods of heightened unrest or tension, forcing us to make alternative
arrangements where necessary. In addition, the political and security situation in Israel
may result in parties with whom we have agreements claiming that they are not obligated to
perform their commitments under those agreements pursuant to force majeure provisions. We
can give no assurance that security and political conditions will not adversely impact our
business in the future. Any hostilities involving Israel or the interruption or
curtailment of trade between Israel and its present trading partners could adversely
affect our operations and could make it more difficult for us to raise capital.
Furthermore, Towers manufacturing facilities are located exclusively in Israel,
which has been experiencing terrorist activity and military action. We could experience
serious disruption of our manufacturing in Israel if acts associated with this conflict
result in any serious damage to Towers manufacturing facilities. In addition, our
business interruption insurance may not adequately compensate us for losses that may
occur, and any losses or damages incurred by us could have a material adverse effect on
our business.

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Our operations may be negatively
affected by the obligations of our Israeli personnel to perform military service.

In
the event of severe unrest or other conflict, Israeli individuals could be required to
serve in the military for extended periods of time. In response to increases in terrorist
activity, there have been periods of significant call-ups of Israeli military reservists,
and it is possible that there will be additional call-ups in the future. Many male Israeli
citizens, including most of Towers employees, are subject to compulsory military
reserve service through middle age. Our operations in Israel could be disrupted by the
absence for a significant period of time of one or more of our key employees or a
significant number of our other employees due to military service. Such disruption could
harm our operations.

Our operations may be affected by
negative economic conditions in Israel.

Israel
has experienced periods of recession in economic activity, resulting in low growth rates
and growing unemployment. Our operations in Israel could be adversely affected if the
economic conditions in Israel deteriorate. In addition, Israel has experienced several
general strikes and other work stoppages, affecting banks, government offices, airports
and ports. These strikes have had an adverse effect on the Israeli economy and on
businesses, including our ability to deliver products to our customers or to receive raw
materials from our suppliers in a timely manner. From time to time, the Israeli trade
unions threaten strikes or work-stoppages, which may, if carried out, have a material
adverse effect on the Israeli economy and our business.

If the exemption allowing us to
operate our Israeli manufacturing facilities seven days a week is not renewed, our
business will be adversely affected.

We
operate our Israeli manufacturing facilities seven days a week pursuant to an exemption
from the law that requires businesses in Israel to be closed from sundown on Friday
through sundown on Saturday. This exemption expires by its terms on December 31, 2009. If
the exemption is not renewed and we are forced to close any or all of the Israeli
facilities for this period each week, our financial results and business will be harmed.

If we are considered to be a
passive foreign investment company, either presently or in the future, US Holders will be
subject to adverse US tax consequences.

We
will be a passive foreign investment company, or PFIC, if 75% or more of our gross income
in a taxable year, including our pro rata share of the gross income of any company, US or
foreign, in which we are considered to own, directly or indirectly, 25% or more of the
shares by value, is passive income. Alternatively, we will be considered to be a PFIC if
at least 50% of our assets in a taxable year, averaged over the year and ordinarily
determined based on fair market value, including our pro rata share of the assets of any
company in which we are considered to own, directly or indirectly, 25% or more of the
shares by value, are held for the production of, or produce, passive income. If we were to
be a PFIC, and a US Holder does not make an election to treat us as a qualified
electing fund, or QEF, or a mark to market election, excess
distributions to a US Holder, any gain recognized by a US Holder on a disposition of
our ordinary shares would be taxed in an unfavorable way. Among other consequences, our
dividends would be taxed at the regular rates applicable to ordinary income, rather than
the 15% maximum rate applicable to certain dividends received by an individual from a
qualified foreign corporation. The tests for determining PFIC status are applied annually
and it is difficult to make accurate predictions of future income and assets, which are
relevant to the determination of PFIC status. In addition, under the applicable statutory
and regulatory provisions, it is unclear whether we would be permitted to use a gross loss
from sales (sales less cost of goods sold) to offset our passive income in the calculation
of gross income. In light of the uncertainties described above, we have not obtained an
opinion of counsel with respect to our PFIC status and no assurance can be given that we
will not be a PFIC in any year. If we determine that we have become a PFIC, we will then
notify our US Holders and provide them with the information necessary to comply with the
QEF rules. If the IRS determines that we are a PFIC for a year with respect to which we
have determined that we were not a PFIC, however, it might be too late for a US Holder to
make a timely QEF election, unless the US Holder qualifies under the applicable Treasury
regulations to make a retroactive (late) election. US Holders who hold ordinary shares
during a period when we are a PFIC will be subject to the foregoing rules, even if we
cease to be a PFIC in subsequent years, subject to exceptions for US Holders who made a
timely QEF or mark-to-market election.

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It may be difficult to enforce a
US judgment against us, our officers, directors and advisors or to assert US securities
law claims in Israel.

Tower
is incorporated in Israel. Most of Towers executive officers and directors and our
Israeli accountants and attorneys are nonresidents of the United States, and a majority of
Towers assets (excluding its U.S. subsidiaries and their assets) and the assets of
these persons are located outside the United States. Therefore, it may be difficult to
enforce a judgment obtained in the United States, against Tower or any of these persons,
in US or Israeli courts based on the civil liability provisions of the US Federal
securities laws, except to the extent that such judgment could be enforced in the U.S.
against Towers U.S. subsidiaries. Additionally, it may be difficult for you to
enforce civil liabilities under US Federal securities laws in original actions instituted
in Israel.

|ITEM 4. |  | INFORMATION ON THE COMPANY
|------- |  | --------------------------

A. HISTORY
AND DEVELOPMENT OF THE COMPANY

We
are a pure-play independent specialty foundry dedicated to the manufacture of
semiconductors. Typically, pure-play foundries do not offer products of their own, but
focus on producing integrated circuits, or ICs, based on the design specifications of
their customers. We manufacture semiconductors using production processes for our
customers primarily based on third party designs and our own proprietary designs. We
currently offer the manufacture of ICs with geometries ranging from 1.0 to 0.13-micron. We
also provide design services and complementary technical services. ICs manufactured by us
are incorporated into a wide range of products in diverse markets, including consumer
electronics, personal computers, communications, automotive, industrial and medical device
products.

We
are focused on establishing leading market share in high-growth specialized markets by
providing our customers with high-value wafer foundry services. Our historical focus has
been standard digital complementary metal oxide semiconductor (CMOS) process
technology, which is the most widely used method of producing ICs. We are currently
focused on the emerging opportunities in the fields of CMOS image sensors, mixed-signal,
radio frequency CMOS (RFCMOS), radio frequency identification (RFID) technologies and
power management. To better serve our customers, we have developed and are continuously
expanding our technology offerings for use in these fields. Through our expertise and
experience gained over fifteen years of operation, we differentiate ourselves by creating
a high level of value for our clients through innovative technological processes, design
and engineering support and services, competitive manufacturing indices, and dedicated
customer service.

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Tower
was founded in 1993, with the acquisition of National Semiconductors 150-mm wafer
fabrication facility, or Fab 1, and commenced operations as an independent foundry with a
production capacity of approximately 5,000 wafers per month. Since then, we have
significantly modernized our Fab 1 facility and equipment, which has improved our process
geometries to range from 1.0-micron to 0.35-micron and enhanced our process technologies
to include CMOS image sensors, embedded flash and mixed-signal technologies.

In
January 2001, we commenced construction of a new, state-of-the-art wafer fabrication
facility, which we refer to as Fab 2, located in Migdal Haemek, Israel and adjacent to our
first facility, Fab 1. In 2003, we completed the infrastructure of Fab 2 and commenced
production wafer shipments from this Fab. Fab 2 is designed to operate in geometries of
0.18-micron and below, using advanced materials and advanced CMOS technology licensed from
Freescale and Toshiba and other technologies that we developed and will develop
independently or with development partners. Depending on the process technology and
product mix, when fully ramped-up we estimate that Fab 2 will be able to achieve capacity
levels of up to approximately 40,000 wafers per month. We have not completed the full
ramp-up of Fab 2. The timing of that decision and its implementation will depend upon
several factors, including, funding, and cost availability of equipment and market
conditions.

Our
capital expenditures, net of Investment Center grants, for 2008, 2007 and 2006 of
approximately $74 million, $91 million and $163 million, respectively, were made
principally in connection with the construction of, and purchase of equipment and
technology for, Fab 2.

Towers
legal and commercial name is Tower Semiconductor Ltd. Tower was incorporated under the
laws of Israel. Towers manufacturing facilities and executive offices are located in
the Ramat Gavriel Industrial Park, Shaul Amor Street, Post Office Box 619, Migdal Haemek,
23105 Israel, and our telephone number is 972-4-650-6611. Towers worldwide web site
is http://www.towersemi.com. Information on Towers web site is not
incorporated by reference in this annual report.

Jazz

In
September 2008, Tower completed the merger with Jazz Technologies in a stock for stock
transaction. Jazz Technologies is the parent company of its wholly-owned subsidiary, Jazz
Semiconductor, Inc. Jazz Technologies and Jazz Semiconductor are collectively be referred
to in this report as Jazz.

Jazz
Technologies, formerly known as Acquicor Technology Inc. was incorporated in Delaware on
August 12, 2005 as a blank check company for the purpose of acquiring one or more domestic
and/or foreign operating businesses in the technology, multimedia or networking sectors,
which Jazz Technologies accomplished through the acquisition of Jazz Semiconductor in
February 2007.

Jazz
is now an independent semiconductor foundry focused on specialty process technologies for
the manufacture of analog and mixed-signal semiconductor devices. Jazzs specialty
process technologies include advanced analog, radio frequency, high voltage, bipolar and
silicon germanium bipolar complementary metal oxide (SiGe) semiconductor
processes, for the manufacture of analog and mixed-signal semiconductors. Jazzs
customers use the analog and mixed-signal semiconductor devices in products they design
that are used in cellular phones, wireless local area networking devices, digital TVs,
set-top boxes, gaming devices, switches, routers and broadband modems. Jazz operates one
semiconductor fabrication facility in Newport Beach, California, in which it currently
produces the majority of its products and in which all of Jazzs process research and
development is performed.

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B. BUSINESS
OVERVIEW

INDUSTRY OVERVIEW 
PROLIFERATION OF ANALOG AND MIXED-SIGNAL SEMICONDUCTORS AND THE GROWING NEED FOR SPECIALTY PROCESS
TECHNOLOGIES

Semiconductor
devices are responsible for the rapid growth of the electronics industry over the past
fifty years. They are critical components in a variety of applications, from computers,
consumer electronics and communications, to industrial, military, medical and automotive
applications. The semiconductor industry is characterized by rapid changes in technology,
frequently resulting in the obsolescence of recently introduced products. As performance
has increased and size and cost have decreased, the use of semiconductors and the number
of their applications have grown significantly.

Historically,
the semiconductor industry was composed primarily of companies that designed and
manufactured ICs in their own fabrication facilities. These companies, such as Intel and
IBM, are known as integrated device manufacturers, or IDMs. In the mid-1980s, fabless IC
companies, which focused on IC design and used external manufacturing capacity, began to
emerge. Fabless companies initially outsourced production to IDMs, which filled this need
through their excess capacity. As the semiconductor industry continued to grow, increasing
competition forced fabless companies and IDMs to seek reliable and dedicated sources of IC
manufacturing services. Use of external manufacturing capacity allowed IDMs to reduce
their investment in their existing and next-generation manufacturing facilities and
process technologies and gain access to manufacturing process technologies and production
capacity they do not possess. This need has been met by the development of independent
companies, known as foundries, which focus primarily on providing IC manufacturing
services to semiconductor suppliers. Foundry services are now used by nearly every major
semiconductor company in the world, including IDMs as part of a dual-source,
risk-diversification and cost effectiveness strategy.

Semiconductor
suppliers face increasing demands for new products that provide higher performance,
greater functionality and smaller form factors at lower prices, which require increasingly
complex ICs. In addition to the increased complexity of designs, there has also been a
dramatic increase in the number of applications for semiconductors. To compete
successfully, semiconductor suppliers must also minimize the time it takes to bring a
product to market. As a result, fabless companies and IDMs are focusing more on their core
competenciesdesign and intellectual propertyand outsourcing manufacturing to
foundries.

The
two basic functional technologies for semiconductor products are digital and analog.
Digital semiconductors provide critical processing power and have helped enable many of
the computing and communication advances of recent years. Analog semiconductors monitor
and manipulate real world signals such as sound, light, pressure, motion, temperature,
electrical current and radio waves, for use in a wide variety of electronic products such
as digital still cameras, X-Ray medical applications, flat panel displays, personal
computers, cellular handsets, telecommunications equipment, consumer electronics,
automotive electronics and industrial electronics. Analog-digital, or mixed-signal,
semiconductors combine analog and digital devices on a single chip to process both analog
and digital signals.

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Integrating
analog and digital components on a single, mixed-signal semiconductor enables smaller and
more highly integrated, power-efficient, feature-rich and cost-effective semiconductor
devices but presents significant design and manufacturing challenges. For example,
combining high-speed digital circuits with sensitive analog circuits on a single,
mixed-signal semiconductor can increase electromagnetic interference and power
consumption, both of which cause a higher amount of heat to be dissipated and decrease the
overall performance of the semiconductor. Challenges associated with the design and
manufacture of mixed-signal semiconductors increase as the industry moves toward more
advanced process geometries. As a result, analog and mixed-signal semiconductors can be
complex to manufacture and typically require sophisticated design expertise and strong
application specific experience and intellectual property.

As
mentioned, mixed-signal ICs are an essential part of any electronic system that interacts
with the real world. Our advanced analog CMOS process technologies have more features than
standard analog CMOS process technologies and are well suited for higher performance or
more highly integrated analog and mixed-signal semiconductors, such as high-speed
analog-to-digital or digital-to-analog converters and mixed-signal semiconductors with
integrated data converters. These process technologies generally incorporate higher
density passive components, such as capacitors and resistors, as well as improved active
components, such as native or low voltage devices, and improved isolation techniques, into
standard analog CMOS process technologies. We currently have advanced analog CMOS process
technologies in 0.5 micron, 0.35 micron, 0.25 micron, 0.18 micron 0.16 micron and 0.13
micron.

The
enormous costs associated with modern fabs, combined with the increasing demand for
complex ICs, has created an expanding market for outsourced manufacturing offered by
foundries. Foundries can cost-effectively supply advanced ICs to even the smallest fabless
companies by creating economies of scale through pooling the demand of numerous customers.
In addition, customers whose IC designs require process technologies other than standard
digital CMOS have created a market for independent foundries that focus on providing
specialized process technologies. Thus, wafer manufacturers may also need to make a
significant investment in specialty process technologies to manufacture these
semiconductors. Specialty process technologies enable greater analog content and can
reduce the die size of an analog or mixed-signal semiconductor, thereby increasing the
number of dies that can be manufactured on a wafer and reducing final die cost. In
addition, specialty process technologies can enable increased performance, superior noise
reduction and improved power efficiency of analog and mixed-signal semiconductors compared
to traditional standard CMOS processes. These specialty process technologies include
advanced analog CMOS, radio frequency CMOS (RF CMOS), CMOS Image Sensors (CIS), high
voltage CMOS, bipolar CMOS (BiCMOS), silicon germanium BiCMOS (SiGe BiCMOS), and bipolar
double-diffused metal oxide semiconductor (BCD).

Foundries
also offer competitive customer service through design, testing, and other technical
services, often at a level previously found only at an IDMs internal facilities.

The
economic crisis that started at mid Q3 2008 caused a decrease of 40% in the demand for
semiconductor products. Recovery of this market will depend on the recovery of the overall
economy

# MANUFACTURING PROCESSES
AND SPECIALIZED TECHNOLOGIES

We
manufacture ICs on silicon wafers, generally using the customers proprietary circuit
designs. In some cases, we use third-party or our own proprietary design elements. The end
product of our manufacturing process is a silicon wafer containing multiple identical ICs.
In most cases, our customer assumes responsibility for dicing, assembly, packaging and
testing.

We
provide wafer fabrication services to fabless IC companies and IDMs and enable smooth
integration of the semiconductor design and manufacturing processes. By doing so, we
enable our customers to bring high-performance, highly integrated ICs to market rapidly
and cost effectively. We believe that our technological strengths and emphasis on customer
service have allowed us to develop unique positions in large, high-growth specialized
markets for CMOS image sensors, RF, Power Management and High Performance mixed signal
ICs. We serve as a sole source or alternative provider of foundry services.

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We
manufacture specialty process technologies, mostly based on CMOS process platforms with
added features to enable improved size, performance and cost characteristics for analog
and mixed-signal semiconductors. Products made with our specialty process technologies are
typically more complex to manufacture than products made using standard process
technologies employing similar line widths. Generally, customers who use our specialty
process technologies cannot easily move designs to another foundry because the analog
characteristics of the design are dependent upon its implementation of the applicable
process technology. The relatively small engineering community with specialty process
know-how has also limited the number of foundries capable of offering specialty process
technologies.

In
addition, the specialty process design infrastructure is complex and includes design kits
and device models that are specific to the foundry in which the process is implemented and
to the process technology itself. We believe that our specialized process technologies
combined with Design Enablement capabilities distinguish our IC manufacturing services and
attract industry-leading customers.

We
believe that we are a trusted, customer-oriented service provider that has built a solid
reputation in the foundry industry over the last fifteen years. We have built strong
relationships with customers, who continue to use our services, even as their demands
evolve to smaller form factors and new applications. Our consistent focus on providing
high-quality, value added services, including engineering and design support, has allowed
us to attract customers for our facilities who seek to work with a proven provider of
foundry services. Our emphasis on working closely with customers and accelerating the
time-to-market of our customers next-generation products is also reflected in our
corporate structure. As a result, we have a high customer retention rate and an increase
in new customers and new products for production.

We
derived approximately 67% of our revenues for the year ended December 31, 2008 from our
target specialized markets: CMOS image sensors, Wireless communication, RF-SiGe, High
performance analog and Power ICs. We are highly experienced in these markets, being an
early entrant and having developed unique proprietary technologies, primarily through
licensing and joint development efforts with our customers and other technology companies.

The
specific process technologies that we currently focus on include: CMOS Image Sensors
(CIS), Advanced Analog CMOS, Radio Frequency CMOS (RF CMOS), Radio Frequency
Identification (RFID), Bipolar CMOS (BiCMOS), Silicon Germanium (SiGe BiCMOS), High
Voltage CMOS, and Bipolar CMOS double-diffused metal oxide semiconductor (BCD).

CMOS Image Sensors

CMOS
image sensors are ICs used to capture an image in a wide variety of consumer,
communications, medical, automotive and industrial market applications, including
camera-equipped cell phones, digital still and video cameras, security and surveillance
cameras and video game consoles. Our dedicated manufacturing and testing processes assure
consistently high electro-optical performance of the integrated sensor through wafer-level
characterization. Our CMOS image sensor processes have demonstrated superior optical
characteristics, excellent spectral response and high resolution and sensitivity. The
ultra-low dark current, high efficiency and accurate spectral response of our photodiode
enable faithful color reproduction and acute detail definition.

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In
addition, our innovative stitching technology enables semiconductor exposure
tools to manufacture single ultra high-resolution CMOS image sensors containing millions
of pixels at sizes far larger than their existing field.

We
are currently actively involved in the high-end sensor and applications specific markets,
which include applications such as high end video, industrial machine vision, dental
X-Ray, medical X-Ray and automotive sensors.

As
early as 1997, we recognized the market potential of using CMOS process technology for a
digital camera-on-a-chip, which would integrate a CMOS image sensor, filters and digital
circuitry. In entering the CMOS image sensor foundry business, we utilized research and
development work that had been ongoing since 1993. Our services include a broad range of
turnkey solutions and services, including pixel IP services, optical characterization of a
CMOS process, innovative stitching manufacturing technique and optical testing and
packaging. CMOS image sensors manufactured by us deliver outstanding image quality for a
broad spectrum of digital imaging applications.

During
2007, we ramped to production products with 2.8 micron, 3.2 micron and 3.6 micron pixels,
all developed by us and supplied to our customers as pixel IP. Our Advanced Photo Diode
(APD) technology used in these CMOS image sensors enables improved optical and electrical
performance of ultra-small pixels utilizing deep sub-micron process technologies, thus
enabling the manufacturing of small, cost-effective camera module solutions.

For
the X-Ray market, we developed stitched technology in Fab2 on 0.18micron process and a
variety of 15 to 150-micron pixels that are optimized for X-Ray applications. These pixels
are used by our customers in dental and other medical X-Ray products. During 2007 and 2008
five of our dental sensor customers ramped numerous products into mass production, mainly
using our Fab2 8 0.18 micron process.

The
stitched technology that was developed for Fab 2 during 2006 provided us with the ability
to manufacture large sensors (up to one die per wafer) on 8 wafers using state of
the art, 0.18-micron CMOS image sensor technology. In 2007 and 2008, we had several new
orders from customers whose products are based on this technology.

In
December 2007, we established a partnership with CMT Medical Technologies Ltd., a leading
provider of advanced digital X-ray imaging systems for medical diagnosis, to develop,
market and sell X-ray detectors for medical applications. The detectors intended use
is for radiography/fluoroscopy, cardiology, angiography, mammography and similar
large-size X-ray modalities. Our first 5 x 6 sensor prototype has been
exhibiting outstanding results compared to any other technology currently used in the
medical market.

RF CMOS

In
recent years, more and more designers opt to develop high frequency products based on RF
CMOS technologies. The superior cost structure of CMOS technologies enables high volume,
low cost production of such high frequency products. We used our mixed signal expertise to
leverage and develop processes and provide services for customers utilizing CMOS
technologies and need high frequency performance.

Our
RF CMOS process technologies have more features than advanced analog CMOS process
technologies and are well suited for wireless semiconductors, such as highly integrated
wireless transceivers, power amplifiers, and television tuners. These process technologies
generally incorporate integrated inductors, high performance variable capacitors, or
varactors, and RF laterally diffused metal oxide semiconductors into an advanced analog
CMOS process technology. In addition to the process features, RF offering includes design
kits with RF models, device simulation and physical layouts tailored specifically for RF
performance. We currently have RF CMOS process technologies in 0.25 micron and 0.18 micron
and have announced availability of a 0.13 micron process.

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BiCMOS for RF and High
Performance Analog

Our
BiCMOS process technologies have more features than RF CMOS process technologies and are
well suited for RF semiconductors such as wireless transceivers and television tuners.
These process technologies generally incorporate high-speed bipolar transistors into an RF
CMOS process. The equipment requirements for BiCMOS manufacturing are specialized and
require enhanced tool capabilities to achieve high yield manufacturing. We currently have
a 0.35 micron BiCMOS process technology.

Our
SiGe BiCMOS process technologies have more features than BiCMOS processes and are well
suited for more advanced RF and high performance analog semiconductors such as high-speed,
low noise, highly integrated multi-band wireless transceivers, television tuners and power
amplifiers. These process technologies generally incorporate a silicon germanium bipolar
transistor, which is formed by the deposition of a thin layer of silicon germanium within
a bipolar transistor, to achieve higher speed, lower noise, and more efficient power
performance than a BiCMOS process technology. It is also possible to achieve speeds using
SiGe BiCMOS process technologies equivalent to those demonstrated in standard CMOS
processes that are two process generations smaller in line-width. For example, a 0.18
micron SiGe BiCMOS process is able to achieve speeds comparable to a 90 nanometer RF CMOS
process. As a result, SiGe BiCMOS makes it possible to create analog products using a
larger geometry process technology at a lower cost while achieving similar or superior
performance to that achieved using a smaller geometry standard CMOS process technology.
The equipment requirements for SiGe BiCMOS manufacturing are similar to the specialized
equipment requirements for BiCMOS. We developed enhanced tool capabilities in conjunction
with large semiconductor tool suppliers to achieve high yield SiGe manufacturing. We
believe this equipment and related process expertise makes us one of the few silicon
manufacturers with demonstrated ability to deliver SiGe BiCMOS products. We currently have
SiGe BiCMOS process technologies at 0.35 micron and 0.18 micron and develop a 0.13 micron
SiGe BiCMOS process.

Power and Power
Management ICs

Our
high voltage CMOS and BCD process technologies have more features than advanced analog
CMOS processes and are well suited for power and driver semiconductors such as voltage
regulators, battery chargers, power management products and audio amplifiers. These
process technologies generally incorporate higher voltage CMOS devices such as 5V, 8V,
12V, 40V and 60V LDMOS devices, and, in the case of BCD, bipolar devices, into an advanced
analog CMOS process. We currently have high voltage & low Rdson CMOS offerings in 0.5
micron, 0.35 micron, 0.25 micron and 0.18 micron, and BCD offerings in 0.5 micron. We are
working to extend the high voltage options and integrate the BCD process technology into
our more advanced Power Management technology nodes (0.35 and 0.18 micron) to enable
higher levels of analog integration at voltage ranges that are suitable for automotive
electronics and line power conditioning for consumer devices.

In
addition, we have developed a unique, zero mask adder NVM solution specifically for Power
and Power Management devices on our 0.18um platform. This, combined with our scalable
model for LDMOS devices makes our Power Management platform very attractive in the Power
IC market.

We
continue to invest in technology that helps improve the performance and integration level
and reduce the cost of analog and mixed-signal products. This includes improving the
density of passive elements such as capacitors and inductors, improving the analog
performance and voltage handling capability of active devices, and integrating more
advanced features in our specialty CMOS processes that are currently not readily
available. Examples of such features currently under development include technologies
aimed at integrating Micro-Electro-Mechanical-System (MEMS) devices with CMOS, adding
Silicon-on-Insulator (SOI) substrates to enable increased integration of RF and analog
functions on a single die and scaling the features we offer today to the 0.13 micron
process technology.

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# CUSTOMERS, MARKETING AND
SALES

Our
marketing and sales strategy seeks to aggressively expand our global customer base. We
have marketing, sales and engineering support personnel in the United States, Taiwan and
Israel. Our marketing and sales staff is supported by independent sales representatives,
located throughout the world, who have been selected based on their understanding of the
semiconductor marketplace. In November 2007, we opened a representative office in Taiwan
to support our increasing presence throughout the Asia Pacific region. Our representative
office provides applications and logistical support to our existing customers. This
representative office also performs marketing activities aimed at the local market to
increase our customer base.

Our
sales cycle is generally 8-26 months or longer for new customers and can be as short as
8-12 months for existing customers. The typical stages in the sales cycle process from
initial contact until production are:

| |  | technical
evaluation;
| | - | ---------------------

| |  | product
design to our specifications including integration of third party intellectual property;
| | - | ------------------------------------------------------------------------------------------------

| |  | photomask
- design and third party photomask manufacturing;
| | - | -----------------------------------------------------------

| |  | silicon
prototyping;
| | - | --------------------

| |  | assembly
and test;
| | - | ------------------

| |  | validation
and qualification; and
| | - | ---------------------------------

| |  | production.
| | - | -----------

The
primary customers of our foundry services are fabless semiconductor companies and
independent device manufacturers (IDMs). A substantial portion of our product sales are
made pursuant to long-term contracts with our customers, under which we have agreed to
reserve manufacturing capacity at our production facilities for such customers. Our
customers include many industry leaders, some of Towers shareholders and a number of
Taiwanese companies that preferred our solution to the solutions that were offered
locally. During the year ended December 31, 2008, we had five significant customers who
contributed 17%, 13%, 9%, 8% and 5% of our revenues, respectively. In 2007, Tower had
seven significant customers who contributed 29%, 13%, 11%, 7%, 5%, 5% and 5% of
Towers revenues, respectively.

The
percentage of our revenues from customers located outside the United States was 31%, 25%
and 23% in the years ended December 31, 2006, 2007 and 2008, respectively. Although most
of our revenues are from US-based customers, we expect a substantial portion of our
revenues to continue to come from customers located outside the United States. The
following table sets forth the geographical distribution, by percentage, of our net
revenues for the periods indicated:

- 27 -

---

---

|              | Year ended December 31,
|------------- | -----------------------
|
|
|
|
|United States |                        
|Israel        |                        
|Asia-Pacific  |                        
|Europe        |                        
|              |                        
|Total         |                        
|              |                        

We
publish press releases, opinion editorials, whitepapers, perform presentations,
participate in panel sessions at industry conferences, hold a variety of regional and
international technology seminars, and attend and exhibit at a number of industry trade
shows to promote our products and services. We discuss advances in our process technology
portfolio and progress on specific relevant programs with our prospective and major
customers as well as industry analysts and research analysts on a regular basis.

A
few of our major customers purchase services and products on a contract basis. Most other
customers purchase using purchase orders. We price our products for these customers on a
per wafer or per die basis, taking into account the complexity of the technology, the
prevailing market conditions, volume forecasts, the strength and history of our
relationships with the customer and our current capacity utilization. Most of our
customers usually place their orders only two to four months before shipment; however a
few of our major customers are obligated to provide us with longer forecasts of their
wafer needs.

Our
customers use our processes to design and market a broad range of analog and mixed-signal
semiconductors for diverse end markets including wireless and high-speed wireline
communications, consumer electronics, automotive and industrial. We manufacture products
that are used for high-performance applications such as transceivers and power management
for cellular phones; transceivers and power amplifiers for wireless local area networking
products; power management, audio amplifiers and driver integrated circuits for consumer
electronics; tuners for digital televisions and set-top boxes; modem chipsets for
broadband access devices and gaming devices; serializer/deserializers, or SerDes, for
fiber optic transceivers; focal plan arrays for imaging applications; controllers for
power amplifier chips in cellular phones and wireline interfaces for switches and routers.

# Competition

The
global semiconductor foundry industry is highly competitive. The major independent
pure-play foundries are Taiwan Semiconductor Manufacturing Corporation, United
Microelectronics Corporation, Chartered Semiconductor Manufacturing Ltd. and Semiconductor
Manufacturing International Corp. These four foundries focus on 12 deep-submicron
complementary metal oxide semiconductor (CMOS) processing. The rest of the foundry
industry generally targets more specialty process technologies and includes emerging and
existing Chinese, Korean and Malaysian foundries. The primary specialty foundries we
compete with are Vanguard, DongBu, X-Fab, He Jien Technology, ASMC, CSMC, Grace, HHNEC,
and Silterra. In addition, there are IDMs and end-product manufacturers that produce ICs
for their own use and/or allocate a portion of their manufacturing capacity to foundry
operations. Most of the foundries with which we compete are located in Asia-Pacific and
benefit from their close proximity to other companies involved in the design and
manufacture of ICs. The principal elements of competition in the wafer foundry market are:

| |  | technical
competence;
| | - | ---------------------

| |  | production
quality;
| | - | -------------------

| |  | time-to-market
& manufacturing cycle time;
| | - | ------------------------------------------

- 28 -

---

---

| |  | available
capacity;
| | - | -------------------

| |  | device
yields;
| | - | --------------

| |  | design
and customer support services;
| | - | -------------------------------------

| |  | access
to intellectual property;
| | - | --------------------------------

| |  | price;
| | - | ------

| |  | management
expertise;
| | - | ---------------------

| |  | strategic
relationships;
| | - | ------------------------

| |  | research
and development capabilities; and
| | - | ------------------------------------------

| |  | stability
and reliability of supply in order to be a trusted supplier.
| | - | ----------------------------------------------------------------------

Many
of our competitors have greater manufacturing capacity, multiple manufacturing facilities,
a more diverse and established customer base, greater financial, marketing, distribution
and other resources and a better cost structure.

We
seek to compete primarily on the basis of advanced specialty technology, breadth of
product offering, production quality, technical support and services involving design,
engineering support and manufacturing. We have a differentiated service offering and track
record in specialized markets, which enables us to effectively compete with larger foundry
service providers.

We
broadly compete with the pure-play technology node-driven foundry service providers such
as Taiwan Semiconductor Manufacturing Company, United Microelectronics Corporation,
Semiconductor Manufacturing International Corporation and Chartered Semiconductor
Manufacturing Ltd., which, in addition to providing leading edge complementary metal oxide
semiconductor (CMOS) process technologies, also have capacity for some specialty process
technologies. We also compete with integrated device manufacturers that have internal
semiconductor manufacturing capacity or foundry operations, such as IBM. In addition,
several new dedicated foundries have commenced operations and may compete directly with
us. Many of our competitors have higher capacity, longer operating history, longer or more
established relationships with their customers, superior research and development
capability and greater financial and marketing resources than us. As a result, these
companies may be able to compete more aggressively over a longer period of time than us.

IBM
competes in both the standard CMOS segment and in specialty process technologies. In
addition, there are a number of smaller participants in the specialty process arena. We
believe that most of the large dedicated foundry service providers compete primarily in
the standard CMOS segment, but they also have capacity for specialty process technologies.

In
addition, prior to Jazzs separation from Conexant Systems, Inc.
(Conexant) in 2002, Conexant entered into a long-term licensing agreement with
Taiwan Semiconductor Manufacturing Company under which Taiwan Semiconductor Manufacturing
Company licensed from Conexant the right to manufacture semiconductors using
Conexants then existing 0.18 micron or greater SiGe BiCMOS process technologies.
Taiwan Semiconductor Manufacturing Company publicly announced in 2001 that it planned to
use the licensed technology to accelerate its own foundry processes for the networking and
wireless communications markets. Since Jazzs formation, Jazz has made improvements
in its SiGe BiCMOS process technology. Jazz has not licensed any of these improvements to
Taiwan Semiconductor Manufacturing Company. In the event Taiwan Semiconductor
Manufacturing Company determines to focus its business on the SiGe BiCMOS market, it may
use and develop the technology licensed to it in 2001 to compete directly with Jazz in the
specialty market, and such competition may harm our business.

- 29 -

---

---

As
our competitors continue to increase their manufacturing capacity, there could be an
increase in specialty semiconductor capacity during the next several years. As specialty
capacity increases there may be more competition and pricing pressure on our services, and
underutilization of our capacity may result. Any significant increase in competition or
pricing pressure may erode our profit margins, weaken our earnings or increase our losses.

Additionally,
some semiconductor companies have advanced their complementary metal oxide semiconductor
designs to 90 nanometer or smaller geometries. These smaller geometries may provide the
customer with performance and integration features that may be comparable to, or exceed,
features offered by our specialty process technologies, and may be more cost-effective at
higher production volumes for certain applications, such as when a large amount of digital
content is required in a mixed-signal semiconductor and less analog content is required.
Our specialty process technologies will therefore compete with these advanced CMOS
processes for customers and some of our potential and existing customers could elect to
design these advanced CMOS processes into their next generation products. We are not
currently capable, and do not currently plan to become capable, of providing CMOS
processes at these smaller geometries. If our existing customers or new customers choose
to design their products using these CMOS processes our business may suffer.

There
can be no assurance that we will be able to compete effectively on the basis of all or any
of these elements. Our ability to compete successfully may depend to some extent on
factors outside of our control, including industry and general economic trends, import and
export controls, exchange controls, exchange rate fluctuations, interest rate fluctuations
and political developments. If we cannot compete successfully in its industry, its
business and results of operations will be harmed.

# WAFER FABRICATION
SERVICES

Wafer
fabrication is an intricate process that consists of constructing layers of conducting and
insulating materials on raw wafers in intricate patterns that give the IC its function. IC
manufacturing requires hundreds of interrelated steps performed on different types of
equipment, and each step must be completed with extreme accuracy for finished ICs to work
properly. The process can be summarized as follows:

Circuit
Design. IC production begins when a fabless IC company or IDM designs the layout of a
devices components and designates the interconnections between each component. The
result is a pattern of components and connections that defines the function of the IC. In
highly complex circuits, there may be more than 35 layers of electronic patterns. After
the IC design is complete, we provide these companies with IC manufacturing services.

Mask
Making. The design for each layer of a semiconductor wafer is imprinted on a
photographic negative, called a reticle or mask. The mask is the blueprint for each
specific layer of the semiconductor wafer.

IC
Manufacturing. Transistors and other circuit elements comprising an IC are formed by
repeating a series of processes in which photosensitive material is deposited on the wafer
and exposed to light through a mask. Advanced IC manufacturing processes consist of
hundreds of steps, including photolithography, oxidation, etching and stripping of
different layers and materials, ion implantation, deposition of thin film layers, chemical
mechanical polishing and thermal processing. The final step in the IC manufacturing
process is wafer probe, which involves electronically inspecting each individual IC in
order to identify those that are operable for assembly.

- 30 -

---

---

Assembly
and Test. After IC manufacture, the wafers are transferred to assembly and test
facilities. In the assembly process, each wafer is cut into dies, or individual
semiconductors, and tested. Defective dies are discarded, while good dies are packaged and
assembled. Assembly protects the IC, facilitates its integration into electronic systems
and enables the dissipation of heat or cold. Following assembly, the functionality,
voltage, current and timing of each IC is tested. After testing, the completed IC is
shipped to the IC supplier or directly to its final destination.

# Procurement and Sourcing

Our
manufacturing processes use many highly specialized materials, including silicon wafers,
chemicals, gases, photomasks and various metals. These raw materials generally are
available from several suppliers. In many instances, we purchase raw materials from a
single source to obtain preferred pricing. In those cases, we generally also seek to
identify, and in some cases qualify, alternative sources of supply.

In
addition, Jazz has agreements with several key material suppliers under which they hold
similar levels of inventory at Jazzs warehouse and fab for its use. Jazz is not
under any obligation under these agreements to purchase raw material inventory that is
held by its vendors at its site until Jazz actually uses it, unless Jazz holds the
inventory beyond specified time limits.

# RESEARCH AND DEVELOPMENT

Our
future success depends, to a large degree, on our ability to continue to successfully
develop and introduce to production advanced process technologies that meet our
customers needs. Our process development strategy relies on CMOS process platforms
that we license and transfer from third parties or develop ourselves.

From
time to time, at a customers request, we develop a specialty process module, which
we use for such customer on an exclusive basis, and, if permitted under our agreements
with such customer, we then add it to our process offering. Such developments are very
common in all of our special process technologies noted above. In 2004, in response to
market demand, we introduced a 0.16-micron optical shrink solution which represents a 10%
linear shrink from our existing 0.18-micron offering while utilizing virtually the same
0.18-micron libraries and IP. The shrink allows a 15 to 20 percent die size reduction and
a potentially higher wafer ASP and lower die cost. Applications include industry standard
CMOS logic and some mixed-signal technologies. This 0.16-micron technology is currently in
production.

Our
research and development activities have related primarily to our process, device and
design development efforts in all specialty areas that were mentioned above, and have been
sponsored and funded by us with some participation by the Israeli Office of the Chief
Scientist, or OCS. Accordingly, we are subject to restrictions set forth in Israeli law
which limit the ability of a company to manufacture products or to transfer technologies
outside of Israel, if such products or technologies were developed with OCS funding.
Research and development expenses for the years ended December 31, 2006, 2007 and 2008
were $15.0 million, $13.8 million and $15.0 million, net of government participation of
$1.9 million, $2.6 million and $1.7 million, respectively. As of May 31, 2009, we employed
173 professionals in our research and development departments, 36 of whom have PhDs. In
addition to our research and development department located at our facilities in Migdal
Haemek, we maintain a design center in Netanya, Israel and in New-port Beach California.

- 31 -

---

---

Jazzs
research and development activities seek to upgrade and integrate manufacturing
technologies and processes. Although Jazz emphasizes firm-wide participation in the
research and development process, it maintains a central research and development team
primarily responsible for developing cost-effective technologies that can serve the
manufacturing needs of its customers. A substantial portion of Jazzs research and
development activities are undertaken in cooperation with its customers and equipment
vendors. Due to the rapid changes in technology that characterize the semiconductor
industry, effective research and development is essential to Jazzs success. Jazz
plans to continue to invest significantly in research and development activities to
develop advanced process technologies for new applications.

# PROPRIETARY RIGHTS

# Intellectual Property
and Licensing Agreements

Our
success depends in part on our ability to obtain patents, licenses and other intellectual
property rights covering our production processes. To that end, we have acquired certain
patents and patent licenses and intend to continue to seek patents on our production
processes.

As
of May 31, 2009, Tower held 81 patents. Tower has entered into various patent licenses and
cross-licenses with technology companies including Toshiba, Freescale, Synopsys, ARM,
Chipidea Microelectronics, Virage Logic, Impinj and others. Tower may choose to renew its
present licenses or obtain additional technology licenses in the future. There can be no
assurance that any such licenses could be obtained on commercially reasonable terms.

Tower
constantly seeks to strengthen its technological expertise through relationships with
technology companies and silicon suppliers. Tower seeks to expand its core strengths in
CMOS image sensors, embedded flash and mixed-signal technologies by combining its
proprietary technology with those of other technology companies. A main component of
Towers process development strategy is to acquire licenses for standard CMOS
technologies and cell libraries from leading designers, such as Freescale and Toshiba, and
further develop specialized processes through Towers internal design teams. The
licensing of these technologies has enormously reduced Towers internal development
costs.

As
of May 31, 2009, Jazz had 143 patents in force in the United States and 27 patents in
force in foreign countries. Jazz also had 24 pending patent applications in the United
States, 23 pending patent applications in foreign countries and no patent pending
applications under the Patent Cooperation Treaty.

Jazzs
expired patents generally related to legacy technologies that were developed by its
predecessors, namely Rockwell. Due to the rapid pace of technological changes and
advancement in the field of semiconductor fabrication and processing, Jazz does not
believe that the expiration of these patents materially affects its competitive position.

Jazz
Semiconductor entered into a technology license agreement that grants to it worldwide
perpetual license rights from PolarFab regarding certain process technologies that it
intends to incorporate into its BCD process technologies for the manufacture of wafers by
Jazz for its customers and customers of PolarFab. Jazz also entered into an associated
technology transfer agreement for such processes. Jazz is able to adapt, prepare
derivatives based on, or otherwise exploit the licensed technology, however, Jazz is
restricted from using certain licensed BCD process technologies with respect to motor
controllers for hard disk drives. Jazz is also able to sublicense the process technologies
to ASMC, HHNEC and any of its future manufacturing suppliers to manufacture for Jazz and
its customers.

In
connection with Jazz Semiconductors separation from Conexant in 2002, Conexant
contributed to Jazz Semiconductor a substantial portion of its intellectual property,
including software licenses, patents and intellectual property rights in know-how related
to its business. Jazz Semiconductor agreed to license intellectual property rights
relating to the owned intellectual property contributed to Jazz Semiconductor by Conexant
back to Conexant and its affiliates. Conexant may use this license to have Conexant
products produced by third-party manufacturers and to sell such products, but must obtain
Jazz Semiconductors prior consent to sublicense these rights for the purpose of
enabling that third party to provide semiconductor fabrication services to Conexant.

- 32 -

---

---

Our
ability to compete depends on our ability to operate without infringing the proprietary
rights of others. The semiconductor industry is generally characterized by frequent
litigation regarding patent and other intellectual property rights. As is the case with
many companies in the semiconductor industry, we have from time to time received
communications from third parties asserting that their patents cover certain of its
technologies or alleging infringement of their other intellectual property rights. We
expect that it will receive similar communications in the future. Irrespective of the
validity or the successful assertion of such claims, we could incur significant costs and
devote significant management resources to the defense of these claims, which could
seriously harm us.

Foundation IP Blocks

To
better serve our customers design needs using advanced CMOS processes and mixed-signal, we
have entered into a series of agreements with leading providers of physical design
libraries, mixed-signal and non volatile memory design components. These components are
basic design building blocks, such as standard cells, interface input-output (I/O) cells,
software compilers for the generation of on-chip embedded memories arrays, mixed-signal
and non-volatile memory design blocks. To achieve optimal performance, all of these
components must be customized to work with our manufacturing process. These components are
used in most of our customers chip designs.

We
interact closely with customers throughout the design development and prototyping process
to assist them in the development of high performance and low power consumption
semiconductor designs and to lower their final die, or individual semiconductor, costs
through die size reductions and integration. We provide engineering support and services
as well as manufacturing support in an effort to accelerate our customers design and
qualification process so that our customers can achieve faster time to market. We have
entered into alliances with Cadence Design Systems, Inc., Synopsys, Inc. and Mentor
Graphics Corp., leading suppliers of electronic design automation tools, and also licensed
technology from ARM Holdings plc and Synopsys, Inc., leading providers of physical
intellectual property components for the design and manufacture of semiconductors. Through
these relationships, we provide our customers with the ability to simulate the behavior of
our processes in standard electronic design automation, or EDA, tools. To provide
additional functionality in the design phase, we offer our customers, standard and
proprietary models within design kits that we have developed. These design kits, which
collectively comprise our design library, or design platform, allow our customers to
quickly simulate the performance of a semiconductor design of our processes, enabling them
to refine their product design before actually manufacturing the semiconductor.

The
applications for which our specialty process technologies are targeted present challenges
that require an in-depth set of simulation models. We provide these models as an integral
part of our design platform. At the initial design stage, our customers internal
design teams use our proprietary design kits to design semiconductors that can be
successfully and cost-effectively manufactured using our specialty process technologies.
Our engineers, who typically have significant experience with analog and mixed-signal
semiconductor design and production, work closely with our customers design teams to
provide design advice and help them optimize their designs for our processes and their
performance requirements. After the initial design phase, we provide our customers with a
multi-project wafer service to facilitate the early and rapid use of our specialty process
technologies, which allows them to gain early access to actual samples of their designs.
Under this multi-project wafer service, we schedule a bimonthly multi-project wafer run in
which we manufacture several customers designs in a single mask set, providing our
customers with an opportunity to reduce the cost and time required to test their designs.
We believe our circuit design expertise and our ability to accelerate our customers
design cycle while reducing their design costs represents one of our competitive
strengths.

- 33 -

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---

Synopsys. In June 2001, we entered into an agreement with Synopsys (formerly, Avant!)
          under which Synopsys developed libraries for Towers 0.18-micron process
          technology. Multiple customers use the Synopsys libraries in producing their
ICs           at our company. In 2004, we entered into a set of comprehensive technology
          transfer and license agreements with Synopsys that provide us with broad rights
          to use Synopsys library technology in multiple process technology
          generations including 0.18 micron and 0.13 micron. Under these agreements, we
          were given the right to develop, customize, validate and characterize libraries
          based on Synopsys library technology and to distribute such libraries.
          These agreements place us in a superior position of having in-house capability
          to serve our customers needs. Certain parts of the 2004 license
agreements           relating to support services provided by Synopsys were terminated
according to           an agreement signed between the parties in July 2007.

ARM
Limited. In 2002 and subsequently in 2004 and 2006, we entered into license agreements
with ARM Limited (formerly, Artisan Components and ARM Inc.) under which we received a
license to a suite of library products for our 0.18-micron and 0.13-micron process
technologies and ARM licenses its libraries to our customers free of charge. Multiple
customers use the ARM libraries in their chip design for manufacturing at our company. The
ARM libraries include, among others, standard cells, general purpose and specialty
input-output cells and memory generators.

Virage
Logic. In 2002 and subsequently in 2004 and in 2006, we entered into license
agreements with Virage Logic under which we received a license to a suite of library
products for our 0.18-micron and 0.13-micron process technologies, respectively. These
library products are available for licensing by our customers, and with respect to most of
the 0.13-micron library products, free of a license charge. Virage offers a variety of
SRAM and ROM memory compilers on both process technologies, and also offers standard
cells, general purpose and specialty input-output cells libraries in the 0.13-micron
technology. Presently, multiple customers products that use Virage Logics
memory products are in production at Fab 2. In addition, our license agreements with
Virage Logic from 2002 and 2006 have also introduced Virage Logics patented
Nonvolatile Electrically Alterable embedded memories for production on our 0.18-micron
CMOS logic process. Currently, customers products that use Virage Logics
non-volatile memory products are in production at Fab 2. We have selected and qualified
these memories for our process to help our customers meet their application requirements
for cost-effective embedded non-volatile memory for security, encryption, unique device
identification, analog trimming, silicon repair and flexible program store.

Chipidea
Microelectronics. (Today MIPS Technologies, Inc). In 2003 and subsequently in
2005 and 2006, we entered into a non-exclusive, perpetual, royalty-free license and design
agreement with Chipidea Microelectronics. Further to this agreement, Chipidea has
customized several of its mixed-signal design blocks for manufacturing on our 0.18-micron
and 0.13-micron process technologies, such as USB 2.0 (Universal Serial Bus 2.0) and
USB2.0 OTG (On The Go), which are currently being utilized by several of our customers.

Impinj
Inc.In 2005, we entered into a development and license agreement with Impinj Inc.
under which Impinj is developing its AEON® non-volatile memory (NVM), in
parallel architecture, based on its patented Self-Adaptive Silicon®
technology, for production on our 0.13-micron CMOS logic process. We chose Impinjs
cost-effective NVM to help our customers products meet their application
requirements for embedded non-volatile memories. Primary applications for Impinjs
AEON parallel architecture include analog trimming, digital rights management and wireless
controllers. In 2007, Impinjs AEON®/MTP Parallel Architecture NVM cores became
available in our 0.13-micron logic process.

- 34 -

---

---

Image Sensor Technologies

We
developed, both independently and together with our customers, basic pixel intellectual
property to be used by those customers in the manufacturing of our CMOS image sensor
products.

C. ORGANIZATIONAL
STRUCTURE

The
legal and commercial name of our company is Tower Semiconductor Ltd. Tower was
incorporated under the laws of the State of Israel in 1993. Tower Semiconductor USA, Inc.
is a wholly-owned subsidiary incorporated in the United States.

In
September 2008, we completed the merger with Jazz Technologies in a stock for stock
transaction. Jazz Technologies is the parent company of its wholly-owned subsidiary, Jazz
Semiconductor, Inc., an independent semiconductor foundry focused on specialty process
technologies for the manufacture of analog intensive mixed-signal semiconductor devices.
As a result of this transaction, both Jazz Technologies and Jazz Semiconductor became
wholly owned subsidiaries of the Company.

D. PROPERTY,
PLANTS AND EQUIPMENT

# Manufacturing Facilities

Fab 1

We
acquired our Fab 1 facility from National Semiconductor in 1993, which had operated the
facility since 1986. We occupy the facility pursuant to a long-term lease from the Israel
Lands Authority that expires in 2032.

Due
to the sensitivity and complexity of the semiconductor manufacturing process, a
semiconductor manufacturing facility requires a special clean room in which
most of the manufacturing functions are performed. Our Fab 1 facility includes an
approximately 51,900 square foot clean room.

Since
we commenced manufacturing at Fab 1, we increased its manufacturing capacity, using our
1.0 micron to 0.35-micron processes, including specialized processes. Fab 1 is also
manufacturing products for Siliconix Incorporated and Siliconix Technology C.V under a
long term foundry agreement that we entered into in May 2004 using process technology that
Siliconix transferred to us. The parties amended this foundry agreement during the first
quarter of 2008 and further amended it during 2009, mainly to revise the terms of the
purchase of trench products as well as transfer additional differentiated product
platforms to Tower for manufacturing.

Our
exact capacity is variable and depends on the combination of the processes being used and
the product mix being manufactured hence, it may be significantly lower at certain times
as a result of certain of our combinations that may require more processing steps than
others. We have the ability to rapidly change the mix of production processes in use in
order to respond to changing customer needs and maximize utilization of the fab. In
general, our ability to increase our manufacturing capacity has been achieved through the
addition of equipment, improvement in equipment utilization, the reconfiguration and
expansion of the existing clean room area and the construction of an additional clean room
area within the building shell of Fab 1.

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---

Fab 2

In
January 2001, we commenced construction of Fab 2, our advanced wafer fab adjacent to Fab 1
in Migdal Haemek. The land on which Fab 2 is located is subject to a long-term lease from
the Israel Lands Authority that expires in 2049.

Fab
2 offers integrated circuits manufacturing services utilizing advanced materials and a
0.18-micron process technology we licensed from Toshiba, as well as 0.13-micron process
technology we licensed from Freescale. Fab 2 is also manufacturing products in 0.35-micron
process technology that International Rectifier Corporation (IR) transferred
to us under a long term foundry agreement that we entered into in September 2006, which
was further amended during 2009, mainly to revise the terms of the purchased quantities.
During the fourth quarter of 2007, we began volume production of products for IR.

The
overall clean room area in Fab 2 is approximately 100,000 square feet. We began volume
production at Fab 2 during the third quarter of 2003. Depending on the process technology
and product mix, when fully ramped-up, we estimate that Fab 2 will be able to achieve
capacity levels of approximately 40,000 wafers per month.

Since
2000, we have invested significantly in the purchase of fixed assets, primarily in
connection with the construction of Fab 2, technology advancement and capacity expansion.
Capital expenditures in 2008, 2007 and 2006 were approximately $74 million, $91 million
and $163 million, respectively. Capital expenditure for the years 2008, 2007 and 2006
years were not deducted by related Investment Center grants.

We
have registered liens in favor of the State of Israel and our banks on substantially all
of our present and future assets, including Fab 1 and Fab 2 (see Item 5 
Operating and Financial Review and Prospects  B. Liquidity and Capital Resources
 Fab 2 Agreements  Credit Facility).

Newport Beach

Jazzs
headquarters and manufacturing facilities are located in Newport Beach, California. Jazz
leases the use of these facilities from Conexant under non-cancellable operating leases
that expire March 12, 2017 and it has the option to extend each lease for two consecutive
five-year periods after March 12, 2017. Jazz and Conexant executed amendments to the
leases which provide that Jazzs headquarters office may be relocated once to another
building within one mile of its current location at Conexants option and expense,
subject to certain conditions.

The
following table provides certain information as to Jazzs principal general offices,
manufacturing and warehouse facilities:

|Property Location         | Use                    | Floor Space        
|------------------------- | ---------------------- | -------------------
|
|
|
|
|Newport Beach, California | Headquarters office    | 68,227 square feet 
|                         
|Newport Beach, California | Manufacturing facility | 320,510 square feet

We
expect these office and warehouse facilities to be adequate for our business purposes
through 2009 and expect additional space to be available to use on commercially reasonable
terms as needed.

- 36 -

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# ENVIRONMENTAL QUALITY
MATTERS AND CERTIFICATIONS

We
have placed significant emphasis on achieving and maintaining a high standard of
manufacturing quality. Our operations are subject to a variety of laws and governmental
regulations relating to the use, discharge and disposal of toxic or otherwise hazardous
materials used in our production processes. Failure to comply with these laws and
regulations could subject us to material costs and liabilities, including costs to clean
up contamination caused by our operations.

In
addition, Jazzs operations are subject to strict regulation and periodic monitoring
by the United States Environmental Protection Agency along with several state and local
environmental agencies in the U.S.

We
believe that we are currently in compliance in all material respects with applicable
environmental laws and regulations.

In
November 2004, Tower received ISO 14001 certification from The Standards Institution of
Israel. A series of international standards on environmental management, ISO 14000
provides a framework for the development of an environmental management system and the
supporting audit program. ISO 14001 is the cornerstone standard of the ISO 14000 series.
It specifies a framework of control for an environmental management system pursuant to
which an organization can be certified by a third party. The ISO 14001 certification
applies to all of Towers manufacturing facilities. Towers authorized design
center in Netanya, Israel also received certification.

In
December 2004, Tower received the OHSAS 18001 certification from the Standard Institution
of Israel, which provides the framework of control for Safety and Health. This
certification covers all of Towers activities and departments.

In
November 2005, Tower achieved ISO/TS 16949 certification from the UK-based National
Quality Association pertaining to the manufacturing processes, work procedures and product
performance meeting the requirements of the automotive industry. This quality management
system standard certification covers all of Towers departments and activities.

In
March 2006, Tower achieved ISO 17799 certification from The Standards Institution of
Israel for the high quality of Towers security technology and implementations,
covering all of Towers departments and activities.

In
2004, Tower achieved ISO 9000:2001 certification from The Standards Institution of Israel
for all quality systems and processes, covering all of Towers departments and
activities. This certification is renewed annually pursuant to extensive audits performed
by the SII.

Jazz
seeks to attract and retain leading international and domestic semiconductor companies as
customers by establishing and maintaining a reputation for high quality and reliable
services and products. Jazzs Newport Beach, California fab has achieved ISO9001:2000
certification and has also obtained certification for implementing the standard
requirements of ISO 14001:2004, ISO/IEC 27001:2005, the specification OHSAS 18001:2007 and
ISO/TS 16949:2002. ISO9001:2000 sets the criteria for developing a fundamental quality
management system. This system focuses on continuous improvement, defect prevention and
the reduction of variation and waste. ISO 14001 consists of a set of standards that
provide guidance to the management of organizations to achieve an effective environmental
management system. ISO/IEC 27001:2005 replaces the previous BS7799 standard, and is the
new global certification that focuses on security information management activities
associated with the reduction of security breaches. OHSAS 18001:2007 is an internationally
accepted specification that defines the requirements for establishing, implementing and
operating an Occupational Health and Safety Management System, which is a framework that
allows an organization to consistently identify and manage operational risks, reduce the
potential for accidents, help achieve compliance with health and safety legislation, and
continually improve its performance.

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Jazz
has implemented an environmental management system that assists Jazz in identifying
applicable environmental regulations, evaluating compliance status and establishing timely
waste preventive measures. Jazz has also obtained certification for implementing the
standard requirements of ISO 14001:2004. ISO 14001 consists of a set of standards that
provide guidance to the management of organizations to achieve an effective environmental
management system.

Jazz
achieved ISO/TS 16949:2002 certification in 2008. ISO/TS 16949:2002 is a Technical
Specification written by the International Automotive Task Force (IATF) which aligns
existing US, German, French and Italian automotive quality system standards within the
global automotive industry. It specifies the quality system requirements for the design,
development, production, installation and servicing of automotive-related products.

Jazz
implements quality assurance initiatives that are designed to ensure high yields at its
facilities. Jazz tests and monitors raw materials and production at various stages in the
manufacturing process before shipment to customers. Quality assurance also includes
on-going production reliability audits and failure tracking for early identification of
production problems.

|ITEM 4A. |  | UNRESOLVED STAFF COMMENTS
|-------- |  | -------------------------

Not
Applicable.

|ITEM 5. |  | OPERATING AND FINANCIAL REVIEW AND PROSPECTS
|------- |  | --------------------------------------------

A. OPERATING
RESULTS

# Managements
Discussion and Analysis of Financial Condition and Results of Operations

The information contained in this
section should be read in conjunction with our consolidated financial statements for the
year ended December 31, 2008 and related notes and the information contained elsewhere in
this annual report. Our financial statements have been prepared in accordance with U.S.
generally accepted accounting principles (US GAAP). We recast the comparative
prior year amounts included in our financial statements and in this report to US GAAP.
Prior to the fourth quarter of 2007, we prepared our financial reports in accordance with
generally accepted accounting principles in Israel and provided reconciliation to US GAAP
in the notes to the financial statements.

# Overview

We
are a pure-play independent specialty foundry dedicated to the manufacture of
semiconductors. Pure-play foundries do not offer any products of their own, but focus on
producing integrated circuits based on the design specifications of their customers. We
manufacture semiconductors using advanced production processes for our customers primarily
based on third party designs and our own proprietary designs. We currently offer the
manufacture of ICs with geometries ranging from 1.0 to 0.13-micron.

In
September 2008, Tower completed its merger with Jazz Technologies in a stock for stock
transaction. Upon the closing of the merger with Jazz, each outstanding share of Jazz
common stock was converted into 1.8 ordinary shares of Tower, each outstanding warrant,
option and convertible debentures to acquire one Jazz common stock became exercisable for
1.8 ordinary shares of Tower. Effective September 19, 2008, Jazzs common stock,
warrants and units were no longer traded on the American Stock Exchange (AMEX).

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In
consideration for the shares, options and warrants of Jazz, Tower issued approximately
34,256,292 ordinary shares 5,381,213 options and 59,459,423 warrants with a total value of
$46.7 million (or $50.1 million including transaction costs). The per share value, as well
as the value of the options and warrants, was calculated based on Towers stock price
prevailing around May 19, 2008, the date of signing the definitive agreement of the merger
and its announcement, in accordance with provisions of EITF 99-12 Determination of
the Measurement Date for the Market Price of Acquirer Securities Issued in a Purchase
Business Combination. The merger was accounted for under the purchase method of
accounting in accordance with U.S. generally accepted accounting principles for accounting
and financial reporting purposes. Under this method, Jazz was treated as the
acquired company. The results of Jazzs operations have been included in
the consolidated financial statements for the period between September 19, 2008 and
December 31, 2008 and its balance sheet was included as of December 31, 2008.

As
mentioned above, pursuant to the merger, Jazzs outstanding warrants immediately
prior to the effective time of the merger, became exercisable for Tower ordinary shares,
at an exercise price of $2.78 per Tower ordinary share. The expiration date of the
warrants is March 17, 2011.

Tower
may redeem the warrants in whole and not in part, at a price of $0.01 per warrant,
upon a minimum of 30 days prior written notice of redemption and if and only if,
the last sales price of Towers ordinary shares equals or exceeds $4.72 per
share for any 20 trading days within a 30 trading day period ending three
business days before Tower sends the notice of redemption. The redeemable warrants are
redeemable only at the discretion of Tower and as such in accordance with provisions of
EITF 00-19, were classified in shareholders equity. For details regarding the convertible
notes see below under liquidity and capital resources.

During
the year ended December 31, 2008, we had five significant customers who contributed
between 5% to 17% of our revenues. In 2007, we had seven significant customers who
contributed between 5% to 29% of our revenues. In 2006, we had seven significant customers
who contributed between 5% to 23% of our revenues.

The
percentage of our sales from customers located outside the United States was 23%, 25% and
31% in the years ended December 31, 2008, 2007 and 2006, respectively. We believe that a
substantial portion of our sales will continue to come from customers located outside the
United States.

# Critical Accounting
Policies

Revenue Recognition.

The
Companys net revenues are generated primarily from manufacturing and sales of
semiconductor wafers. The Company derives the remaining balance of net revenues from the
sale of photomasks, engineering services and design-related services. The majority of the
Companys revenue is achieved through the efforts of its direct sales force.

In
accordance with generally accepted accounting principles, the Company recognizes revenues
when the following fundamental criteria are met: (i) persuasive evidence of an
arrangement exists, (ii) delivery has occurred or services have been rendered,
(iii) the price to the customer is fixed or determinable and (iv) collection of
the resulting receivable is reasonably assured. These criteria are usually met at the time
of product shipment. Revenues are recognized when the acceptance criteria are satisfied,
based on performing electronic, functional and quality tests on the products prior to
shipment and customer on-site testing. Such Company testing reliably demonstrates that the
products meet all of the specified criteria prior to formal customer acceptance, and that
product performance can reasonably be expected to conform to the specified acceptance
provisions.

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Revenues
from contracts with multiple elements are recognized as each element is earned based on
the relative fair value of each element and when there are no undelivered elements that
are essential to the functionality of the delivered elements and when the amount is not
contingent upon delivery of the undelivered elements. Advances received from customers
towards future engineering services, product purchases and in some cases capacity
reservation are deferred until products are shipped to the customer, services are rendered
or the capacity reservation period ends.

Our
revenue recognition policy is significant because our revenues are a key component of our
results of operations. We follow very specific and detailed guidelines in measuring
revenue; however an accrual for estimated returns, which is computed primarily on the
basis of historical experience, is recorded. Any changes in assumptions for determining
the accrual for returns and other factors affecting revenue recognition may affect mainly
the timing of our revenue recognition and cause our operating results to vary from quarter
to quarter. Accordingly, our financial position and results of operations may be affected.

Depreciation and
Amortization.

We
are heavily capital oriented and the amount of depreciation is a significant amount of our
yearly expenses. Changes to the useful lives assumption and hence the depreciation can
have material impact on our results of operations. Depreciation and amortization expenses
in 2008 amounted to $138.8 million. During the third quarter of 2003, we commenced
depreciating the Fab 2 property and equipment and amortizing the 0.18-micron technology,
based on the straight-line method. During the second quarter of 2007, we reassessed the
estimated useful lives of our machinery and equipment and as a result, effective as of
April 1, 2007, machinery and equipment is to be depreciated over estimated useful lives of
7 years rather than 5 years as estimated prior to such date. The change reflects our best
estimate of the useful lives of our equipment and is also based on experience accumulated
from Fab 1 and on recent trends in industry practices. We believe that the change better
reflects the economics associated with the ownership of the equipment. Currently, we
estimate that the expected economic life of our assets will be as follows: (i) buildings
(including facility infrastructure) 10 to 25 years; (ii) machinery and equipment
 three to seven years; and (iii) the 0.18-micron and 0.13 micron technology 
four years, with each amortization phases commencing on the date on which such Fab 2
manufacturing line became ready for its intended use. We expect that depreciation and
amortization expenses will be approximately $137 million in 2009. Changes in our estimates
regarding the expected economic life of Fab 2 assets, or a change in the dates on which
each of the Fab 2 manufacturing lines is ready for its intended use, might affect our
depreciation and amortization expenses.

Impairment of Fixed Assets and
Intangible Assets.

Management
reviews long-lived assets and intangible assets on a periodic basis, as well as when such
a review is required based upon relevant circumstances to determine whether events or
changes in circumstances indicate that the carrying amount of such assets may not be
recoverable. According to SFAS 144 and SFAS 142 for those assets that have definite useful
lives, recoverability tests are performed based on undiscounted expected cash flows, SFAS
144 requires that when the asset is not recoverable an impairment loss should be computed
based on the difference between the carrying amount of the assets (or asset group) and the
fair value. The fair value in most instances will be determined using present value
techniques applied to expected cash flows.

- 40 -

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---

Application
of SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets
(SFAS No. 144) resulted in an impairment charge which was recorded during
2008.

The
fair values of the Machinery and Equipment were determined using expected cash flows
discounted at discount rate commensurate with the risk involved in generating such cash
flows.

Impairment of Goodwill

Goodwill
is subject to an impairment test on at least an annual basis or upon the occurrence of
certain events or circumstances. Goodwill impairment is assessed based on a comparison of
the fair value of the unit, to which the goodwill is ascribed to as against the underlying
carrying value of its net assets, including goodwill. If the carrying amount of the unit
exceeds its fair value, the implied fair value of the goodwill is compared with its
carrying amount to measure the amount of impairment loss, if any. Changes in the
assumptions used in calculation of the fair value of the unit may have significant effect
on determining whether an impairment charge is required and hence may affect our results
of operations.

Tower Convertible
Debentures.

According
to Accounting Principles Board Opinion No. 14 (APB 14), we are to allocate the
proceeds from the sale of the securities to each security issued based on their relative
fair value. We are required, according to SFAS 133, to determine whether the conversion
option embedded in the convertible debt should be bifurcated and accounted for separately.
Such determination is based on the determination whether on a stand alone such conversion
option would be classified in equity. If the option can be classified as equity no
bifurcation is required. The analysis required under SFAS 133 involves the consideration
of many factors and assumptions. Any changes in those factors or assumptions may have
significant effect on determining whether embedded derivatives are required to be
bifurcated and hence may affect our results of operations.

# Initial Adoption of New
Standards and Recently Issued Accounting Standards

FAS
157-3

In
October 2008, the FASB staff issued Staff Position (FSP) No. FAS 157-3, Determining
the Fair Value of a Financial Asset When the Market for That Asset Is Not Active.
The FSP amends Statement 157 by incorporating an example to illustrate key
considerations in determining the fair value of a financial asset in an inactive
market. The FSP is effective upon issuance and should be applied to prior periods for
which financial statements have not been issued.

The
FSPs illustrative example and associated guidance clarifies various application
issues raised by preparers of financial statements. With regard to the measurement
principles of Statement 157, the FSP emphasizes the following:

| |  | Objective
of Fair Value  The objective of a fair value measurement is to determine the price
that would be received to sell an asset in an orderly transaction that is not a forced
liquidation or distressed sale between market participants as of the measurement date.
This objective does not change even when there is little, if any, market activity for an
asset as of the measurement date.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

- 41 -

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| |  | Distressed
Transactions  Even in times of market dislocation, it is not appropriate to
conclude that all market activity represents forced liquidations or distressed sales.
However, it is also not appropriate to automatically conclude that any transaction price
is determinative of fair value. The evaluation of whether individual transactions
are forced (that is, whether one of the parties is forced or otherwise compelled to
transact) depends on the facts and circumstances and may require the use of significant
judgment.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Relevance
of Observable Data  Observable market data may require significant adjustment to
meet the objective of fair value. For example, in cases where the volume and level
of trading activity in the asset have declined significantly, the available prices vary
significantly over time or among market participants, or the prices are not current, the
observable inputs might not be relevant and could require significant adjustment. If
the adjustment is significant, the measurement would be considered Level 3.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
Companys Assumptions and Nonperformance and Liquidity Risks  The use of the
Companys internal assumptions about future cash flows and appropriately
risk-adjusted discount rates is acceptable when relevant observable market data
does not exist. In addition, such assumptions or techniques must incorporate adjustments
for nonperformance and liquidity risks that market participants would consider in valuing
the asset.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Third
Party Pricing Quotes  Quotes and information obtained from brokers or pricing
services are not necessarily determinative if an active market does not exist for
the financial asset being measured. In addition, an entity should place less
reliance on quotes that do not reflect actual market transactions.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We
considered the guidance in this FSP in evaluating Towers and Jazzs bank loans
and certain of Towers and Jazzs debt securities that are traded in inactive
markets.

EITF
07-5

In
June 2008, the FASB Emerging Issues Task Force reached a consensus on EITF Issue No. 07-5,
Determining Whether an Instrument (or an Embedded Feature) is Indexed to an
Entitys Own Stock. The Consensus was reached on the following three issues:

| | 1. | How
an entity should evaluate whether an instrument (or embedded feature) is
               indexed to its own stock.
| | -- | ---------------------------------------------------------------------------------------------------------------------

| | 2. | How
the currency in which the strike price of an equity-linked financial
               instrument (or embedded equity-linked feature) is denominated affects the
               determination of whether the instrument is indexed to an entitys own
               stock.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | How
an issuer should account for market-based employee stock option valuation
               instruments.
| | -- | ---------------------------------------------------------------------------------------------------------

This
consensus will affect entities with (1) options or warrants on their own shares (not
within the scope of Statement 150), including market-based employee stock option valuation
instruments; (2) forward contracts on their own shares, including forward contracts
entered into as part of an accelerated share repurchase program; and (3) convertible debt
instruments and convertible preferred stock. Also affected are entities that issue
equity-linked financial instruments (or financial instruments that contain embedded
equity-linked features) with a strike price that is denominated in a foreign currency.

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We
adopted this consensus effective January 1, 2009. We identified several instruments that
are affected by the consensus all of which were, before the adoption of the consensus,
classified in equity and upon the adoption were reclassified from equity to liability.
These instruments include warrants and previously bifurcated conversion option, with
either anti-dilution feature or with exercise price denominated in NIS. At the date of
adoption and in accordance with transition provisions of the consensus, we measured those
instruments at fair value. The difference between the fair values and the amount
previously recorded in equity was recognized as an adjustment to the opening balance of
retained earnings.

The
effect of the adoption on equity retained earning is as follows:

|                                     | January 1, 2009 Dollars
in Thousands
|------------------------------------ | ------------------------------------
|
|
|
|
|Additional paid in capital           |                                     
|Retained earnings                    |                                     
|                                     |                                     
|Fair value reclassified to liability |                                     

The
effect of the adoption of EITF 07-5 on our consolidated results of operations and net loss
for the three months ended March 31, 2009 was immaterial.

FSP
APB 14-1

Effective
January 1, 2009, we adopted FSP No. APB 14-1, Accounting for Convertible Debt
Instruments that may be Settled in Cash upon Conversion (Including Partial Cash
Settlement). FSP APB No. 14-1 applies to any convertible debt instrument that may be
wholly or partially settled in cash and requires the separation of the debt and equity
components of cash-settleable convertibles at the date of issuance. The FSP is effective
for the convertible debt issued by Jazz (the 8% convertible notes due 2011). The
merger on September 19, 2008, as part of the purchase method, required us to fair value
their convertible debt instrument. As a result, a new basis was determined to the
convertibles of $108.6 million, the debt discount was $19.6 million. Upon adoption of the
FSP, we evaluated the equity component as of the merger date and determined that it is
immaterial. As such, we expect no impact on our consolidated results of operations or
financial position resulting from the adoption of this FSP for periods following the
merger.

SFAS
No. 161

Effective
January 1, 2009, we adopted SFAS No. 161, Disclosures about
Derivative Instruments and Hedging Activities (SFAS No. 161).
SFAS No. 161 expands disclosures but does not change accounting for derivative
instruments and hedging activities. The adoption of SFAS No. 161 did not have any
impact on our consolidated results of operations or financial position.

- 43 -

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SFAS
No. 160

In
December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in
Consolidated Financial Statements (SFAS No. 160). SFAS No. 160 improves
the relevance, comparability, and transparency of financial information provided to
investors by requiring all entities to report non-controlling (minority) interests in
subsidiaries in the same way as equity in the consolidated financial statements. Moreover,
SFAS No. 160 eliminates the diversity that currently exists in accounting for transactions
between an entity and non-controlling interests by requiring they be treated as equity
transactions. SFAS No. 160 is effective as of the start of fiscal years beginning after
December 15, 2008. Early adoption is not allowed. Since we currently have no minority
interest, the adoption of this standard did not have any impact on our consolidated
results of operations or financial position.

FSP
142-3

In
April 2008, the FASB issued FASB Staff Position 142-3, Determination of the Useful
Life of Intangible Assets (FSP 142-3). FSP 142-3 amends the
factors that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FASB Statement
No. 142, Goodwill and Other Intangible Assets
(SFAS 142). The objective of FSP 142-3 is to improve the consistency
between the useful life of a recognized intangible asset under SFAS 142 and the
period of expected cash flows used to measure the fair value of the asset under
SFAS 141(R), Business Combinations, and other U.S. generally
accepted accounting principles. FSP 142-3 will be effective beginning in fiscal year
2010. We are currently evaluating the impact that FSP 142-3 will have, if at all, on
our consolidated financial statements and disclosures.

FSP
FAS 107-1 and APB 28-1

In
April 2009 the FASB issued FASB staff position 107-1 and APB 28-1, Interim
Disclosures about Fair Value of Financial Instruments. This FSP applies to all
financial instruments within the scope of Statement 107 held by publicly traded companies,
as defined by Opinion 28 and are effective for interim reporting periods ending after June
15, 2009, with early adoption permitted for periods ending after March 15, 2009.

FSP
FAS 107-1 and APB 28-1 relates to fair value disclosures for any financial instruments
that are not currently reflected on the balance sheet of companies at fair value. Prior to
issuing this FSP, fair values for these assets and liabilities were only disclosed once a
year. The FSP now requires these disclosures on a quarterly basis, providing qualitative
and quantitative information about fair value estimates for all those financial
instruments not measured on the balance sheet at fair value. We are currently evaluating
the additional disclosure requirements of this FSP.

FSP
FAS 115-2 and FAS 124-2

In
April 2009 the FASB issued FASB staff position 115-2 and 124-2, Recognition and
Presentation of Other-Than-Temporary Impairments (OTTI) for investment
in debt securities. This FSP applies to all entities and are effective for interim and
annual reporting periods ending after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009. Earlier adoption for periods ending before March 15,
2009, is not permitted.

Under
the FSP, the primary change to the OTTI model for debt securities is the change in focus
from an entitys intent and ability to hold a security until recovery. Instead, an
OTTI is triggered if (1) an entity has the intent to sell the security, (2) it is more
likely than not that it will be required to sell the security before recovery, or (3) it
does not expect to recover the entire amortized cost basis of the security. In addition,
the FSP changes the presentation of an OTTI in the income statement if the only reason for
recognition is a credit loss (i.e., the entity does not expect to recover its entire
amortized cost basis). That is, if the entity has the intent to sell the security or it is
more likely than not that it will be required to sell the security, the entire impairment
(amortized cost basis over fair value) will be recognized in earnings.

- 44 -

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However,
if the entity does not intend to sell the security and it is not more likely than not that
the entity will be required to sell the security, but the security has suffered a credit
loss, the impairment charge will be separated into the credit loss component, which is
recorded in earnings, and the remainder of the impairment charge, which is recorded in
other comprehensive income (OCI). We expect no impact on our consolidated results of
operations or financial position resulting from the adoption of this FSP.

FSP
FAS 157-4

In
April 2009 the FASB issued FASB staff position 157-4, Determining Fair Value When
the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly. This FSP applies to all assets
and liabilities within the scope of accounting pronouncements that require or permit fair
value measurements, except as discussed in paragraphs 2 and 3 of statement 157. The FSP is
Effective for interim and annual reporting periods ending after June 15, 2009, and shall
be applied prospectively.

FSP
FAS 157-4 relates to determining fair values when there is no active market or where the
price inputs being used represent distressed sales. It reaffirms what Statement 157 states
is the objective of fair value measurementto reflect how much an asset would be sold
for in an orderly transaction (as opposed to a distressed or forced transaction) at the
date of the financial statements under current market conditions. Specifically, it
reaffirms the need to use judgment to ascertain if a formerly active market has become
inactive and in determining fair values when markets have become inactive.

FSP
FAS 157-4 provides guidance on (1) estimating the fair value of an asset or liability
(financial and nonfinancial) when the volume and level of activity for the asset or
liability have significantly decreased and (2) identifying transactions that are not
orderly.

We
are currently evaluating the impact that this FSP will have, if at all, on our
consolidated financial statements and disclosures.

# Results of Operations

You
should read the following discussion and analysis of our financial condition and results
of operations in conjunction with the financial statements and the related notes thereto
included in this annual report. The following table sets forth certain statement of
operations data as a percentage of total revenues for the years indicated. The results for
2008 include Jazzs results from September 19, 2008.

|                                                 | Year Ended December 31,
|------------------------------------------------ | -----------------------
|
|
|
|
|Statement of Operations Data:                    |                        
|Total revenues                                   |                        
|Cost of total revenues                           |                        
|                                                 |                        
|Gross loss                                       |                        
|Research and development                         |                        
|Marketing, general and administrative            |                        
|                                                 |                        
|Write-off of in-process research and development |                        
|Merger related costs                             |                        
|Fixed assets impairment                          |                        
|                                                 |                        
|Operating loss                                   |                        
|Financing expense, net                           |                        
|Gain on debt restructuring                       |                        
|Other income (expense), net                      |                        
|                                                 |                        
|Income tax provision                             |                        
|                                                 |                        
|Loss                                             |                        
|                                                 |                        

- 45 -

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# Year Ended December 31,
2008 compared to Year Ended December 31, 2007

Revenues.
          Revenue for the year ended December 31, 2008 increased by 9.0% to $251.7
million           from $230.9 million for the year ended December 31, 2007.

Following the successful merger with
Jazz, the results above include Jazzs results from September 19, 2008 which amount
to $56.3 million.

Cost
of Total Revenues. Cost of total revenue for the year ended December 31, 2008 amounted
to $298.7 million, compared with $284.8 million for the year ended December 31, 2007. This
modest 4.9% increase in cost of revenue, which includes also the results of Jazz
commencing September 19, 2008, was mainly attributable to a reduction in depreciation and
amortization expenses and due to the previously announced cost reduction plan executed by
the company. The decrease in depreciation and amortization expenses resulted from the
change made by the Company in the estimated useful lives of its machinery and equipment in
the second quarter of 2007 (and as a result, our machinery and equipment are depreciated
over estimated useful lives of 7 years rather than 5 years) and from the fixed assets
impairment in 2008, as detailed below.

Gross
Loss. Gross loss for the year ended December 31, 2008 was $47.0 million compared to a
gross loss of $53.9 million for the year ended December 31, 2007. The decrease in gross
loss was mainly attributable to the 9.0% increase in revenues and the lower depreciation
and cost reduction plan as described above. A primary reason for the fact we have incurred
gross loss is attributed to our manufacturing facilities which did not operate
at their maximal utilization rates, which utilization rates were further reduced by a rate reduction
trend commenced in the third quarter of 2008 following the worldwide economic downturn. As
a result, and because fixed costs (including depreciation) represent a substantial portion
of the operating costs of semiconductor manufacturing facilities, our revenue could not
cover the entire cost of goods (including depreciation) and we operated at a gross loss.

Research
and Development. Research and development expenses for the year ended December 31,
2008 amounted to $15.0 million as compared to $13.8 million for the year ended December
31, 2007.

Marketing,
General and Administrative. Marketing, general and administrative expenses for the
year ended December 31, 2008 amounted to $33.2 million as compared to $31.6 million for
the year ended December 31, 2007.

The
relatively modest increase in research and development and marketing, general and
administrative expenses, despite including the results of Jazz commencing September 19,
2008, was achieved due to the previously announced cost reduction plans.

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Write-off
of in-process research and development and merger related costs, these one-time
expenses, resulting from the merger with Jazz, amounted to $2.3 million in the year ended
December 31, 2008.

Fixed
Assets Impairment. Fixed assets impairment amounted to $120.5 million in the year
ended December 31, 2008. Due to the current worldwide economic downturn, the prevailing
market conditions in the semiconductor industry, global decreased demand, downward price
pressure and excess inventory, we determined that circumstances indicate that the carrying
amount of our machinery and equipment may not be recoverable. We estimated the fair value
of our machinery and equipment and determined that the carrying amounts exceed the fair
values by $120.5 million and recorded a charge in that amount in 2008. The fair values of
the machinery and equipment were determined using expected cash flows discounted at a
discount rate commensurate with the risk involved in generating such cash flows.

Operating
Loss. Operating loss for the year ended December 31, 2008 was $218.1 million, compared
to $99.3 million for the year ended December 31, 2007. The increase in the operating loss
is mainly due to the above mentioned one time fixed assets impairment in the amount of
$120.5 million. Operating loss excluding one-time items, which are comprised of $120.5
fixed assets impairment and $2.3 million write off of in process research and development
and merger related costs, decreased by $4.1 million as compared to the year ended December
31, 2007.

Financing
Expense, Net. Financing expenses, net for the year ended December 31, 2008 were $17.6
million compared to financing expenses, net of $35.0 million for the year ended December
31, 2007. This decrease is mainly due to Towers debt restructuring detailed below,
measuring at fair value of Towers loans and convertible debentures and due to lower
interest on our long-term debt following the LIBOR rate decrease.

Gain
On Debt Restructuring. Gain on debt restructuring resulting from Towers
definitive agreements with its Banks and Israel Corp. (sometimes referred to herein as
TIC) as detailed below, was $130.7 million for the year ended December 31,
2008.

Other
Income (Expense), Net. Other expense, net, for the year ended December 31, 2008 was
$0.9 million compared to other income, net of $0.1 million for the year ended December 31,
2007.

Loss.
          Loss for the year ended December 31, 2008 was $106.4 million, compared to
$134.2           million for the year ended December 31, 2007. This decrease is
attributable           mainly to $130.7 million gain on debt restructuring, $4.1million
decrease in the           above operating loss excluding one-time items and $17.4 million
decrease in           finance expenses which was partially offset by $120.5 million fixed
assets           impairment and $2.3 million one-time write-off of in-process research
and           development and merger related costs.

# Year Ended December 31,
2007 compared to Year Ended December 31, 2006

Revenues.Revenues for the year ended December 31, 2007 increased by 23.2% to $230.9
          million from $187.4 million for the year ended December 31, 2006. This $43.4
          million increase was mainly attributable to a higher volume of wafer shipments.

Cost
of Total Revenues.Cost of total revenues for the year ended December 31, 2007
amounted to $284.8 million, compared with $267.5 million for the year ended December 31,
2006. This increase of 6.4% in cost of revenues, which is relatively low in relation to
the 23.2% increase in sales, which is mainly attributable to the Companys cost
structure of high level of fixed costs as a result of which with an increased volume of
sales the Company can benefit and achieve reasonable margins for each incremental dollar
of revenue. In addition we had a reduction in depreciation and amortization expenses as
result of our reassessment of the estimated useful lives of our machinery and equipment,
as described above. This change has been accounted for as a change in estimate and is
applied prospectively. Total depreciation and amortization expenses included in cost of
revenues was approximately $137 million for the year ended December 31, 2007, as compared
to approximately $155 million for the year ended December 31, 2006, mainly attributable to
the change in useful lives.

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Gross
Loss. Gross loss for the year ended December 31, 2007 was $53.9 million compared to a
gross loss of $80.1 million for the year ended December 31, 2006. The decrease in gross
loss was mainly attributable to the 23.2% increase in revenues as compared to a 6.4%
increase in cost of revenues as described above. A primary reason for the fact we have
incurred gross loss is attributed to our manufacturing facilities which did not operate at
their maximal utilization rates. As a result, and because fixed costs (including
depreciation) represent a substantial portion of the operating costs of semiconductor
manufacturing facilities, our revenue could not cover the entire cost of goods (including
depreciation) and we operated at a gross loss.

Research
and Development. Research and development expenses for the year ended December 31,
2007 decreased to $13.8 million from $15.0 million for the year ended December 31, 2006
mainly attributed to decreased depreciation.

Marketing,
General and Administrative Expenses.Marketing, general and administrative expenses
for the year ended December 31, 2007 increased to $31.6 million from $25.8 million for the
year ended December 31, 2006. The increase is primarily due to stock based compensation
expenses and increased sales expenses deriving directly from the higher revenues mentioned
above.

Operating
Loss.Operating loss for the year ended December 31, 2007 was $99.3 million, compared
to $121.0 million for the year ended December 31, 2006. The decrease in the operating loss
is attributable mainly to the decrease in the gross loss described above.

Financing
Expense, Net.Financing expense, net for the year ended December 31, 2007 was $35.0
million compared to financing expenses, net of $47.6 million for the year ended December
31, 2006. This decrease is mainly due to the consummation of the debt restructuring with
Towers banks which was closed in the third quarter of 2006, pursuant to which,
approximately 30% of our then outstanding loans were converted into capital notes and the
interest rate applicable to the interest payments was reduced from the three month LIBOR
rate plus 2.5% to the three month LIBOR rate plus 1.1%.

Other
Income, Net.Other income, net, for the year ended December 31, 2007 was $0.09 million
compared to $0.6 million for the year ended December 31, 2006.

Loss.
          Loss for the year ended December 31, 2007 was $134.2 million, compared to
$167.9           million for the year ended December 31, 2006. This decrease is primarily
          attributable to the decrease of $21.6 million in the operating loss and to the
          $12.6 million decrease in financing expenses described above.

# Impact of Inflation and
Currency Fluctuations

The
dollar cost of our operations in Israel is influenced by the timing of any change in the
rate of inflation in Israel and the extent to which such change is not offset by the
change in valuation of the NIS in relation to the dollar. During the year ended December
31, 2008, the exchange rate of the dollar in relation to the NIS decreased by 1.1%, and
the Israeli Consumer Price Index, or CPI, increased by 3.8% (during the year ended
December 31, 2007 there was a decrease of 9.0% in the exchange rate of the dollar in
relation to the NIS and an increase of 3.4% in the CPI).

We
believe that the rate of inflation in Israel has not had a material effect on our business
to date. However, our dollar costs will increase if inflation in Israel exceeds the
devaluation of the NIS against the dollar, or if the timing of such devaluation lags
behind inflation in Israel.

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Almost
all of the cash generated from our operations and from our financing and investing
activities is denominated in U.S. dollars and NIS. Our expenses and costs are denominated
in NIS, U.S. dollars, Japanese Yen and Euros. We are, therefore, exposed to the risk of
currency exchange rate fluctuations.

Towers
and Jazzs bank loans mainly provide for interest based on a floating LIBOR rate, and
we are therefore exposed to interest rate fluctuations. From time to time, we engage in
various hedging strategies to reduce our exposure to some, but not all, of these risks and
intend to continue to do so in the future. However, despite any such hedging activity, we
are likely to remain exposed to interest rate fluctuations, which may increase the cost of
our business activities, particularly our financing expenses.

Part
of Towers debentures are denominated in NIS linked to the Israeli CPI and therefore
we are exposed to fluctuation in the NIS/dollar exchange rate. The dollar amount of our
financing costs (interest and currency adjustments) related to these debentures will
increase if the rate of inflation in Israel is not offset (or is offset on a lagging
basis) by the devaluation of the NIS in relation to the dollar. In addition, the dollar
amount of any repayment on account of the principal of these debentures will also
increase.

The
quantitative and qualitative disclosures about market risk are in Item 11 of this annual
report.

B. LIQUIDITY
AND CAPITAL RESOURCES

As
of December 31, 2008, we had an aggregate of $34.9 million in cash and cash equivalents
(including $27.6 million of Jazzs cash and cash equivalents) as compared to $44.5
million we had as of December 31, 2007.

During
the year ended December 31, 2008, we raised $52.0 million through long-term loans, $20.0
million through capital notes in connection with the definitive agreements with
Towers banks and TIC detailed below and generated a net amount of $12.6 million from
our operating activities. The above mentioned liquidity resources financed the capital
expenditure investments we made during the year ended December 31, 2008, which aggregated
$87.2 million, mainly in connection with the purchase and installation of equipment for
the ramp up of Fab 2 and the principal repayment of convertible debentures in the amount
of $8.2 million.

As
of December 31, 2008, we presented in our balance sheet an aggregate of $216.8 million of
debentures (the carrying amounts), of which $8.3 million are presented in current
maturities and were fully paid in January 2009.

As
of December 31, 2008, we presented in our balance sheet loans from banks in the amount of
$230 million, as compared to $380 million as of December 31, 2007. $7 million out of the
$230 million loans were presented as short-term. This reduction in bank loans is mainly
attributed to the definitive agreements signed with Towers banks and TIC in
September 2008, according to which a material portion of Towers debt was converted
into equity equivalent capital notes.

Pursuant
to these agreements: (i) $250 million of Towers debt was converted into equity
capital notes, exercisable into Towers ordinary shares at $1.42 per share; (ii) TIC
invested $20 million in the Company in exchange for equity equivalent capital notes of the
Company exercisable into Towers ordinary shares at $0.71 per share. Furthermore, TIC
committed to invest up to an additional $20 million under certain conditions. In January
2009, such conditions were satisfied and TIC invested said amount. In consideration for
such investment, TIC received an amount of equity equivalent capital notes, exercisable
into Towers ordinary shares, at a price of $0.26 per share. In addition, (i) the
commencement date for the repayment of the remaining principal of the banks loans
was postponed from September 2009 to September 2010, such that the outstanding loans shall
be repaid in 8 quarterly installments between September 2010 and June 2012; (ii) interest
payments owed to the banks and originally due September 2008 through June 2009 were added
to the remaining principal of the banks loans and will be paid in the same schedule;
(iii) the interest rate on the remaining principal of the banks loans will be LIBOR
plus 2.5% per annum; and (iv) the banks waived in full Towers compliance with
financial covenants through the end of 2008, which waiver was later further extended
by the banks until June 30, 2009.

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Until
conversion, the above mentioned equity equivalent capital notes have no voting rights, no
maturity date, no dividend rights, are not tradable, are not registered, do not carry
interest, are not linked to any index and are not redeemable. For further details
regarding the September 2008 definitive agreements with Towers banks and TIC see
 Fab 2 Agreements below. See also Notes 1, 12B and 16 to the
consolidated financial statements as of December 31, 2008.

During
the past years, we have experienced significant recurring losses, negative net cash flows
and an increasing accumulated deficit We are working in various ways to mitigate our
financial difficulties. Since the second half of 2005, we have increased our customer
base, mainly in Fab 2, modified our organizational structure to better address our
customers and to improve our market positioning, increased our sales activities, improved
our quarterly and yearly EBITDA and cash flow from operations, increased our installed
capacity level, raised funds and restructured our debt. See details in Notes 12B, 16A(3)
and 17F-J to the 2008 audited consolidated financial statements. We have also diversified
our customer base and strengthened our position in the industry through the merger with
Jazz.

The
current worldwide economic downturn and the prevailing adverse market conditions in the
semiconductor industry which commenced in 2008 (including global decreased demand,
downward price pressure, excess inventory, unutilized capacity and the lack of
availability of funding sources), may adversely affect our future financial results and
position, including our ability to support our on-going operations and growth plans. We
are working to mitigate the potential effect of this downturn through several measures,
including completing the execution of the previously announced cost reduction plan, which
is targeted at saving approximately $80 million on an annual run-rate, and exploring
alternative sources of funding (such as a possible sale and lease-back of a portion of our
real estate assets, sale of other fixed assets and/or intellectual property, licensing and
the receipt of all or part of pending grants from the Israeli Investment Center). There is
no assurance that we will be able to obtain sufficient funding from these or other sources
to allow us to maintain our ongoing activities and operations. See also Notes 12B, 16A(3),
16A(6) and 17 F-J to the 2008 audited consolidated financial statements.

For
implications on our operations if we do not obtain Investment Center approval or generate
increased levels of cash from operations or do not raise additional funding and if we
will not be in compliance with the repayment schedule under the amended facility agreement
and are unsuccessful in negotiating a revised repayment schedule, see Item 3. Key
Information  Risk Factors  Risks Affecting Our Business  If the
Investment Center will not release to us the pending and over-due grants ";
Our business requires a significant amount of financing, and our business may be
adversely affected if its sources of liquidity are unavailable or insufficient to fund its
operations, or if such sources will not be available; and If Tower fails to
comply with the repayment schedule".

# Fab 2 Agreements

Wafer Partner Agreement.

During
the years 2000 and 2001, we entered into various shares purchase agreements (Wafer
Partner Agreements) with Wafer Partners to partially finance the construction and
equipping of Fab 2. Pursuant to the Wafer Partner Agreements, the Wafer Partners agreed to
invest an aggregate of $250 million to purchase Ordinary Shares of the Company. According
to the Wafer Partner Agreements, we agreed, subject to certain conditions, to reserve for
each Wafer Partner a certain portion, and collectively approximately 50%, of Fab 2 wafer
manufacturing capacity for a period of 10 years ending January 2011.

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In
August 2006, we signed agreements with SanDisk, according to which: (i) SanDisk was
committed to purchase volume quantities of 0.13 micron wafers during 2007 and 2008 and
will have a right of first refusal for a portion of our 0.13 micron capacity in 2009; (ii)
SanDisk provided with a loan of approximately $10 million for the purpose of financing the
purchase of a portion of the equipment needed for 0.13 micron production. The loan bears
interest at three-month USD LIBOR plus 1.1%. In 2008 we amended the agreement mainly to
revise the terms of the loan repayments schedule. We granted SanDisk a first ranking
charge on the equipment purchased with the amounts borrowed.

Wafer
Credits. In connection with their investments in Fab 2, we issued to our wafer
partners non-transferable credits that may be used to reduce the cash amounts to be paid
by them when paying for wafers manufactured in Fab 2. These credits could generally be
used at a rate of 7.5% for purchases made through June 2005 and 15% for purchases made
thereafter. Our wafer partners, SanDisk, Alliance and Macronix, agreed that they would not
utilize any of their credits, for purchase orders of our wafer products until December 31,
2006. For orders placed from January 1, 2004 to December 31, 2006, each major wafer
partner was entitled, every quarter, to convert into our ordinary shares its wafer credits
that could have been utilized by such wafer partner against the actual payment of wafers
manufactured at Fab 2 during such quarter; otherwise, these credits will bear interest
payable every quarter at three-month LIBOR plus 2.5%. As of May 31, 2009, approximately
$16 million of accumulated wafer credits had been converted into an aggregate of 10.4
million ordinary shares. No material changes were done in 2008.

In
2006, we and one of the Primary Wafer Partners, entered into an agreement to extend the
date until which the credits could be utilized and would be subject to repayment if not so
utilized to December 2009. Further, according to the agreement, with respect to certain
orders placed until July 2006, and all orders placed thereafter through December 2009,
such unutilized advances bear interest at an annual rate equal to three-month USD LIBOR
plus 1.1%, payable at the end of each quarter, through December 2009.

All
of the ordinary shares issued to our wafer partners and Israel Corp. in connection with
their committed investments are subject to registration rights and to a shareholders
agreement applicable to shares held by SanDisk, Israel Corp. and Macronix.

Towers Credit
Facility

In
January 2001, Tower entered into a credit facility with two leading Israeli banks, Bank
Hapoalim B.M. and Bank Leumi Le-Israel, B.M., which was revised several times, under which
Tower borrowed an aggregate of $557 million to fund the establishment and equipping of Fab
2 (Facility Agreement). The Facility Agreement has been most recently amended
in September 2008, see below. As of December 31, 2008, Towers outstanding debt under
this Facility Agreement was approximately $206 million, which carries interest at a rate
of three-month USD LIBOR plus 2.5% per annum. For details, see below.

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September 2008 Definitive
Agreement with each of Towers Banks and TIC

In
September 2008, Tower signed and closed definitive agreements with its banks and TIC.
Pursuant to the agreements: (i) $200 million of Towers debt to the banks was
converted at a conversion rate of $1.42 into equity equivalent capital notes of the
Company, exercisable into Towers ordinary shares, representing two times the average
closing price per share on NASDAQ for the ten trading days prior to August 7, 2008
(the date of our public announcement regarding our debt conversion negotiations with
Towers banks and TIC); (ii) the commencement date for the repayment of the remaining
principal of the banks loans was postponed from September 2009 to September 2010,
such that the outstanding loans shall be repaid in eight equal quarterly installments
between September 2010 and June 2012; (iii) interest payments owed to the banks and
originally due September 2008 through June 2009 were added to the remaining principal of
the loans and will be paid according to the same schedule; (iv) the interest rate on the
remaining principal of the loans was set to be LIBOR plus 2.5% per annum; (v) in an
amendment to the facility agreement made in September 2006 Tower agreed to compensate the
banks for a reduction of the applicable interest rate on the loans of 1.4% effective as of
May 2006, by issuing them an additional number of shares (or equity equivalent capital
notes or convertible debentures) on or about December 31, 2010, calculated based on the
amount of decreased interest payments (the amounts payable in securities of the Company
may be payable in cash under certain circumstances and may be reduced in the event the
Company prepays any part of the outstanding loans). The amount of said compensation was
revised pro-rata to the decreased loans; (vi) the banks waived in full Towers
compliance with financial covenants through the end of 2008; (vii) $50 million of
debt owed by Tower to TIC (consisting of $30 million owed under a credit line loan
facility and $20 million of Towers convertible debentures series B held by TIC) were
converted at a conversion rate of $1.42 into equity equivalent capital notes exercisable
into Towers ordinary shares, representing two times the average closing price per
share on NASDAQ for the ten trading days prior to August 7, 2008; and (viii) TIC
invested $20 million in exchange for equity equivalent capital notes of the Company
exercisable into Towers ordinary shares at $0.71 per share, representing the average
closing price per share on NASDAQ for the ten trading days prior to August 7, 2008.

Furthermore,
TIC committed to invest up to an additional $20 million under certain conditions. In
January 2009, such conditions were satisfied and TIC invested said amount. In
consideration for such investment, TIC received an amount of equity equivalent capital
notes of the Company, similar to the other capital notes issued by the Company in
connection with the September 2008 amendment of the facility agreement. The above
mentioned equity equivalent capital notes have no voting rights, no maturity date, no
dividend rights, are not tradable, are not registered, do not carry interest, are not
linked to any index and are not redeemable. The equity equivalent capital notes are akin
to options with an exercise price of zero and are economically equivalent to the shares
issuable upon exercise, and are therefore classified in permanent equity.

As
part of the definitive agreements with Towers banks and TIC, in 2008 Tower issued
them equity equivalent capital notes exercisable into approximately 204 million ordinary
shares of the Company with total value of $115 million, calculated based on the price of
the stock of the Company around September 25, 2008, the date of signing and closing of the
definitive agreements. Such debt conversion resulted in a gain of $130.7 that was recorded
in our statement of operations for 2008. In January 2009 Tower issued equity equivalent
capital notes to TIC exercisable into approximately 77 million ordinary shares of the
Company with total value of $20 million

Compliance with Financial
Ratios and Covenants.

Under
the terms of its amended facility agreement, Tower must meet certain financial ratios,
including mainly financial covenants relating to quarterly sales, quarterly earnings
before interest, taxes, depreciation and amortization (quarterly EBITDA), life of
loan coverage ratio (which is the ratio of the Fab 2 net cash flow to the total debt
related to Fab 2 in any quarter), ratio of debt to EBITDA and ratio of equity to assets.
Under the terms of the amended facility agreement, satisfying these financial ratios and
covenants is a material provision. According to the facility agreement, as amended, the
banks waived Towers compliance with the financial covenants of the amended facility
agreement through June 30, 2009.

As
of May 31, 2009, Tower was in full compliance with all of the covenants under the amended
facility agreement, as amended to date.

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The
amended facility agreement provides that if, as a result of any default, Towers
banks were to accelerate the Companys obligations, we would be obligated, among
other matters, to immediately repay all loans made by the banks (which as of May 31, 2009
amounted to approximately $208 million) plus penalties, and the banks would be entitled to
exercise the remedies available to them under the amended facility agreement, including
enforcement of their liens against all of Towers assets.

Under
the terms of the amended facility agreement, (i) there are limitations on changes of
ownership which generally require that, TIC hold a minimum of approximately 48 million of
our ordinary shares (including shares issuable upon conversion of our convertible
debentures), and (ii) TIC and our three largest wafer partners nominate a majority of our
board of directors, subject to exceptions; and (iii) additional conditions and covenants,
including restrictions on incurring debt and a prohibition on the distribution of
dividends.

Banks Warrants

In
January 2001, Tower issued its banks warrants to purchase an aggregate of 400,000 ordinary
shares at a purchase price of $6.20 per share, which expired in January 2006. In December
2003, pursuant to the November 11, 2003 amendment to the credit facility, we issued the
banks additional five year warrants to purchase an aggregate of 896,596 ordinary shares at
a purchase price of $6.17 per share, exercisable until December 2008. In connection with
the July 2005 amendment to the credit facility, Tower issued the Banks five year warrants
to purchase an aggregate of 8,264,464 ordinary shares at a purchase price of $1.21 per
share. Under the terms of the September 2006 amendment to Towers amended facility
agreement, the warrants issued to the banks in 2003 and 2005 were extended to be
exercisable until September 2011. In connection with credit line agreements entered into
by Tower, its banks and TIC in 2007, Tower issued each of its banks and TIC warrants to
purchase an aggregate of 5,411,764. The credit line agreements were terminated as part of
the September 2008 definitive agreements with Towers banks and TIC, but the warrants
remain outstanding.

Investment by Israel
Corporation.

In
2006, in connection with an amendment to the facility agreement made on September 2006,
TIC invested $100 million in the Company for equity equivalent capital notes convertible
into 65.8 million of the Companys ordinary shares, at a price per share of $1.52
(which equals the average closing price during the 10 consecutive trading days prior to
signing the MOU). Such equity equivalent capital notes have no voting rights, no maturity
date, no dividend rights, are not tradable, are not registered, do not carry interest, are
not linked to any index and are not redeemable.

In
2007, in connection with Towers credit line agreements with its banks and TIC, Tower
received from TIC a credit line for loans of $30 million, which credit line agreement was
terminated as detailed above.

As
part of Towers September 2008 definitive agreements with its banks and TIC (i) an
amount of $50 million of debt owed by Tower to TIC was converted into equity equivalent
capital notes convertible into 35.2 million of Towers ordinary shares, representing
twice the average closing price per share on NASDAQ for the ten trading days prior to
August 7, 2008 and (ii) TIC invested $20 million in the Company in exchange for
equity equivalent capital notes of the Company convertible into 28.2 million of
Towers ordinary shares, representing the average closing price per share on NASDAQ
for the ten trading days prior to August 7, 2008. In January 2009, following an
additional investment by TIC of $20 million, Tower issued TIC equity equivalent capital
notes convertible into 76.9 million of Towers ordinary shares.

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The
equity equivalent capital notes contain provisions and terms which are similar to all
other capital notes issued by the Company, and are akin to options with an exercise price
of zero and are economically equivalent to the shares issuable upon exercise, and are
therefore classified in permanent equity.

Investment Center Grants

In
December 2000, the Israeli governments Investment Center approved an investment
program in connection with Fab 2. The approval certificate provides for government grants
equal to 20% of qualified investments up to $1.25 billion (i.e., up to $250 million),
subject to customary conditions and other conditions, including a requirement that
approximately 30% of our Fab 2 funding consist of paid-in-capital and that $550 million of
our Fab 2 funding be obtained by way of a credit facility from commercial banks (which
amount was subsequently reduced to $500 million with the consent of the Investment
Center). A lien is registered on Towers assets for the benefit of the Investment
Center which ranks subordinate to that of Towers banks. The approval certificate
also provides for a tax holiday on all taxable income related to Fab 2 for the first two
years of undistributed profitable operations. As of today, Tower received $165 million in
grants from the Investment Center, and satisfied in full the 30% requirement described
above. As long as we comply with the terms of our approval certificate, we are not
required to make royalty payments or any other payments under the terms of our Investment
Center grants.

To
be eligible to receive grants, we were required to invest minimum amounts on an annual
basis. We notified the Investment Center of our reduced rate of annual investments and in
July 2004 we received approval of our revised investment schedule from the Investment
Center. Israeli law limits the ability of the Investment Center to extend this time
limitation, unless approved through an expansion plan. In 2007, we submitted the final
report in relation to the investments made through 2005 totaling $825 million out of the
entire investment plan of $1.25 billion. The investment plan has been spread over
additional years and was not completed through 2005 primarily due to the external economic
conditions of the worldwide markets during 2001 through 2004 and the semiconductor
industry in particular following the September 11, 2001 terrorist attack, as well as the
outbreak of the Second Intifada (Israeli-Palestinian conflict) in September 2000, which
lasted until 2003. We have therefore been holding discussions with the Investment Center
to achieve satisfactory arrangements to approve an expansion plan to commence as of
January 1, 2006. On numerous occasions, we have received assurances and commitments from
governmental authorities that such an expansion plan will be approved pending positive
recommendation of an economical audit by the Industrial Bank of the Investment Center. In
2005, at the Investment Centers request, we submitted a revised business plan to the
Investment Center and its Industrial Bank for the period commencing January 1, 2006, for
which we have invested to date from January 1, 2006 through May 31, 2009, approximately
$225 million in Fab 2 plant and equipment, hence as of May 31, 2009, $45 million of cash
grants are pending and over-due. While the Industrial Bank of the Investment Center gave a
positive recommendation, the governmental approval process has been protracted and as a
result, in May 2008, we filed a petition with the Israeli High Court of Justice targeting
an approval certificate from the Investment Center for the expansion plan. On June 24,
2008 the respondents (the Israeli Ministry of Finance, the Israeli Ministry for Industry,
Trade and Labor and the Investment Center) filed their response to the petition and on
July 6, 2008, the Company filed its response to the response of the respondents. On July
7, 2008 the Court ordered that the proceeding be transferred to a three-judge panel. A
hearing has been scheduled for October 2009. In August 2008, the Investment Center
rejected our expansion plan request. In November 2008, we filed an appeal on this decision
to the Israeli Ministerial Committee, which is comprised of the Israeli Minister of
Finance and the Israeli Minister of Industry, Trade and Labor. A discussion of this
committee has not yet been held. In parallel, Tower is holding discussions with the
Investment Center and senior Governmental officials to obtain approval of the proposed
expansion plan and/or find an alternative process to release the pending and over-due $45
million of cash grants to Tower. Currently Tower cannot estimate when it will receive the
pending and over-due grants or when it will receive a formal response to its request for
an expansion plan to commence as of January 1, 2006 or if the Investment Center will
approve its request or will release the grants. If the Investment Center does not approve
our request for an expansion plan, or otherwise release the pending and over-due grants,
it will have a material adverse effect on Towers operations and financial condition,
and Tower would likely be required to obtain financing from alternative sources, , in
order to fund its on-going operations, which financing may not be available. Such
financing sources may include potential opportunities for sale and lease-back of a portion
of Towers real estate assets, sale of other fixed assets and/or intellectual
property licensing. See Item 3. Key Information  Risk Factors  Risks Affecting
Our Business Risk Factors  If the Investment Center will not release to us the
pending and over-due grants . . .

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Public Offerings and
Private Placements

Set
forth below is a description of public and private offerings of securities completed by us
since inception of our financing activity for Fab 2.

Public
Offering in Israel. January 2002. In January 2002, we completed a sale of units in
Israel, composed of NIS 110,579,800 principal amount of convertible unsecured subordinated
debentures and 2,211,596 options, resulting in net proceeds of approximately $21.5
million. Each debenture was NIS 1 in principal amount, and was adjusted to reflect
increases in the Israeli Consumer Price Index and carried interest at a rate of 4.7% per
annum, payable yearly commencing January 20, 2003. Principal was payable in four
installments beginning in January of 2006 through January 2009. In January 2009, the last
principal installment was paid, thereby redeeming the debentures in full. Prior to
December 31, 2008, the debentures were convertible into ordinary shares at a conversion
rate of one ordinary share per NIS 41 principal amount of debentures linked to the Israel
Consumer Price Index. Each option was exercisable into one ordinary share until January
20, 2006 at an exercise price of NIS 39, linked to the Israel Consumer Price Index. All
options expired and none have been exercised.

Rights
Offering 2002. In September 2002, we distributed to our shareholders and certain of
our employees in Israel and the United States rights to purchase ordinary shares and
warrants to purchase our ordinary shares. Substantially all of the rights exercised in
connection with the rights offering were exercised by Israel Corp. and our major wafer
partners. The rights offering resulted in net proceeds of approximately $19.7 million.

Public
Offering- January 2004. In January 2004, we completed an underwritten public offering
in the United States of 11.4 million of our ordinary shares at a price to the public of
$7.00 per share. The underwritten public offering resulted in net proceeds of
approximately $75.1 million.

Rights
Offering 2005. In December 2005, we distributed in the United States and Israel
transferable rights to purchase up to $50 million US dollar denominated debentures that
are convertible into up to approximately 45.5 million of our ordinary shares. In
connection with the exercise of these rights, through January 2006, we issued, in the
aggregate, 48.2 million convertible debentures, with each debenture of $1.00 in principal
amount, or a total of $48.2 million principal amount of debentures, which bear annual
interest at the rate of 5%. The principal of the debentures, together with accrued
interest, is payable in one installment on January 12, 2012. The debentures are
convertible into our ordinary shares at a rate of one ordinary share per $1.10 aggregate
principal amount of debentures. The debentures contained a price protection anti-dilution
provision, which expired in December 2006 without having been triggered. As part of
Towers September 2008 definitive agreements with its banks and TIC, described above,
a majority of the debentures held by TIC were converted into equity equivalent capital
notes. Subject to the terms of Towers amended facility agreement, we may at our
option announce the early redemption of the debentures, provided that the outstanding
aggregate balance of principal on account of the debentures is equal to or less than
$500,000. The debentures and interest thereon are unsecured and rank behind Towers
existing and future secured indebtedness. As of May 31, 2009 the outstanding principal
amount of the convertible debentures was $10.7 million.

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Public
Offering in Israel 2006. In June 2006, we completed an underwritten public offering of
our securities on the TASE in Israel resulting in gross proceeds of approximately NIS 140
million (approximately $31 million). In the offering the following securities were issued,
in the aggregate, (i) convertible debentures in the face amount of NIS 163,800,000
(approximately $36.7 million), (ii) 390,000 options each exercisable for three months
ended September 27, 2006 for NIS 100 principal amount of convertible debentures at an
exercise price equal to 85% of their face amount linked to the Israeli Consumer Price
Index (CPI), (iii) 10,920,000 warrants each exercisable for three months ended
September 27, 2006 for one ordinary share at a price of NIS 6.75 linked to the CPI and
(iv) 5,460,000 warrants each exercisable for three years ending June 30, 2009 for one
ordinary share at a price of NIS 7.40 (approximately $2.2), linked to the CPI. In
addition, the Company sold the same securities through a private placement to its market
maker in connection with the offering in consideration for NIS 526,000.

The
options and warrants described in (ii) and (iii) above expired in September 2006 and the
warrants described in (iv) above expired on June 28, 2009. The convertible debentures were
convertible into ordinary shares at a conversion rate of one ordinary share per NIS 8.40
(approximately $2.0) principal amount of convertible debentures. The conversion price was
subject to a reduction feature until June 2008, according to which the conversion rate of
the debentures was reduced in July 2008 from NIS 8.4 to NIS 4.31 (approximately $1.05).
The convertible debentures carry a zero coupon with principal payable at maturity in
December 2011, at a premium of 37% over face value, linked to the Israeli Consumer Price
Index (CPI). As of May 31, 2009 the outstanding principal amount of the convertible
debentures was approximately $54.3 million.

Private
Placement in Israel 2006. In the fourth quarter of 2006, we received and accepted
orders from Israeli investors in private placements for 11,615,000 Ordinary Shares and
5,227,500 warrants (Series 5 Warrants) in the aggregate. The price of the
Ordinary Shares was equal to the closing price of our shares on the Tel-Aviv Stock
Exchange prior to the relevant private placements and the warrants were issued for no
consideration. Total immediate gross proceeds amounted to approximately $22 million.

Each
of the Series 5 Warrants is exercisable at any time during a period of four years ending
in December 2010 at a price per share equal to NIS 9.48 (approximately $2.46) linked to
the CPI, reflecting a 25% premium to the market price of Towers shares at the date
the prospectus was published.

Private
placement in the US  March 2007. In March 2007, we completed a private placement
of our securities in which we sold ordinary shares and warrants for the purchase of
ordinary shares, raising a total of approximately $29 million in gross proceeds. In the
private placement, Towers issued approximately 18.8 million shares, warrants
exercisable for approximately 9.4 million shares at an exercise price of $2.04 (subject to
downward adjustments), exercisable until March 15, 2012 (Series I Warrants),
and short-term warrants exercisable for approximately 18.8 million shares at an exercise
price of $1.70, which was identical to the closing price of Towers ordinary shares
on the NASDAQ on the trading day immediately prior to the closing of the private placement
(Series II Warrants), exercisable until December 31, 2007. All of the Series
II Warrants have expired by their terms without exercise.

Long
term debentures issued in Israel  2007. In the second half of 2007, in a private
placement with Israeli investors, we accepted orders for 342 units, resulting in gross
proceeds of approximately NIS 167 million (approximately $40 million). Each unit was
comprised of: (i) long-term non-convertible bonds, repayable in six equal annual
installments between the dates of December 2011 and December 2016, with a face amount of
NIS 250,000 (approximately $59,700) and carrying an annual interest rate of 8 percent;
(ii) long-term convertible bonds repayable in December 2012 with a 17.2 NIS conversion
price (approximately $5.2) and with a face amount of NIS 262,500 (approximately $62,700),
carrying an annual interest rate of 8 percent, and (iii) 5,800 warrants, each exercisable
until 2011, for one ordinary share at a price of $2.04. Principal and interest on the
bonds, including the convertible bonds, are linked to the Israeli consumer price index, or
CPI, and were issued at 95.5% of par value. The conversion and exercise prices are subject
to reduction in certain limited circumstances. The conversion price was subject to a
reduction feature until June 2009, according to which the conversion rate of the
debentures will be reduced in July 2009 from NIS 17.2 to approximately NIS 4.15 and the
exercise price of the warrants will be reduced from $2.4 to $1.06.

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In
September 2007, we expanded our series of long-term debentures and warrants, by selling
12,118 units, each comprised of long-term non-convertible debentures, with a face amount
of NIS 2,500 (approximately $620), long-term convertible debentures, with a face amount of
NIS 2,625 (approximately $650), and 58 warrants. The debentures were issued at 90% of par
value and with the same terms as the debentures and the warrants issued in the private
placement. In this expansion, we raised gross proceeds of approximately $14 million.

On
January 2008 we expanded our series of long-term convertible debentures which were issued
at 85% of par value in consideration for gross proceeds of approximately $1.4 million. As
of May 31, 2009 the outstanding principal amount of the long-term convertible bonds amount
was approximately $34.9 million and the amount of long-term non-convertible bonds was
approximately $31.6 million.

Shelf
Registration StatementIn January 2008, we filed a shelf registration statement on
Form F-3 with the U.S. Securities and Exchange Commission, registering the possible offer
and sale from time to time of up to $40 million of securities which we may elect to offer
and sell during the three years following the effective date of the registration
statement. The registration form was declared effective in February 2008.

Jazz Loan Facility

On
September 19, 2008, Jazz Technologies entered into a second amended and restated loan
and security agreement, as parent guarantor, with Wachovia Capital Markets, LLC, as lead
arranger, bookrunner and syndication agent, and Wachovia Capital Finance Corporation
(Western), as administrative agent (Wachovia), and Jazz Semiconductor and
Newport Fab, LLC, as borrowers, with respect to a three-year secured asset-based revolving
credit facility for the total amount of $55 million, including up to $10 million for
letters of credit. On December 31, 2008, Wells Fargo acquired all of Wachovia Corporation
and its businesses and obligations.

Jazzs
borrowing availability varies according to the levels of the borrowers eligible
accounts receivable, eligible equipment and other terms and conditions described in the
loan agreement. The maturity date of the facility is September 19, 2011, unless
earlier terminated. Loans under the facility bear interest at a rate equal to, at
borrowers option, either the lenders prime rate plus a margin ranging from
0.25% to 0.75% or the LIBOR rate (as defined in the loan agreement) plus a margin ranging
from 2% to 2.5% per annum. The facility is secured by all of Jazzs assets. Borrowing
availability under the facility as of December 31, 2008 was $13.0 million in addition to
outstanding borrowings of $27.0 million and $2.0 million in letters of credit committed
under the facility on that date.

The
loan agreement contains customary covenants and other terms, including covenants based on
EBITDA (as defined in the loan agreement), as well as customary events of default. If any
event of default occurs, Wachovia may declare due immediately, all borrowings under the
facility and foreclose on the collateral. Furthermore, an event of default under the loan
agreement would result in an increase in the interest rate on any amounts outstanding. As
of December 31, 2008, Jazz was in compliance of all the covenants under this facility.

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As
of December 31, 2008, Jazz had borrowings of $27.0 million under its line of credit with
Wachovia and had $13.0 million of additional availability under this credit line. As of
December 28, 2007, Jazz had borrowings of $8.0 million under our line of credit with
Wachovia and had $37.1 million of additional availability under this credit line.

Jazzs
debt and obligations, including its obligations pursuant to the loan agreement, are not
being guaranteed by Tower.

Jazz Convertible Notes

Jazz
has outstanding an aggregate of $128.2 million principal amount of convertible notes which
bear interest at a rate of 8% per annum payable semi-annually and are due on December
2011. Jazz may redeem the Convertible Notes for cash on or after December 31, 2009 at a
redemption price equal to par plus accrued and unpaid interest plus a redemption premium
equal to 2% in the year beginning December 31, 2009 until December 31, 2010 and 0%
thereafter.

Pursuant
to the merger with Tower, each holder of the convertible notes immediately prior to the
merger, has the right to convert such holders note into Tower ordinary shares based
on an implied conversion price of approximately $4.07 per Tower ordinary share. As stated
above, Jazzs obligations under the convertible notes are not being guaranteed by
Tower.

Upon
conversion, Jazz has the right to deliver, in lieu of shares of Towers ordinary
shares, cash or a combination of cash and shares of Towers ordinary shares to
satisfy the conversion obligation. If Jazz elects to deliver cash or a combination of cash
and Tower ordinary shares to satisfy the conversion obligation, the amount of such cash
and Tower ordinary shares, if any, will be based on the trading price of Towers
ordinary shares during the 20 consecutive trading days beginning on the third trading day
after proper delivery of a conversion notice.

Upon
the occurrence of certain specified fundamental changes, the holders of the convertible
notes will have the right, subject to various conditions and restrictions, to require Jazz
to repurchase the convertible notes, in whole or in part, at par plus accrued and unpaid
interest to, but not including, the repurchase date. In addition, if Jazz undergoes
certain fundamental changes prior to December 31, 2009 Jazz may be obligated to pay a make
whole premium on convertible notes converted in connection with such fundamental change by
issuing additional shares of common stock upon conversion of the convertible notes.

In
connection with the merger of Jazz with Tower, the convertible notes were recorded at the
preliminary fair value of $108.6 million on the date of the acquisition by Tower. Jazz has
subsequently accreted $1.5 million in interest for the period from September 19, 2008
through December 31, 2008. As of December 31, 2008, $128.2 million in principal amount of
convertible notes remains outstanding.

Jazzs
obligations under the convertible notes are guaranteed by Jazzs wholly owned
domestic subsidiaries.

C. RESEARCH
AND DEVELOPMENT, PATENTS AND LICENSES

Our
research and development activities have related primarily to our process development and
have been sponsored and funded by us with some participation by the Israeli government.
Our research and development expenses for the years ended December 31, 2008, 2007 and 2006
were $15 million, $13.8 million and $15.0 million net of government participation of $1.7
million $2.6 million and $1.9 million respectively. Tower also incurred costs in
connection with the transfer of Toshiba and Freescale technology for use in Fab 2, some of
which have been amortized over the estimated economic life of the technology following the
commencement of production in Fab 2 during the third quarter of 2003 (see also in this
Item Critical Accounting Policies  Depreciation and Amortization).

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For
a description of our research & development policies and our patents and licenses, see
Item 4. Information on the Company-4.B. Business Overview.

D. TREND
INFORMATION

The
economic crisis that began in the middle of the third quarter of 2008 has caused a
significant decrease in the demand for semiconductor products. Recovery of this market
will depend on the recovery of the overall economy.

E. OFF-BALANCE
SHEET ARRANGEMENTS

We
are not a party to any material off-balance sheet arrangements except for purchase
commitments, standby letters of credit and guarantees detailed in section F below.

F. TABULAR
DISCLOSURE OF CONTRACTUAL OBLIGATIONS

The
following table summarizes our contractual obligations and commercial commitments as of
December 31, 2008:

|                                  | Payment Due
|--------------------------------- | -----------
|
|
|
|
|Contractual Obligations           |            
|Short term liabilities primarily  |            
|vendors and accounts payable (1)  |            
|Loans from banks (2)              |            
|Debentures (3)                    |            
|Operating leases                  |            
|Construction & equipment purchase |            
|agreements (4)                    |            
|Other long-term liabilities       |            
|Purchase obligations              |            
|                                  |            
|Total contractual obligations     |            
|                                  |            

| | (1) | Short-term
liabilities include primarily our trade accounts payable for           equipment and
services as well as payroll related commitments.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Loans
from banks include principal and interest payments in accordance with the           terms
of the credit facility agreements with the banks, as well as the estimated
          impact of our hedging transactions.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Debentures
include total amount of principal and interest payments for the           presented
periods.
| | --- | -------------------------------------------------------------------------------------------------------

| | (4) | Construction
& equipment purchase agreements include amounts related to           ordered
equipment that has not yet been received.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------

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In
addition to these contractual obligations, we have committed approximately $4.2 million
in standby letters of credit and guarantees to secure our Fab 2 and Jazz equipment
obligations.

The
above table does not include other contractual obligations or commitments we have, such as
undertakings pursuant to royalty agreements, commissions and service agreements. We are
unable to reasonably estimate the total amounts or the time table for such payments to be
paid under the terms of these agreements, as the royalties, commissions and required
services are a function of future revenues, the volume of business and hourly-based fees.
In addition, the above table does not include our liability with respect to our customers,
which as of December 31, 2008, amounted to approximately $16.7 million that may be
utilized by them against future purchases of products. We are unable to reasonably
estimate the total amounts that may be utilized by our customers since we can not
reasonably estimate their future orders in the periods set forth in the above chart.

|ITEM 6. |  | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
|------- |  | ------------------------------------------

A. DIRECTORS
AND SENIOR MANAGEMENT

Set
forth below is information regarding the members of our administrative, supervisory or
management bodies and our directors as of June 29, 2009.

|Senior Management     | Age |  | Title                                                                                                                                                       
|--------------------- | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|
|
|
|
|Russell C.  Ellwanger | 54  |  | Chief Executive Officer of Tower and Chairman of the Board of Directors of its wholly-owned subsidiaries, Tower Semiconductor USA, Inc and Jazz Technologies
|Oren Shirazi          | 39  |  | Chief Financial Officer, Vice President of Finance                                                                                                          
|Dr.  Itzhak Edrei     | 50  |  | Executive Vice President of Business Groups                                                                                                                 
|Charles A. Fox        | 53  |  | Senior Vice President of Sales and Corporate Marketing                                                                                                      
|Ephie Koltin          | 48  |  | Senior Vice President of Worldwide Operations                                                                                                               
|Dalit Dahan           | 41  |  | Vice President of Human Resources and IT                                                                                                                    
|Nati Somekh Gilboa    | 34  |  | Vice President , Chief Legal Officer and Corporate Secretary Jazz                                                                                           
|
|Rafi Mor              | 46  |  | Senior Vice President of Jazz and General Manager of Jazz Semiconductor site, Newport Beach (California)                                                    

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|Directors             | Age |  | Title                            
|--------------------- | --- |  | ---------------------------------
|
|
|
|
|Amir Elstein          | 54  |  | Chairman of the Board            
|Russell C.  Ellwanger | 54  |  | Director                         
|Nir Gilad             | 52  |  | Director                         
|Ron Moskovitz         | 46  |  | Director                         
|Kalman Kaufman        | 64  |  | Independent Director             
|Alex Kornhauser       | 63  |  | Independent and External Director
|Dana Gross            | 42  |  | Independent Director             
|Ilan Flato            | 53  |  | Independent and External Director
|Rami Guzman           | 69  |  | Independent Director             

Russell
C. Ellwanger  has served as our Chief Executive Officer since May 2005. Mr.
Ellwanger also serves as Chairman of the Board of Directors of our wholly-owned
subsidiaries, Tower Semiconductor USA, Inc. and Jazz Technologies, Inc. From 1998 to 2005,
Mr. Ellwanger served in various executive positions for Applied Materials Corporation,
including Group Vice President, General Manager of the Applied Global Services (AGS), from
2004 to 2005, Group Vice President, General Manager of the CMP and Electroplating Business
Group, from 2002 to 2004. Mr. Ellwanger also served as Corporate Vice President, General
Manager of the Metrology and Inspection Business Group, from 2000 to 2002, during which he
was based in Israel. From 1998 to 2000, Mr. Ellwanger served as Vice President of Applied
Materials 300-mm Program Office, USA. Mr. Ellwanger served as General Manager of
Applied Materials Metal CVD Division from 1997 to 1998 and from 1996 to 1997, Mr.
Ellwanger served as Managing Director of CVD Business Development, during which he was
based in Singapore. In addition, Mr. Ellwanger held various managerial positions in
Novellus System from 1992 to 1996 and in Philips Semiconductors from 1980 to 1992.

Oren
Shirazi  has served as our Chief Financial Officer since November 2004. Mr.
Shirazi joined us in October 1998 and served as our controller since July 2000, after
serving as vice controller since October 1998. Prior to joining us, Mr. Shirazi was
employed as an Audit Manager in the accounting firm of Ratzkovski-Fried & Co., which
merged into Ernst & Young (Israel). Mr. Shirazi is a Certified Public Accountant in
Israel (CPA). He has an MBA from the Graduate School of Business of Haifa University with
honors and a BA in economics and accounting from the Haifa University.

Dr.
          Itzhak Edrei  has served as our Executive Vice President of
          Business Groups since September 2008 after serving as Senior Vice President of
          Product Lines and Sales since August 2005. From August 2001 to August 2005 Dr.
          Edrei served as Vice President of Research and Development, having served as
          Director of Research and Development since 1996. From 1994 to 1996, Dr. Edrei
          served as our Device and Yield Department Manager. Prior to joining Tower, Dr.
          Edrei was employed by National Semiconductor as Device Section Head. Dr. Edrei
          earned his Ph.D. in physics from Bar Ilan University and his post-doctorate
from           Rutgers University.

Charles
A. Fox was appointed Senior Vice President, Worldwide Sales & Marketing in
September 2008 and previously served as Vice President of Sales and Marketing for Jazz
Semiconductor since July 2007. Mr. Fox served as Vice President of Worldwide Marketing and
Division General Manager at Xilinx. He also spent 10 years in various management positions
at Intel. Previously, Mr. Fox was CEO of KeyEye Communications. He also served as
President and CEO of Chameleon Systems and Vice President of Marketing for Cradle
Technologies. Mr. Fox earned both BSEE and MBA degrees with honors from the University of
Wisconsin, Madison and completed the AEA Executive program at Stanford University.

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Ephie
Koltin was appointed Senior Vice President of Worldwide Operations in June
2009, after serving as Vice President of Business Development since January 2009.
Previously Mr. Koltin served as Vice President Fab 1 since April 2007, and has served as
Test and Facility Manager since January 2008, after serving as Vice President of Business
Development since August 2005, as Vice President, General Foundry and Mixed Signal
Technology since 2003 and as Senior Director, FAB 2 Process Engineering since 2000.
From 1995 to 1999, Mr. Koltin served in several senior positions as Director, NVM
Technology, CIS technology and ERS manager, Fab 1. Prior to joining Tower, Mr. Koltin was
employed at National Semiconductor and the Technion  Israel Institute of Technology.
Mr. Koltin holds a B.Sc. in Mechanical Engineering and M.Sc. in Materials Engineering from
the Technion  Israel Institute of Technology.

Dalit
Dahan  serves as Vice President of Human Resources and was appointed IT
Manager in January 2008, after serving as Vice President of Human Resources since April
2004. Ms. Dahan joined us in November 1993 and served as Personnel Manager since April
2000, after having served as Compensation & Benefits Manager and in various other
positions in the Human Resources Department. Prior to joining us, Ms. Dahan served as
Manager of the North Branch of O.R.S  Manpower Company for 3 years. Ms. Dahan holds
a bachelors degree in social science from Haifa University and an MBA from the
University of Derby.

Nati
Somekh Gilboa  was appointed as Vice President, Chief Legal Officer and
Corporate Secretary in September 2008, after serving as Corporate Secretary and General
Counsel since March 2005, and as  Associate General Counsel since May
2004. From 2001 to 2004, Ms. Somekh Gilboa was employed by Goldsobel & Kirshen, Adv.
Ms. Somekh Gilboa holds an LL.M. and J.D. from Boston University and a B.A. from
Johns Hopkins University. She is a member of the Israeli Bar Association and the New York
bar.

Rafi
Mor  was appointed as Senior Vice President and General Manager of Jazz
Semiconductor (Towers wholly-owned subsidiary) Newport Beach (California) Site in
September 2008. Previously, Mr. Mor served in Tower Semiconductor Ltd. as Vice President
of Business Development since April 2007, after serving as Vice President and Fab 2
Manager since August 2005, and as Fab 1 Manager since March 2003. From November 2000 to
March 2003, Mr. Mor served as Senior Director of Process Device & Yield of Fab 1. From
1998 to 2000, Mr. Mor served as Director of Equipment Reliability & Support of Fab 1.
Previously, Mr. Mor was employed by National Semiconductor in various engineering and
management capacities. Mr. Mor holds masters and bachelors degrees in chemical
engineering from Ben Gurion University.

Amir
Elstein  was appointed as Chairman of the Board in January 2009. Mr. Elstein
serves as a member of the Board of Directors of Teva Pharmaceutical Industries Ltd., and a
member of the Board of Directors of Israel Corporation Ltd.  Mr. Elstein serves as
Chairman of the Board of Governors of the Jerusalem College of Engineering. He also serves
a chairman/member of the board of several academic, scientific and educational, social and
cultural institutions. Mr. Elstein was a member of Teva Pharmaceutical Industries senior
management team from 2005 to 2008, where most recently he held the position of the
Executive Vice President at the Office of the CEO, overseeing Global Pharmaceutical
Resources. Prior thereto, he was an executive at Intel Corporation, where he worked for 23
years, eventually serving as General Manager of Intel Electronics Ltd., an Israeli
subsidiary of Intel.  Mr. Elstein received his B.Sc. in Physics and Mathematics from
the Hebrew University in 1980 and his M.Sc. in the Solid State Physics Department of
Applied Physics from the Hebrew University in 1982. In 1992, Mr. Elstein received his
diploma of Senior Business Management from the Hebrew University.

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Nir Gilad has served as a director since May 2007. Mr. Gilad has served as Chief
Executive Officer of Israel Corp. since June 2007; he previously served as Vice-Chief
Executive Officer of the Israel Corporation from May 2006 to May 2007. From 2004-2006, Mr.
Gilad served as Vice-Chief Executive Officer of Migdal Holdings Insurance and Financings
Ltd., Chief Executive Officer of Migdal Investment Management 2001 Ltd. and chairman of
Migdal Capital Markets Ltd. In addition, from 1999-2003, Mr. Gilad served as General
Comptroller of the Treasury Office of the State of Israel. Throughout the years, Mr. Gilad
was a member and chairman of several boards of directors. Mr. Gilad holds a B.A. in
Economics and Agricultural Management in Natural Sciences from the Hebrew University of
Jerusalem and an M.A. in business administration from Bar Ilan University.

Ron
Moskovitz has served as a director since October 2007.  Mr. Moskovitz
is the CEO of Quantum Pacific Advisory Limited, a UK based company.  From July 2002
until November 2007, Mr. Moskovitz served as Senior Vice President and Chief Financial
Officer of Amdocs Limited. From 1998 until July 2002, Mr. Moskovitz served as Vice
President of Finance of Amdocs Limited.  Between 1994 and 1998, Mr. Moskovitz served
in various senior financial positions in Tower Semiconductor Ltd.  Mr. Moskovitz
serves as a member of the Board of Director of Israel Corporation Ltd.  Mr. Moskovitz
is a certified public accountant in Israel. He holds a B.A. in accounting and economics
from Haifa University and an MBA from Tel-Aviv University.

Kalman
Kaufman has served as a director and as a member of our Audit Committee since
August 2005 and as a member of our Stock Option and Compensation Committee since May 2008.
Mr. Kaufman also served as Corporate Vice President at Applied Materials from 1994 to
2005. Between 1985 and 1994, Mr. Kaufman served as President of KLA Instruments Israel, a
company he founded, and General Manager of Kulicke and Soffa Israel. Mr. Kaufman is
currently the Chairman of Solgel Nanotechnology and is a member of several boards of
directors. He holds engineering degrees from the Technion  Israel Institute of
Technology.

Alex
Kornhauser has served as an independent and external director since August
2008. Mr. Kornhauser serves as Senior VP, GM of Manufacturing at Numonyx Corporation since
March 2008. From January 1978 to March 2008, Mr. Kornhauser held many positions at Intel
Corporation from design engineer, project manager, department manager, engineering manager
and general manager of certain groups, segments and plants. More specifically, from August
2000 to May 2007 he served as Intel Israel Site GM, from January 2006 until March 2008 he
served as VP of the Flash Memory Group, from December 2004 to December 2005 Mr. Kornhauser
served as VP of TMG NVM Strategic Segment, from January 2001 to November 2004 he served as
VP of TMG F18 Plant Manager and from January 1996 to December 2000 he served as F18
General Manager. Mr. Kornhauser holds a B.S. in Electronics from Bucharest Polytechnic
Institute in Romania.

Dana
Gross has served as an independent director since November 2008.  Dana
is a Venture Partner at Camel Ventures, a leading Israeli Venture Capital firm. From
2006 to 2008, Ms. Gross was a Senior VP, Israel Country Manager at SanDisk
Corporation.  From 1992 to 2006, Ms. Gross held various senior positions at
M-Systems, including Chief Marketing Officer, VP World Wide Sales, President of M-Systems
Inc. (US Subsidiary) and CFO, VP Finance and Administration.  In addition, Ms. Gross
served as a director of M-Systems Ltd., Audiocodes Ltd. and PoweDsine Ltd.  Ms.
Gross holds a B.Sc. in Industrial Engineering from Tel-Aviv University and an M.A. in
business administration from San Jose State University.

Ilan
Flato has served as an independent and external director since April 2009.
Mr. Flato serves as a Senior Non-Executive Director of Emblaze Ltd. since April 2006.
Until 2004, Mr. Flato served as the VP for planning, economics and online banking in
United Mizrahi Bank and as the Chief Economist of the bank. From 1992 and 1996, Mr. Flato
served as the Economic Advisor to the Prime Minister of Israel. Prior to this position,
Mr. Flato served in the Treasury Office as the deputy director of the budget department.
In addition, Mr. Flato served as a member of the board of directors of many government
owned companies. Mr. Flato holds a B.A. in Economics and Work Relationships from Tel-Aviv
University and a Masters in Law from Bar-Ilan University.

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Rami
Guzman has served as a director since February 2009. Mr. Guzman is a
director of Bank Leumi Le-Israel, he is a director in several IT companies and serves as
consultant to IT and telecom companies. Mr. Guzman held various senior positions at
Motorola Inc. and Motorola Israel Ltd. since 1985, including VP of Motorola Inc. and
Director of Motorola Israel Ltd. In addition, until July 2004, Mr. Guzman was the CFO of
Motorola Israel Ltd. Prior to joining Motorola, Mr. Guzman worked for the Ministry of
Finance first as senior assistant and deputy to the Director of the Budget and then as
Government-wide MIS and IT Commissioner. Mr. Guzman holds a B.A. in Economics (1963) and
an M.A. in Business and Public Administration (1969) from the Hebrew University of
Jerusalem. He was a Research Fellow at Stanford University and Stanford Research
Institute, California, USA, and completed Ph.D. studies at the Hebrew University of
Jerusalem.

B. COMPENSATION

For
the year ended December 31, 2008, we paid to all our directors and senior management, as a
group, an aggregate of $3.1 million, in salaries, fees and bonuses. The total amount set
aside or accrued in the year ended December 31, 2008 to provide for severance, retirement
and similar benefits for such persons was $0.5 million.

On
December 21, 2008 the Board of Directors approved to reduce the payment of annual fees and
participation fees (per meeting) to the Independent Directors in both cases to the minimum
permitted under applicable Israeli law and regulations plus 30% of the gap between the
minimum and the maximum permitted under applicable Israeli law and regulations.

During
2001, Towers Audit Committee, Board of Directors and shareholders approved a stock
option plan which provides for the grant to our Board members of options to purchase up to
400,000 ordinary shares. During 2007, we granted 80,000 options to our directors under
this plan at a weighted average exercise price of $1.74. As of May 31, 2009, 120,000
options to purchase ordinary shares were outstanding under this plan, with a weighted
average exercise price of $1.58. These options vest over a four-year period, according to
various vesting schedules and are generally not exercisable following the fifth
anniversary of their vesting date.

On
January 31, 2007, our shareholders approved, following our Board of Directors and
Audit Committee approvals, the grant to each independent director of the Company who is
not affiliated with our major shareholders, and is not an employee of the Company, initial
options to purchase Ordinary Shares that equal 150,000 less the number of unvested options
to purchase Ordinary Shares held by such independent director as of the date of the
shareholders meeting. These initial options vest over three years, one third on the
first month anniversary of the date the shareholders approved the grant, and thereafter,
the remaining two-thirds pro-rata on a monthly basis over the remaining two years until
fully vested.

Each
new independent director appointed will be granted 150,000 options to purchase Ordinary
Shares, exercisable at the closing price of our shares on the NASDAQ on the trading day
immediately prior to the relevant date of appointment, with the same vesting terms as the
initial grants.

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Upon
each third anniversary of a previous grant of options to an independent director, each
such Independent Director shall be granted an additional 150,000 options to purchase
Ordinary Shares, which will vest over 3 years on a monthly basis until fully vested. The
exercise price per each such option shall be the closing price of our shares on the NASDAQ
on the trading day immediately prior to the relevant grant date. Subject to certain
conditions, the options that have vested shall be exercisable by an independent director
for a period of ten years following the date on which the relevant options, as the case
may be, first vested. So long as this option plan remains in effect, no future grants will
be made to independent directors under the 2001 plan mentioned above. During 2008, we
granted 450,000 options to our independent directors under this plan at a weighted average
exercise price of $0.54. As of May 31, 2009 1,013,328 options were outstanding under the
plan with a weighted average exercise price of $0.80.

In
April 2005, Towers Board of Directors approved the grant of options to purchase up
to 1,325,724 of our ordinary shares (which represented 1.6% of our issued and outstanding
shares as of June 30, 2006) to Russell Ellwanger, our then newly-appointed Chief Executive
Officer, who was also appointed as a director, which was further approved by our
shareholders in October 2005. These options are exercisable at an exercise price of $1.56,
which was the closing market price of our shares on the last trading day prior to the
board approval of the grant. These options vest over a four-year period, with 25%
vesting over each year of employment. The options granted are exercisable for a period of
ten years from the date of grant.

In
addition, in May 2006, Towers Audit Committee and Board of Directors approved the
grant of options to Mr. Ellwanger in addition to the options granted to him in April 2005,
such that in total, he will hold options to purchase shares that represent 4% of our
issued and outstanding shares on a fully diluted basis during the two-year period
beginning May 16, 2006 (the date of the approval of the Audit Committee). This was further
approved by our shareholders on September 28, 2006. The exercise price of the initial
grant of approximately 4.3 million additional options was $1.45, the 90 day average
closing price of our shares prior to May 17, 2006 (the date of the Board of
Directors approval). In future dilutive events following May 2006, additional
options were granted to the CEO with an exercise price equal to the price per share of the
newly issued securities. The vesting period of the new options will be identical to the
vesting period of the existing options. As of May 31, 2009, a total of 14,861,812 options
were outstanding to our CEO at a weighted average exercise price of $1.65.

On
January 31, 2007, our shareholders approved: (i) an eight percent (8%) increase in Mr.
Ellwangers annual base salary from $350,000 to $378,000, effective January 1, 2007;
and (ii) a performance-based bonus of up to $525,000 for the year ending December 31,
2006.

In
December 2007 our shareholders approved: (i) the procurement of a life insurance policy
for Mr. Ellwanger; (ii) the payment to Mr. Ellwanger of an annual salary (together with
social benefits) of approximately $505,950, effective as of April 1, 2007; (iii) the
reimbursement of Mr. Ellwanger for the difference, if any, between: (a) payments made by
him, or on his behalf, to the Israeli tax authorities in respect of his aggregate base
salary and performance-based bonuses from the Company, and (b) the amount that he would
have been required to pay to the United States tax authorities had he been subject to
United States taxation in respect of such amounts; (iv) the re-imbursement of Mr.
Ellwanger for expenses associated with his relocation to Israel of up to approximately
$280,000 on an annual basis; and (v) a performance-based bonus of up to $408,240 for the
year ended December 31, 2007.

In
August 2008 our shareholders approved (i) an increase in Mr. Ellwangers annual base
salary from $505,950 (including social benefits) to $546,765 (including social benefits),
effective as of January 1, 2008;(ii) a performance-based bonus for Mr. Ellwanger up to
$673,596 for the year ending December 31, 2008.

In
May 2006, Towers board of directors further approved the allocation of additional
options to be made available for grant to Towers employees if the total number of
employee options, including the options to our CEO and senior management, during the 24
months period ended May 2008, will represent less than 8% of our shares on a fully diluted
basis

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During
2008, we granted a total of 1,394,000 options to purchase ordinary shares to our senior
managers as a group (excluding the options granted to our CEO described above). These
options have a weighted average exercise price of $0.92 per share with vesting periods
over four years and expire in 2018.

As
of May 31, 2009, options to purchase approximately 15,872,749 ordinary shares held by our
employees (excluding the options granted to our CEO and directors described above but
including our senior managers), with exercise prices ranging from $0.32 to $25, with
weighted average exercise price of $1.57 were outstanding under employees share options
plans. Also as of such date, 1,601,832 options were available for future grants under our
share options plans.

In
connection with the merger of Tower with Jazz in a stock for stock transaction, upon the
closing of the merger, each outstanding employee option to acquire one Jazz common stock
became exercisable for 1.8 ordinary shares of Tower. In connection thereto Tower issued
5,381,213 options.

In
November 2008, the Companys Audit Committee and Board of Directors approved the
Companys 2009 Employee Share Incentive Plan, subject to Shareholders approval,
which provides for the grant of options or restricted share units
(RSUs) to the Companys employees (including its CEO) and to the
employees of the Companys subsidiaries. This plan was approved by the Companys
shareholders on April 2009. The total options available for grant under the Plan will be
up to 28,292,881 options to our CEO and up to 28,292,881 options will be designated to our
employees and our subsidiaries employees. The amount of 28,292,881 options amounts
to 4% of the Companys diluted shares as of November 12, 2008, the date of the Board
of Directors approval. Notwithstanding the above, the amount of available options
for grant at any time will be reduced by the aggregate number of outstanding options under
previous employee options plans and under the previous CEO Share Option Plans. As of May
31, 2009 no incentive awards had been made under the plan.

Information
regarding amounts set aside or accrued by Tower and Jazz for severance pay and other
employee benefit plans in Note 15 to our consolidated financial statements is incorporated
herein by reference.

C. BOARD
PRACTICES

Our
Articles of Association provide that the Board of Directors shall consist of at least five
and no more than 11 members. All directors, except for external directors, hold office
until their successors are elected at the next annual general meeting of shareholders. Our
officers are appointed by the Board of Directors and (subject, in certain cases, to
employment agreement provisions that require 270 days notice of termination) continue to
serve at the discretion of the Board of Directors. The Board of Directors may grant the
CEO the power to appoint officers.

Our
Articles of Association provide that any director may, by written notice to us, appoint
another person to serve as an alternate director, and may cancel such appointment. Any
person who is not already a director may act as an alternate, and the same person may not
act as the alternate for more than one director at a time. The term of appointment of an
alternate director may be for one meeting of the Board of Directors or for a specified
period or until notice is given of the cancellation of the appointment.

None
of the members of the Board are entitled to receive any severance or similar benefits upon
termination of service with the Board of Directors.

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The
Israeli Companies Law  1999 (the Companies Law) requires Israeli
companies with shares that have been offered to the public in or outside of Israel to
appoint no less than two external directors. No person may be appointed as an external
director if the person or the persons relative, partner, employer or any entity
under the persons control, has or had, on or within the two years preceding the date
of the persons appointment to serve as external director, any affiliation with the
company or any entity controlling, controlled by or under common control with the company.
The term affiliation includes:

| |  | an
employment relationship;
| | - | ---------------------------

| |  | a
business or professional relationship maintained on a regular basis;
| | - | ----------------------------------------------------------------------

| |  | control;
and
| | - | ------------

| |  | service
as an office holder.
| | - | ----------------------------

A
person shall be qualified to serve as an external director only if he or she possesses
accounting and financial expertise or professional qualifications. At least one external
director must possess accounting and financial expertise. The conditions and criteria for
possessing accounting and financial expertise or professional qualifications were
determined in regulations promulgated by the Israeli Minister of Justice in consultation
with the Israeli Securities Authority. The regulations mandate that a person is deemed to
have expertise in finance and accounting if his or her education, experience
and qualifications provide him or her with expertise and understanding in business matters
 accounting and financial statements, in a way that allows him or her to understand,
in depth, the companys financial statements and to encourage discussion about the
manner in which the financial data is presented.

The
companys board of directors must evaluate the proposed external directors
expertise in finance and accounting, by considering, among other things, his or her
education, experience and knowledge in the following: (i) accounting and auditing issues
typical to the field in which the company operates and to companies of a size and
complexity similar to such company; (ii) a companys external public
accountants duties and obligations; (iii) preparing company financial statements and
their approval in accordance with the Companies Law and the Israeli Securities Law.

A
director is deemed to be professionally qualified if he or she meets any of
the following criteria: (i) has an academic degree in any of the following professions:
economics, business administration, accounting, law or public administration; (ii) has a
different academic degree or has completed higher education in a field that is the
companys main field of operations, or a field relevant to his or her position; or
(iii) has at least five years experience in any of the following, or has a total of five
years experience in at least two of the following: (A) a senior position in the business
management of a corporation with significant operations, (B) a senior public position or a
senior position in public service, or (C) a senior position in the companys main
field of operations. The board of directors here too must evaluate the proposed external
directors professional qualification in accordance with the criteria set
forth above.

The
declaration required by law to be signed by a candidate to serve as an external director
must include a statement by such candidate concerning his or her education and experience,
if relevant, in order that the board of directors may properly evaluate whether such
candidate meets the requirements set forth in the regulations. Additionally, the candidate
should submit documents and certificates that support the statements set forth in the
declaration.

No
person may serve as an external director if the persons position or other business
activities create, or may create, a conflict of interest with the persons
responsibilities as an external director or may otherwise interfere with the persons
ability to serve as an external director. If, at the time external directors are to be
appointed, all current members of the board of directors are of the same gender, then at
least one external director must be of the other gender.

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External
directors are to be elected by a majority vote at a shareholders meeting, provided
that either:

| |  | the
majority of shares voted at the meeting, including at least one-third of the shares held
by non-controlling shareholders that voted at the meeting, vote in favor of election of
the director; or
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
total number of shares held by non-controlling shareholders voted against the election of
the director does not exceed one percent of the aggregate voting rights in the company.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
initial term of an external director is three years and may be extended for additional
three year terms, subject to certain conditions. External directors may be removed only by
the same percentage of shareholders as is required for their election, or by a court, and
then only if the external directors cease to meet the statutory qualifications for their
appointment or if they violate their duty of loyalty to the company. Each committee of a
companys board of directors must include at least one external director.

Mr.
          Ilan Flato and Mr. Alex Kornhauser currently serve as our external directors.
          Mr. Kornhauser was appointed for an initial three-year term expiring in August
          2011 and Mr. Flato was appointed for an initial three-year term expiring in
          April 2012. Ms. Miri Katz resigned as an external director on August 2008 due
to           potential conflicts of interest in connection with her appointment to the
board           of directors of Bank Leumi.

An
external director is entitled to compensation, as provided in regulations adopted under
the Israeli Companies Law, and is otherwise prohibited from receiving any other
compensation, directly or indirectly, in connection with service provided as an external
director.

The
Companies Law requires public companies to appoint an audit committee. Mr. Ilan Flato, Mr.
Alex Kornhauser and Mr. Kalman Kaufman serve on Towers audit committee. The
responsibilities of the audit committee include reviewing the companys financial
statements, monitoring the companys independent auditors, identifying irregularities
in the management of the companys business and approving related party transactions
as required by law. An audit committee must consist of at least three directors, including
the external directors of the company. The chairman of the board of directors, any
director employed by or otherwise providing services to the company, and a controlling
shareholder or any relative of a controlling shareholder, may not be a member of the audit
committee. An employee, executive officer or director of a controlling shareholder of an
Israeli company may serve as a member of an audit committee under Israeli law, unless such
individual controls more than 50% of the controlling shareholder. Each of our external
directors are members of our audit committee.

Under
the Companies Law, the board of directors must appoint an internal auditor, who is
recommended by the audit committee. The role of the internal auditor is to examine, among
other matters, whether the companys actions comply with the law and orderly business
procedure. Under the Companies Law, the internal auditor may be an employee of the company
but not an office holder, an affiliate, or a relative of an office holder or affiliate,
and he may not be the companys independent auditor or its representative.

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The
board of directors has established a stock option and compensation committee. Mr. Alex
Kornhauser, Mr. Kalman Kaufman and Mr. Amir Elstein serve as the committee members. The
committee meets at least once a year. The primary function of this committee is to approve
our employee compensation policy and determine remuneration and other terms of employment
for our officers. In setting our remuneration policy, the committee considers a number of
factors including:

| |  | the
overall employment market environment;
| | - | ------------------------------------------

| |  | the
basic salaries and benefits available to comparable officers at comparable companies;
| | - | -----------------------------------------------------------------------------------------

| |  | the
need to attract and retain officers of an appropriate caliber;
| | - | ------------------------------------------------------------------

| |  | the
 need to  ensure  such  executives'  commitment  to the  future  success  of our  company
 by means of                   incentive schemes;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
performance of the officer; and
| | - | -----------------------------------

| |  | financial
and operating results of our company.
| | - | -----------------------------------------------

D. EMPLOYEES

The
following table sets forth for the last three fiscal years, the number of our employees
engaged in the specified activities.

|                                             | As of December 31,
|-------------------------------------------- | ------------------
|
|
|
|
|Process and product engineering, R&D, design |                   
|Manufacturing, operations                    |                   
|Manufacturing support                        |                   
|Administration, marketing, finance           |                   
|                                             |                   
|                                             |                   
|Total                                        |                   
|                                             |                   

---

| | *
As of December 31, 2008 includes employees of Tower and Jazz; as of December 31, 2007 and
2006 (prior to the merger date) includes only employees of Tower.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------

Except
for an arrangement regarding pension contributions, Tower have no collective bargaining
agreements with any of its employees. However, by administrative order, certain provisions
of the collective bargaining agreements between the Histadrut (General Federation of Labor
in Israel) and the Coordination Bureau of Economic Organizations, relating primarily to
the length of the work day, minimum wages, pension contributions, insurance for
work-related accidents, procedures for dismissing employees, determination of severance
pay and other conditions of employment are applicable to our employees. In accordance with
these provisions, the salaries of our employees are partially indexed to the Consumer
Price Index in Israel.

Under
the special collective bargaining agreement to which we are party, we are required to
contribute funds to an employees Managers Insurance fund and/or
pension fund. Such funds generally provide a combination of savings plans, insurance and
severance pay benefits to the employee, securing his or her right to receive pension or
giving the employee a lump sum payment upon retirement, under certain circumstances, if
legally entitled, upon termination of employment. To the Managers Insurance fund,
the employee usually contributes an amount equal to 5% of his or her wages and the
employer usually contributes an additional 13.3% to 15.8%. To the pension fund the
employee usually contributes an amount equal to between 5% and 6% of his or her wages and
the employer usually contributes an additional 13.7% to 17.3%. Israeli law generally
requires severance pay upon the retirement or death of an employee or termination of
employment without due cause. Under our special collective bargaining agreement, we are
exempt from such payment as long as, and for period during which, we contribute the above
mentioned benefits to such employees pension fund and/or Managers Insurance.

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A
significant portion of Jazzs employees at its Newport Beach, California fab are
represented by a union and covered by a collective bargaining agreement that expires in
December 2009. Jazz maintains a defined benefit pension plan for certain of its employees
covered by a collective bargaining agreement that provides for monthly pension payments to
eligible employees upon retirement. The pension benefits are based on years of service and
specified benefit amounts. In addition the bargaining agreement includes Postretirement
Medical Plan to certain employees For certain eligible bargaining unit employees who
terminate employment, the Company provides a lump-sum benefit payment.

E. SHARE
OWNERSHIP

All
of the persons listed above under the caption Directors and Senior Management
own ordinary shares and/or options to purchase ordinary shares. Except as described below,
none of such persons own shares and/or options amounting to 1% or more of the outstanding
ordinary shares. Information regarding our share option plans and warrants presented in
Note 17B to our consolidated financial statements is incorporated herein by reference.

|ITEM 7. |  | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
|------- |  | -------------------------------------------------

A. MAJOR
SHAREHOLDERS

The
following table and notes thereto set forth information, as of May 31, 2009, concerning
the beneficial ownership (as defined in Rule 13d-3 under the Securities Exchange Act of
1934, as amended), and on a diluted basis, of ordinary shares by any person who is known
to own at least 5% of our issued and outstanding ordinary shares. As of such date,
160,026,919 ordinary shares were issued and outstanding. The voting rights of our major
shareholders do not differ from the voting rights of other holders of our ordinary shares.
However, certain of our shareholders have entered into a shareholders agreement pursuant
to which they may be able to exercise control over matters requiring shareholder approval,
including the election of directors and approval of significant corporate transactions.

|Identity of Person or Group        | Amount
Owned (1) | Percent of
Class(1) | Percent of Class
(Diluted)(2)
|---------------------------------- | ---------------- | ------------------- | -----------------------------
|
|
|
|
|Israel Corporation Ltd. (3)        |                  |                     |                              
|SanDisk Corporation (3)            |                  |                     |                              
|Macronix International Co. Ltd.(3) |                  |                     |                              
|Bank Leumi Le-Israel, B.M          |                  |                     |                              
|Bank Hapoalim, B.M                 |                  |                     |                              

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| | (1) | Assumes
the holders beneficial ownership of all ordinary shares and all
          securities that the holder has a right to purchase within 60 days. Also assumes
          that no other exercisable or convertible securities held by other shareholders
          has been exercised or converted into shares of the Company.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Assumes
that all currently outstanding securities to purchase ordinary shares,           other
than those which cannot be calculated as of the date of this registration
          statement, have been exercised by all holders.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Pursuant
to a shareholders agreement among Israel Corp., SanDisk Corporation and
          Macronix Co. Ltd., each of Israel Corp., SanDisk Corporation and Macronix Co.
          Ltd. may be said to have shared voting and dispositive control over
          approximately 24% of the outstanding shares of Tower.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | Based
on information provided by Israel Corp., represents 14,260,504 shares           currently
owned by Israel Corp., 2,561,467 shares issuable upon conversion of           debentures,
206,092,833 shares issuable upon conversion of capital notes and           2,941,176
shares issuable upon the exercise of warrants at an exercise price per           share of
$2.04.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (5) | Based
on information provided by SanDisk, represents 15,878,972 shares currently
          owned by SanDisk and 3,181,818 shares issuable upon conversion of debentures.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (6) | Based
on information provided by Macronix, represents 8,773,395 shares currently
          owned by Macronix and 909,090 shares issuable upon conversion of debentures.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (7) | Based
on information provided by Bank Leumi, represents 96,409,377 shares           issuable
upon conversion of capital notes, 4,132,232 shares issuable upon the           exercise
of warrants at an exercise price per share of $1.21, 1,000,000 shares           issuable
upon exercise of warrants at an exercise price per share of $2.04 and           448,298
ordinary shares issuable upon exercise of warrants at an exercise price           per
share of $6.17.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (8) | Based
on information provided by Bank Hapoalim represents 96,409,377 shares           issuable
upon conversion of capital notes, 4,132,232 shares issuable upon the           exercise
of warrants at an exercise price per share of $1.21, 1,470,588 shares           issuable
upon exercise of warrants at an exercise price per share of $2.04 and           448,298
ordinary shares issuable upon exercise of warrants issued to Tarshish           Hahzakot
Vehashkaot Hapoalim Ltd at an exercise price per share of $6.17.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Pursuant
to a shareholders agreement dated January 18, 2001, among Israel Corp., Alliance
Semiconductor, SanDisk and Macronix, such parties have agreed, among other things, to vote
or cause to be voted all their respective shares for the election to the Board of
Directors of nominees designated by each party, nominees recommended by the Board, the
election of a designee of the Israel Corp. to serve as Chairman of the Board, unless
agreed to otherwise (as was agreed in January 5, 2009 with the appointment of Amir Elstein
as Chairman of the Board of Directors), and against the election of any other persons to
the Board of Directors. In addition, subject to certain exceptions, each shareholder
agreed to restrictions on the transfer of its shares, including certain rights of first
refusal.

As
of May 31, 2009, there were a total of 35 holders of record of our ordinary shares, of
which 22 were registered with addresses in the United States. Such United States record
holders were, as of such date, the holders of record of approximately 71% of our
outstanding ordinary shares. The number of record holders in the United States is not
representative of the number of beneficial holders nor is it representative of where such
beneficial holders are resident since many of these ordinary shares were held of record by
brokers or other nominees (including one U.S. nominee company, CEDE & Co., which held
approximately 60% of our outstanding ordinary shares as of said date).

- 71 -

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|B. | RELATED
PARTY TRANSACTIONS
|-- | --------------------------

Agreements
with Certain of our Wafer Partners and Israel Corp. We are party to several agreements
with our wafer partners, related to the financing of Fab 2 and manufacture of products as
described under the caption Fab 2 Agreements in Item 5. Operating and
Financial Review and Prospects Reference of this annual report and Note 11A to the
consolidated financial statements included in this annual report, which discussions are
incorporated by reference herein.

Agreements
with Israel Corp.Discussed under Item 5. Operating and Financial Review and
Prospects  B. Liquidity and capital resources and under Item 7. Major
Shareholders And Related Party Transactions  A. Major Shareholders, which
discussion is incorporated by reference herein.

Grant
of Options to our CEO and Director.Discussed under Item 6  Directors,
Senior Management and Employees  E. Share Ownership, which discussion is
incorporated by reference herein.

|C. | INTERESTS
OF EXPERTS AND COUNSEL
|-- | --------------------------------

Not
applicable.

|ITEM 8. |  | FINANCIAL
INFORMATION
|------- |  | ---------------------

|A. | CONSOLIDATED
STATEMENTS AND OTHER FINANCIAL INFORMATION
|-- | -------------------------------------------------------

Our
consolidated financial statements are incorporated herein by reference to pages following
the signature page of this Annual Report.

# Legal Proceedings

In
May 2008, Tower filed a petition with the Israeli High Court of Justice in which it asked
the Court to order that its expansion plan be brought before the relevant Israeli
governmental bodies for their respective approvals without delay. This petition was filed
after making repeated requests over an extended period of time and after Tower sent
letters in March, April and May of 2008 to the Israeli Ministry of Finance, the Israeli
Ministry for Industry, Trade and Labor and the Investment Center, in which we noted among
other things, that absent the expansion program being brought before the relevant
governmental bodies within a specified period of time, a petition would be filed with the
Court to compel the same. On May 29, 2008 the Court ordered that the respondents (the
Israeli Ministry of Finance, the Israeli Ministry for Industry, Trade and Labor and the
Investment Center) respond to Towers petition within 21 days of service of the
petition. On June 24, 2008 the respondents (the Israeli Ministry of Finance, the Israeli
Ministry for Industry, Trade and Labor and the Investment Center) filed their response to
the petition and on July 6, 2008, the Company filed its response to the response of the
respondents. In July, the Court ordered that the proceeding be transferred to a
three-judge panel. A hearing has been scheduled for October 2009. On August 2008, the
Investment Center rejected Towers expansion plan request. On November 2008, Tower
filed an appeal on this decision to the Israeli Ministerial Committee, which is comprised
of the Israeli Minister of Finance and the Israeli Minister of Industry, Trade and Labor.
A discussion of this committee has not yet been held. See also Item 3. Key Information
 Risk Factors  Risks Affecting Our Business If the Investment Center
will not release to us the pending and over-due grants".

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During
2008, an International Trade Commission (ITC) action was filed by Agere/LSI
Corporation (LSI), which alleged infringement by 17 corporations of LSIs
patent no. 5227335. Following the initial filing, LSI amended the ITC complaint requesting
to add the Company, Jazz and three other corporations as additional respondents. Jazz, the
Company and the other three corporations were added as additional respondents in the ITC
action in October 2008. The Company and Jazz are assessing the merits of this action and
cannot provide an estimate of any possible losses or predict the outcome thereof, which
could have a material and adverse effect on the Company and Jazzs business and
financial position. The Company and Jazz intend to vigorously defend the litigation.

In
connection with Jazzs aerospace and defense business, its facility security
clearance and trusted foundry status, the Company and Jazz are working with the Defense
Security Service of the United States Department of Defense (DSS) to develop
an appropriate structure to mitigate any concern of foreign ownership, control or
influence over the operations of Jazz specifically relating to protection of classified
information and prevention of potential unauthorized access thereto. In order to safeguard
classified information, it is expected that the DSS will require adoption of a Special
Security Agreement (SSA). The SSA may include certain security related
restrictions, including restrictions on the composition of the board of directors, the
separation of certain employees and operations, as well as restrictions on disclosure of
classified information to the Company. The provisions contained in the SSA may also limit
the projected synergies and other benefits to be realized from the merger of Jazz into the
Company. There is no assurance when, if at all, an SSA will be reached.

From
time to time we are a party to various litigation matters incidental to the conduct of our
business. There is no pending or threatened legal proceeding to which we are a party,
that, in the opinion of management, is likely to have a material adverse effect on our
future financial results or financial condition.

|B. | SIGNIFICANT
CHANGES
|-- | -------------------

Not
applicable.

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|ITEM 9. |  | THE
OFFER AND LISTING
|------- |  | ---------------------

Our
ordinary shares are listed and traded on the NASDAQ Global Market under the symbol
TSEM. In addition, in January 2001, our ordinary shares commenced trading on
the Tel Aviv Stock Exchange (TASE) under the symbol TSEM.

The
following table sets forth, for the periods indicated, the high and low reported sales
prices of the ordinary shares on the NASDAQ Global Market and Tel Aviv Stock Exchange:

|                    | NASDAQ Global Market | Tel Aviv Stock Exchange
|------------------- | -------------------- | -----------------------
|
|
|
|
|May 2009            |                      |                        
|April 2009          |                      |                        
|March 2009          |                      |                        
|February 2009       |                      |                        
|January 2009        |                      |                        
|December 2008       |                      |                        
|First quarter 2009  |                      |                        
|Fourth quarter 2008 |                      |                        
|Third quarter 2008  |                      |                        
|Second quarter 2008 |                      |                        
|First quarter 2008  |                      |                        
|Fourth quarter 2007 |                      |                        
|Third quarter 2007  |                      |                        
|Second quarter 2007 |                      |                        
|First quarter 2007  |                      |                        
|2008                |                      |                        
|2007                |                      |                        
|2006                |                      |                        
|2005                |                      |                        
|2004                |                      |                        

|ITEM 10. |  | ADDITIONAL
INFORMATION
|-------- |  | ----------------------

# Articles of Association;
Israeli Companies Law

Registration Number and
Purposes

Our
registration number with the Israeli Companies Registrar is 520041997. Pursuant to Section
4 of our Articles of Association (Articles), Towers objective is to
engage in any lawful activity.

Articles of Association

Our
Articles were adopted in November 2000, and as amended most recently on September 24,
2008, provide for an authorized capital of NIS 1,100 million divided into 1,100 million
ordinary shares. The objective stated in the Articles is to engage in any lawful activity.

We
have currently outstanding only one class of equity securities, our ordinary shares, par
value NIS 1.00 per share. Holders of ordinary shares have one vote per share, and are
entitled to participate equally in the payment of dividends and share distributions and,
in the event of liquidation of the Company, in the distribution of assets after
satisfaction of liabilities to creditors. No preferred shares are currently authorized.

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Our
Articles require that we hold our annual general meeting of shareholders each year no
later than 15 months from the last annual meeting, at a time and place determined by the
Board of Directors, upon at least 21 days prior notice to our shareholders. No
business may be commenced until a quorum of two or more shareholders holding at least 33
1/3% of the voting rights are present in person or by proxy. Shareholders may vote in
person or by proxy, and are required to prove title to their shares as required by the
Companies Law pursuant to procedures established by the Board of Directors. Resolutions
regarding the following matters shall be passed by an ordinary majority of those voting at
the general meeting:

| |  | amendments
to our Articles;
| | - | ---------------------------

| |  | appointment
and termination of our independent auditors;
| | - | --------------------------------------------------------

| |  | appointment
and dismissal of directors;
| | - | ---------------------------------------

| |  | approval
of acts and transactions requiring general meeting approval under the Companies Law;
| | - | ---------------------------------------------------------------------------------------------

| |  | increase
 or  reduction  of  authorized  share  capital  or the  rights  of  shareholders  or a
 class  of                   shareholders;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------

| |  | any
merger as provided in section 320 of the Companies Law; and
| | - | ---------------------------------------------------------------

| |  | the
exercise of the Board of Directors powers by the general meeting, if the Board of
Directors is unable to exercise its powers and the exercise of any of its powers is
essential for Towers proper management, as provided in section 52(a) of the
Companies Law.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A
special meeting may be convened by the request of two directors or by written request of
one or more shareholders holding at least 5% of our issued share capital and 1% of the
voting rights or one or more shareholders holding at least 5% of the voting rights.
Shareholders requesting a special meeting must submit their proposed resolution with their
request. Within 21 days of receipt of the request, the Board must convene a special
meeting and send out notices setting forth the date, time and place of the meeting.
Subject to exceptions, such notice must be given at least 21 days but not more than 35
days prior to the special meeting.

Exemption and
Indemnification Agreements with Directors

In
December 2001, we entered into exemption and indemnification agreements with the members
of our Board of Directors, pursuant to which, subject to the limitations set forth in the
Israeli Companies Law and our Articles of Association, they will be exempt from liability
for breaches of the duty of care owed by them to the Company or indemnified for certain
costs, expenses and liabilities with respect to events specified in the exemption and
indemnification agreements. In September 2005, we entered into amended exemption and
indemnification agreements with the members of our Board of Directors to reflect certain
amendments to the Companies Law that came into effect in March 2005. Our shareholders
approved these amended exemption and indemnification agreements in October 2005.

The Companies Law

We
are subject to the provisions of the Companies Law. The Companies Law codifies the
fiduciary duties that office holders, including directors and executive
officers, owe to a company. An office holder, as defined in the Companies Law, is a
director, general manager, chief business manager, deputy general manager, vice general
manager, executive vice president, vice president, another manager directly subordinate to
the managing director or any other person assuming the responsibilities of any of the
foregoing positions without regard to such persons title. Each person listed in the
table in Item 6. Directors, Senior Management and Employees above is an office
holder. Under the Companies Law, all arrangements as to compensation of office holders who
are not directors require approval of the board of directors. With the exception of
compensation of external directors in an amount specified in the regulations adopted under
the Companies Law, arrangements regarding the compensation of directors also require audit
committee and shareholder approval.

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The
Companies Law requires an office holder to promptly disclose any personal interest that he
or she may have and all related material information known to him or her, in connection
with any existing or proposed transaction by the company. In addition, if the transaction
is an extraordinary transaction, the office holder must also disclose any personal
interest held by the office holders spouse, siblings, parents, grandparents,
descendants, spouses descendants and the spouse of any of the foregoing, or any
corporation in which the office holder is a 5% or greater shareholder, holder of 5% or
more of the voting power, director or general manager or in which he or she has the right
to appoint at least one director or the general manager. An extraordinary transaction is
defined as a transaction not in the ordinary course of business, not on market terms, or
that is likely to have a material impact on the companys profitability, assets or
liabilities.

The
Companies Law requires that specific types of transactions, actions and arrangements be
approved as provided for in a companys articles of association and in some
circumstances by the companys audit committee, board of directors and shareholders.
In the case of a transaction that is not an extraordinary transaction, after the office
holder complies with the above disclosure requirements, only board approval is required,
unless the Articles provide otherwise. If the transaction is an extraordinary transaction,
then, in addition to any approval required by the Articles it must be approved first by
the audit committee and then by the board of directors, and, in specific circumstances, by
a meeting of the shareholders. Subject to exceptions set forth in the Companies Law, an
office holder who has a personal interest in a matter that is considered at a meeting of
the board of directors or the audit committee may not be present during the relevant
discussion at such meeting or vote on such matter.

The
Companies Law applies the same disclosure requirements to a controlling shareholder of a
public company, which is defined as a shareholder who has the ability to direct the
activities of a company, other than if this power derives solely from the
shareholders position on the board of directors or any other position with the
company and includes a shareholder that holds 25% or more of the voting rights if no other
shareholder owns more than 50% of the voting rights in the company. Extraordinary
transactions with a controlling shareholder or in which a controlling shareholder has a
personal interest, and agreements relating to employment and compensation terms of
controlling shareholders require the approval of the audit committee, the board of
directors and the shareholders of the company. The shareholder approval must either
include at least one-third of the shares held by disinterested shareholders who are
present, in person or by proxy, at the meeting, or, alternatively, the total shareholdings
of the disinterested shareholders who vote against the transaction must not represent more
than one percent of the voting rights in the company.

In
addition to approval by a companys board of directors, a private placement in a
public company requires approval by a companys shareholders in the following cases:

| |  | A
private placement that meets all of the following conditions:
| | - | ---------------------------------------------------------------

| |  | 20
percent or more of the voting rights in the company prior to such issuance are being
offered;
| | - | ------------------------------------------------------------------------------------------------

| |  | The
private placement will increase the relative holdings of a shareholder that holds five
percent or more of the companys outstanding share capital (assuming the exercise of
all of the securities convertible into shares held by that person), or that will cause
any person to become, as a result of the issuance, a holder of five percent or more of
the companys outstanding share capital; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | All
or part of the consideration for the offering is not cash or registered securities, or
the private placement is not being offered at market terms.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | A
private placement which results in anyone becoming a controlling shareholder.
| | - | -------------------------------------------------------------------------------

The
above transactions must not be adverse to the companys interest.

Under
the Companies Law, a shareholder has a duty to act in good faith towards the company and
other shareholders and refrain from abusing his power in the company, including, among
other things, vote in the general meeting of shareholders on the following matters:

| |  | any
amendment to the Articles;
| | - | ------------------------------

| |  | an
increase of the company's authorized share capital;
| | - | ------------------------------------------------------

| |  | a
merger; or
| | - | ------------

| |  | approval
of interested party transactions that require shareholder approval.
| | - | ----------------------------------------------------------------------------

In
addition, any controlling shareholder, any shareholder who knows that it possesses power
to determine the outcome of a shareholder vote and any shareholder who has the power to
appoint or prevent the appointment of an office holder in the company is under a duty to
act with fairness towards the company. The Companies Law does not describe the substance
of this duty.

Tender
Offer. A person wishing to acquire shares or any class of shares of a publicly traded
Israeli company and who would as a result hold over 90% of the companys issued and
outstanding share capital or of a class of shares, is required by the Companies Law to
make a tender offer to all of the companys shareholders for the purchase of all of
the issued and outstanding shares of the company. If the shares represented by the
shareholders who did not tender their shares in the tender offer constitute less than 5%
of the issued and outstanding share capital of the company, all of the shares that the
acquirer offered to purchase will be transferred to the acquirer by operation of law. If
the dissenting shareholders hold more than 5% of the issued and outstanding share capital
of the company, the acquirer may not acquire additional shares of the company from
shareholders who accepted the tender offer to the extent that following such acquisition
the acquirer would then own over 90% of the companys issued and outstanding share
capital. The Companies Law provides for an exception regarding this threshold requirement
for a shareholder that on February 1, 2000 held over 90% of the public Israeli
companys issued and outstanding share capital. Shareholders may petition the court
to alter the consideration for the acquisition.

The
Companies Law provides that, subject to certain exceptions, an acquisition of shares of an
Israeli public company must be made by means of a tender offer if as a result of the
acquisition the purchaser would become a holder of 25% or more of the voting rights in the
company. This rule does not apply if there is already another shareholder of the company
that holds 25% or more of the voting rights in the company. Similarly, the Companies Law
provides that, subject to certain exceptions, an acquisition of shares in a public company
must be made by means of a tender offer if as a result of the acquisition the purchaser
would become a holder of more than 45% of the voting rights in the company, if there is no
shareholder that holds more than 45% of the voting rights in the company.

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Merger.
          The Companies Law permits merger transactions if approved by each partys
          board of directors and the majority of each partys shares voted on the
          proposed merger at a shareholders meeting called on at least 35 days          prior
notice. Under the Companies Law, merger transactions may be approved by           holders
of a simple majority of our shares present, in person or by proxy, at a           general
meeting and voting on the transaction. In determining whether the           required
majority has approved the merger, if shares of a company are held by           the other
party to the merger, or by any person holding at least 25% of the           outstanding
voting shares or 25% of the means of appointing directors of the           other party to
the merger, then a vote against the merger by holders of the           majority of the
shares present and voting, excluding shares held by the other           party or by such
person, or anyone acting on behalf of either of them, is           sufficient to reject
the merger transaction. If the transaction would have been           approved but for the
exclusion of the votes of certain shareholders as provided           above, a court may
still approve the merger upon the request of holders of at           least 25% of the
voting rights of a company, if the court holds that the merger           is fair and
reasonable, taking into account the value of the parties to the           merger and the
consideration offered to the shareholders. Upon the request of a           creditor of
either party to the proposed merger, the court may delay or prevent           the merger
if it concludes that there exists a reasonable concern that, as a           result of the
merger, the surviving company will be unable to satisfy the           obligations of any
of the parties to the merger. In addition, a merger may not           be consummated
unless at least 30 days have passed from the receipt of the           shareholders approval
and 50 days have passed from the time that a merger           proposal has been filed
with the Israeli Registrar of Companies.

NASDAQ Marketplace Rules
and Home Country Practices

NASDAQs
Marketplace Rule 4350 (Rule 4350) was amended to permit foreign private
issuers to follow certain home country corporate governance practices without the need to
seek an individual exemption from NASDAQ. Instead, a foreign private issuer must provide
NASDAQ with a letter from outside counsel in its home country certifying that the
issuers corporate governance practices are not prohibited by home country law.

In
July 2005, pursuant to this new exception, we provided a notice to NASDAQ required by Rule
4350, with a letter from our outside Israeli counsel informing it that in keeping with
Rule 4350(a)(1) we had elected to follow the practices of our home country in lieu of
those set forth in Rule 4350, to the extent permitted thereby, and provided a letter from
our outside Israeli counsel certifying that our the practices being followed of amending
employee share option plans that do not permit the grant of options to directors upon the
approval of our board of directors, and without seeking shareholder approval (which
approval is required for NASDAQ-listed companies under Marketplace Rule 4350(i)), is in
place thereof were not prohibited by Israeli law.

As
provided by Rule 4350(a)(1), in lieu of the requirements of Rule 4350 we have chosen to
follow the practices of our home country with respect to the following:

| |  | We
do not supply an annual report as required by Rule 4350(b)(1)(A), but makes our audited
financial statements available to our shareholders prior to our annual general meeting.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
majority of our Board of Directors is not comprised of directors who meet the definition
of independence contained in NASDAQ Marketplace Rule 4200(a)(15), as required by Rule
4350(c)(1). Under the Companies Law a majority of the Board of Directors is not required
to be comprised of independent directors. In keeping with the requirements of the
Companies Law two of the members of our Board of Directors are external directors, and
are independent as defined under Rule 10A-3 of the Securities Act.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Our
Board has not adopted a policy of conducting regularly scheduled meetings at which only
our independent directors are present, as required by Rule 4350(c)(2). The Companies Law
does not require our external directors to conduct regularly scheduled meetings at which
only they are present.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | The
compensation of our chief executive officer and all other executive officers is not
determined, or recommended to the Board for determination, in the manner required by Rule
4350(c)(3). In accord with the Companies Law the compensation of the chief executive
officer and all other officers requires the approval of our Board of Directors, however
the compensation of our chief executive officer, who also serves as a director, requires
also the approval of our shareholders.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Director
nominees are not selected, or recommended for the Boards selection, as required by
Rules 4350(c)(4)(A) and 4350(c)(4)(C).
| | - | -----------------------------------------------------------------------------------------------------------------------------------

| |  | Our
Board of Directors has not adopted a formal written charter or board resolution
addressing the nomination process and such related matters as may be required under
United States federal securities laws, as required by Rule 4350(c)(4)(B).
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Although
we have adopted a formal written audit committee charter, there is no requirement under
the Companies Law to do so and the charter as adopted may not specify all the items
enumerated in Rule 4350(d)(1).
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Our
audit committee does not meet with all of the requirements of Rules 4350(d)(2)(A)(i),
4350(d)(2)(A)(iii) and 4350(d)(2)(A)(iv). Though all members are independent as such term
is defined under Rule 10A-3 of the Exchange Act, the audit committee does not comply with
the foregoing Rule 4350 requirements, as permitted by the Companies Law.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Our
articles of association do not provide for a quorum of not less than 33 1/3% of the
outstanding shares of our voting ordinary shares for meetings of our ordinary
shareholders, as required by Rule 4350(f). Our articles of association presently require
a quorum consisting of two shareholders holding a combined 33% of our ordinary shares.
Under the Companies Law a quorum consisting of two shareholders holding a combined 25% of
the companys voting shares is required.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | We
review and approve all related party transactions in accordance with the requirements and
procedures for approval of interested party acts and transactions, set forth in the
Companies Law, which do not fully reflect the requirements of Rule 4350(h).
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | We
seek shareholder approval for all corporate action requiring such approval, in accordance
with the requirements of the Companies Law, which does not fully reflect the requirements
of Rule 4350(i).
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We
may in the future provide NASDAQ with an additional similar letter or letters notifying
NASDAQ that we are following our own practices, consistent with the Companies Law and
practices in Israel in lieu of other requirements of Marketplace Rule 4350.

Material
Contracts.Discussions of these agreements are incorporated herein by reference to the
discussion under the caption Intellectual Property and Licensing Agreements in
Item 4".Information on the Company and under the caption Fab 2
Agreements in Item 5. Operating and Financial Review and Prospects of
this annual report.

Fab
2 Agreements. Since 2000, we have entered into several important Fab 2 agreements and
arrangements with a key technology partner, wafer and equity financing partners, the
Israeli Investment Center and two leading Israeli banks. Discussions of these agreements
are incorporated herein by reference to the discussion under the caption Fab 2
Agreements in Item 5. Operating and Financial Review and Prospects of
this annual report and to Note 11A to the consolidated financial statements included in
this annual report.

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Intellectual
Property and Licensing Agreements.Discussions of these agreements are incorporated
herein by reference to the discussion under the caption Intellectual Property and
Licensing Agreements in Item 4".Information on the Company of this
annual report.

Exchange Controls

Under
Israeli law, non-residents of Israel who purchase ordinary shares with certain non-Israeli
currencies (including US dollars) may freely repatriate in such non-Israeli currencies all
amounts received in Israeli currency in respect of the ordinary shares, whether as a
dividend, as a liquidating distribution, or as proceeds from any sale in Israel of the
ordinary shares, provided in each case that any applicable Israeli income tax is paid or
withheld on such amounts. The conversion into the non-Israeli currency must be made at the
rate of exchange prevailing at the time of conversion.

Under
Israeli law and our companys Articles, both residents and non-residents of Israel
may freely hold, vote and trade our ordinary shares.

Taxation

The
below discussion does not purport to be an official interpretation of the tax law
provisions mentioned therein or to be a comprehensive description of all tax law
provisions which might apply to our securities or to reflect the views of the relevant tax
authorities, and it is not meant to replace professional advice in these matters. The
below discussion is based on current, applicable tax law, which may be changed by future
legislation or reforms. Non-residents should obtain professional tax advice with respect
to the tax consequences under the laws of their countries of residence of holding or
selling our securities.

Israeli
Capital Gains Tax

Until
the end of the year 2002 and provided we maintained our status as an Industrial
Corporation, capital gains from the sale of our securities were generally exempt
from Israeli Capital Gains Tax. This exemption did not apply to a shareholder whose
taxable income was determined pursuant to the Israeli Income Tax Law (Inflationary
Adjustments) 1985, or to a person whose gains from selling or otherwise disposing of our
securities were deemed to be business income.

On
January 1, 2006 an amendment to the Israeli tax regime became effective (the 2006
Tax Reform). The 2006 Tax Reform significantly changed the tax rates applicable to
income derived from selling shares.

According
to the 2006 Tax Reform, an individual is subject to a 20% tax rate on real capital gains
derived from the sale of shares, as long as the individual is not a substantial
shareholder (generally a shareholder with 10% or more of the right to profits, right
to nominate a director or voting rights) in the company issuing the shares. The rate on
the gains from publicly traded shares applicable to gains that were realized between
January 1, 2003 and January 1, 2006 was 15%.

A
substantial shareholder will be subject to tax at a rate of 25% in respect of real capital
gains derived from the sale of shares issued by the company in which he or she is a
substantial shareholder. The determination of whether the individual is a substantial
shareholder will be made on the date that the securities are sold. In addition, the
individual will be deemed to be a substantial shareholder if at any time during the 12
months preceding this date he or she had been a substantial shareholder.

Corporations
will be subject to corporate tax rates in respect of total income, including capital
gains, with the corporate tax rate reduced gradually from 27% in the 2008 tax year to 26%
in the 2009 tax year and 25% in the 2010 tax year and thereafter. However, between 2006
and 2009, corporations whose taxable income was not determined, immediately before the
2006 Tax Reform was published, pursuant to part B of the Israeli Income Tax Law
(Inflationary Adjustments), 1985 or pursuant to the Income Tax Regulations (Rules on
Bookkeeping by Foreign Invested Companies and Certain Partnership and Determination of
their Chargeable Income), 1984 will generally be taxed at a rate of 25% on their capital
gains from the sale of their securities.

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Non-Israeli
residents are exempt from Israeli capital gains tax on any gains derived from the sale of
shares in an Israeli corporation publicly traded on the TASE and/or on a foreign stock
exchange, provided such gains do not derive from a permanent establishment of such
shareholders in Israel and that such shareholders did not acquire their shares prior to
the issuers initial public offering. However, non-Israeli corporations will not be
entitled to such exemption if an Israeli resident (i) has a controlling interest of 25% or
more in such non-Israeli corporation, or (ii) is the beneficiary of or is entitled to 25%
or more of the revenues or profits of such non-Israeli corporation, whether directly or
indirectly.

In
some instances where our shareholders may be liable to Israeli tax on the sale of their
ordinary shares, the payment of the consideration may be subject to the withholding of
Israeli tax at the source.

Pursuant
to the treaty between the Governments of the United States and Israel with respect to
taxes on income, or the US-Israel tax treaty, the sale, exchange or disposition of our
ordinary shares by a person who qualifies as a resident of the United States under the
treaty and who is entitled to claim the benefits afforded to him by the treaty, will
generally not be subject to Israeli capital gains tax. This exemption shall not apply to a
person who held, directly or indirectly, shares representing 10% or more of the voting
power in our company during any part of the 12-month period preceding the sale, exchange
or disposition, subject to certain conditions. A sale, exchange or disposition of our
shares by a US resident qualified under the treaty, who held, directly or indirectly,
shares representing 10% or more of the voting power in our company at any time during the
preceding 12-month period would be subject to Israeli tax, to the extent applicable;
however, under the treaty, this US resident would be permitted to claim a credit for these
taxes against the US income tax with respect to the sale, exchange or disposition, subject
to the limitations in US laws applicable to foreign tax credits.

Israeli
Tax on Interest Income and on Original Issuance Discount

Interest
and Original Issuance Discount (OID) on our convertible debentures will, in general, be
subject to Israeli tax of up to 20% if received by an individual. This reduced rate of tax
will not apply if the interest and OID are business income in the hands of the recipient,
if the interest is recorded or should be recorded in the individuals accounting
books, if the recipient is a substantial shareholder of our company, if financing expenses
related to the purchase of the debentures were deducted by the individual in the
calculation of the individuals Israeli taxable income, or if the individual is an
employee, supplier, or service provider of the company and the tax authorities have not
been persuaded that the payment of interest was not affected by the relationship between
the parties. In such cases the regular rate of tax on Interest and OID of up to 46% will
apply to the individual. Interest and OID paid to corporations will be subject to
corporate tax at the regular rates of 27% in 2008, 26% in 2009 and 25% in 2010 and
thereafter.

Beginning
on January 1, 2009, interest, OID or inflation linkage differentials paid to an individual
who is a foreign resident which does not have a permanent establishment in Israel, on
debentures issued by an Israeli corporation and which are traded on the TASE, are
generally exempt from taxes. However, this exemption from taxes will not apply if the
recipient is a substantial shareholder of the corporation, if the recipient is an
affiliate of the issuer of the debentures, or if the individual is an employee, supplier,
or service provider of the company and the tax authorities have not been persuaded that
the Payment was not affected by the relationship between the parties. As a result of the
provisions related to tax withholding, as explained below, foreign resident individuals
and corporations will be subject to tax of 25% or less, according to the relevant treaty
relating to their domicile country.

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Under
regulations promulgated as part of the 2006 Tax Reform, withholding tax at source from
debenture interest and OID paid to resident individuals will, in general, be at a rate of
20%. However, if the individual receiving the interest and OID is a substantial
shareholder, an employee, supplier or service provider of the company, tax will be
withheld at the marginal rates applicable to individuals. Corporations will be subject to
withholding tax at the applicable rate of corporate tax as set out above. Withholding tax
at source from debenture interest and OID paid to non-resident individuals or corporations
will be at a rate of 25% or less, according to the relevant treaty relating to their
domicile country. In any event, under the US-Israel Tax Treaty, the maximum Israeli tax
withheld on interest and OID paid on our convertible debentures due 2006 to a US treaty
resident (other than a US bank, savings institution or company) is 17.5%.

Israeli
Tax on Dividend Income

On
distributions of dividends other than bonus shares, or stock dividends, to Israeli
individuals and foreign resident individuals and foreign resident corporations we would be
required to withhold income tax at the rate of 20%. If the income out of which the
dividend is being paid is attributable to an Approved Enterprise under the Law for the
Encouragement of Capital Investments, 1959, the rate is generally not more than 15%. A
different rate may be provided for in a treaty between Israel and the shareholders
country of residence.

Under
the US-Israel Tax Treaty, Israeli withholding tax on dividends paid to a US treaty
resident may not, in general, exceed 25%, or 15% in the case of dividends paid out of the
profits of an Approved Enterprise. Where the recipient is a US corporation owning 10% or
more of the voting stock of the paying corporation and the dividend is not paid from the
profits of an Approved Enterprise, the Israeli tax withheld may not exceed 12.5%, subject
to certain conditions.

PFIC
Rules

A
non-US corporation will be classified as a passive foreign investment company, or a PFIC,
for US federal income tax purposes if either (i) 75% or more of its gross income for the
taxable year is passive income, or (ii) on a quarterly average for the taxable year by
value (or, if it is not a publicly traded corporation and so elects, by adjusted basis),
50% or more of its gross assets produce or are held for the production of passive income.

We
do not believe that we satisfied either of the tests for PFIC status in 2008 or in any
prior year. However, there can be no assurance that we will not be a PFIC in 2009 or a
later year. If, for example, the passive income earned by us exceeds 75% or
more of our gross income, we will be a PFIC under the income test.
Passive income for PFIC purposes includes, among other things, gross interest, dividends,
royalties, rent and annuities. For manufacturing businesses, gross income for PFIC
purposes should be determined by reducing total sales by the cost of goods sold. Although
not free from doubt, if our cost of goods sold exceeds our total sales by an amount
greater than our passive income, such that we are treated as if we had no gross income for
PFIC purposes, we believe that we would not be a PFIC as a result of the income test.
However, the tests for determining PFIC status are applied annually and it is difficult to
make accurate predictions of future income and assets, which are relevant to the
determination of PFIC status.

If
we were to be a PFIC at any time during a US holders holding period, such US holder
would be required to either: (i) pay an interest charge together with tax calculated at
maximum ordinary income tax rates on excess distributions, which is defined to
include gain on a sale or other disposition of ordinary shares, or (ii) so long as the
ordinary shares are regularly traded on a qualifying exchange, elect to
recognize as ordinary income each year the excess in the fair market value, if any, of its
ordinary shares at the end of the taxable year over such holders adjusted basis in
such ordinary shares and, to the extent of prior inclusions of ordinary income, recognize
ordinary loss for the decrease in value of such ordinary shares (the mark to
market election). For this purpose, the NASDAQ National Market is a qualifying
exchange. US holders are strongly urged to consult their own tax advisers regarding the
possible application and consequences of the PFIC rules.

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Documents on Display

We
are required to file reports and other information with the SEC under the Securities
Exchange Act of 1934 and the regulations thereunder applicable to foreign private issuers.
Reports and other information filed by us with the SEC may be inspected and copied at the
SECs public reference facilities described below. Although as a foreign private
issuer we are not required to file periodic information as frequently or as promptly as
United States companies, we generally do publicly announce our quarterly and year-end
results promptly and file periodic information with the SEC under cover of Form 6-K. As a
foreign private issuer, we are also exempt from the rules under the Exchange Act
prescribing the furnishing and content of proxy statements and our officers, directors and
principal shareholders are exempt from the reporting and other provisions in Section 16 of
the Exchange Act.

You
may review and copy our filings with the SEC, including any exhibits and schedules, at the
SECs public reference room at 100 F Street N.E., Washington, D.C. 20549. You may
call the SEC at 1-800-SEC-0330 for further information on this public reference room. As a
foreign private issuer, all documents which were filed after November 4, 2002 on the
SECs EDGAR system will be available for retrieval on the SECs website at
www.sec.gov. These SEC filings are also available to the public on the Israel Securities
Authoritys Magna website at www.magna.isa.gov.il and from commercial document
retrieval services. We also generally make available on our own web site
(www.towersemi.com) our quarterly and year-end financial statements as well as other
information.

Any
statement in this annual report about any of our contracts or other documents is not
necessarily complete. If the contract or document is filed as an exhibit to a registration
statement, the contract or document is deemed to modify the description contained in this
annual report. We urge you to review the exhibits themselves for a complete description of
the contract or document.

|ITEM 11. |  | QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- |  | ----------------------------------------------------------

Market
risk is the risk of loss related to changes in market prices, including interest rates and
foreign exchange rates, of financial instruments and derivatives that may adversely impact
our consolidated financial position, results of operations or cash flows.

Our
primary market risk exposures relate to interest rate movements on borrowings and
fluctuations of the exchange rate of the US dollar, which is the primary currency in which
we conduct our operations, against the NIS, the Japanese Yen and the Euro. To manage those
risks and mitigate our exposure to them, we use financial instruments from time to time,
primarily, interest rate collar agreements (with a knock-out and knock-in features for
certain agreements), and foreign currency forward contracts and options (including
zero-cost cylinders).

All
financial instruments are managed and controlled under a program of risk management in
accordance with established policies. These policies are reviewed and approved by our
board of directors. Our treasury operations are subject to an internal audit on a regular
basis. We do not hold derivative financial instruments for speculative purposes, and we do
not issue any derivative financial instruments for trading or speculative purposes.

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# Risk of Interest Rate
Fluctuation

We
have market risk exposure to changes in interest rates on our long-term debt obligations
with floating interest rates. We have entered into debt obligations to support our capital
expenditures and needs. From time to time we enter into interest rate collar agreements to
modify our exposure to interest rate movements and to reduce our borrowing costs. These
agreements limit our exposure to the risks of fluctuating interest rates by allowing us to
convert a portion of the interest on our borrowings from a variable rate to a limited
variable rate.

We
are subject to interest rate exposure in connection with $206 million long-term debt
outstanding as of December 31, 2008 under the Tower amended facility agreement, as such
debt bears interest at a rate of LIBOR plus 2.5% per annum and in connection with $27
million of Jazzs bank loans as such debt bears interest at a rate equal to, at the
borrowers option, either the lenders prime rate plus a margin ranging from
0.25% to 0.75% or the LIBOR rate (as defined in the such loan agreement) plus a margin
ranging from 2.0% to 2.5% per annum. The interest rate as of December 31, 2008 on $113
million loans was 4.0%. The $113 million includes $80 million loans under the Tower
amended facility agreement covered by collar agreement and $33 million loans not subject
to the collar agreements ($6 million under the Tower amended facility agreement and $27
million under the Jazz loan agreement). The interest rate of the additional $120 million
loans covered by collar agreement was 5.3%, including the results of our hedging
activities effective as of June 2009. Following the September 2008 definitive agreement
with Towers banks and TIC, the loans under the Tower amended facility agreement are
repayable in 8 equal consecutive quarterly installments between September 2010 and June
2012 and the maturity date of Jazzs bank loan is September 2011.

As
of December 31, 2008, we had collar agreements in the amount of $200 million, out of which
$80 million expired in March 2009 and $120 million will expire in June 2012.

Our
collar agreements resulted in a realized gain of $1.0 million in the year ended December
31, 2008. As of December 31, 2008, the fair value of these agreements was a $3.2 million
unrealized loss.

During
2008 we entered into new collar agreements in the amount of $120 million, effective June
2009. The terms of these collar agreements are as follows: if the LIBOR is below the floor
level of 2.8% we will pay total interest at the fixed rate of 5.3% (the 2.8% floor rate
plus 2.5% under the Tower amended facility agreement); if the LIBOR is between 2.8% and a
range between 5.01% and 5.60%, we will pay total interest at the actual LIBOR plus 2.5%;
if the LIBOR is higher than the range of 5.01% and 5.6%, we will pay total interest at a
fixed rate of between 7.5% and 8.1% (the cap level plus 2.5%).

Under
current terms of Towers loans and the collar agreements and Jazzs loans, we
have determined that an assumed 10% upward shift in the LIBOR rate at December 31, 2008
(from 1.5% to 1.65%), will not have a material effect on our yearly interest payments in
2009. For each 1% upward shift in the LIBOR rate in the range between the floor level and
the cap level, (from 4% to 4.5%, for example), our yearly interest payments will increase
by approximately $1.0 million

Our
cash equivalents and interest-bearing deposits are exposed to market risk due to
fluctuation in interest rates, which may affect our interest income and the fair market
value of our investments. We manage this exposure by performing ongoing evaluations of our
investments in those deposits. Due to the short maturities of our investments, their
carrying value approximates their fair value.

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Foreign
Exchange Risk

We
are exposed to the risk of fluctuation in the NIS/dollar exchange rate with respect to
Towers 2002, 2006 and 2007 debentures. As of December 31, 2008 the adjusted
outstanding principal amount of these debentures was $133.3 million. The dollar amount of
our finance costs (interest and currency adjustments) related to these debentures will be
increased if the rate of inflation in Israel is not offset (or is offset on a lagging
basis) by the devaluation of the NIS in relation to the dollar. In addition, the dollar
amount of any repayment on account of the principal of these debentures will be increased
as well. If the devaluation of the NIS against the dollar is greater than the rate of
inflation in Israel, the dollar amounts we may raise on the date of exercising our NIS
denominated options linked to the CPI will be decreased.

From
the date of the issuance of the 2002 convertible debentures in January 2002 until December
31, 2008, the Israel consumer price index increased by 14.8% while the US dollar/NIS
exchange rate decreased by 17.0%. From the date of the issuance of the 2006 convertible
debentures in June 2006 until December 31, 2008, the Israel consumer price index increased
by 5.6% while the US dollar/NIS exchange rate decreased by 14.4%. From the date of the
issuance of the 2007 debentures in the second half of 2007 until December 31, 2008, the
Israel consumer price index increased by 7.0% while the US dollar/NIS exchange rate
decreased by approximately 12.3%.

The
2002 convertible debentures carried annual interest at a fixed rate of 4.7%. The
debentures were payable in four annual installments commencing in January 2006. In January
2009, the last principal installment was paid, thereby redeeming the debentures in full.
The 2005 convertible debentures are denominated in USD and bear annual interest at the
rate of 5%. The principal of the debentures, together with accrued interest, will be
payable in one installment on January 12, 2012. The 2006 convertible debentures carry a
zero coupon with principal payable at maturity in December 2011, at a premium of 37% over
face value. The 2007 debentures bear annual interest at a fixed rate of 8.0% and repayable
starting 2011. The convertible notes issued by Jazz bear interest at a rate of 8% per
annum payable twice a year and mature on December 31, 2011.Therefore, we are not subject
to cash flow exposure to interest rate fluctuations with respect to the debentures or
notes. However, in case the actual market interest rates are lower than the interest rate
provided for under the debentures or notes, our actual finance costs would be higher than
would have been had our debentures or notes provided for interest at a floating interest
rate.

Our
main foreign currency exposures other than debentures are associated with exchange rate
movements of the US dollar, our functional and reporting currency, against the NIS,
Japanese Yen and the Euro. To protect against reductions in value and the volatility of
future cash flows caused by changes in foreign exchange rates, we utilize foreign currency
forward contracts and options (including zero-cost cylinder options) in order to minimize
part of the impact of foreign currency fluctuations on our financial position and results
of operations. A cylinder option is a combination of a purchased call option and a written
put option. The exercise prices of the options may not be identical and this effectively
creates a synthetic range forward. The maturity dates of the options coincide with the
scheduled payments.

In
order to mitigate our exposure to the risk of fluctuations in the NIS/dollar exchange rate
with respect to our NIS denominated expenses, mainly payroll, Tower entered into option
transactions. As of December 31, 2008 Tower had $25.5 million open exchange rate
agreements which will expire throughout 2009. No material loss was recorded from these
transactions in 2008. We are exposed to currency risk in the event of default by the other
parties of the exchange transaction. We estimate the likelihood of such default to occur
is remote, as the other parties are widely recognized and reputable Israeli banks.

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Assuming
a 10% revaluation of the NIS against the US dollar on December 31, 2008 (from 3.80 to
3.42), the effective fair value of our liabilities net of assets denominated in NIS
(mainly vendors, debentures and liabilities in regard to employees ) would have increased
in approximately $13 million.

# Impact of Inflation

We
believe that the rate of inflation in Israel has had a minor effect on our business to
date. However, our dollar costs in Israel will increase if inflation in Israel exceeds the
devaluation of the NIS against the dollar or if the timing of such devaluation lags behind
inflation in Israel.

|ITEM 12. |  | DESCRIPTION
OF SECURITIES OTHER THAN EQUITY SECURITIES
|-------- |  | ------------------------------------------------------

Not
applicable.

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# PART II

|ITEM 13. |  | DEFAULTS,
DIVIDEND ARREARAGES AND DELINQUENCIES
|-------- |  | -----------------------------------------------

None.

|ITEM 14. |  | MATERIAL
MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
|-------- |  | ----------------------------------------------------------------------------

Not
applicable.

|ITEM 15. |  | CONTROLS
AND PROCEDURES
|-------- |  | -----------------------

Evaluation of Disclosure
Controls and Procedures

Our
management, with the participation of our Chief Executive Officer and our Chief Financial
Officer, has evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934, as amended (the Act) as of the end of the period covered by this annual
report on Form 20-F. Based on this evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that these disclosure controls and procedures were effective
as of such date, at a reasonable level of assurance, in ensuring that the information
required to be disclosed by our company in the reports we file or submit under the Act is
(i) accumulated and communicated to our management (including the Chief Executive Officer
and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized
and reported within the time periods specified in the SECs rules and forms.

Internal Control over
Financial Reporting

Management
is responsible for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision
and with the participation of our management, including our Chief Executive Officer and
Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal
control over financial reporting based on the criteria in Internal Control 
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our evaluation, management has concluded that our internal control
over financial reporting was effective as of December 31, 2008.

Because
of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risks that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may
deteriorate.

Attestation
Report of the Registered Public Accounting Firm. The attestation report of our
registered public accounting firm is included in page F-1 of our audited consolidated
financial statements set forth in Item 18. Financial Statements, and is
incorporated herein by reference.

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|ITEM 16. |  | [RESERVED]
|-------- |  | ----------

|ITEM 16A. |  | AUDIT
COMMITTEE FINANCIAL EXPERT
|--------- |  | --------------------------------

Our
board of directors has determined that a member of our audit committee, Mr. Ilan Flato, is
an audit committee financial expert and is independent as defined by NASDAQ Marketplace
Rule 4350.

|ITEM 16B. |  | CODE
OF ETHICS
|--------- |  | --------------

We
adopted a code of ethics that applies to all of our directors, officers and employees,
including our Chief Executive Officer, Chief Financial Officer, controller, and persons
performing similar functions. We have posted our code of ethics on our website,
www.towersemi.com under About Tower.

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|ITEM 16C. |  | PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|--------- |  | --------------------------------------

The
following table presents fees for professional services rendered by our independent
registered public accounting firm for audit services, audit-related services and for tax
services:

|                   | 2008* | 2007*
|------------------ | ----- | -----
|
|
|
|
|Audit fees (1)     |       |      
|All other fees (2) |       |      
|Tax fees (3)       |       |      
|                   |       |      
|                   |       |      
|                   |       |      

|* | 2008
costs include Towers costs to Deloitte Israel and commencing the merger date also
include Jazz costs to Deloitte US and Ernst & Young US; 2007 costs include only Towers
costs to Deloitte Israel.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(1) | Audit
fees consist of fees for professional services rendered for the audit of           our
financial statements, services in connection with statutory and regulatory
          filings and engagements (including review of Forms 20-F, 10-K, 10-Q, F-1, F-3,
          F-4 and S-8 and SOX), and reviews of our unaudited interim consolidated
          financial statements included in our quarterly reports.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Non-audit
related fees consist of accounting consultation, due diligence           services in
connection with the merge and consultation on financial accounting           standards,
not arising as part of the audit.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Tax
fees consist of fees for tax compliance services, tax planning and tax           advice.
|--- | --------------------------------------------------------------------------------------------

Our
audit committees charter states that the audit committee is responsible for
receiving specific information on the independent auditors proposed services and for
pre-approving all audit services annually and separately approving any other permitted
non-audit related services. All of the non-audit services provided in 2008 and 2007 were
pre-approved without reliance on the Waiver Provisions in paragraph (c)(7)(i)(C)of
Regulation S-X.

|ITEM 16D. |  | EXEMPTIONS
FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.
|--------- |  | -----------------------------------------------------------

Not
Applicable.

|ITEM 16E. |  | PURCHASES
OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
|--------- |  | -----------------------------------------------------------------------

Not
Applicable.

# PART III

|ITEM 17. |  | FINANCIAL
STATEMENTS
|-------- |  | --------------------

Not
applicable.

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|ITEM 18. |  | FINANCIAL
STATEMENTS
|-------- |  | --------------------

See
Index to Financial Statements following the signature page.

|ITEM 19. |  | EXHIBITS
|-------- |  | --------

1.1        Articles
of Association of the Registrant, approved by shareholders on November 14, 2000, as
amended (incorporated by reference to Exhibit 3.1 of the Registrants Registration
Statement on Form F-1, File No. 333-126909, Form F-1 No. 333-126909).

1.2        Amendment
to Articles of Association of the Registrant (incorporated by reference to exhibit 4.2 to
the Registration Statement on Form S-8 No. 333-117565 (Form S-8 No. 333-117565).

1.3        Amendment
to the Articles of Association of the Registrant (approved by shareholders on September
28, 2006) (incorporated by reference to Exhibit 4.2 of the Registrants Registration
Statement on Form S-8, File No. 333-138837 (the 2006 Form S-8).

1.4        Amendment
to Articles of Association of Registrant (approved by shareholders on September 24, 2008)
(incorporated by reference to Exhibit 3.4 of the Registrants Registration Statement
on Form S-8, File No. 333-153710 (the 2008 Form S-8).

2.1        Bank
Warrants, dated January 18, 2001, between the Registrant and Bank Hapoalim B.M. and Bank
Leumi Le-Israel B.M. (incorporated by reference to exhibit 2.2 to the Registrants
Annual Report on Form 20-F for the year ended December 31, 2000 (the 2000 Form 20-F)).

2.2        Registration
Rights Agreement, dated January 18, 2001, by and between SanDisk Corporation, Israel
Corporation, Alliance Semiconductor Ltd. and Macronix International Co., Ltd.
(incorporated by reference to exhibit 2.2 to the 2000 Form 20-F).

2.3        Terms
of the Registrants Convertible Debentures issued under an Indenture, dated January
22, 2002, (incorporated by reference to the summary of terms included under the caption
Description of the Debentures in Exhibit C to the Registrants Report on
Form 6-K for January 2002 (No. 2), filed January 16, 2002 (January 2002 Form 6-K)).

2.4        Terms
of the Registrants Options (Series 1) (incorporated by reference to the summary of
terms included under the caption Description of the Options in Exhibit C to
the January 2002 Form 6-K).

2.5        Form
of Indenture (incorporated by reference to exhibit 4.2 to the Registrants Amendment
No. 6 to the Registration Statement on Form F-1/A No. 333-126909 (the Form F-1 No.
333-126909).

2.6        Form
of Note for the Debentures (incorporated herein by reference to Exhibit A to the
Indenture filed as exhibit 4.2 to Form F-1 No. 333-126909 ).

2.7        First
Amendment to a Warrant Issued on December 11, 2003 to Tarshish Hahzakot Vehashkaot
Hapoalim Ltd., dated September 28, 2006 (incorporated by reference to exhibit 99.14 of
the November 2006 Form 6-K).

2.8        First
Amendment to a Warrant Issued on December 11, 2003 to Bank Leumi Le-Israel, dated
September 28, 2006 (incorporated by reference to exhibit 99.15 of the November 2006 Form
6-K).

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2.9        First
Amendment to a Warrant Issued on August 4, 2005 to Bank Hapoalim B.M., dated September
28, 2006 (incorporated by reference to exhibit 99.16 of the November 2006 Form 6-K).

2.10        First
Amendment to a Warrant Issued on August 4, 2005 to Bank Leumi Le-Israel B.M., dated
September 28, 2006 (incorporated by reference to exhibit 99.17 of the November 2006 Form
6-K).

2.11        Form
of Series I Warrant (incorporated by reference to exhibit 99.6 of the March 2007 Form
6-K).

2.12        Form
of Series II Warrant (incorporated by reference to exhibit 99.7 of the March 2007 Form
6-K).

3.1        Consolidated
Shareholders Agreement, dated January 18, 2001, by and between SanDisk Corporation,
Israel Corporation, Alliance Semiconductor Ltd. and Macronix International Co., Ltd.
(incorporated by reference to the correspondingly-numbered exhibit to the 2000 Form
20-F).

4.1        Share
Purchase Agreement, dated July 4, 2000, by and between SanDisk Corporation and the
Registrant (incorporated by reference to the correspondingly-numbered exhibit to the 2000
Form 20-F).

4.2        Additional
Purchase Obligation Agreement, dated July 4, 2000, by and between SanDisk Corporation (SanDisk)
and the Registrant (incorporated by reference to the correspondingly-numbered exhibit to
the 2000 Form 20-F).

4.3        Share
Purchase Agreement, dated August 29, 2000, by and between Alliance Semiconductor
Corporation (Alliance) and the Registrant (incorporated by reference to the
correspondingly-numbered exhibit to the 2000 Form 20-F).

4.4        Share
Purchase Agreement, dated December 11, 2000, by and between QuickLogic Corporation (QuickLogic)
and the Registrant (incorporated by reference to the correspondingly-numbered exhibit to
the 2000 Form 20-F).

4.5        Share
Purchase Agreement, dated December 12, 2000, by and between Macronix International Co.,
Ltd. (Macronix) and the Registrant (incorporated by reference to the
correspondingly-numbered exhibit to the 2000 Form 20-F).

4.6        Share
Purchase Agreement, dated December 12, 2000, between Israel Corporation and the
Registrant (incorporated by reference to the correspondingly-numbered exhibit to the 2000
Form 20-F).

4.7        Additional
Purchase Obligation Agreement, dated December 12, 2000, between Israel Corporation and
the Registrant (incorporated by reference to the correspondingly-numbered exhibit to the
2000 Form 20-F).

4.8        Share
Purchase Agreement, dated February 11, 2001, between The Challenge Fund  Etgar II
and the Registrant (incorporated by reference to the correspondingly-numbered exhibit to
the 2000 Form 20-F).

4.9        Facility
Agreement, dated January 18, 2001, among the Registrant, Bank Hapoalim B.M. and Bank
Leumi Le-Israel B.M. (the Facility Agreement) (incorporated by reference to
the correspondingly-numbered exhibit to the 2000 Form 20-F).

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4.10        Design
and Construction/Turn-Key Contract, dated August 20, 2000, among the Registrant, M+W
Zander Holding GmbH, Meissner-Baran Ltd. and Baran Group Ltd. (incorporated by reference
to the correspondingly-numbered exhibit to the 2000 Form 20-F).

4.11        Approval,
dated December 31, 2000, of the Israeli Investment Center (Hebrew language document; a
summary of the terms is included in the 2000 Form 20-F under the caption Fab 2
Agreements in Item 5. Operating and Financial Review and Prospects)
(incorporated by reference to the correspondingly-numbered exhibit to the 2000 Form
20-F).

4.12        Agreement
between the Registrant and Saifun, dated October 9, 1997 (incorporated by reference to
exhibit 1.1 to the Registrants Annual Report on Form 20-F for the year ended
December 31, 1997).

4.13        Registrants
Non-Employee Director Share Option Plan 2000/3 (incorporated by reference to exhibit 4.5
to the Registrants Registration Statement on Form S-8 No. 333-83204 (Form S-8
No. 333-83204)).

4.14        Form
of Grant Letter for Non-Employee Directors Share Option Plan 2001/4 (incorporated by
reference to exhibit 4.9 to the Form S-8 No. 333-83204).

4.15        Form
of Grant Letter for Non-Employee Directors Share Option Plan 2001/5 (incorporated by
reference to exhibit 4.10 to the Form S-8 No. 333-83204).

4.16        Wafer
Partner Conversion Agreements, dated September 2001, between the Registrant and each of
SanDisk, Alliance and Macronix (incorporated by reference to exhibit 4.17 to the
Registrants Annual Report on Form 20-F for the year ended December 31, 2001 (the
2001 Form 20-F)).

4.17        Letter
Agreement, dated November 29, 2001, among SanDisk, Alliance, Macronix, QuickLogic and the
Registrant regarding the Utilization of Prepayments (incorporated by reference to exhibit
4.18 to the 2001 Form 20-F).

4.18        Letter
Agreements among Alliance, Macronix, QuickLogic, Israel Corp. and the Registrant and
between SanDisk and the Registrant regarding Additional Wafer Partner Financing Date
(incorporated by reference to exhibit 4.19 to the 2001 Form 20-F).

4.19        Letter
Agreement, dated November 15, 2001, among SanDisk, Alliance, Macronix, QuickLogic, ICTech
and the Registrant regarding Amendment to Financing Plan (incorporated by reference to
exhibit 4.20 to the 2001 Form 20-F).

4.20        First
Amendment, dated January 29, 2001, to the Facility Agreement (incorporated by reference
to exhibit 4.21 to the 2001 Form 20-F).

4.21        Second
Amendment, dated January 10, 2002, to Facility Agreement (incorporated by reference to
exhibit 4.22 to the 2001 Form 20-F).

4.22        Third
Amendment, dated March 7, 2002, to the Facility Agreement (incorporated by reference to
exhibit 4.23 to the 2001 Form 20-F).

4.23        Joint
Development and Transfer and Cross License Agreement, dated May 2002, between the
Registrant and a Japanese manufacturer (incorporated by reference to exhibit 10.3 to the
Registrants Registration Statement on Form F-2, No. 333-97043).

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4.24        Technology
License Agreement, dated April 7, 2000, between the Registrant and Toshiba Corporation
(incorporated by reference to exhibit 10.4 to the Registrants Registration
Statement on Form F-2, No. 333-97043). (Portions of this exhibit have been omitted
pursuant to a request for confidential treatment.)

4.25        Technology
Transfer License Agreement, dated September 2002, between Registrant and Motorola, Inc.
(incorporated by reference to exhibit 10.5 to the Registrants Registration
Statement on Form F-2, No. 333-97043). (Portions of this exhibit have been omitted
pursuant to a request for confidential treatment.)

4.26        Fourth
Amendment, dated April 29, 2002, to the Facility Agreement (incorporated by reference to
exhibit 4.27 to the Registrants Annual Report on Form 20-F for the year ended
December 31, 2002 (the 2002 Form 20-F)).

4.27        Fifth
Amendment dated September 18, 2002 to the Facility Agreement (incorporated by reference
to exhibit 4.28 to the 2002 Form 20-F).

4.28        Amendment
to Fifth Amendment to the Facility Agreement, dated October 22, 2002, to the Facility
Agreement (incorporated by reference to exhibit 4.29 to the2002 Form 20-F).

4.29        Letter
Agreement, dated March 2002, among SanDisk, Alliance, Macronix, ICTech and Challenge Fund
to advance Third and Fourth Milestone Payments (incorporated by reference to exhibit 4.30
to the 2002 Form 20-F).

4.30        Letter
Agreement, dated July 2002, among SanDisk, Alliance, Macronix, and ICTech to exercise
rights distributed in rights offering (incorporated by reference to exhibit 4.31 to the
2002 Form 20-F).

4.31        Letter
Agreement, dated March 2003, among SanDisk, Alliance, Macronix, ICTech, and the
Registrant (incorporated by reference to exhibit 4.32 to the 2002 Form 20-F).

4.32        Form
of Rights Agent Agreement between the Registrant and American Stock Transfer & Trust
Company (including form of Rights Certificate) (incorporated by reference to exhibit 4.1
to the Registrants Registration Statement on Form F-2, No. 333-97043).

4.33        Form
of Warrant Agreement between the Registrant and American Stock Transfer & Trust
Company (including form of Warrant Certificate) (incorporated by reference to exhibit 4.2
to the Registrants Registration Statement on Form F-2, No. 333-97043).

4.34        Investment
Center Agreement related to Fab 1, dated November 13, 2001 (English translation of Hebrew
original) (incorporated by reference to exhibit 10.2 to the Registrants
Registration Statement on Form F-2, No. 333-97043).

4.35        Development
and License Agreement, dated March 31, 2002, between Virage Logic Corporation and the
Registrant (incorporated by reference to exhibit 4.37 to the 2002 Form 20-F). (Portions
of this exhibit have been omitted pursuant to a request for confidential treatment.)

4.36        Master
Services and License Agreement, dated June 2002, between Artisan Components, Inc. and the
Registrant (incorporated by reference to exhibit 4.38 to the 2002 Form 20-F).

4.37        Seventh
Amendment to the Facility Agreement, dated November 11, 2003, (incorporated by reference
to Exhibit 99.1 of the Registrants Report on Form 6-K filed on December 17, 2003).

- 93 -

---

---

4.38        Undertaking
of the Registrant, dated November 11, 2003 (incorporated by reference to Exhibit 99.3 of
the Registrants Report on Form 6-K filed on December 17, 2003).

4.39        Letter
Agreement, dated November 11, 2003, by and among the Registrant, Israel Corporation
Technologies, SanDisk Corporation, Alliance Semiconductor Corporation and Macronix
International Co., Ltd. (incorporated by reference to Exhibit 99.4 of the Registrants
Report on Form 6-K filed on December 17, 2003).

4.40        Foundry
Agreement, dated May 12, 2004, between the Registrant and Siliconix incorporated
(incorporated by reference to exhibit 4.42 to the Registrants Annual Report on Form
20-F for the year ended December 31, 2004 (the  2004 Form 20-F)). (Portions of this
exhibit have been omitted pursuant to a request for confidential treatment.)

4.41        Share
Purchase Agreement, dated December 8, 2004, between the Registrant and the Purchasers
named therein (incorporated by reference to exhibit 4.43 to the 2004 Form 20-F).

4.42        Agreement,
dated December 31, 2004, by and among the Registrant and the Purchasers named therein
(incorporated by reference to exhibit 4.44 to the 2004 Form 20-F).

4.43        Employee
Share Option Plan 2004 (incorporated by reference to Exhibit 4.3 to the Registrants
Registration Statement on Form S-8 No. 333-117565 (Form S-8 No. 333-117565).

4.44        Form
of Grant Letter to Israeli Employees (incorporated by reference to Exhibit 4.4 to Form
S-8 No. 333-117565).

4.45        Form
of Grant Letter to US Employees (incorporated by reference to Exhibit 4.5 to Form S-8 No.
333-117565).

4.46        Bank
Warrants, dated August 2005, between the Registrant and Bank Hapoalim B.M. and Bank Leumi
Le-Israel B.M (incorporated by reference to correspondingly-numbered exhibit to the
Registrants Annual Report on Form 20-F for the year ended December 31, 2005 (the
2005 Form 20-F).

4.47        Ninth
Amendment to the Facility Agreement, dated July 2005, dated July 24, 2005 (incorporated
by reference to exhibit 4.5 to the Form F-1 No. 333-126909 (Form F-1 No. 333-126909).

4.48        Tenth
Amendment to the Facility Agreement, dated September 2005 (incorporated by reference to
Exhibit 4.4 to Form F-1 No. 333-126909).

4.49        Eleventh
Amendment to the Facility Agreement, dated October 2005 (incorporated by reference to
Exhibit 4.3 to Form F-1 No. 333-126909).

4.50        Twelfth
Amendment to the Facility Agreement, dated November 2005 (incorporated by reference to
Exhibit 4.6 to Form F-1 No. 333-126909).

4.51        Thirteenth
Amendment to the Facility Agreement, dated May 2006 (incorporated by reference to
correspondingly-numbered exhibit to the Registrants Annual Report on Form 20-F for
the year ended December 31, 2006"2006 Form 20-F).

4.52        Fourteenth
Amendment to the Facility Agreement, dated May 2006 (incorporated by reference to
correspondingly-numbered exhibit to the 2006 Form 20-F).

4.53        Fifteenth
Amendment to the Facility Agreement, dated June 2006 (incorporated by reference to
correspondingly-numbered exhibit to the 2006 Form 20-F).

- 94 -

---

---

4.54        Form
of Rights Agent Agreement with Rights Certificate Attached (incorporated by reference to
Exhibit 4.1 to Form F-1 No. 333-126909).

4.55        Development
and License Agreement, dated July 2005, between Impinj, Inc. and the Registrant
(incorporated by reference to correspondingly-numbered exhibit to the 2005 Form 20-F).
(Portions of this exhibit have been omitted pursuant to a request for confidential
treatment.)

4.56        License
and Design Agreement, dated January 10, 2003 between Chipidea Microelectronics S.A. and
the Registrant (incorporated by reference to correspondingly-numbered exhibit to the 2005
Form 20-F). (Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.)

4.57        Amendment
to Design Agreement of January 2003 between Chipidea Microelectronics S.A. and the
Registrant, dated June 2005 (incorporated by reference to correspondingly-numbered
exhibit to the 2005 Form 20-F). (Portions of this exhibit have been omitted pursuant to a
request for confidential treatment.)

4.58        License
Agreement, dated April 29, 2004, between Synopsys, Inc. and the Registrant (incorporated
by reference to correspondingly-numbered exhibit to the 2005 Form 20-F). (Portions of
this exhibit have been omitted pursuant to a request for confidential treatment.)

4.59        Employee
Share Option Plan 2005, as amended (incorporated by reference to Exhibit 4.1 of the 2008
Form S-8).

4.60        Form
of Grant Letter to Israeli Employees (incorporated by reference to Exhibit 4.4 of the
2006 Form S-8).

4.61        Form
of Grant Letter to US Employees (incorporated by reference to Exhibit 4.5 of the 2006
Form S-8).

4.62        Form
of Grant Letter for grants to Jazz employees under the Employee Share Option Plan 2005
(incorporated by reference to Exhibit 4.4 of the 2008 Form S-8).

4.63        Jazz
Technologies, Inc. 2006 Equity Incentive (incorporated by reference to Exhibit 4.5 of the
2008 Form S-8)

4.64        Form
of Assumption Letter from the Registrant to holders of Jazz Technologies, Inc. 2006
Equity Incentive Plan options (incorporated by reference to Exhibit 4.6 of the 2008 Form
S-8)

4.65        Form
of Option Agreement under the Jazz Technologies, Inc. 2006 Equity Incentive Plan
(incorporated by reference to Exhibit 4.7 of the 2008 Form S-8)

4.66        CEO
Share Option Plan 2005 (incorporated by reference to Exhibit 4.6 of the 2006 Form S-8).

4.67        Option
Grant Letter Agreement  CEO Share Option Plan 2005 from the Registrant to Russell
Ellwanger, dated July 15, 2005 (incorporated by reference to Exhibit 4.7 of the 2006 Form
S-8).

4.68        Option
Grant Letter Agreement  CEO Share Option Plan 2005 from the Registrant to Russell
Ellwanger, dated September 28, 2006 (incorporated by reference to Exhibit 4.8 of the 2006
Form S-8).

- 95 -

---

---

4.69        Option
Grant Letter Agreement  CEO Share Option Plan 2005 from Tower Semiconductor USA,
Inc. to Russell Ellwanger, dated July 15, 2005 (incorporated by reference to Exhibit 4.9
of the 2006 Form S-8).

4.70        Equity
Convertible Capital Note, dated September 28, 2006, issued to Israel Corporation Ltd.
(incorporated by reference to Exhibit 99.4 of the Form 6-K for the month of November 2006
No. 6 filed on November 7, 2006 (the November 2006 Form 6-K)).

4.71        Registration
Rights Agreement, dated September 28, 2006, with Israel Corporation Ltd. (incorporated by
reference to Exhibit 99.5 of the November 2006 Form 6-K).

4.72        Amending
Agreement, dated August 24, 2006, with Bank Hapoalim B.M. and Bank Leumi Le-Israel B.M.,
to the Facility Agreement (incorporated by reference to Exhibit 99.6 of the November 2006
Form 6-K).

4.73        Facility
Agreement, as amended and restated by the parties through August 24, 2006 (incorporated
by reference to Exhibit 99.7 of the November 2006 Form 6-K).

4.74        Conversion
Agreement, dated September 28, 2006, with Bank Hapoalim B.M. (incorporated by reference
to Exhibit 99.8 of the November 2006 Form 6-K).

4.75        Conversion
Agreement, dated September 28, 2006, with Bank Leumi Le-Israel B.M. (incorporated by
reference to Exhibit 99.9 of the November 2006 Form 6-K).

4.76        Registration
Rights Agreement, dated September 28, 2006, with Bank Hapoalim B.M. (incorporated by
reference to Exhibit 99.10 of the November 2006 Form 6-K).

4.77        Registration
Rights Agreement, dated September 28, 2006, with Bank Leumi Le-Israel B.M. (incorporated
by reference to Exhibit 99.11 of the November 2006 Form 6-K).

4.78        Equity
Convertible Capital Note, dated September 28, 2006, issued to Bank Hapoalim B.M.
(incorporated by reference to Exhibit 99.12 of the November 2006 Form 6-K).

4.79        Equity
Convertible Capital Note, dated September 28, 2006, issued to Bank Leumi Le-Israel B.M.
(incorporated by reference to Exhibit 99.13 of the November 2006 Form 6-K).

4.80        Form
of Securities Purchase Agreement (incorporated by reference to Exhibit 99.2 of the Form
6-K for the month of March 2007 No.1 filed on March 15, 2007 (the March 2007 Form
6-K)).

4.81        Form
of Registration Rights Agreement (incorporated by reference to Exhibit 99.4 of the March
2007 Form 6-K).

4.82        Loan
Agreement, dated August 2006, between the Registrant and SanDisk Corporation
(incorporated by reference to correspondingly-numbered exhibit to the 2006 Form 20-F).

4.83        Amendment
No. 1 to restated Facility Agreement, dated September 10, 2007 (incorporated by reference to Exhibit 4.85 to the 2007 20-F).

4.84        Agreement
and Plan of Merger and Reorganization, dated May 19, 2008, between the Registrant, Jazz
Technologies, Inc. and Armstrong Acquisition Corp. (incorporated by reference to Exhibit
2.1 of the May 20, 2008 Form 6-K)

4.85        Amending
Agreement to the Facility Agreement, dated September 25, 2008, with Bank Hapoalim B.M.
and Bank Leumi Le-Israel B.M.

- 96 -

---

---

4.86        Facility
Agreement, as amended and restated by the parties through September 29, 2008.

4.87        Conversion
Agreement, dated September 25, 2008, with Bank Hapoalim B.M.

4.88        Conversion
Agreement, dated September 25, 2008, with Bank Leumi Le-Israel B.M.

4.89        Conversion
Agreement, dated September 25, 2008, with the Israel CorporationLtd.

4.90        Pledge
Agreement, dated September 25, 2008, with Bank Hapoalim B.M. and Bank Leumi Le-Israel
B.M.

4.91        Amended
and Restated Registration Rights Agreement, dated September 25, 2008, with Bank Hapoalim
B.M.

4.92        Amended
and Restated Registration Rights Agreement, dated September 25, 2008, with Bank Leumi
Le-Israel B.M.

4.93        Undertaking
by Israel Corporation Ltd., dated September 25, 2008.

4.94        Securities
Purchase Agreement, dated September 25, 2008, with the IsraelCorporation Ltd.

4.95        Equity
Convertible Capital Note, dated September 29, 2008, issued to Bank           Hapoalim
B.M.

4.96        Equity
Convertible Capital Note, dated September 29, 2008, issued to Bank Leumi Le-Israel B.M.

4.97        Equity
Convertible Capital Note, in the principal amount of $30 million,           dated
September 25, 2008, issued to the Israel Corporation Ltd. in connection           with
the conversion of debt.

4.98        Equity
Convertible Capital Note, in the principal amount of $20 million,           dated
September 25, 2008, issued to the Israel Corporation Ltd. in connection           with
the conversion of debt.

4.99        Equity
Convertible Capital Note, in the principal amount of $20 million,           dated
September 25, 2008, issued to the Israel Corporation Ltd. in connection           with
the investment.

4.100        Equity
Convertible Capital Note, in the principal amount of $20 million,           dated January
7, 2008, issued to the Israel Corporation Ltd. in connection with           the
investment.

4.101        Amended
and Restated Registration Rights Agreement, dated September 25, 2008, with the Israel
Corporation Ltd.

4.102        Amendment
to Undertaking by the Israel Corporation Ltd., dated January 6, 2009.

12.1        Certification
by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

12.2        Certification
by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

13.1        Certification
by Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

13.2        Certification
by Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

14.1        Consent
of Brightman Almagor & Co.

- 97 -

---

---

# SIGNATURES

Pursuant
to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant
hereby certifies that it meets all the requirements for filing on Form 20-F and has duly
caused and authorized the undersigned to sign this Annual Report to be signed on its
behalf.

| |  | TOWER SEMICONDUCTOR LTD.By: /s/ Russell C.  Ellwanger
Russell C.  EllwangerChief Executive Officer
| |  | ----------------------------------------------------------------------------------------------------------------

June 30, 2009



---

---

# TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES CONSOLIDATED FINANCIAL
STATEMENTS AS OF DECEMBER 31, 2008



---

---

# TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES

# INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS

| |                                                         |           
| | ------------------------------------------------------- | ----------
|
|
|
|
| |                                                         | Page      
| |                                                        
| | REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | F-1       
| |                                                        
| | BALANCE SHEETS                                          | F-2       
| |                                                        
| | STATEMENTS OF OPERATIONS                                | F-3       
| |                                                        
| | STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY           | F-4       
| |                                                        
| | STATEMENTS OF CASH FLOWS                                | F-5 - F-6 
| |                                                        
| | NOTES TO FINANCIAL STATEMENTS                           | F-7 - F-74



---

---

|                             |                        
|---------------------------- | -----------------------
|
|
|
|
|                             | Brightman Almagor Zohar
|1 Azrieli Center            
|Tel Aviv 67021              
|P.O.B. 16593, Tel Aviv 61164
|Israel                      
|                            
|                             | Tel: +972 (3) 608 5555 
|                             | Fax: +972 (3) 609 4022 
|                             | info@deloitte.co.il    
|                             | www.deloitte.com       

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

# To the Board of
Directors and the shareholders ofTower Semiconductor Ltd.

We have audited the accompanying consolidated
balance sheets of Tower Semiconductor Ltd. and subsidiaries (the Company) as
of December 31, 2008 and 2007, and the related consolidated statements of operations,
shareholders equity and cash flows for each of the three years in the period ended
December 31, 2008. These financial statements are the responsibility of the Companys
Board of Directors and management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, such consolidated
financial statements present fairly, in all material respects, the financial position of
Tower Semiconductor Ltd. and subsidiaries as of December 31, 2008 and 2007, and the
results of their operations and their cash flows for each of the three years in the period
ended December 31, 2008, in conformity with accounting principles generally accepted in
United States of America.

We have also audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of December 31, 2008, based on
criteria established in Internal Control  Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report
dated February 23, 2009 expressed an unqualified opinion on the effectiveness of the
Companys internal control over financial reporting.

# Brightman Almagor Zohar
& Co.Certified Public
AccountantsA Member Firm of Deloitte
Touche Tohmatsu

# Tel Aviv, IsraelFebruary 23, 2009

F - 1.1

---

---

|                             |                        
|---------------------------- | -----------------------
|
|
|
|
|                             | Brightman Almagor Zohar
|1 Azrieli Center            
|Tel Aviv 67021              
|P.O.B. 16593, Tel Aviv 61164
|Israel                      
|                            
|                             | Tel: +972 (3) 608 5555 
|                             | Fax: +972 (3) 609 4022 
|                             | info@deloitte.co.il    
|                             | www.deloitte.com       

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

# To Board of Directors
and the shareholders ofTower Semiconductor Ltd.

We have audited the internal control
over financial reporting of Tower Semiconductor Ltd. and subsidiaries (the
Company) as of December 31, 2008, based on criteria established in Internal
Control  Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). As described in ITEM 15 CONTROLS AND PROCEDURES 
INTERNAL CONTROL OVER FINANCIAL REPORTING, management excluded from its assessment the
internal control over financial reporting at Jazz Technologies, Inc, which was acquired on
September 19, 2008 and whose financial statements constitute 42 % and 27 % of net and
total assets, respectively, 22 % of revenues, and 1 % of net income of the consolidated
financial statement amounts as of and for the year ended December 31, 2008. Accordingly,
our audit did not include the internal control over financial reporting at Jazz
Technologies, Inc. The Companys Board of Directors and management are responsible
for maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting, included in ITEM 15
CONTROLS AND PROCEDURES  INTERNAL CONTROL OVER FINANCIAL REPORTING. Our
responsibility is to express an opinion on the Companys internal control over
financial reporting based on our audit.

We conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.

A companys internal control
over financial reporting is a process designed by, or under the supervision of, the
companys principal executive and principal financial officers, or persons performing
similar functions, and effected by the companys board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A companys internal control over
financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.

F - 1.2

---

---

|                             |                        
|---------------------------- | -----------------------
|
|
|
|
|                             | Brightman Almagor Zohar
|1 Azrieli Center            
|Tel Aviv 67021              
|P.O.B. 16593, Tel Aviv 61164
|Israel                      
|                            
|                             | Tel: +972 (3) 608 5555 
|                             | Fax: +972 (3) 609 4022 
|                             | info@deloitte.co.il    
|                             | www.deloitte.com       

Because of the inherent limitations
of internal control over financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements due to error or fraud may
not be prevented or detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods are
subject to the risk that the controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may
deteriorate.

In our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2008, based on the criteria established in Internal Control 
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.

We have also audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated financial statements as of and for the year ended December 31, 2008 of the
Company and our report dated February 23, 2009 expressed an unqualified opinion on those
financial statements.

# Brightman Almagor Zohar
& Co.Certified Public
AccountantsA Member Firm of Deloitte
Touche Tohmatsu

# Tel Aviv, IsraelFebruary 23, 2009

F - 1.3

---

---

TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS(dollars in thousands, except share data and per share data)

|                                                    |  | As of December 31,
|--------------------------------------------------- |  | ------------------
|
|
|
|
|A S S E T S                                         |  |                   
|                                                    |  |                   
|CURRENT ASSETS                                      |  |                   
|Cash and cash equivalents                           |  |                   
|Trade accounts receivable:                          |  |                   
|Related parties                                     |  |                   
|Others                                              |  |                   
|Other receivables                                   |  |                   
|Inventories                                         |  |                   
|Other current assets                                |  |                   
|                                                    |  |                   
|Total current assets                                |  |                   
|                                                    |  |                   
|                                                    |  |                   
|LONG-TERM INVESTMENTS                               |  |                   
|                                                    |  |                   
|                                                    |  |                   
|PROPERTY AND EQUIPMENT, NET                         |  |                   
|                                                    |  |                   
|                                                    |  |                   
|INTANGIBLE ASSETS, NET                              |  |                   
|                                                    |  |                   
|                                                    |  |                   
|GOODWILL                                            |  |                   
|                                                    |  |                   
|                                                    |  |                   
|OTHER ASSETS , NET                                  |  |                   
|                                                    |  |                   
|                                                    |  |                   
|TOTAL ASSETS                                        |  |                   
|                                                    |  |                   
|                                                    |  |                   
|LIABILITIES AND SHAREHOLDERS' EQUITY                |  |                   
|                                                    |  |                   
|CURRENT LIABILITIES                                 |  |                   
|Current maturities of convertible debentures        |  |                   
|Short-term bank loan                                |  |                   
|Trade accounts payable                              |  |                   
|Deferred revenue and short-term customers' advances |  |                   
|Other current liabilities                           |  |                   
|                                                    |  |                   
|Total current liabilities                           |  |                   
|                                                    |  |                   
|LONG-TERM LOANS FROM BANKS (*)                      |  |                   
|                                                    |  |                   
|DEBENTURES (**)                                     |  |                   
|                                                    |  |                   
|LONG-TERM CUSTOMERS' ADVANCES                       |  |                   
|                                                    |  |                   
|OTHER LONG-TERM LIABILITIES                         |  |                   
|                                                    |  |                   
|                                                    |  |                   
|Total liabilities                                   |  |                   
|                                                    |  |                   
|                                                    |  |                   
|SHAREHOLDERS' EQUITY                                |  |                   
|                                                    |  |                   
|                                                    |  |                   
|TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY          |  |                   
|                                                    |  |                   

|(*) | of
which $202,989 and $365,563 are calculated based on its fair value as of December 31,
2008 and December 31, 2007, respectively.
|--- | ----------------------------------------------------------------------------------------------------------------------------------

|(**) | of
which $16,825 and $28,484 are calculated based on its fair value as of December 31, 2008
and December 31, 2007, respectively.
|---- | --------------------------------------------------------------------------------------------------------------------------------

See notes to consolidated financial statements.

F - 2

---

---

TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS(dollars in thousands, except share data and per share data)

|                                                 |  | Year ended December 31,
|------------------------------------------------ |  | -----------------------
|
|
|
|
|REVENUES                                         |  |                        
|                                                 |  |                        
|COST OF REVENUES                                 |  |                        
|                                                 |  |                        
|                                                 |  |                        
|GROSS LOSS                                       |  |                        
|                                                 |  |                        
|                                                 |  |                        
|OPERATING COSTS AND EXPENSES                     |  |                        
|                                                 |  |                        
|Research and development                         |  |                        
|Marketing, general and administrative            |  |                        
|Write-off of in-process research and development |  |                        
|Merger related costs                             |  |                        
|Fixed assets impairment                          |  |                        
|                                                 |  |                        
|                                                 |  |                        
|                                                 |  |                        
|                                                 |  |                        
|                                                 |  |                        
|OPERATING LOSS                                   |  |                        
|                                                 |  |                        
|FINANCING EXPENSE, NET                           |  |                        
|                                                 |  |                        
|GAIN ON DEBT RESTRUCTURING                       |  |                        
|                                                 |  |                        
|OTHER INCOME (EXPENSE), NET                      |  |                        
|                                                 |  |                        
|                                                 |  |                        
|LOSS BEFORE INCOME TAX EXPENSES                  |  |                        
|                                                 |  |                        
|INCOME TAX PROVISION                             |  |                        
|                                                 |  |                        
|                                                 |  |                        
|LOSS FOR THE YEAR                                |  |                        
|                                                 |  |                        
|                                                 |  |                        
|BASIC LOSS PER ORDINARY SHARE                    |  |                        
|                                                 |  |                        
|Loss per share                                   |  |                        
|                                                 |  |                        
|                                                 |  |                        
|Weighted average number of ordinary              |  |                        
|shares outstanding - in thousands                |  |                        
|                                                 |  |                        

See notes to consolidated financial statements.

F - 3

---

---

TOWER SEMICONDUCTOR LTD.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY(dollars in thousands, except share data and per share data)

|                                               | Ordinary shares | Additional
paid-in
capital | Capital
notes | Cumulative
stock based
compensation | Treasury
stock | Accumulated
Other
comprehensive
gain (loss) | Accumulated
deficit | Comprehensive
income (loss) | Total
|---------------------------------------------- | --------------- | -------------------------- | ------------- | ----------------------------------- | -------------- | ------------------------------------------- | ------------------- | --------------------------- | -----
|
|
|
|
|BALANCE - JANUARY 1, 2006                      |                 |                            |               | 68,232,056                          |                | $                                           | 16,548              |                             | $    
|                                               |                 |                           
|Issuance of shares and warrants                |                 |                            |               | 16,729,145                          |                |                                             | 3,860               |                             |      
|Conversion of convertible debentures to shares |                 |                            |               | 16,734,316                          |                |                                             | 3,696               |                             |      
|Employee stock-based compensation              |                 |                            |               |                                     |                |                                             |                     |                             |      
|Exercise of options                            |                 |                            |               | 7,250                               |                |                                             | 2                   |                             |      
|Exercise of warrants                           |                 |                            |               | 350,000                             |                |                                             | 81                  |                             |      
|Stock-based compensation, note 17B(5)          |                 |                            |               |                                     |                |                                             |                     |                             |      
|Capital notes                                  |                 |                            |               |                                     |                |                                             |                     |                             |      
|Other comprehensive gain                       |                 |                            |               |                                     |                |                                             |                     |                             |      
|Loss for the year                              |                 |                            |               |                                     |                |                                             |                     |                             |      
|                                               |                 |                            |               |                                     |                |                                             |                     |                             |      
|Comprehensive loss                             |                 |                            |               |                                     |                |                                             |                     |                             |      
|                                               |                 |                            |               |                                     |                |                                             |                     |                             |      
|                                               |                 |                           
|BALANCE - DECEMBER 31, 2006                    |                 |                            |               | 102,052,767                         |                | $                                           | 24,187              |                             | $    
|                                               |                 |                           
|Issuance of shares and warrants                |                 |                            |               | 22,705,598                          |                |                                             | 5,398               |                             |      
|Conversion of convertible debentures to shares |                 |                            |               | 591,520                             |                |                                             | 142                 |                             |      
|Employee stock-based compensation              |                 |                            |               |                                     |                |                                             |                     |                             |      
|Exercise of options                            |                 |                            |               | 176,231                             |                |                                             | 44                  |                             |      
|Reclassification of bifurcated conversion      |                 |                           
|option to shareholders' equity                 |                 |                            |               |                                     |                |                                             |                     |                             |      
|Stock-based compensation, note 17B(5)          |                 |                            |               |                                     |                |                                             |                     |                             |      
|Other comprehensive loss                       |                 |                            |               |                                     |                |                                             |                     |                             |      
|Cumulative effect adjustment of the Facility   |                 |                           
|Agreement to retained earnings                 |                 |                            |               |                                     |                |                                             |                     |                             |      
|Loss for the year                              |                 |                            |               |                                     |                |                                             |                     |                             |      
|                                               |                 |                            |               |                                     |                |                                             |                     |                             |      
|Comprehensive loss                             |                 |                            |               |                                     |                |                                             |                     |                             |      
|                                               |                 |                            |               |                                     |                |                                             |                     |                             |      
|                                               |                 |                           
|BALANCE - DECEMBER 31, 2007                    |                 |                            |               | 125,526,116                         |                | $                                           | 29,771              |                             | $    
|                                               |                 |                           
|Issuance of shares and warrants                |                 |                            |               | 34,256,292                          |                |                                             | 9,699               |                             |      
|Conversion of convertible debentures to shares |                 |                            |               | 1,543,226                           |                |                                             | 459                 |                             |      
|Employee stock-based compensation              |                 |                            |               |                                     |                |                                             |                     |                             |      
|Exercise of options                            |                 |                            |               | 5                                   |                |                                             |                     |                             |      
|Reclassification of bifurcated conversion      |                 |                           
|option to shareholders' equity                 |                 |                            |               |                                     |                |                                             |                     |                             |      
|Capital notes                                  |                 |                            |               |                                     |                |                                             |                     |                             |      
|Other comprehensive loss                       |                 |                            |               |                                     |                |                                             |                     |                             |      
|Loss for the year                              |                 |                            |               |                                     |                |                                             |                     |                             |      
|                                               |                 |                            |               |                                     |                |                                             |                     |                             |      
|Comprehensive loss                             |                 |                            |               |                                     |                |                                             |                     |                             |      
|                                               |                 |                            |               |                                     |                |                                             |                     |                             |      
|                                               |                 |                           
|BALANCE - DECEMBER 31, 2008                    |                 |                            |               | 161,325,639                         |                | $                                           | 39,929              |                             | $    
|                                               |                 |                            |               |                                     |                |                                             |                     |                             |      

See notes to consolidated financial statements.

F - 4

---

---

TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS(dollars in thousands, except share data and per share data)

|                                                                     | Year ended December 31,
|-------------------------------------------------------------------- | -----------------------
|
|
|
|
|CASH FLOWS - OPERATING ACTIVITIES                                    |                        
|                                                                     |                        
|Loss for the year                                                    |                        
|Adjustments to reconcile loss for the year                           |                        
|to net cash provided by (used in) operating activities:              |                        
|Income and expense items not involving cash flows:                   |                        
|Gain on debt restructuring                                           |                        
|Depreciation and amortization                                        |                        
|Effect of indexation, translation and fair value measurement on debt |                        
|Fixed assets impairment                                              |                        
|Write down of customer advance                                       |                        
|Other expense (income), net                                          |                        
|Write-off of in-process research and development                     |                        
|Changes in assets and liabilities:                                   |                        
|Trade accounts receivable                                            |                        
|Other receivables and other current assets                           |                        
|Inventories                                                          |                        
|Trade accounts payable                                               |                        
|Deferred revenue and customers' advances                             |                        
|Other current liabilities                                            |                        
|Other long-term liabilities                                          |                        
|                                                                     |                        
|                                                                     |                        
|Decrease in customers' advances, net                                 |                        
|                                                                     |                        
|Net cash provided by (used in) operating activities                  |                        
|                                                                     |                        
|                                                                     |                        
|CASH FLOWS - INVESTING ACTIVITIES                                    |                        
|                                                                     |                        
|Investments in property and equipment                                |                        
|Investment grants received                                           |                        
|Proceeds related to sale and disposal of property and equipment      |                        
|Acquisition of subsidiary consolidated for the first time (a)        |                        
|Investments in other assets and intangible assets                    |                        
|Decrease in designated cash and short-term                           |                        
|interest-bearing deposits                                            |                        
|Decrease (increase) in short-term interest-bearing deposits          |                        
|Long-term investments                                                |                        
|                                                                     |                        
|Net cash used in investing activities                                |                        
|                                                                     |                        
|                                                                     |                        
|CASH FLOWS - FINANCING ACTIVITIES                                    |                        
|                                                                     |                        
|Proceeds from long-term loans                                        |                        
|Proceeds on account of capital notes                                 |                        
|Proceeds from issuance of debentures and warrants, net               |                        
|Proceeds from issuance of ordinary shares and warrants, net          |                        
|Proceeds from exercise of warrants                                   |                        
|Repayment of debenture                                               |                        
|Proceeds from exercise of share options                              |                        
|Fees related to amendment of line of credit                          |                        
|Debt repayment                                                       |                        
|                                                                     |                        
|Net cash provided by financing activities                            |                        
|                                                                     |                        
|                                                                     |                        
|Effect of foreign exchange rate change                               |                        
|                                                                     |                        
|                                                                     |                        
|INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                     |                        
|CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR                        |                        
|                                                                     |                        
|                                                                     |                        
|CASH AND CASH EQUIVALENTS - END OF YEAR                              |                        
|                                                                     |                        

F - 5

---

---

TOWER SEMICONDUCTOR LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS(dollars in thousands, except share data and per share data)

|                                                                            | Year ended December 31,
|--------------------------------------------------------------------------- | -----------------------
|
|
|
|
|NON-CASH ACTIVITIES                                                         |                        
|                                                                            |                        
|Investments in property and equipment                                       |                        
|                                                                            |                        
|Stock-based compensation                                                    |                        
|                                                                            |                        
|Investments in other assets                                                 |                        
|                                                                            |                        
|Conversion of long-term customers' advances to share capital                |                        
|                                                                            |                        
|Conversion of long term debt and convertible debentures to capital notes    |                        
|                                                                            |                        
|Conversion of convertible debentures to share capital                       |                        
|                                                                            |                        
|Cumulative effect adjustment of the Facility Agreement to retained earnings |                        
|                                                                            |                        
|Reclassification of bifurcated conversion option to shareholders' equity    |                        
|                                                                            |                        
|Issuance of shares and warrants relating the merger with Jazz               |                        
|                                                                            |                        
|                                                                            |                        
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                            |                        
|                                                                            |                        
|Cash paid during the year for interest                                      |                        
|                                                                            |                        
|Cash paid during the year for income taxes                                  |                        
|                                                                            |                        
|                                                                            |                        
|(a) ACQUISITION OF SUBSIDIARY CONSOLIDATED FOR                              |                        
|THE FIRST TIME, SEE ALSO NOTE 3 :                                           |                        
|                                                                            |                        
|Assets and liabilities of the subsidiary as of September 19, 2008 :         |                        
|                                                                            |                        
|Working capital (excluding cash and cash equivalents)                       |                        
|Fixed assets                                                                |                        
|Long-term investments                                                       |                        
|Intangible assets                                                           |                        
|Other assets                                                                |                        
|Convertible debenture                                                       |                        
|Long-term liabilities                                                       |                        
|Goodwill                                                                    |                        
|                                                                            |                        
|                                                                            |                        
|                                                                            |                        
|Less:                                                                       |                        
|Issuance of share capital and warrants                                      |                        
|Accrued merger related costs                                                |                        
|                                                                            |                        
|                                                                            |                        
|                                                                            |                        
|                                                                            |                        
|                                                                            |                        

# See notes to
consolidated financial statements.

F - 6

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 1 |  | DESCRIPTION OF BUSINESS AND GENERAL
|------ | - | -----------------------------------

| | Tower
Semiconductor Ltd. (the Company), incorporated in Israel, commenced
operations in 1993. The Company is an independent specialty wafer foundry that delivers
customized solutions in a variety of advanced complementary metal oxide semiconductor
(CMOS) technologies, including digital CMOS, mixed-signal and RF (radio frequency) CMOS,
CMOS image sensors and power management devices. The Company manufactures integrated
circuits in geometries ranging between 1.0 and 0.35 microns at its 150-millimeter
fabrication facility (Fab 1), and in geometries ranging between 0.18 and 0.13
microns at its 200-millimeter fabrication facility (Fab 2). As a foundry, the
Company manufactures wafers using its advanced technological capabilities and the
proprietary integrated circuit designs of its customers.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys ordinary shares are traded on the NASDAQ Global Market and on the Tel-Aviv
Stock Exchange.
| | --------------------------------------------------------------------------------------------------------

| | In
September 2008, the Company completed its merger with Jazz Technologies in a stock for
stock transaction. Jazz Technologies is the parent company of its wholly-owned
subsidiary, Jazz Semiconductor, Inc., an independent semiconductor foundry focused on
specialty process technologies for the manufacture of analog intensive mixed-signal
semiconductor devices. As a result of this transaction, both Jazz Technologies and Jazz
Semiconductor became wholly owned subsidiaries of the Company (Jazz Technologies and Jazz
Semiconductor shall collectively be referred to as Jazz). Jazzs process
technologies include Analog-Intensive Mixed-Signal (AIMS) process technologies, Analog
CMOS, RFCMOS, bipolar and silicon germanium bipolar complementary metal oxide (SiGe)
Silicon and SiGe BiCMOS, SiGe C-BiCMOS, Power CMOS and High Voltage CMOS. Its customersanalog
and mixed-signal semiconductor devices are used in cellular phones, wireless local area
networking devices, digital TVs, set-top boxes, gaming devices, switches, routers and
broadband modems.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys consolidated financial statements include Jazz results for the period
between September 19, 2008 and December 31, 2008 and Jazz balance sheet as of December
31, 2008. The Companys consolidated financial statements are presented after
elimination of inter-company transactions and balances. For additional data regarding the
merger, see also Note 3.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
industry in which the Company and Jazz operate is characterized by wide fluctuations in
supply and demand. Such industry is also characterized by the complexity and sensitivity
of the manufacturing process, high levels of fixed costs, and the need for constant
advancements in production technology. During the past several years, the Company has
experienced significant recurring losses, negative net cash flows and an increasing
accumulated deficit. The Company is working in various ways to mitigate its financial
difficulties. Since the second half of 2005, the Company has increased its customer base,
mainly in Fab 2, modified its organizational structure to better address its customers
and to improve its market positioning, increased its sales activities, improved its
quarterly and yearly EBITDA and cash flow from operations, increased its installed
capacity level, raised funds and restructured its debt. See details in Notes 12B, 16A(3)
and 17 F-J.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 7

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 1 |  | DESCRIPTION OF BUSINESS AND GENERAL (Cont.)
|------ | - | -------------------------------------------

| | In
September 2008, the Company signed and closed definitive agreements with the two leading
Israeli banks, Bank Hapoalim B.M. and Bank Leumi Le-Israel B.M.,(Banks) and
the Israel Corporation (TIC) for the conversion of approximately $250,000 of
the Companys debt into equity and for TICs additional equity investments in
the Company in the amount of up to $40,000. For details see Note 12B.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
current worldwide economic downturn, the prevailing adverse market conditions in the
semiconductor industry including global decreased demand, downward price pressure, excess
inventory, unutilized capacity and the lack of availability of funding sources may
adversely affect the future financial results and position of the Company, including its
ability to continue to support its ongoing operations and growth plans. The Company is
working to mitigate the potential effect of this downturn through several measures, which
it believes could result in sufficient timely funding to allow it to continue its
operations, including completing the execution of the previously announced cost reduction
plan, which is targeted at saving approximately $60,000 on an annual run-rate, and
exploring alternative sources of funding (such as a possible sale and lease-back of a
portion of its real estate assets, sale of other assets and/or intellectual property,
licensing, receipt of all or part of pending grants from the Israeli Investment Center
and other alternatives for fund raising). There is no assurance that the Company will be
able to obtain sufficient funding from these or other sources to allow it to maintain its
ongoing activities and operations. See also Notes 12B, 16A(3), 16A(6) and 17 F-J.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 2 |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|------ | - | ------------------------------------------

| | The
Companys consolidated financial statements are presented in accordance with U.S.
generally accepted accounting principles (US GAAP).
| | -------------------------------------------------------------------------------------------------------------------------------------------

| | A. | Use
of Estimates in Preparation of Financial Statements
| | -- | -------------------------------------------------------

| | The
preparation of financial statements in conformity with generally accepted accounting
principles requires the Company to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities as of the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ from
those estimates.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Principles
of Consolidation
| | -- | ---------------------------

| | The
Companys consolidated financial statements include the financial statements of the
Company and its wholly-owned subsidiaries, which include its marketing and sales
subsidiary in the United States and Jazz, a leading independent wafer foundry focused on
Analog-Intensive Mixed Signal (AIMS) process technologies based in Newport Beach,
California (see also Note 3). The Companys consolidated financial statements
include Jazz results for the period between September 19, 2008 and December 31, 2008 and
Jazz balance sheet as of December 31, 2008. The Companys consolidated financial
statements are presented after elimination of inter-company transactions and balances.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 8

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 2 |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------ | - | --------------------------------------------------

| | C. | Presentation
of Assets and Liabilities Resulting from the Merger with Jazz
| | -- | --------------------------------------------------------------------------

| | Assets
and liabilities resulting from the merger with Jazz are presented based on estimated fair
values as of the date of the merger, see Note 3. The fair values of Jazzs assets
and liabilities are based on a preliminary valuation performed by the Company in
accordance with SFAS No. 141, Business Combinations (SFAS No. 141).
Final valuation of Jazzs assets and liabilities may vary significantly.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | D. | Cash
and Cash Equivalents
| | -- | -------------------------

| | Cash
and cash equivalents consist of banks deposits and short-term investments (primarily time
deposits and certificates of deposit) with original maturities of three months or less.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | E. | Allowance
for Doubtful Accounts
| | -- | -------------------------------

| | The
allowance for doubtful accounts is computed mainly on the specific identification basis
for accounts whose collectability, in the Companys estimation, is uncertain.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F. | Inventories
| | -- | -----------

| | Inventories
are stated at the lower of cost or market. Cost is determined for raw materials and
supplies mainly on the basis of the weighted moving average cost per unit. Cost is
determined for work in process and finished goods on the basis of actual production
costs.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | G. | Property
and Equipment
| | -- | ----------------------

| | (1) | Property
and equipment are presented at cost, including financing expenses and           other
capitalizable costs. Capitalizable costs include only incremental direct           costs
that are identifiable with, and related to, the property and equipment and           are
incurred prior to its initial operation. Identifiable incremental direct           costs
include costs associated with the funding, acquiring, constructing,
          establishing and installing property and equipment (whether performed by others
          or internally), and costs directly related to preproduction test runs of
          property and equipment that are necessary to get it ready for its intended use.
          Those costs include payroll and payroll-related costs of employees who devote
          time and are dedicated to the acquiring, constructing, establishing and
          installing of property and equipment. Allocation, when appropriate, of
          capitalizable incremental direct costs is based on the Companys estimates
          and methodologies including time sheet inputs.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Cost
is presented net of investment grants received or receivable, and less accumulated
depreciation and amortization. The accrual for grants receivable was determined based on
qualified investments made during any reporting period, provided that the primary
criteria for entitlement had been met.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 9

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 2 |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------ | - | --------------------------------------------------

| | G. | Property
and Equipment (Cont.)
| | -- | ------------------------------

| | (1) | (Cont.)
| | --- | -------

| | During
2007, the Company reassessed the estimated useful lives of its machinery and equipment
and as a result, machinery and equipment are depreciated over estimated useful lives of 7
years commencing the second quarter of 2007 (as opposed to 5 years prior to such period).
The change was based on the Companys best estimate of the useful lives of its
equipment, its experience accumulated from Fab 1 and recent trends in industry practices.
The Company believes that the change better reflects the economics associated with the
ownership of the equipment. This change has been accounted for as a change in estimate
and was applied prospectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
the effect of this change, see Note 7A.
| | -------------------------------------------

| | Property
and equipment resulting from the merger with Jazz were recorded at estimated fair value
as of the date of the merger and are depreciated as described below (See Note 3).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Depreciation
is calculated based on the straight-line method over the estimated economic lives
commonly used in the industry of the assets or terms of the related leases, as follows:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                                         |            
| | ----------------------------------------------------------------------- | -----------
| | Buildings and building improvements (including facility infrastructure) | 10-25 years
| | Machinery and equipment                                                 | 3-7 years  

| | (2) | Impairment
examinations and recognition are performed and determined based on           the
accounting policy outlined in S below.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------

| | H. | Intangible
Assets
| | -- | -----------------

| | Technology
| | ----------

| | The
cost of Fab 2 technologies includes the technology process cost and incremental direct
costs associated with implementing the technologies until the technologies are ready for
their intended use. The costs in relation to Fab2 technologies are amortized over the
expected estimated economic life of the technologies commonly used in the industry.
Amortization phases commence on the dates on which each of the Fab2 manufacturing lines
is ready for its intended use. Fab2 technologies are presented net of accumulated
amortization as of December 31, 2008 and 2007 in the amounts of $73,948 and $63,911,
respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 10

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 2 |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------ | - | --------------------------------------------------

| | H. | Intangible
Assets (Cont.)
| | -- | -------------------------

| | Technology
(Cont.)
| | ------------------

| | Impairment
examinations and recognition are performed and determined based on the accounting policy
outlined in S below.
| | ------------------------------------------------------------------------------------------------------------------------

| | Intangible
assets and goodwill resulting from the merger with Jazz were recorded at estimated fair
value as of the date of the merger, see Note 3.
| | --------------------------------------------------------------------------------------------------------------------------------------------------

| | I. | Other
Assets
| | -- | ------------

| | Prepaid
Long-Term Land Lease
| | ----------------------------

| | Prepaid
lease payments to the Israel Land Administration (ILA) as detailed in Notes
16A(7) and 16C are amortized over the lease period.
| | -----------------------------------------------------------------------------------------------------------------------------------------

| | J. | Convertible
Debentures
| | -- | ----------------------

| | Under
Accounting Principles Board Opinion No. 14 (APB 14), the proceeds from the
sale of the securities are allocated to each security issued based on their relative fair
value. SFAS 133 generally provides criteria that, if met, require companies to bifurcate conversion
options from their host instruments and account for them as free standing derivative
financial instruments. These three criteria are (a) the economic characteristics and risks
of the embedded derivative instrument are not clearly and closely related to the economic
characteristics and risks of the host contract, (b) the hybrid instrument that embodies
both the embedded derivative instrument and the host contract is not remeasured at fair
value under otherwise applicable generally accepted accounting principles with changes in
fair value reported in earnings and (c) a separate instrument with the same terms as the
embedded derivative instrument would be considered a derivative instrument subject to the
requirements of SFAS 133. In determining whether embedded derivative should be bifurcated
the Company considers all other scope exceptions provided by SFAS No. 133. One scope
exception particularly relevant to convertibles provides that if the embedded conversion
feature is both indexed to and classified in the Companys equity based on the
criteria established in EITF 00-19 and other EITFs, bifurcation is not required.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Convertible
debentures resulting from the merger with Jazz are based on its estimated fair value as
of the date of the merger, see Note 3.
| | ------------------------------------------------------------------------------------------------------------------------------------------

F - 11

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 2 |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------ | - | --------------------------------------------------

| | J. | Convertible
Debentures (Cont.)
| | -- | ------------------------------

| | Stock-Based
Instruments in Financing Transactions
| | -------------------------------------------------

| | The
Company calculates the fair value of stock-based instruments included in the units issued
in its financing transactions. That fair value is recognized in equity, if determined to
be eligible for equity classification. The amount allocated to such instruments, in
connection with the issuance of debt not accounted at fair value is considered a discount
on the debt issued and results in an adjustment to the yield on the debt issued.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | K. | Income
Taxes
| | -- | ------------

| | The
Company and its subsidiaries account for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes (SFAS No. 109). This Statement
prescribes the use of the liability method whereby deferred tax asset and liability
account balances are determined based on differences between financial reporting and tax
bases of assets and liabilities. Deferred taxes are computed based on the tax rates
anticipated (under applicable law as of the balance sheet date) to be in effect when the
deferred taxes are expected to be paid or realized.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Deferred
tax assets are recognized if it is probable that such assets would be realized, for
temporary differences, which will result in deductible amounts in future years and for
carryforwards. An allowance against such deferred tax assets is recognized if it is
probable that some portion or all of the deferred tax assets will not be realized. Due to
the material loss carryforward amount of the Company as of December 31, 2008 and
uncertainties with regard to its utilization in the future, no deferred taxes were
recorded in the Companys results of operations, however deferred tax assets were
recorded in Jazz, see Note 20C.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
future utilization of Jazzs net operating loss carry forwards to offset future
taxable income may be subject to an annual limitation as a result of ownership changes
that may have occurred previously or that could occur in the future, see Note 20E.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company and its subsidiaries account for unrecognized tax benefits in accordance with
Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting
for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109 (FIN
48) and recognize interest and penalties that would be assessed in relation to the
settlement value of unrecognized tax benefits as a component of income tax expense.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | L. | Revenue
Recognition
| | -- | -------------------

| | The
Company and Jazzs net revenues are generated principally from sales of
semiconductor wafers. The Company and Jazz derives the remaining balance of its net
revenues from the resale of photomasks and other engineering services. The majority of
the Company and Jazzs sales are achieved through the efforts of its direct sales
force.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 12

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 2 |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------ | - | --------------------------------------------------

| | L. | Revenue
Recognition (Cont.)
| | -- | ---------------------------

| | In
accordance with SEC Staff Accounting Bulletin (SAB) No. 101, Revenue
Recognition in Financial Statements (SAB No. 101), and SAB No. 104,
Revenue Recognition (SAB No. 104), the Company and Jazz
recognize revenues when the following fundamental criteria are met: (i) persuasive
evidence of an arrangement exists, (ii) delivery has occurred or services have been
rendered, (iii) the price to the customer is fixed or determinable and (iv) collection
of the resulting receivable is reasonably assured. These criteria are usually met at the
time of product shipment. Revenues are recognized when the acceptance criteria are
satisfied, based on performing electronic, functional and quality tests on the products
prior to shipment and customer on-site testing. Such Company testing reliably
demonstrates that the products meet all of the specified criteria prior to formal
customer acceptance, and that product performance can reasonably be expected to conform
to the specified acceptance provisions.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Revenues
from contracts with multiple elements are recognized as each element is earned based on
the relative fair value of each element and when there are no undelivered elements that
are essential to the functionality of the delivered elements and when the amount is not
contingent upon delivery of the undelivered elements. Advances received from customers
towards future engineering services, product purchases and in some cases capacity
reservation are deferred until products are shipped to the customer, services are
rendered or the capacity reservation period ends.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company and Jazz provides for sales returns and allowances relating to specified yield or
quality commitments as a reduction of revenues at the time of shipment based on
historical experience and specific identification of events necessitating an allowance.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | M. | Research
and Development
| | -- | ------------------------

| | Research
and development costs are charged to operations as incurred. Amounts received or
receivable from the government of Israel and others, as participation in research and
development programs, are offset against research and development costs. The accrual for
grants receivable is determined based on the terms of the programs, provided that the
criteria for entitlement have been met.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | N. | Loss
Per Ordinary Share
| | -- | -----------------------

| | Basic
earnings per share is calculated, in accordance with SFAS No. 128, Earnings Per
Share (SFAS No. 128), by dividing profit or loss attributable to
ordinary equity holders of the Company (the numerator) by the weighted average number of
ordinary shares outstanding (the denominator) during the reported period. Diluted
earnings per share is calculated by adjusting profit or loss attributable to ordinary
equity holders of the Company, and the weighted average number of shares outstanding, for
the effects of all dilutive potential ordinary shares.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 13

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 2 |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------ | - | --------------------------------------------------

| | O. | Comprehensive
Income (Loss)
| | -- | ---------------------------

| | In
accordance with SFAS 130, comprehensive income (loss) represents the change in
shareholders equity during a reporting period from transactions and other events
and circumstances from non-owner sources. It includes all changes in equity during a
reporting period except those resulting from investments by owners and distributions to
owners. Other comprehensive income (loss) represents gains and losses that are included
in comprehensive income but excluded from net income.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | P. | Functional
Currency and Transaction Gains and Losses
| | -- | ----------------------------------------------------

| | The
currency of the primary economic environment in which the Company and its subsidiaries
conduct their operations is the U.S. dollar (dollar). Accordingly, the dollar
is the functional and reporting currency. Financing expenses, net in 2008 include net
foreign currency transaction gains of $2,401 and financing expenses, net in 2007 and 2006
include net foreign currency transaction losses of $3,526 and $3,659, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Q. | Jazzs
Pension Plans
| | -- | --------------------

| | Jazzs
liabilities relating its retirement plan for hourly employees and postretirement health
and life benefits plans are stated at their fair values.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------

| | Jazz
adopted SFAS No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88,
106 and 132(R)", (SFAS No. 158) which requires to recognize the
funded status of the defined benefit and other postretirement benefit plans in the
balance sheet, with changes in the funded status recognized through comprehensive income,
net of tax, in the year in which they occur. SFAS No. 158 requires the amounts recognized
in financial statements be determined on an actuarial basis. To accomplish this,
extensive use is made of assumptions about inflation, investment returns, mortality,
turnover, medical trend rates and discount rates. A change in these assumptions could
cause actual results to differ from those reported.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 14

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 2 |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------ | - | --------------------------------------------------

| | R. | Stock-Based
Compensation
| | -- | ------------------------

| | In
January 1, 2006, the Company adopted the provisions of SFAS No. 123 (revised 2004), Share-Based
Payment (SFAS No. 123(R)), under which employee share-based equity awards accounted
for under the fair value method. Accordingly, stock-based compensation to employees and
directors is measured at the grant date, based on the fair value of the award. The
Company elected the modified prospective method as its transition method. Under the
modified prospective method the compensation cost recognized by the Company beginning in
2006 includes (a) compensation cost for all equity incentive awards granted prior to, but
not yet vested as of January 1, 2006, based on the grant-date fair value estimated in
accordance with the original provisions of SFAS No. 123, and (b) compensation cost for
all stock-based compensations granted subsequent to January 1, 2006, based on the
grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). The
Company uses the straight-line attribution method to recognize stock-based compensation
costs over the service period of the award.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | S. | Impairment
of Assets
| | -- | --------------------

| | Impairment
of Fixed Assets and Intangible Assets
| | ------------------------------------------------

| | The
Company reviews long-lived assets and intangible assets on a periodic basis, as well as
when such a review is required based upon relevant circumstances, to determine whether
events or changes in circumstances indicate that the carrying amount of such assets may
not be recoverable. Application of SFAS No. 144 Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS No. 144) resulted in an impairment
charge which was recorded during 2008, see Note 7B.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Impairment
of Goodwill
| | ----------------------

| | Goodwill
is subject to an impairment test on at least an annual basis or upon the occurrence of
certain events or circumstances. Goodwill impairment is assessed based on a comparison of
the fair value of the unit, to which the goodwill is ascribed to as against the
underlying carrying value of its net assets, including goodwill. If the carrying amount
of the unit exceeds its fair value, the implied fair value of the goodwill is compared
with its carrying amount to measure the amount of impairment loss, if any.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | T. | Derivatives
| | -- | -----------

| | The
Company issues derivatives from time to time, whether embedded or freestanding, that are
denominated in currency other than its functional currency (generally the NIS in which
its shares are also traded). The Company considers those instruments to be indexed only
to its own stock and not dual indexed. After considering the various guidance available
on this issue, the Company decided that pending the final consensus in EITF 07-5 it will
continue to consider such instruments as indexed solely to its own shares.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 15

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 2 |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------ | - | --------------------------------------------------

| | U. | Initial
Adoption of New Standards
| | -- | ---------------------------------

| | FAS
157-3
| | ---------

| | In
October 2008, the FASB staff issued Staff Position (FSP) No. FAS 157-3, Determining
the Fair Value of a Financial Asset When the Market for That Asset Is Not Active.The
FSP amends Statement 157 by incorporating an example to illustrate key
considerations in determining the fair value of a financial asset in an inactive
market. The FSP is effective upon issuance and should be applied to prior periods for
which financial statements have not been issued.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
FSPs illustrative example and associated guidance clarifies various application
issues raised by preparers of financial statements. With regard to the measurement
principles of Statement 157, the FSP emphasizes the following:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Objective
of Fair Value  The objective of a fair value measurement is to determine the price
that would be received to sell an asset in an orderly transaction that is not a forced
liquidation or distressed sale between market participants as of the measurement date.
This objective does not change even when there is little, if any, market activity for an
asset as of the measurement date.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Distressed
Transactions  Even in times of market dislocation, it is not appropriate to
conclude that all market activity represents forced liquidations or distressed sales.
However, it is also not appropriate to automatically conclude that any transaction price
is determinative of fair value. The evaluation of whether individual transactions
are forced (that is, whether one of the parties is forced or otherwise compelled to
transact) depends on the facts and circumstances and may require the use of significant
judgment.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Relevance
of Observable Data  Observable market data may require significant adjustment to
meet the objective of fair value. For example, in cases where the volume and level
of trading activity in the asset have declined significantly, the available prices vary
significantly over time or among market participants, or the prices are not current, the
observable inputs might not be relevant and could require significant adjustment. If
the adjustment is significant, the measurement would be considered Level 3.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
Companys Assumptions and Nonperformance and Liquidity Risks  The use of the
Companys internal assumptions about future cash flows and appropriately
risk-adjusted discount rates is acceptable when relevant observable market data
does not exist. In addition, such assumptions or techniques must incorporate adjustments
for nonperformance and liquidity risks that market participants would consider in valuing
the asset.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 16

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 2 |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------ | - | --------------------------------------------------

| | U. | Initial
Adoption of New Standards (Cont.)
| | -- | -----------------------------------------

| | FAS
157-3(Cont.)
| | ----------------

| |  | Third
Party Pricing Quotes  Quotes and information obtained from brokers or pricing
services are not necessarily determinative if an active market does not exist for
the financial asset being measured. In addition, an entity should place less
reliance on quotes that do not reflect actual market transactions.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company considered the guidance in this FSP in evaluating its Banks loans and
certain of its debt securities that are traded in inactive markets.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------

| | V. | Recently
Issued Accounting Standards
| | -- | ------------------------------------

| | SFAS
No. 161
| | ------------

| | In
March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an amendment of SFAS 133 (SFAS 161).
SFAS 161 applies to all derivative instruments and non-derivative instruments that are
designated and qualify as hedging instruments and related hedged items accounted for
under SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities(SFAS
133). The provisions of SFAS 161 require entities to provide greater transparency
through additional disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are accounted
for under SFAS 133 and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entitys financial position, results
of operations and cash flows. SFAS 161 is effective for fiscal years and interim periods
beginning after November 15, 2008. The Company is currently evaluating the
additional disclosure requirements of SFAS 161.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | FSP
142-3
| | ---------

| | In
April 2008, the FASB issued FASB Staff Position 142-3, Determination of the Useful
Life of Intangible Assets (FSP 142-3). FSP 142-3 amends the
factors that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FASB Statement No. 142,
Goodwill and Other Intangible Assets(SFAS 142). The
objective of FSP 142-3 is to improve the consistency between the useful life of a
recognized intangible asset under SFAS 142 and the period of expected cash flows
used to measure the fair value of the asset under SFAS 141(R), Business
Combinations, and other U.S. generally accepted accounting principles. FSP 142-3
will be effective beginning in fiscal year 2010. The Company is currently evaluating the
impact that FSP 142-3 will have, if at all, on its consolidated financial statements
and disclosures.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 17

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 2 |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------ | - | --------------------------------------------------

| | V. | Recently
Issued Accounting Standards (Cont.)
| | -- | --------------------------------------------

| | FSP
APB 14-1
| | ------------

| | In
May 2008, the FASB issued FASB Staff Position (FSP) APB 14-1, Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including
Partial Cash Settlement) (APB 14-1). APB 14-1 requires the issuer to
separately account for the liability and equity components of convertible debt
instruments in a manner that reflects the issuers nonconvertible debt borrowing
rate. The guidance will result in companies recognizing higher interest expense in the
statement of operations due to amortization of the discount that results from separating
the liability and equity components. APB 14-1 will be effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years. The Company is currently assessing the impact of APB 14-1 on
its consolidated financial statements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | FSP
EITF 03-6-1
| | ---------------

| | In
June 2008, the FASB issued FASB Staff Position No. EITF 03-6-1, Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating Securities(FSP
EITF 03-6-1). FSP EITF 03-6-1 establishes that unvested share-based payment awards
that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or
unpaid) are participating securities as defined in Emerging Issues Task Force (EITF)
Issue No. 03-6, Participating Securities and the Two-Class Method under FASB
Statement No. 128", and should be included in the computation of earnings per share
pursuant to the two-class method as described in Statement of Financial Accounting
Standards No. 128, Earnings per Share. FSP EITF 03-6-1 is effective for
financial statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those years. All prior-period earnings per share data presented
shall be adjusted retrospectively to conform to the provisions of FSP EITF 03-6-1. Early
application is not permitted. The Company is currently evaluating the impact that the
adoption of FSP EITF 03-6-1 will have on its consolidated financial statements but
believes that its effect will be immaterial due to immaterial use of instruments within
the scope of the FSP.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 18

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 2 |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------ | - | --------------------------------------------------

| | V. | Recently
Issued Accounting Standards (Cont.)
| | -- | --------------------------------------------

| | EITF
Issue No. 07-5
| | -------------------

| | In
June 2008, the FASB Emerging Items Task Force reached a consensus on EITF Issue No. 07-5,
Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an Entitys
Own Stock. The Consensus was reached on the following three issues:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 1. | The
way an entity should           evaluate whether an instrument (or embedded feature)
          is indexed to its own stock.
| | -- | ------------------------------------------------------------------------------------------------------------------------------

| | 2. | The
way the currency in which the strike price of an equity-linked financial
          instrument (or embedded equity-linked feature) is denominated affects the
          determination of whether the instrument is indexed to an entitys own
          stock.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | The
way an issuer should account for market-based employee stock option           valuation
instruments.
| | -- | --------------------------------------------------------------------------------------------------------

| | This
consensus will affect entities with (1) options or warrants on their own shares (not
within the scope of Statement 150), including market-based employee stock option
valuation instruments; (2) forward contracts on their own shares, including forward
contracts entered into as part of an accelerated share repurchase program; and (3)
convertible debt instruments and convertible preferred stock. Also affected are entities
that issue equity-linked financial instruments (or financial instruments that contain
embedded equity-linked features) with a strike price that is denominated in a foreign
currency.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
consensus is effective for fiscal years (and interim periods) beginning after December
15, 2008. The consensus must be applied to outstanding instruments as of the beginning of
the fiscal year in which the issue is adopted as a cumulative-effect adjustment to the
opening balance of retained earnings for that fiscal year. Early application is not
permitted.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company is currently evaluating the effect of EITF 07-5 and has not yet determined the
impact of the consensus on its financial position or results of operations.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | W. | Reclassification
| | -- | ----------------

| | Certain
amounts in prior years financial statements have been reclassified in order to
conform to the 2008 presentation.
| | -------------------------------------------------------------------------------------------------------------------------

F - 19

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 3 |  | MERGER WITH JAZZ
|------ | - | ----------------

| | Introduction
| | ------------

| | In
connection with the merger of the Company with Jazz described in Note 1 in a stock for
stock transaction, upon the closing of the merger with Jazz, each outstanding share of
Jazz common stock was converted into 1.8 ordinary shares of the Company, each outstanding
warrant, option and convertible debentures to acquire one Jazz common stock became
exercisable for 1.8 ordinary shares of the Company. Effective September 19, 2008, Jazzs
common stock, warrants and units were no longer traded on the American Stock Exchange
(AMEX).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
consideration for the shares, options and warrants of Jazz, the Company issued
approximately 34,256,292 ordinary shares 5,381,213 options and 59,459,423 warrants with a
total value of $46,744 (or $50,070 including transaction costs). The per share value, as
well as the value of the options and warrants, was calculated based on the Companys
stock price prevailing around May 19, 2008, the date of signing the definitive agreement
of the merger and announcing it, in accordance with provisions of EITF 99-12 Determination
of the Measurement Date for the Market Price of Acquirer Securities Issued in a Purchase
Business Combination. The merger was accounted for under the purchase method of
accounting in accordance with U.S. generally accepted accounting principles for
accounting and financial reporting purposes. Under this method, Jazz was treated as the
acquired company. The results of Jazzs operations have been included in
the consolidated financial statements for the period between September 19, 2008 and
December 31, 2008 and its balance sheet was included as of December 31, 2008.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Estimated
Fair Values of Jazz's Assets and Liabilities as of the Date of
Merger
| | -------------------------------------------------------------------------------

| | The
following table summarizes the estimated fair values of Jazzs assets and
liabilities at the date of merger:
| | ----------------------------------------------------------------------------------------------------------------

| |                                     | September 19, 2008
| | ----------------------------------- | ------------------
|
|
|
|
| | Current assets                      |                   
| | Long-term investments               |                   
| | Property, plant, and equipment      |                   
| | Intangible assets                   |                   
| | Other assets                        |                   
| | Goodwill                            |                   
| |                                     |                   
| | Total assets as of merger date      |                   
| |                                     |                   
| |                                     |                   
| | Current liabilities                 |                   
| | Convertible debentures              |                   
| | Other long-term liabilities         |                   
| |                                     |                   
| | Total liabilities as of merger date |                   
| |                                     |                   
| |                                     |                   
| | Net assets as of merger date        |                   
| |                                     |                   
| |                                     |                   

F - 20

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 3 |  | MERGER WITH JAZZ (Cont.)
|------ | - | ------------------------

| | Estimated
Fair Values of Jazz's Assets and Liabilities as of the Date of
Merger (Cont.)
| | ---------------------------------------------------------------------------------------

| | Of
the $59,500 of intangible assets, $1,300 were assigned to existing technology, $15,100
were assigned to patents and other core technology, $1,800 were assigned to in-process
research and development, $2,600 were assigned to customer relations, $5,200 were
assigned to trade name and $33,500 were assigned to real estate lease agreements; $7,000
represent goodwill. The fair values set forth above are based on a preliminary valuation
of Jazzs assets and liabilities performed by the Company in accordance with SFAS No. 141,
Business Combinations (SFAS No. 141). Final valuation of Jazzs
assets and liabilities may vary significantly.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Pro-Forma
Financial Information
| | -------------------------------

| | The
following unaudited pro-forma financial information assumes that the merger occurred on
January 1, 2007. Such information is presented for illustrative purposes only and is not
necessarily indicative of the operating results that would have been achieved if the
merger had taken place on the date specified, nor are they indicative of the Companys
future operating results.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Year ended December 31,
| |  | -----------------------
|
|
|
|
| |  |                        
| |  |                        
| |  |                        
| |  |                        
| |  |                        
| |  |                        

|NOTE 4 |  | OTHER RECEIVABLES
|------ | - | -----------------

| | Other
receivables consist of the following:
| | -------------------------------------------

| |                     | As of December 31,
| | ------------------- | ------------------
|
|
|
|
| | Government agencies |                   
| | Others              |                   
| |                     |                   
| |                     |                   
| |                     |                   

F - 21

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 5 |  | INVENTORIES
|------ | - | -----------

| | Inventories
consist of the following:
| | -------------------------------------

| |                 | As of December 31,
| | --------------- | ------------------
|
|
|
|
| | Raw materials   |                   
| | Work in process |                   
| | Finished goods  |                   
| |                 |                   
| |                 |                   
| |                 |                   
| |                 |                   

| | Work
in process and finished goods are presented net of aggregate write-downs to net
realizable value of $12,488 and $6,497 as of December 31, 2008 and 2007, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 6 |  | LONG-TERM INVESTMENTS
|------ | - | ---------------------

| | Long-term
investments consist of the following:
| | -----------------------------------------------

| |                                               | As of December 31,
| | --------------------------------------------- | ------------------
|
|
|
|
| | Severance pay funds (see Note 15B)            |                   
| | Investment in HHNEC (see below)               |                   
| | Investment in limited partnership (see below) |                   
| | Others                                        |                   
| |                                               |                   
| |                                               |                   
| |                                               |                   

| | Investment
in Limited Partnership:
| | ----------------------------------

| | In
December 2007, the Company together with CMT Medical Technologies Ltd., a leading
provider of advanced digital X-ray imaging systems for medical diagnosis, established a
limited partnership to develop and market X-ray detectors for medical applications. The
Company owns 38% of the limited partnership and accounts for the investment in the
limited partnership using the equity method.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Investment
in HHNEC:
| | --------------------

| | Jazz
is holding an equity investment in HHNEC (Shanghai Hau Hong NEC Electronics Company,
Ltd.). As of December 31, 2008, the investment represented a minority interest of
approximately 10% in HHNEC, hence the investment in HHNEC was recorded at fair value as
of the date of the merger and subsequently carried using the cost method of accounting
for investments, as the Company does not have the ability to exercise significant
influence, see Note 3.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
part of the acquisition of 10% interest in HHNEC, Jazz is obligated to pay additional
amounts to former stockholders of Jazz Semiconductor if it will realize proceeds in
excess of $10,000 from a liquidity event through February 16, 2010. In that event, Jazz
will pay the former Jazz Semiconductor stockholders an amount equal to 50% of the
proceeds over $10,000.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 22

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 7 |  | PROPERTY AND EQUIPMENT, NET
|------ | - | ---------------------------

| | A. | Composition:
| | -- | ------------

| |                                               | As of December 31,
| | --------------------------------------------- | ------------------
|
|
|
|
| | Cost:                                         |                   
| | Buildings (including facility infrastructure) |                   
| | Machinery and equipment (*)                   |                   
| |                                               |                   
| |                                               |                   
| |                                               |                   
| | Accumulated depreciation and amortization     |                   
| | Buildings (including facility infrastructure) |                   
| | Machinery and equipment                       |                   
| |                                               |                   
| |                                               |                   
| |                                               |                   
| |                                               |                   
| |                                               |                   

| | (*) | Presented
net of impairment charges as of December 31, 2008, see B below.
| | --- | -------------------------------------------------------------------------

| | Supplemental
disclosure relating to cost of property and equipment:
| | -------------------------------------------------------------------

| | (1) | As
of December 31, 2008 and 2007, the cost of buildings, machinery and           equipment
was reflected net of investment grants in the aggregate of $267,922.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Depreciation
expenses, in relation to Fab 2 property and equipment were           $94,211, $113,393
and $123,422 in 2008, 2007 and 2006, respectively.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------

| | Depreciation
expenses, in relation to Jazz property and equipment were $5,513 in the period between
the merger date and December 31, 2008.
| | ------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Had
the Company calculated its depreciation for machinery and equipment using a
          useful life of a five year schedule (see Note 2G(1)), depreciation expenses for
          2008 would have been $129,870 (as compared to $102,256 presented using a useful
          life of a seven year schedule).
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Fixed
Assets Impairment
| | -- | -----------------------

| | Due
to the current worldwide economic downturn, the prevailing market conditions in the
semiconductor industry, global decreased demand, downward price pressure and excess
inventory (see also Note 1), the Company has determined during 2008 that the events and
circumstances indicate that the carrying amount of its machinery and equipment may not be
recoverable. In accordance with SFAS No. 144 Accounting for the Impairment or
Disposal of Long-Lived Assets, the Company tested the recoverability of its
machinery and equipment based, among others, on its business plan and prevailing market
conditions, and determined that the carrying amounts of its machinery and equipment may
not be recoverable. The Company evaluated the fair value of its machinery and equipment
and determined that the carrying amounts exceed the fair values by $120,538. The Company
recorded a charge in that amount in a separate line in its 2008 statement of operations.
The fair values of the Machinery and Equipment were determined using expected cash flows
discounted at discount rate commensurate with the risk involved in generating such cash
flows.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 23

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 7 |  | PROPERTY AND EQUIPMENT, NET (Cont.)
|------ | - | -----------------------------------

| | C. | Investment
Grants
| | -- | -----------------

| | In
January 1996, an investment program (1996 program) for expansion of Fab 1 in
the aggregate amount (as amended in December 1999 and 2001) of $228,680, entitling the
Company to investment grants, was approved by the Investment Center. The Company
completed its investments under the 1996 program in December 2001 and invested through
such date approximately $207,000. In May 2002, the Company submitted the final report in
relation to the 1996 program. As of December 31, 2008, the report has not yet received
final approval from the Investment Center.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | See
Note 16A(6) with respect to the Fab 2 program approved by the Investment Center in
December 2000.
| | -----------------------------------------------------------------------------------------------------

| | Entitlement
to the above grants and other tax benefits is subject to various conditions stipulated by
the Israeli Law for the Encouragement of Capital Investments  1959 (Investments
Law) and the regulations promulgated thereunder, as well as the criteria set forth
in the certificates of approval. In the event the Company fails to comply with such
conditions, the Company may be required to repay all or a portion of the grants received
plus interest and certain inflation adjustments. In order to secure fulfillment of the
conditions related to the receipt of investment grants, floating liens were registered in
favor of the State of Israel on substantially all of the Companys assets, see Note
20A.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | D. | For
liens, see Notes 12D, 16A(6) and 16D(2).
| | -- | --------------------------------------------

|NOTE 8 |  | INTANGIBLE ASSETS, NET
|------ | - | ----------------------

| | Intangible
assets, net consist of the following:
| | ------------------------------------------------

| |  | As of December 31,
| |  | ------------------
|
|
|
|
| |  |                   
| |  |                   
| |  |                   
| |  |                   
| |  |                   
| |  |                   
| |  |                   
| |  |                   
| |  |                   
| |  |                   

| | (*) | Intangible
assets amounts in relation to Jazz are based on its fair value as of                the
merger date, see Note 3.
| | --- | ---------------------------------------------------------------------------------------------------------------------------

| | In
process research and development in the amount of 1,800 was immediately written off and
included in a separate line in the statement of operations.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------

F - 24

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 9 |  | OTHER ASSETS, NET
|------ | - | -----------------

| | Other
assets, net consist of the following:
| | -------------------------------------------

| |                                                  | As of December 31,
| | ------------------------------------------------ | ------------------
|
|
|
|
| | Prepaid long-term land lease, net (see Note 16C) |                   
| | Debentures issuance expenses, net (see Note 17)  |                   
| | Prepaid expenses - long-term                     |                   
| | Deferred financing charges, net                  |                   
| |                                                  |                   
| |                                                  |                   
| |                                                  |                   
| |                                                  |                   

|NOTE 10 |  | ASSET-BASED REVOLVING CREDIT FACILITY
|------- | - | -------------------------------------

| | On
September 19, 2008, Jazz entered into a Second Amended and Restated Loan and Security
Agreement, as guarantor of its subsidiary Jazz Semiconductor, Inc., with Wachovia Capital
Markets, LLC, as lead arranger, bookrunner and syndication agent, and Wachovia Capital
Finance Corporation (Western), as administrative agent (Wachovia), and Jazz
Semiconductor, Inc. and Newport Fab, LLC, as borrowers (the Wachovia Loan Agreement),
with respect to a three-year secured asset-based revolving credit facility in the total
amount of up to $55,000. On December 31, 2008, Wells Fargo acquired all of Wachovia
Corporation and its businesses and obligations.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
borrowing availability varies according to the levels of the borrowers eligible
accounts receivable, eligible equipment and other terms and conditions described in the
Wachovia Loan Agreement. The maturity date of the facility is September 2011, unless
terminated earlier. Loans under the facility bear interest at a rate equal to, at the
borrowers option, either the lenders prime rate plus a margin ranging from
0.25% to 0.75% or the LIBOR rate (as defined in the Wachovia Loan Agreement) plus a
margin ranging from 2.0% to 2.5% per annum.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Wachovia Loan Agreement contains customary covenants and other terms, including covenants
based on Jazzs EBITDA (as defined in the Wachovia Loan Agreement), as well as
customary events of default. The facility is secured by the assets of Jazz and the
borrowers. If any event of default occurs, Wachovia may declare that all borrowings under
the facility are due immediately, foreclose on the collateral and increase the interest
rate on any amounts outstanding. As of December 31, 2008, Jazz was in compliance of all
the covenants under this facility.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2008, Jazz had an outstanding balance of $27,000 in loans, of which
$20,000 is classified as long-term debt. In addition, as of such date, there were
approximately $2,000 outstanding under letters of credit, and the remaining available
credit line was approximately $13,000.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 25

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 11 |  | OTHER CURRENT LIABILITIES
|------- | - | -------------------------

| | Other
current liabilities consist of the following:
| | ---------------------------------------------------

| |                                                        | As of December 31,
| | ------------------------------------------------------ | ------------------
|
|
|
|
| | Accrued compensation and benefits                      |                   
| | Vacation accrual                                       |                   
| | Interest payable (primarily in relation to convertible |                   
| | debentures)                                            |                   
| | Due to related parties                                 |                   
| | Other                                                  |                   
| |                                                        |                   
| |                                                        |                   
| |                                                        |                   
| |                                                        |                   

|NOTE 12 |  | LONG-TERM LOANS FROM BANKS
|------- | - | --------------------------

| | A. | Composition:
| | -- | ------------

| |                                                  | As of December 31, 2008
| | ------------------------------------------------ | -----------------------
|
|
|
|
| | In U.S. Dollar                                   |                        
| | In U.S. Dollar                                   |                        
| |                                                  |                        
| | Total long-term debt from Banks-principal amount |                        
| | Fair value adjustments                           |                        
| |                                                  |                        
| | Total long-term debt from Banks                  |                        
| |                                                  |                        
| | Jazz's long-term debt from Banks, see Note 10    |                        
| |                                                  |                        
| | Total long-term debt from Banks                  |                        
| |                                                  |                        
| |                                                  |                        

| |                                                   | As of December 31, 2007
| | ------------------------------------------------- | -----------------------
|
|
|
|
| | In U.S. Dollar                                    |                        
| | In U.S. Dollar                                    |                        
| | In U.S. Dollar, see B below, "September           |                        
| | 2007 Amendment"                                   |                        
| |                                                   |                        
| | Total long-term debt from Banks- principal amount |                        
| | Fair value adjustments                            |                        
| |                                                   |                        
| | Total long-term debt from Banks                   |                        
| |                                                   |                        
| |                                                   |                        

| | (*) | The
effective interest rate as of December 31, 2008 and 2007 of loans in the           amount
of $200,000 and $80,000, respectively, takes into account the terms of           the
hedging agreements described in Note 14A.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 26

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 12 |  | LONG-TERM LOANS FROM BANKS (Cont.)
|------- | - | ----------------------------------

| | B. | Facility
Agreement
| | -- | ------------------

| | Introduction
| | ------------

| | In
January 2001, the Company entered into a credit Facility Agreement with the Banks, which
was revised several times, under which the Company borrowed an aggregate of $557,000 to
fund the establishment and equipping of Fab 2 (Facility Agreement). The
Facility Agreement has been most recently amended in September 2008, see below. As of
December 31, 2008, the Companys outstanding debt under this Facility Agreement is
approximately $206,000, which carries interest at a rate of three-month USD LIBOR plus
2.5% per annum. For details, see below.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | September
2006 Amendment
| | ------------------------

| | As
part of the financing for the ramp-up plan, in September 2006, the Company closed a
definitive amendment to the Facility Agreement. Pursuant to the amendment, among other
things: (i) $158,000 of debt under the Facility Agreement was converted into equity
equivalent capital notes of the Company, which notes are convertible into 51,973,684 of
the Companys ordinary shares, representing twice the average closing price per
share during the ten days prior to signing the Memorandum of Understanding (MOU)
that preceded the final amendment; these equity equivalent capital notes have no voting
rights, no maturity date, no dividend rights, are not tradable, are not registered, do
not carry interest, are not linked to any index and are not redeemable; (ii) the interest
rate applicable for the quarterly actual interest payment on the loans was decreased from
three-month USD LIBOR plus 2.5% per annum to three-month USD LIBOR plus 1.1% per annum,
effective from May 17, 2006 (the Decreased Amount). As compensation for the
Decreased Amount and subject to adjustment, it was agreed that in January 2011, the Banks
would be issued such number of shares (or equity equivalent capital notes or convertible
debentures) that equals the Decreased Amount divided by the average closing price of the
Companys ordinary shares during the fourth quarter of 2010 (the Fourth
Quarter 2010 Price). If during the second half of 2010, the closing price of Companys
ordinary shares on every trading day during this period exceeds $3.49, then the Banks
will only be granted such number of shares (or equity equivalent capital notes or
convertible debentures) that equals half of the Decreased Amount divided by the Fourth
Quarter 2010 Price. If during the period ending December 31, 2010, the Banks sell a
portion of the equity equivalent capital notes or shares issuable upon the conversion of
the equity equivalent capital notes described in (i) above, at a price per share in
excess of $3.49, then the consideration payable for the interest rate reduction will be
reduced proportionately. The amounts payable in securities of the Company may be payable
in cash under certain circumstances; (iii) the repayment schedule of the outstanding
loans, which following the conversion was approximately $369,000, was set to be in 12
equal quarterly installments between September 2009 and June 2012 (which payment schedule
was further postponed according to the closing of the September 2008 definitive agreement
with the Companys Banks and TIC); (iv) the exercise periods of the warrants held by
the Banks immediately prior to the signing of the September 2006 amendment, were extended
such that they are exercisable until September 2011, see Note 17B(5)(a); and (v) the
financial ratios and covenants that the Company is to satisfy were revised.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 27

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 12 |  | LONG-TERM LOANS FROM BANKS (Cont.)
|------- | - | ----------------------------------

| | B. | Facility
Agreement (Cont.)
| | -- | --------------------------

| | September
2007 Credit Line Agreements with the Banks and TIC and September
2007 Amendment
| | -----------------------------------------------------------------------------------------

| | In
September 2007, the Company signed and closed definitive agreements with the Banks and
with TIC, providing for credit lines totaling up to $60,000, 25% of which was to be
provided by each Bank and 50% by TIC, $28,000 of which had been borrowed during 2007 and
the remainder during 2008. Each drawdown comprised of 25% from each bank and 50% from
TIC. Loans under the credit lines carried an interest at an annual rate of three-month
USD LIBOR plus 3% and were repayable 2 years from the date any loan was borrowed. The
above described loans terms, including repayment schedule, outstanding amounts and
other terms, were later revised to result in postponed schedule, lower amount outstanding
and other terms, for details, see September 2008 definitiveagreement
with the Banks and TIC below. The Company paid the Banks and TIC customary
fees. For details regarding 5,411,764 warrants granted to the Banks and TIC in connection
with this agreement, see Note 17B(5). Further, in September 2007, the Company signed and
closed a definitive amendment to the Facility Agreement mainly to reflect into it the
Credit Line Agreements described above and to revise the financial ratios and covenants
that the Company was to satisfy.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | September
2008 Definitive Agreement with the Companys Banks and TIC
| | --------------------------------------------------------------------

| | In
September 2008, the Company signed and closed definitive agreements with its Banks and
TIC.
| | ----------------------------------------------------------------------------------------------

| | Pursuant
to the agreements: (i) $200,000 of the Companys debt to the Banks was converted at
a conversion rate of $1.42 into equity equivalent capital notes of the Company,
exercisable into the Companys ordinary shares, representing two times the average
closing price per share on NASDAQ for the ten trading days prior to August 7, 2008
(the date of the Companys public announcement regarding its debt conversion
negotiations with the Banks and TIC); (ii) the commencement date for the repayment of the
remaining principal of the Banks loans was postponed from September 2009 to
September 2010, such that the outstanding loans shall be repaid in eight equal quarterly
installments between September 2010 and June 2012; (iii) interest payments owed to the
Banks and originally due September 2008 through June 2009 were added to the remaining
principal of the Banks loans and will be paid according to the same schedule; (iv)
the interest rate on the remaining principal of the Banks loans was set to be LIBOR
plus 2.5% per annum; (v) the compensation for the Decreased Amount agreed to in the
September 2006 amendment was revised pro-rata to the decreased loans; (vi) the Banks
waived in full the Companys compliance with financial covenants through the
end of 2008; (vii) $50,000 of debt owed by the Company to TIC (consisting of $30,000 owed
under a loan facility and $20,000 of the Companys convertible debentures series B
held by TIC) were converted at a conversion rate of $1.42 into equity equivalent capital
notes exercisable into the Companys ordinary shares, representing two times the
average closing price per share on NASDAQ for the ten trading days prior to August 7,
2008; and (viii) TIC invested $20,000 in the Company in exchange for equity equivalent
capital notes of the Company exercisable into the Companys ordinary shares at $0.71
per share, representing the average closing price per share on NASDAQ for the ten trading
days prior to August 7, 2008.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 28

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 12 |  | LONG-TERM LOANS FROM BANKS (Cont.)
|------- | - | ----------------------------------

| | B. | Facility
Agreement (Cont.)
| | -- | --------------------------

| | September
2008 Definitive Agreement with the Company's Banks and TIC (Cont.)
| | ----------------------------------------------------------------------------

| | Furthermore,
TIC committed to invest up to an additional $20,000 under certain conditions. In January
2009, such conditions were satisfied and TIC invested said amount. In consideration for
such investment, TIC received an amount of equity equivalent capital notes of the
Company, exercisable into ordinary shares of the Company, at a price of $0.26 per share.
The above mentioned equity equivalent capital notes have no voting rights, no maturity
date, no dividend rights, are not tradable, are not registered, do not carry interest,
are not linked to any index and are not redeemable. The equity equivalent capital notes
are akin to options with an exercise price of zero and are economically equivalent to the
shares issuable upon exercise, and are therefore classified in permanent equity.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
part of the definitive agreements with the Banks and TIC, the Company issued in 2008
equity equivalent capital notes exercisable into approximately 204 million ordinary
shares of the Company with total value of $115,071, calculated based on the price of the
stock of the Company around September 25, 2008, the date of signing and closing of the
definitive agreements. Such debt conversion resulted in a gain of $130,698 that was
recorded in the Companys statement of operations for 2008.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Accounting
for the Loans under the Facility Agreement
| | -----------------------------------------------------

| | Loans
received under the Facility Agreement, as amended to date, are presented commencing
January 1, 2007 at fair value, with changes in value reflected on the statement of
operations, following an early adoption by the Company of FASB No. 159 The Fair
Value Option for Financial Assets and Financial Liabilities and the Companys
election to apply the fair value option to the Facility Agreement.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
effect of the election of fair value option to the Facility Agreement as of January 1,
2007 was a gain of $65,207 which has been recorded as a cumulative-effect adjustment to
retained loss (no tax effects have been recorded).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
carrying amount of the Facility Agreement prior and after the election was $432,430 and
$367,223, respectively.
| | -------------------------------------------------------------------------------------------------------------------

| | In
2006, prior to the fair value election, the loans under the amendment of September 2006
were treated as a troubled debt restructuring within the scope of FASB No. 15. The
September 2008 amendment was accounted for by calculating the fair value of the remaining
outstanding obligation to the Banks. The excess of the fair value of the obligation prior
to the amendment over the fair value of the remaining obligation was considered settled (the
Settled Amount). A gain on conversion of debt was recognized in the amount of the
excess of the Settled Amount over the fair value of the equity equivalent capital notes
issued. The fair value of the notes was calculated based on the price of the stock of the
Company around September 25, 2008, the date of signing and closing of the definitive
agreements with the Banks and TIC.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 29

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 12 |  | LONG-TERM LOANS FROM BANKS (Cont.)
|------- | - | ----------------------------------

| | B. | Facility
Agreement (Cont.)
| | -- | --------------------------

| | Accounting
for the Loans under the Facility Agreement (Cont.)
| | -------------------------------------------------------------

| | As
required by SFAS No. 159 the Company also adopted the provisions of FASB 157 Fair
Value Measurements. The adoption of the Standard is effective January 1, 2007.
According to the Standard, the Company can choose to carry at fair value eligible items
as defined in the Standard from the date of early adoption and accordingly the Company
decided to apply the fair value option to the Facility Agreement. For fair value
measurement, see Note 14D.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C. | Repayment
Schedule
| | -- | ------------------

| | The
principal amount of the long-term debt as of December 31, 2008 is repayable as follows:
| | -------------------------------------------------------------------------------------------

| |      | 
| | ---- | 
|
|
|
|
| | 2010 | 
| | 2011 | 
| | 2012 | 
| |      | 
| |      | 
| |      | 

| | D. | The
Facility Agreement with the Banks restricts the Companys ability to
               place liens on its assets (other than to the State of Israel in respect of
               investment grants  see Note 16A(6) and to SanDisk  see Note
16D(2)),                without the prior consent of the Banks. Furthermore, the
agreements contain                certain restrictive financial ratios and covenants. For
further details                concerning the Facility Agreement and its amendments, see
Note 16A(5).
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | E. | For
long term bank loans of Jazz see Note 10.
| | -- | ---------------------------------------------

F - 30

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 13 |  | DEBENTURES
|------- | - | ----------

| | A. | Composition:
| | -- | ------------

|                                                  | As of December 31, 2008
|------------------------------------------------- | -----------------------
|
|
|
|
|2002 Convertible debentures series A (*)          |                        
|2005 Convertible debentures series B              |                        
|2006 Convertible debentures series C              |                        
|2007 Non-convertible debentures series D          |                        
|2007 Convertible debentures series E, see Note 14 |                        
|                                                  |                        
|                                                  |                        
|Jazz's Convertible debentures                     |                        
|Less - current maturities                         |                        
|                                                  |                        
|                                                  |                        
|                                                  |                        
|                                                  |                        

| | (*) | In
January 2009, the outstanding amount was fully paid and the debentures were
               redeemed in full.
| | --- | ---------------------------------------------------------------------------------------------------------------

| | (**) | See
D below
| | ---- | -----------

|                                                  | As of December 31, 2007
|------------------------------------------------- | -----------------------
|
|
|
|
|2002 Convertible debentures series A (*)          |                        
|2005 Convertible debentures series B              |                        
|2006 Convertible debentures series C              |                        
|2007 Non-convertible debentures series D          |                        
|2007 Convertible debentures series E, see Note 14 |                        
|                                                  |                        
|                                                  |                        
|Less - current maturities                         |                        
|                                                  |                        
|                                                  |                        
|                                                  |                        
|                                                  |                        

| | (*) | In
January 2009, the outstanding amount was fully paid and the debentures were
          redeemed in full.
| | --- | ----------------------------------------------------------------------------------------------------------

| | (**) | See
D below
| | ---- | -----------

| | If
on a payment date of the principal or interest on the debentures (series A-E) there
exists an infringement of certain covenants and conditions under the Facility Agreement,
the dates for payment of interest and principal on the debentures may be postponed,
depending on various scenarios under the Facility Agreement until such covenant or
condition is settled. The debentures and interest thereon are unsecured and subordinated
to the Companys existing and future secured indebtedness, including indebtedness to
the Banks under the Facility Agreement  see Note 16A(5), to SanDisk  see Note
16D(2) and to the government of Israel  see Note 7C.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 31

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 13 |  | DEBENTURES (Cont.)
|------- | - | ------------------

| | B. | 2002
Convertible Debentures Series A
| | -- | ------------------------------------

| | In
January 2002, the Company issued on the Tel-Aviv Stock Exchange, NIS 110,579,800
(approximately $24,300) principal amount of convertible debentures, linked to the Israeli
Consumer Price Index (CPI). The debentures were issued at 96% of their par
value, and bore annual interest at the rate of 4.7%, payable in January of each year
commencing in January 2003. The principal amount was payable in four equal installments
in January of each year between 2006 and 2009. The debentures were convertible until
December 31, 2008 into ordinary shares, at a conversion rate of one Ordinary Share per
each NIS 41.00 principal amount of the debentures. The outstanding principal amount of
convertible debentures as of December 31, 2008, adjusted to the CPI was $8,449, and has
been paid in January 2009, thereby redeeming the debentures in full.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C. | 2005
Convertible Debentures Series B
| | -- | ------------------------------------

| | The
Company issued $48,169 principal amount of convertible debentures by way of a rights
offering based on a prospectus which became effective on December 2005. The debentures
are listed for trade on the Tel-Aviv Stock Exchange and on the NASDAQ Capital Market (Series
B). The debentures accrue annual interest at the rate of 5% which will be payable,
together with the principal of the debentures, in one installment in January 2012. As of
December 31, 2008, the outstanding principal amount of those convertible debentures is
$10,681 following conversions occurred. See also below.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
debentures are convertible into the Companys ordinary shares at a conversion price
of $1.10 per share. The conversion price was subject to downward adjustment under certain
circumstances if the Company had sold securities in future financings at a price per
share which was lower than the conversion price, provided that such financings closed, or
agreements for such financings were signed, through December 2006. No such adjustment was
or will be required and the downward adjustment mechanism has expired.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
analyzing whether the conversion feature requires bifurcation, the Company considered
whether the conversion feature would be classified as a liability orwithin
shareholders equity. To determine classification, the conversion feature must be
analyzed under EITF 00-19. The first step of the EITF 00-19 analysis for these features
is to determine whether the host contract is a conventional convertible instrument. Since
the conversion feature in Series B contains a reset provision that adjusts the conversion
rate, the Company determined that Series B cannot be considered a conventional
convertible instrument.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Since
Series B does not qualify as conventional convertible debt, paragraphs 12-32 of EITF
00-19 must be analyzed to determine whether the conversion feature should be accounted
for as a liability or as equity.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 32

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 13 |  | DEBENTURES (Cont.)
|------- | - | ------------------

| | C. | 2005
Convertible Debentures Series B (Cont.)
| | -- | --------------------------------------------

| | The
Company considered the provisions of Series B and determined that the number of shares
issuable upon conversion of the convertible instrument is uncapped and thus requires
bifurcation and treatment as derivative classified as liability. Such classification
remains until the adjustment feature expires and shares issuable are fixed. The
conversion feature was bifurcated using the with and without method prescribed in DIG
Issue B6 and subsequently marked the conversion feature to fair value through profit and
loss.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (i) | In
December 2006 the downward adjustment to the conversion rate feature expired
          resulting in the change to the embedded derivative such that it no longer
          require bifurcation under SFAS 133 and the amount of the liability for the
          conversion option reclassified to stockholders equity was $28,377 in
          accordance with EITF 06-7 Issuers Accounting for a Previously
          Bifurcated Conversion Option in a Convertible Debt Instrument When the
          Conversion Option No Longer Meets the Bifurcation Criteria in SFAS No.
          133".
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (ii) | The
remaining balance of unamortized discount as of December 31, 2008 and 2007           was
5,398 (including the effect of September 2008 amendment described in Note           12B)
and $19,567, respectively.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | SanDisk
Corporation, Alliance Semiconductor Corporation and Macronix International Co. Ltd.
(collectively, the Primary Wafer Partners) and TIC have invested $27,811 in
the framework of the rights offering.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
part of the September 2008 definitive agreement with the Companys Banks and TIC,
$20,000 in convertible debentures series B were converted into equity equivalent capital
notes of the Company, see Note 12B.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Through
December 31, 2008, $20,306 aggregate principal amount of debentures were converted into
18,460,368 ordinary shares of the Company. Following said conversion into ordinary shares
and the conversion to equity equivalent capital notes as part of the September 2008
definitive agreement with the Companys Banks and TIC, the outstanding principal
amount of convertible debentures Series B as of December 31, 2008 is $10,681.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 33

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 13 |  | DEBENTURES (Cont.)
|------- | - | ------------------

| | D. | 2006
Convertible Debentures Series C
| | -- | ------------------------------------

| | In
2006, the Company issued in a public offering NIS 164,430,000 principal amount of
convertible debentures linked to the CPI, for gross proceeds of NIS 139,765,500
(approximately $31,219), and 391,500 options each exercisable for three months ending on
September 27, 2006 for NIS 100 principal amount of convertible debentures at an exercise
price equal to 85% of their face amount, linked to the CPI. Such options were exercised
fully to convertible debentures such that the total principal amount issued was NIS
203,580,000. The convertible debentures were convertible into the Companys ordinary
shares at a conversion rate of one ordinary share per NIS 8.40 principal amount of
convertible debentures. The conversion price was subject to a reduction feature until
June 2008, according to which the conversion rate of Series C was reduced in July 2008
from NIS 8.4 to NIS 4.31. The convertible debentures carry a zero coupon with principal
payable at maturity in December 2011, at a premium of 37% over principal value, linked to
the CPI. Through December 31, 2008, NIS 1,774,255 aggregate principal amount of
debentures were converted into 408,576 ordinary shares of the Company.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
outstanding principal amount of convertible debentures as of December 31, 2008 is $56,150.
| | ----------------------------------------------------------------------------------------------

| | As
described in C above, Series C conversion rate contained a reduction feature that was
considered a derivative that requires bifurcation and subsequent mark to market through
earnings.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
embedded feature was measured at fair value using a valuation technique that utilizes the
discounted cash flows of Black-Scholes and Monte Carlo simulation. The Monte Carlo
simulation was used to incorporate the possible adjustment of the conversion rate in
different scenarios. The key inputs included were interest rate, the spot price of the
Companys share and its volatility.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
June 2008 the conversion rate reduction feature expiration resulted in a change of the
embedded derivative, such that it no longer required bifurcation under SFAS133 and the
amount of the liability for the conversion option reclassified to stockholdersequity
was $3,907 in accordance with EITF 06-7 Issuers Accounting for a Previously
Bifurcated Conversion Option in a Convertible Debt Instrument When the Conversion Option
No Longer Meets the Bifurcation Criteria in FASB Statement No. 133".
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 34

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 13 |  | DEBENTURES (Cont.)
|------- | - | ------------------

| | E. | 2007
Non-Convertible Debentures Series D and Convertible Debentures Series E
| | -- | ----------------------------------------------------------------------------

| | In
the second half of 2007, the Company consummated a private placement with Israeli
institutions of long-term convertible and non-convertible debentures and warrants, by
which the Company raised gross proceeds of approximately $40,000. In the funding, 342
units were sold, each comprised of: (i) long-term non-convertible-debentures, repayable
in six equal annual installments between the dates of December 2011 and December 2016,
with a face amount of NIS 250,000 (approximately $59.7) and carrying an annual interest
rate of 8 percent (series D); (ii) long-term convertible-debentures repayable
in December 2012 with a 17.2 NIS conversion price, with a face amount of NIS 262,500
(approximately $62.7), carrying an annual interest of 8 percent(series E),
and (iii) 5,800 warrants, each exercisable until 2011, for one Tower Ordinary Share at a
price of $2.04. The debentures are linked to the CPI and were issued at 95.5% of par
value. The conversion and exercise prices are subject to reduction in certain limited
circumstances.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
September 2007, the Company expanded its series of long-term debentures and warrants, by
selling 12,118 units, each comprised of long-term non-convertible debentures, with a face
amount of NIS 2,500 (approximately $0.62), long-term convertible debentures, with a face
amount of NIS 2,625 (approximately $0.65), and 58 warrants. The debentures were issued at
90% of par value and with the other same terms as the debentures and the warrants issued
in the private placement. In this expansion, the Company raised gross proceeds of
approximately $14,000.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
outstanding principal amount of series D and E as of December 31, 2008 was $32,632 and
$36,095, respectively. The Company elected to carry series E at fair value in accordance
with provisions of SFAS No. 155.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F. | Convertible
Debentures Issued By Jazz
| | -- | -------------------------------------

| | In
2006, Jazz completed private placements of convertible debentures. The convertible
debentures bear interest at a rate of 8% per annum payable twice a year. The convertible
debentures may be redeemed on or after December 31, 2009 at agreed upon redemption
prices, plus accrued and unpaid interest. Otherwise, the convertible debentures mature on
December 31, 2011. As a result of the merger, the holders of the convertible debentures
have the option to convert the convertible debentures into the Companys ordinary
shares based on an implied conversion price of $4.07 per Company Ordinary Share.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2008, $128,200 in principal amount of convertible debentures were
outstanding.
| | -------------------------------------------------------------------------------------------------

F - 35

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 14 |  | FINANCIAL INSTRUMENTS AND FAIR VALUE MEASURMENTS
|------- | - | ------------------------------------------------

| | The
Company makes certain disclosures with regard to financial instruments, including
derivatives. These disclosures include, among other matters, the nature and terms of
derivative transactions, information about significant concentrations of credit risk, and
the fair value of financial assets and liabilities.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A. | Interest
Rate Derivatives
| | -- | -------------------------

| | A
derivative is typically defined as an instrument whose value is derived from an
underlying instrument, index or rate, has a notional amount, requires no or little
initial investment and can be net settled.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | SFAS
133 requires that all derivatives be recorded in the financial statements at their fair
value at the date of the financial statements. The changes in the fair value of the
derivatives are charged to the statement of operations unless designated as hedging item
in a cash flows hedge at which time changes are classified in other comprehensive income,
to the extent effective.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company, from time to time, enters into agreements to hedge variable interest rate
exposure on long-term loans. The Company uses interest rate collar agreements, some of
which with a knock-out and knock-in features to hedge its LIBOR-based variable long-term
debt cash flow exposure. The knock-out feature was set above the cap level and the
knock-in feature was set below the floor level. The derivatives, although used as
economic hedges, are not treated as hedges for accounting purposes. The changes in fair
value are recorded immediately in earnings.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2008, the Company had outstanding agreements to economically hedge
interest rate exposure on loans drawn down under the Facility Agreement, the aggregate
amount of which was $200,000, out of which, $120,000 are to be settled commencing June
30, 2009, concurrent with the expected interest cash payments on the Banks loans
following the September 2008 definitive agreement with the Companys Banks and TIC.
As of December 31, 2007, the Company had such outstanding agreements in the amount of
$80,000. Total changes of fair value of all derivatives above resulted in $3,531 loss for
the year ended December 31, 2008.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company does not hold or issue derivative financial instruments for non-hedging purposes.
| | ---------------------------------------------------------------------------------------------

F - 36

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 14 |  | FINANCIAL INSTRUMENTS AND FAIR VALUE MEASURMENTS (Cont.)
|------- | - | --------------------------------------------------------

| | B. | Concentration
of Credit Risks
| | -- | -----------------------------

| | Financial
instruments that potentially subject the Company to concentrations of credit risk consist
principally of cash and cash equivalents, short-term bank deposits, trade receivables and
government agencies receivables. The Companys cash, cash equivalents are maintained
with the two largest banks in Israel, and the composition and maturities of investments
are regularly monitored by the Company. Generally, these securities may be redeemed upon
demand and bear minimal risk.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company generally does not require collateral insurance; however, in certain
circumstances, the Company maintains a credit insurance policy or may require letters of
credit. An allowance for doubtful accounts is determined with respect to those amounts
that were determined to be doubtful of collection. The Company performs ongoing credit
evaluations of its customers, see Note 18.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company is exposed to credit-related losses in respect of derivative financial
instruments in a manner similar to the credit risk involved in the realization or
collection of other types of assets. The Company believes that its exposure to credit
risk is immaterial considering its overall position with the Banks that are the
counterparty to the derivatives.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C. | Fair
Value of Financial Instruments
| | -- | -----------------------------------

| | The
estimated fair values of the Companys financial instruments, excluding the Companys
long-term debentures and long-term Banks loans, do not materially differ from their
respective carrying amounts as of December 31, 2008 and 2007. The fair values of the
Companys debentures, based on quoted market prices as of December 31, 2008, 2007
and 2006 were $34,664, $157,683 and $126,048, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Jazzs
assets and liabilities are presented based on an estimated fair value performed by the
Company as of the merger date, see Note 3.
| | ----------------------------------------------------------------------------------------------------------------------------------------

| | D. | Fair
Value Measurements
| | -- | -----------------------

| | The
Company decided to early adopt the provisions of SFAS No. 157 effective January 1,
2007, concurrent with the adoption of FASB 159 The Fair Value Option for Financial
Assets and Financial Liabilities (SFAS No. 159). Fair values were determined
using the income approach using a present value technique, as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | For
Loans  the cash flows used in that technique reflect the income stream expected to
be used to satisfy the obligation over its economic life. The Company discounted expected
cash flows as forecasted each quarter using the appropriate discount rate for the
applicable maturity.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | For
Embedded Derivatives - the Company utilized the Black Scholes Merton formula.
| | - | ---------------------------------------------------------------------------------

F - 37

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 14 |  | FINANCIAL INSTRUMENTS AND FAIR VALUE MEASURMENTS (Cont.)
|------- | - | --------------------------------------------------------

| | D. | Fair
Value Measurements (Cont.)
| | -- | -------------------------------

| |  | For
Over the Counter derivatives  the Company used the market approach using quotation
from dealer markets.
| | - | ------------------------------------------------------------------------------------------------------------

| |  | For
convertible debentures series E  until recently the market approach using quoted
market prices was used. Due to recent downturn of the financial markets, including the
inactive and depressed market conditions for these debentures in Israel, the Company
believes that the market price does not provide evidence of fair value without
adjustment. Hence, the market approach was adjusted to take into account other features
that have not been captured by the market.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Recurring Fair Value Measurements
Using the Indicated Inputs:

|                                | December 31, 2008 | Quoted prices in
active market for
identical liability
(Level 1) | Significant other
observable inputs
(Level 2) | Significant
unobservable
inputs (Level 3)
|------------------------------- | ----------------- | ---------------------------------------------------------------- | --------------------------------------------- | -----------------------------------------
|
|
|
|
|Convertible debentures series E |                   |                                                                  | $                                             | 16,825                                   
|Long-term debt                  |                   |                                                                  |                                               | 202,989                                  
|Derivatives                     |                   |                                                                  |                                               | 3,236                                    
|                                |                   |                                                                  |                                               |                                          
|                                |                   |                                                                  | $                                             | 223,050                                  
|                                |                   |                                                                  |                                               |                                          
|                                |                   |                                                                  |                                               |                                          

Liabilities
measured on a recurring basis using significant unobservable inputs (Level 3):

|                                                                  | Long-term debt | Convertible
debentures
series E | Derivatives
|----------------------------------------------------------------- | -------------- | ------------------------------- | -----------
|
|
|
|
|As of January 1, 2008 - at fair value                             |                |                                 | $          
|Total losses (gains) recognized in earnings                       |                |                                 |            
|Conversion of Bank loans under the Definitive                     |                |                                
|Agreements with the Banks and TIC, see Note 12B                   |                |                                 |            
|Reclassification of previously bifurcated conversion              |                |                                
|option to shareholders' equity                                    |                |                                 |            
|                                                                  |                |                                 |            
|As of December 31, 2008 - at fair value                           |                |                                 | $          
|                                                                  |                |                                 |            
|Unrealized  losses (gains)recognized in earnings from liabilities |                |                                
|held at period end                                                |                |                                 | $          
|                                                                  |                |                                 |            
|                                                                  |                |                                 |            

F - 38

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 14 |  | FINANCIAL INSTRUMENTS AND FAIR VALUE MEASURMENTS (Cont.)
|------- | - | --------------------------------------------------------

| | D. | Fair
Value Measurements (Cont.)
| | -- | -------------------------------

Non
Recurring Fair Value Measurements Using the Indicated Inputs:

|                                | September 19, 2008 | Significant
unobservable inputs
(Level 3)
|------------------------------- | ------------------ | -----------------------------------------
|
|
|
|
|Long-lived assets held and used |                    |                                          
|Intangible assets               |                    |                                          
|Goodwill                        |                    |                                          
|Long-term investments           |                    |                                          
|Convertible Debentures          |                    |                                          
|                                |                    |                                          
|                                |                    |                                          
|                                |                    |                                          

Recurring
Fair Value Measurements Using the Indicated Inputs:

|                                 | December 31,
2007 | Quoted prices in
active market for
identical liability
(Level 1) | Significant other
observable inputs
(Level 2) | Significant
unobservableinputs (Level 3)
|-------------------------------- | ----------------- | ---------------------------------------------------------------- | --------------------------------------------- | ----------------------------------------
|
|
|
|
|Trading securities - convertible |                   |                                                                  |                                               |                                         
|debentures series E              |                   |                                                                  | $                                             | 28,484                                  
|Long-term debt                   |                   |                                                                  |                                               | 365,563                                 
|Derivatives                      |                   |                                                                  |                                               | 7,018                                   
|                                 |                   |                                                                  |                                               |                                         
|                                 |                   |                                                                  | $                                             | 401,065                                 
|                                 |                   |                                                                  |                                               |                                         
|                                 |                   |                                                                  |                                               |                                         

Liabilities
measured on a recurring basis using significant unobservable inputs (Level 3):

|                                                                       | Long-term debt | Derivatives
|---------------------------------------------------------------------- | -------------- | -----------
|
|
|
|
|As of January 1, 2007 - at fair value                                  |                |            
|Total gains unrealized in earnings                                     |                |            
|                                                                       |                |            
|As of December 31, 2007 - at fair value                                |                |            
|                                                                       |                |            
|                                                                       |                |            
|Unrealized gain  in earnings from liabilities still held at period end |                |            
|                                                                       |                |            
|                                                                       |                |            

F - 39

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 15 |  | OTHER LONG-TERM LIABILITIES
|------- | - | ---------------------------

| | A. | Other
long-term liabilities consist of the following:
| | -- | -----------------------------------------------------

|                                                                                    | As of December 31,
|----------------------------------------------------------------------------------- | ------------------
|
|
|
|
|Accrued severance pay and other employee benefit plans, see B and C below           |                   
|Long-term loans from TIC, see Note 12B "September 2007 Amendment",                  |                   
|Long-term  liability to a Primary Wafer Partner net of current maturity,  see Notes |                   
|16A(4) and 16D(2)                                                                   |                   
|Deferred tax liability                                                              |                   
|Others (*)                                                                          |                   
|                                                                                    |                   
|                                                                                    |                   
|                                                                                    |                   
|                                                                                    |                   

| | (*) | Includes
$718 and $2,468 as of December 31, 2008 and December 31, 2007,           respectively, of
interest payable to related parties in regard to Series B, see           also Note 13C.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Employee
Termination Benefits
| | -- | -----------------------------

| | Israeli
law and labor agreements determine the obligations of the Company to make severance
payments to dismissed employees and to employees leaving employment under certain
circumstances. Generally, the liability for severance pay benefits, as determined by
Israeli Law, is based upon length of service and the employees monthly salary. This
liability is primarily covered by regular deposits made each month by the Company into
recognized severance and pension funds and by insurance policies purchased by the
Company, based on the employees salary for the relevant month. The amounts so
funded and the liability are reflected separately on the balance sheets in long-term
investments and other long-term liabilities, respectively. Commencing January 1, 2005 the
Company started implementing with regard to most of its employees, a labor agreement
according to which, monthly deposits into recognized severance and pension funds or
insurance policies release it from any additional severance obligation to its employees
and therefore the Company incurs no liability or asset, since that date. Any net
severance pay amount as of such date will be released thereafter on the employees
termination date. Payments relating to Israeli employee termination benefits were
approximately $4,018, $3,323 and $2,807 for 2008, 2007 and 2006, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 40

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 15 |  | OTHER LONG-TERM LIABILITIES (Cont.)
|------- | - | -----------------------------------

| | C. | Employee
Benefit Plans
| | -- | ----------------------

| | The
following information provided, recognizes the periodic expenses and changes in benefit
obligations in the period between September 19, 2008 and December 31, 2008 due to the new
bargaining agreement effective May 2, 2008 entered into by Jazz with its collective
bargaining unit employees.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Postretirement
Medical Plan
| | ---------------------------

| | The
components of the net periodic benefit cost and other amounts recognized in other
comprehensive income (loss) for postretirement medical plan expense are as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                         | Year ended December
31, 2008
| | ------------------------------------------------------- | ----------------------------
|
|
|
|
| | Net periodic benefit cost                               |                             
| | Service cost                                            |                             
| | Interest cost                                           |                             
| | Expected return on the plan's assets                    |                             
| | Amortization of transition obligation/(asset)           |                             
| | Amortization of prior service costs                     |                             
| | Amortization of net (gain) or loss                      |                             
| |                                                         |                             
| | Total net periodic benefit cost                         |                             
| |                                                         |                             
| |                                                         |                             
| | Other changes in plan assets and benefits obligations   |                             
| | recognized in other comprehensive income                |                             
| | Prior service cost for the period                       |                             
| | Net (gain) or loss for the period                       |                             
| | Amortization of transition obligation (asset)           |                             
| | Amortization of prior service costs                     |                             
| | Amortization of net (gain) or loss                      |                             
| |                                                         |                             
| | Total recognized in other comprehensive income          |                             
| |                                                         |                             
| |                                                         |                             
| | Total  recognized  in net  periodic  benefit  cost  and |                             
| | other comprehensive income                              |                             
| |                                                         |                             
| |                                                         |                             
| | Weighted average assumptions used:                      |                             
| | Discount rate                                           |                             
| | Expected return on plan assets                          |                             
| | Rate of compensation increases                          |                             
| |                                                         |                             
| | Assumed health care cost trend rates:                   |                             
| | Health care cost trend rate assumed for current year    |                             
| | Ultimate rate                                           |                             
| | Year the ultimate rate is reached                       |                             
| | Measurement date                                        |                             
| |                                                         |                             

F - 41

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 15 |  | OTHER LONG-TERM LIABILITIES (Cont.)
|------- | - | -----------------------------------

| | C. | Employee
Benefit Plans (Cont.)
| | -- | ------------------------------

| | Impact
of one-percentage point change in assumed health care cost trend rates as of December 31,
2008:
| | ------------------------------------------------------------------------------------------------------

| |                                             | Increase | Decrease
| | ------------------------------------------- | -------- | --------
|
|
|
|
| | Effect on service cost and interest cost    |          |         
| | Effect on postretirement benefit obligation |          |         
| |                                             |          |         

| | The
components of the change in benefit obligation; change in plan assets and funded status
for postretirement medical plan are as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------

| |                                                  | Year ended December
31, 2008
| | ------------------------------------------------ | ----------------------------
|
|
|
|
| | Change in benefit obligation:                    |                             
| | Benefit obligation at beginning of period        |                             
| | Service cost                                     |                             
| | Interest cost                                    |                             
| | Benefits paid                                    |                             
| | Change in plan provisions                        |                             
| | Actuarial loss (*)                               |                             
| |                                                  |                             
| | Benefit obligation end of period                 |                             
| |                                                  |                             
| |                                                  |                             
| | Change in plan assets:                           |                             
| |                                                  |                             
| | Fair value of plan assets at beginning of period |                             
| | Actual return on plan assets                     |                             
| | Employer contribution                            |                             
| | Benefits paid                                    |                             
| | Fair value of plan assets at end of period       |                             
| |                                                  |                             
| | Funded status                                    |                             
| |                                                  |                             
| |                                                  |                             

| | (*) | The
actuarial loss for the period ended December 31, 2008 resulted primarily           due to
the decrease in discount rate from 7.00% to 6.10%.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------

F - 42

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 15 |  | OTHER LONG-TERM LIABILITIES (Cont.)
|------- | - | -----------------------------------

| | C. | Employee
Benefit Plans (Cont.)
| | -- | ------------------------------

| |                                                         | As of
| | ------------------------------------------------------- | -----
|
|
|
|
|
| | Amounts recognized in statement of financial position : |      
| | Non-current assets                                      |      
| | Current liabilities                                     |      
| | Non-current liabilities                                 |      
| |                                                         |      
| | Net amount recognized                                   |      
| |                                                         |      
| |                                                         |      
| | Weighted average assumptions used:                      |      
| | Discount rate                                           |      
| | Rate of compensation increases                          |      
| |                                                         |      
| | Assumed health care cost trend rates:                   |      
| | Health care cost trend rate assumed for next year       |      
| | Ultimate rate                                           |      
| | Year the ultimate rate is reached                       |      
| |                                                         |      

| | The
following benefit payments are expected to be paid in each of the next five fiscal years
and in the aggregate for the five fiscal years thereafter:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------

| | Fiscal Year | Other Benefits ($)
| | ----------- | ------------------
|
|
|
|
| | 2009        |                   
| | 2010        |                   
| | 2011        |                   
| | 2012        |                   
| | 2013        |                   
| | 2014 - 2018 |                   

| | Pension
Plan
| | ------------

| | Jazz
has a pension plan that provides for monthly pension payments to eligible employees upon
retirement. The pension benefits are based on years of service and specified benefit
amounts. Jazz uses a December 31 measurement date. Jazz makes quarterly contributions in
accordance with the minimum actuarially determined amounts.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 43

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 15 |  | OTHER LONG-TERM LIABILITIES (Cont.)
|------- | - | -----------------------------------

| | C. | Employee
Benefit Plans (Cont.)
| | -- | ------------------------------

| | The
components of the change in benefit obligation, the change in plan assets and funded
status for the pension plan are as follows:
| | ------------------------------------------------------------------------------------------------------------------------------------

| |                                                                  | Year ended December
31, 2008
| | ---------------------------------------------------------------- | ----------------------------
|
|
|
|
| | Net periodic benefit cost                                        |                             
| | Service cost                                                     |                             
| | Interest cost                                                    |                             
| | Expected return on plan assets                                   |                             
| | Amortization of transition obligation/(asset)                    |                             
| | Amortization of prior service costs                              |                             
| | Amortization of net (gain) or loss                               |                             
| |                                                                  |                             
| | Total net periodic benefit cost                                  |                             
| |                                                                  |                             
| |                                                                  |                             
| | Other changes in plan assets and benefits obligations recognized |                             
| | in other comprehensive income                                    |                             
| | Prior service cost for the period                                |                             
| | Net (gain) or loss for the period                                |                             
| | Amortization of transition obligation (asset)                    |                             
| | Amortization of prior service costs                              |                             
| | Amortization of net (gain) or loss                               |                             
| |                                                                  |                             
| | Total recognized in other comprehensive income                   |                             
| |                                                                  |                             
| | Total recognized in net periodic benefit cost and other          |                             
| | comprehensive income                                             |                             
| |                                                                  |                             
| |                                                                  |                             
| | Weighted average assumptions used:                               |                             
| | Discount rate                                                    |                             
| | Expected return on plan assets                                   |                             
| | Rate of compensation increases                                   |                             
| | Estimated amounts that will be amortized from accumulated other  |                             
| | comprehensive income in the next fiscal year ending:             |                             
| | Transition obligation (asset)                                    |                             
| | Prior service cost                                               |                             
| | Net actuarial (gain) or loss                                     |                             
| |                                                                  |                             

F - 44

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 15 |  | OTHER LONG-TERM LIABILITIES (Cont.)
|------- | - | -----------------------------------

| | C. | Employee
Benefit Plans (Cont.)
| | -- | ------------------------------

| | The
components of the change in benefit obligation; change in plan assets and funded status
for the postretirement medical plan are as follows (dollars in thousands):
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                  | Year ended December
31, 2008
| | ------------------------------------------------ | ----------------------------
|
|
|
|
| | Change in benefit obligation:                    |                             
| | Benefit obligation at beginning of period        |                             
| | Service cost                                     |                             
| | Interest cost                                    |                             
| | Benefits paid                                    |                             
| | Change in plan provisions                        |                             
| | Actuarial loss (gain) (*)                        |                             
| |                                                  |                             
| | Benefit obligation end of period                 |                             
| |                                                  |                             
| |                                                  |                             
| | Change in plan assets                            |                             
| | Fair value of plan assets at beginning of period |                             
| | Actual return on plan assets                     |                             
| | Employer contribution                            |                             
| | Benefits paid                                    |                             
| |                                                  |                             
| | Fair value of plan assets at end of period       |                             
| |                                                  |                             
| | Funded status                                    |                             
| |                                                  |                             
| | Accumulated benefit obligation                   |                             
| |                                                  |                             
| |                                                  |                             

| | (*) | The
actuarial loss for the period ended December 31, 2008 resulted primarily           due to
the poor asset performance (approximately 20% loss) and a decrease in the
          discount rate from 7.00% to 6.20%.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                       | As of
| | ----------------------------------------------------- | -----
|
|
|
|
| | Amounts recognized in statement of financial position |      
| | Non-current assets                                    |      
| | Current liabilities                                   |      
| | Non-current liabilities                               |      
| |                                                       |      
| | Net amount recognized                                 |      
| |                                                       |      
| |                                                       |      
| | Weighted average assumptions used                     |      
| | Discount rate                                         |      
| | Expected return on plan assets                        |      
| | Rate of compensation increases                        |      
| |                                                       |      

F - 45

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 15 |  | OTHER LONG-TERM LIABILITIES (Cont.)
|------- | - | -----------------------------------

| | C. | Employee
Benefit Plans (Cont.)
| | -- | ------------------------------

| | The
following benefit payments are expected to be paid in each of the next five fiscal years
and in the aggregate for the five fiscal years thereafter:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------

| | Fiscal Year | Other Benefits
| | ----------- | --------------
|
|
|
|
| | 2009        |               
| | 2010        |               
| | 2011        |               
| | 2012        |               
| | 2013        |               
| | 2014 - 2018 |               
| |             |               

| | Jazz
has estimated the expected return on assets of the plan of 7.5% based on assumptions
derived from, among other things, the historical return on assets of the plan, the
current and expected investment allocation of assets held by the plan and the current and
expected future rates of return in the debt and equity markets for investments held by
the plan. The obligations under the plan could differ from the obligation currently
recorded if the Companys estimates are not consistent with actual investment
performance.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
pension plan weighted average asset allocations at December 31, 2008 by asset category
are as follows:
| | ----------------------------------------------------------------------------------------------------------

| | Asset Category:   | December 31, 2008 | Target allocation 2009
| | ----------------- | ----------------- | ----------------------
|
|
|
|
| | Equity securities |                   |                       
| | Debt securities   |                   |                       
| | Real estate       |                   |                       
| | Other             |                   |                       
| |                   |                   |                       
| | Total             |                   |                       
| |                   |                   |                       
| |                   |                   |                       

| | The
primary policy goals regarding the plans assets are cost-effective diversification
of plan assets, competitive returns on investment, and preservation of capital. Plan
assets are currently invested in mutual funds with various debt and equity investment
objectives. The target asset allocation for the plan assets is 25-35% debt, or fixed
income securities, and 65-75% equity securities. Individual funds are evaluated
periodically based on comparisons to benchmark indices and peer group funds and necessary
investment decisions are made by the Company in accordance with the policy goals.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 46

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 16 |  | COMMITMENTS AND CONTINGENCIES
|------- | - | -----------------------------

| | A. | Commitments
and Contingencies Relating to Fab 2
| | -- | -----------------------------------------------

| | (1) | Overview
| | --- | --------

| | In
2001, the Companys Board of Directors approved the establishment of the Companys
second wafer fabrication facility in Israel (Fab 2). In Fab 2, the Company
manufactures semiconductor integrated circuits on silicon wafers in geometries of 0.18 to
0.13 micron on 200-millimeter wafers. In connection with the establishment, equipping and
financing of Fab 2, the Company has entered into several related agreements and other
arrangements and has completed several public and private financing transactions. The
agreements and arrangements include those with technology partners, with SanDisk
Corporation, Alliance Semiconductor Corporation, Macronix International Co., Ltd. and
QuickLogic Corporation (collectively, the Wafer Partners), TIC, Banks, the
Government of Israel through the Investment Center and others. The Company has also
entered into agreements for the design and construction of Fab 2, for equipping Fab 2 and
for the transfer to the Company of process technologies to produce wafers in Fab 2.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Wafer
Partner Agreements
| | --- | ------------------------

| | During
the years 2000 and 2001, the Company entered into various shares purchase agreements (Wafer
Partner Agreements) with Wafer Partners to partially finance the construction and
equipping of Fab 2. Pursuant to the Wafer Partner Agreements, the Wafer Partners agreed
to invest an aggregate of $250,000 to purchase ordinary shares of the Company. According
to the Wafer Partner Agreements, the Company agreed, subject to certain conditions, to
reserve for each Wafer Partner a certain portion, and collectively approximately 50%, of
Fab 2 wafer manufacturing capacity for a period of 10 years ending January 2011.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Through
December 31, 2004, the Wafer Partners invested under the Wafer Partner Agreements an
aggregate of $246,823. Of such amount, $201,059, was credited as paid in capital and
$45,764, was established as long-term customers advances which may be, subject to
the terms and conditions stipulated in the Wafer Partner Agreements, as amended to date,
utilized as credit against purchases to be made by the Wafer Partners, primarily through
December 2010, or converted into paid-in-capital for a limited term. Through December 31,
2008, the Wafer Partners were issued an aggregate of 36,489,681 ordinary shares at an
average price per share of $6.94, which was determined based on the average closing sale
price of the Companys ordinary shares for the 15-30 trading days prior to making
any capital investment, see (4) below.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Due
to the termination by one of the Wafer Partners of its semiconductor business, the
Company believes that no future utilization of the wafer credits will be made by such
Wafer Partner, hence a full write-down of its outstanding wafer credits in the amount of
$9,747 was recorded during 2007.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 47

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 16 |  | COMMITMENTS AND CONTINGENCIES (Cont.)
|------- | - | -------------------------------------

| | A. | Commitments
and Contingencies Relating to Fab 2 (Cont.)
| | -- | -------------------------------------------------------

| | (2) | Wafer
Partner Agreements (Cont.)
| | --- | --------------------------------

| | In
addition, the Primary Wafer Partners invested in rights offering in 2002 and 2005 an
aggregate amount of $19,089, see also Note 17F .
| | ----------------------------------------------------------------------------------------------------------------------------------------

| | In
August 2006, the Company signed an agreement with SanDisk, one of the Wafer Partners, to
invest in the expansion of its 0.13 micron manufacturing capacity. For the agreement with
SanDisk, as amended, see Note D(2) below.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
amendments to the Wafer Partner Agreements, see (4) below.
| | --------------------------------------------------------------

| | (3) | TIC
Agreements
| | --- | --------------

| | During
the years 2001-2004, TIC invested $50,000 in the Company for the purchase of an aggregate
of 6,749,669 ordinary shares of the Company at an average price per share of $7.41, which
was determined based on the average closing sale price of the Companys ordinary
shares for the 15-30 trading days prior to making any investment. The investment of TIC
was made in accordance with the share purchase agreement entered into in January 2001.
For a description of an additional investments made by TIC in the aggregate amount of
$29,152 in connection with the 2005 rights offerings, see Note 17F.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2006, in connection with the September 2006 amendment to the Facility Agreement,
described in Note 12B, TIC invested $100,000 in the Company for equity equivalent capital
notes convertible into 65,789,474 of the Companys ordinary shares, at a price per
share of $1.52 (which equals the average closing price during the 10 consecutive trading
days prior to signing the MOU). Such equity equivalent capital notes have no voting
rights, no maturity date, no dividend rights, are not tradable, are not registered, do
not carry interest, are not linked to any index and are not redeemable.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2007, in connection with the September 2007 Credit Line Agreements with the Banks and
TIC, the Company received from TIC a credit line for loans of $30,000, see Note 12B.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 48

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 16 |  | COMMITMENTS AND CONTINGENCIES (Cont.)
|------- | - | -------------------------------------

| | A. | Commitments
and Contingencies Relating to Fab 2 (Cont.)
| | -- | -------------------------------------------------------

| | (3) | TIC
Agreements (Cont.)
| | --- | ----------------------

| | As
part of the September 2008 definitive agreements with the Companys Banks and TIC
(i) an amount of $50,000 of debt owned by the Company to TIC was converted into equity
equivalent capital notes convertible into 35,211,268 of the Companys ordinary
shares, representing twice the average closing price per share on NASDAQ for the ten
trading days prior to August 7, 2008 and (ii) TIC invested $20,000 in the Company in
exchange for equity equivalent capital notes of the Company convertible into 28,169,014
of the Companys ordinary shares, representing the average closing price per share
on NASDAQ for the ten trading days prior to August 7, 2008. In January 2009,
following an additional investment by TIC of $20,000, the Company issued TIC equity
equivalent capital notes convertible into 76,923,077 of the Companys ordinary
shares.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
equity equivalent capital notes are akin to options with an exercise price of zero and
are economically equivalent to the shares issuable upon exercise, and are therefore
classified in permanent equity.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | Amendments
to the Primary Wafer Partner Agreements
| | --- | --------------------------------------------------

| | Pursuant
to the Primary Wafer Partner Agreements, as amended to date, each of the Primary Wafer
Partners had an option to convert, at the end of each calendar quarter commencing 2004,
that portion of the long-term customers advances which it is entitled to utilize,
based upon payments made by such Primary Wafer Partner and purchase orders received from
the Wafer Partners through December 31, 2006, (subject to the below amendment with one of
the Wafer Partners), into fully-paid ordinary shares of the Company. The number of shares
was determined based on the average closing sale price of the Companys ordinary
shares for the 15 trading days preceding the end of the relevant quarter. Accordingly,
through December 31, 2007, two of the Primary Wafer Partners had elected to convert an
aggregate of $12,487 of long-term customer advances into 7,908,063 fully-paid ordinary
shares of the Company, at an average share price of $1.58 per share. Any quarterly
amount, which the Primary Wafer Partners did not so convert, was utilizable against
purchases and was to be repaid on December 2007. The amounts bore interest, payable at
the end of each quarter, at an annual rate equal to three-month USD LIBOR plus 2.5%
through December 31, 2007, subject to the amendment described below with respect to one
of the Wafer Partners.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2006, the Company and one of the Primary Wafer Partners, entered into an agreement to
extend the date until which the credits could be utilized and would be subject to
repayment if not so utilized to December 2009. Further, according to the agreement, with
respect to certain orders placed until July 2006, and all orders placed thereafter
through December 2009, such unutilized advances bear interest at an annual rate equal to
three-month USD LIBOR plus 1.1%, payable at the end of each quarter, through December
2009.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 49

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 16 |  | COMMITMENTS AND CONTINGENCIES (Cont.)
|------- | - | -------------------------------------

| | A. | Commitments
and Contingencies Relating to Fab 2 (Cont.)
| | -- | -------------------------------------------------------

| | (5) | Facility
Agreement
| | --- | ------------------

| | Compliance
with Financial Ratios and Covenants
| | ----------------------------------------------

| | As
of the balance sheet date, the Company was in full compliance with all of the financial
ratios and covenants under the Facility Agreement, as amended to date, see also Note 12B
regarding the Banks waiver of the Companys compliance with financial
covenants through the end of 2008 as part of the September 2008 definitive agreement with
the Companys Banks and TIC. According to the Facility Agreement, satisfying the
financial ratios and covenants is a material provision. The amended Facility Agreement
provides that if, as a result of any default, the Banks were to accelerate the Companys
obligations, the Company would be obligated, among other matters, to immediately repay
all loans made by the Banks (which as of the approval date of the financial statements
amounted to approximately $206,000) plus penalties, and the Banks would be entitled to
exercise the remedies available to them under the Facility Agreement, including
enforcement of their liens against all of the Companys assets.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Liens
| | -----

| | Under
the Facility Agreement, the Company agreed to register liens in favor of the Banks on
substantially all its present and future assets. If, as a result of any default under the
Facility Agreement, the Banks were to accelerate the Companys obligations, the
Company would be obligated to immediately repay all loans made by the Banks (which as of
the approval date of the financial statements amounted to approximately $206,000), plus
penalties, and the Banks would be entitled to exercise the remedies available to them
under the Facility Agreement, including enforcement of the liens against the Companys
assets.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Offeror
by the Banks
| | --------------------

| | If
one or more certain bankruptcy related events occur, the Banks are entitled to bring a
firm offer made by a potential investor to purchase the Companys ordinary shares (the
Offer) at a price provided in the Offer. In such case, the Company shall be
required thereafter to procure a rights offering to invest up to 60% of the amount of the
Offer on the same terms. If the Offer is conditioned on the offeror purchasing a majority
of the Companys outstanding share capital, the rights offering will be limited to
allow for this, unless TIC and the Primary Wafer Partners agree to exercise in a rights
offering rights applicable to their shareholdings and agree to purchase in a private
placement enough shares to ensure that the full amount of the Offer is invested.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
further details in regard to the Facility Agreement, see Note 12B. For interest rate
derivatives agreements in connection with the loans under the facility agreement, see
Note 14.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 50

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 16 |  | COMMITMENTS AND CONTINGENCIES (Cont.)
|------- | - | -------------------------------------

| | A. | Commitments
and Contingencies Relating to Fab 2 (Cont.)
| | -- | -------------------------------------------------------

| | (6) | Approved
Enterprise Status
| | --- | --------------------------

| | In
December 2000, the Investment Center approved an investment program in connection with
Fab 2 for expansion of the Companys plant. The approval certificate for the program
provided for a benefit track entitling the Company to investment grants at a rate of 20%
of qualified investments of up to $1,250,000, or an aggregate of up to $250,000, of which
as of the balance sheet date, an aggregate of approximately $165,000 has been received
from the Investment Center. Under the terms of the program, investments in respect of Fab
2 were to be completed by December 31, 2005, five years from the date the approval
certificate was obtained. Due to the later than planned construction of Fab 2, market
conditions and slower than planned ramp-up, the Company completed approximately 72% of
the investments within the time frame stipulated in the approved enterprise program. In
December 2007, the Company submitted the final report in relation to the program. The
Company has been holding discussions with the Investment Center to achieve satisfactory
arrangements to approve a new expansion program since January 1, 2006.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
May 2008, the Company filed a petition with the Israeli High Court of Justice in which
the Company asked the Court to order that its expansion plan (in connection with its Fab
2 Approved Enterprise Program) be brought before the relevant Israeli Governmental bodies
for their respective approvals without delay. In July, the Court ordered that the
proceeding be transferred to a three-judge panel. A hearing has been scheduled for
October 2009. On August 11, 2008, the Investment Center rejected the Companys
expansion plan request. The Company has appealed this decision before the Israeli
Minister of Finance and the Israeli Minister of Industry, Trade and Labor.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of the approval date of the financial statements, the Company cannot estimate when, if at
all, the Company will receive approval of its request for a new expansion program.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Any
failure by the Company to meet the conditions of the 2000 approval certificate may result
in the cancellation of all or a portion of the grants to be received and tax benefits and
in the Investment Center requiring the Company to repay all or a portion of grants
already received. Under Israeli law, the Companys non-completion of investments in
an amount of $1,250,000 by December 31, 2005 may permit the Investment Center to require
the Company to repay all or a portion of grants already received. The Company believes
that it is improbable that the Investment Center would demand the Company to repay all or
a portion of grants already received, or deny investment grants receivable as of December
31, 2005, due to its non-completion of investments in the amount of $1,250,000 by
December 31, 2005. See also Note 20A.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 51

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 16 |  | COMMITMENTS AND CONTINGENCIES (Cont.)
|------- | - | -------------------------------------

| | A. | Commitments
and Contingencies Relating to Fab 2 (Cont.)
| | -- | -------------------------------------------------------

| | (7) | Agreement
with the ILA
| | --- | ----------------------

| | In
November 2000, the Company entered into a development agreement with the Israel Land
Administration (ILA) with respect to a parcel of land on which Fab 2 was
constructed. Following the completion of the construction of Fab 2 on the land, in June
2003, the Company entered into a long-term lease agreement with the ILA for a period
ending in 2049. The lease payments through 2049 relating to this lease have been paid in
advance and are expensed through the operational lease period.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | License
Agreements
| | -- | ------------------

| | (1) | In
June 2000, the Company entered into a cross license agreement with a major
          technology company. According to the agreement, each party acquired a
          non-exclusive license to certain of the others patents. The Company
agreed           to pay an annual license fee through July 2005. In July 2006, the
Company           extended its cross license agreement with the major technology company
until           December 2010. According to terms of the new agreement, each party
acquired           a non-exclusive license to certain of the others patents, and
the Company           agreed to pay an annual license fee through 2010.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | In
October 1997 the Company and Saifun Semiconductors Ltd (Saifun)
          entered into an agreement for certain exclusive semiconductor manufacturing
          rights on certain licensed technology. The agreement set certain limitations on
          Saifun regarding future licensing of such technology. Pursuant to certain
          provisions of the agreement, the Company and Saifun were obligated to pay each
          other royalties. The agreement was terminated in 2006, with the signing of a
new           agreement, according to which, among other things, Saifun extended the term
of           the license granted to the Company for certain licensed technology.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | The
Company and Jazz enter into intellectual property and licensing agreements           with
third parties from time to time. The effect of each of them on the           Companys
total assets and results of operations is immaterial. Certain of           these
agreements call for royalties to be paid by the Company and Jazz to these           third
parties.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 52

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 16 |  | COMMITMENTS AND CONTINGENCIES (Cont.)
|------- | - | -------------------------------------

| | C. | Leases
| | -- | ------

| | (1) | The
Companys offices and engineering and manufacturing operations are           located
in a building complex situated in an industrial park in Migdal           Haemek, in
the northern part of Israel. These premises are currently           occupied under a
long-term lease from the ILA, which expires in 2032. The           Company has no
obligation for lease payments related to this lease through the           year 2032.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | With
respect to a long-term lease agreement of land on which Fab 2 was           constructed,
see A(7) above.
| | --- | -------------------------------------------------------------------------------------------------------------

| | (3) | The
Company occupies certain other premises under various operating leases. The
          obligations under such leases were not material as of December 31, 2008.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | Jazz
leases its fabrication facilities and headquarters from Conexant Systems,           Inc. (Conexant)
under non-cancelable operating leases through 2017.           Jazz has the unilateral
option to extend the terms of each of these leases for           two consecutive
five-year periods ending in 2027. Jazzs rental payments           under these
leases consist solely of its pro rata share of the expenses incurred           by
Conexant in the ownership of these buildings and applicable adjustments for
          increases in the consumer price index. These expenses include property taxes,
          building insurance, depreciation and common area maintenance and are included
in           operating expenses in the accompanying consolidated statements of
operations.           Jazz is not permitted to sublease space that is subject to the
leases with           Conexant without Conexants prior approval. Jazz also leases
office and           warehouse facilities from third parties. In connection with
acquisition of Jazz           Semiconductor, Jazz and Conexant executed amendments to the
leases. Under the           lease amendments, Jazzs headquarters may be relocated
one time no earlier           than 12 months from the completion of the acquisition of
Jazz Semiconductor to           another building within one mile of Jazzs current
location at           Conexants option and expense subject to certain conditions.
The amount           allocated to facilities leases represents the fair value of acquired
leases           calculated as the difference between market rates for similar facilities
in the           same geographical area and the rent Jazz is estimated to pay over the
life of           the leases, discounted back over the life of the lease. The future
minimum costs           under these leases have been estimated based on costs incurred
during 2008.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
December 31, 2008, future minimum payments under operating leases are primarily due to
Conexant and these costs have been estimated based on the actual costs incurred during
2008 and when applicable have been adjusted for increases in the consumer price index.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 53

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 16 |  | COMMITMENTS AND CONTINGENCIES (Cont.)
|------- | - | -------------------------------------

| | C. | Leases
(Cont.)
| | -- | --------------

| | Future
minimum payments under non-cancelable operating leases are as follows:
| | -----------------------------------------------------------------------------

| |                  | Payment Obligations by Year (dollars in thousands)
| | ---------------- | --------------------------------------------------
|
|
|
|
| | Operating leases |                                                   
| |                  |                                                   

| | D. | Other
Principal Agreements
| | -- | --------------------------

| | The
Company, from time to time in the ordinary course of business, enters into long-term
agreements with various entities for the joint development of products and processes
utilizing technologies owned by both the other entities and the Company.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (1) | Siliconix
| | --- | ---------

| | In
2004, the Company and Siliconix incorporated (Siliconix), a subsidiary of
Vishay Intertechnology Inc., entered into a definitive long-term foundry agreement for
semiconductor manufacturing in the Companys Fab 1. During 2008, the parties
amended the agreement to revise the terms of the purchase of trench wafers as
well as transfer additional product platforms to Tower for the manufacturing of new
products in Fab 1.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | SanDisk
Corporation
| | --- | -------------------

| | In
2006, the Company signed an agreement with SanDisk Corporation (SanDisk), one
of its wafer partners, according to which, SanDisk is committed to purchase volume
quantities of 0.13 micron wafers during 2007 and 2008 and will have a right of first
refusal for a portion of the Companys 0.13 micron capacity in 2009. The Company and
SanDisk also signed a Loan Agreement under which the Company borrowed approximately
$10,000 from SanDisk for the purpose of financing the purchase of a portion of the
equipment needed for 0.13 micron production and SanDisk was granted a first ranking
charge on the equipment purchased therewith. The loan bears interest on the amounts
outstanding at three-month USD LIBOR plus 1.1%. In 2008, the parties amended the
agreement mainly to revise the terms of the loan repayments schedule. Pursuant to
the agreement, SanDisk has been granted a first ranking charge on the equipment purchased
therewith.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 54

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 16 |  | COMMITMENTS AND CONTINGENCIES (Cont.)
|------- | - | -------------------------------------

| | E. | Environmental
Affairs
| | -- | ---------------------

| | The
Companys operations are subject to a variety of laws and governmental regulations
in Israel relating to the use, discharge and disposal of toxic or otherwise hazardous
materials used in the production processes. Operating permits and licenses are required
for the operations of the Companys facilities and these permits and licenses are
subject to revocation, modification and renewal. Government authorities have the power to
enforce compliance with these regulations, permits and licenses. As of the approval date
of the financial statements, the Company was in compliance with the terms of the permits
and licenses.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F. | International
Trade Commission Action
| | -- | -------------------------------------

| | During
2008, an International Trade Commission (ITC) action was filed by LSI/Agere
Corporation (LSI), which alleged infringement by 17 corporations of LSIs
patent no. 5227335. Following the initial filing, LSI amended the ITC complaint
requesting to add the Company, Jazz and three other corporations as additional
respondents. Jazz, the Company and the other three corporations were added as
additional respondents to the ITC action in October 2008. The Company and Jazz are
assessing the merits of this action and cannot provide an estimate of any possible losses
or predict the outcome thereof, which could have a material and adverse effect on the
Company and Jazzs business and financial position. The Company and Jazz intend to
vigorously defend the litigation.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | G. | The
Companys merger with Jazz was submitted for review by the Committee on
               Foreign Investment in the United States (CFIUS), a group of
U.S.                agencies that reviews foreign investments in U.S. companies for
national                security reasons. CFIUS has notified that it has completed
its review,                there are no unresolved national security concerns with
respect to the Merger                and no further action will be taken by CFIUS.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | H. | In
connection with Jazzs aerospace and defense business, its facility
               security clearance and trusted foundry status, the Company and Jazz are
working                with the Defense Security Service of the United States Department
of Defense                (DSS) to develop an appropriate structure to
mitigate any concern of                foreign ownership, control or influence over the
operations of Jazz specifically                relating to protection of classified
information and prevention of potential                unauthorized access thereto. In
order to safeguard classified information, it is                expected that the DSS
will require adoption of a Special Security Agreement                (SSA).
The SSA may include certain security related restrictions,                including
restrictions on the composition of the board of directors, the                separation
of certain employees and operations, as well as restrictions on                disclosure
of classified information to the Company. The provisions contained in                the
SSA may also limit the projected synergies and other benefits to be realized
               from the Merger. There is no assurance when, if at all, an SSA will be
reached.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 55

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 16 |  | COMMITMENTS AND CONTINGENCIES (Cont.)
|------- | - | -------------------------------------

| | I. | Jazzs
Supply Agreement
| | -- | -----------------------

| | Jazz
has a guaranteed supply agreement for certain gases used in Jazzs manufacturing
process that expires in 2014. The agreement specifies minimum purchase commitments and
contains a termination fee that is adjusted downward on each of the agreements
anniversary dates. The initial minimum purchase commitment of approximately $1,000
annually is adjusted based on supplemental gas purchases, wage increases for the labor
portion of the minimum purchase commitment and price increases for supplemental product.
If Jazz were to terminate the supply agreement prior to 2014, the termination fee would
be approximately $4,000.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | J. | Other
Commitments
| | -- | -----------------

| | Receipt
of certain research and development grants from the government of Israel is subject to
various conditions. In the event the Company fails to comply with such conditions, the
Company may be required to repay all or a portion of the grants received. In the Companys
opinion, the Company has been in full compliance with the conditions through December 31,
2008. In regard to investment center grants, see A(6) above.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 17 |  | SHAREHOLDERS EQUITY
|------- | - | --------------------

| | A. | Description
of Ordinary Shares
| | -- | ------------------------------

| | As
of December 31, 2008 and 2007, the Company had 1.1 billion and 800 million authorized
ordinary shares, respectively, par value NIS 1.00 each, of which 160,025,639 and
124,226,116, respectively, were issued and outstanding (net of 1,300,000 ordinary shares
held by the Company as of such dates). As of the balance sheet date, there were
550,130,248 ordinary shares of the Company contingently issuable. This amount includes
ordinary shares to be issued under various agreements according to their provisions: (i)
TIC warrants, see B(5)(b) below; (ii) the exercise of outstanding warrants, see G,H,I and
J below; (iii) options granted to employees of the Company and Jazz and non-employees,
see B(1) below; (iv) the conversion of all outstanding convertible debentures, see Note
13; (v) the exercise of all equity equivalent capital notes, see Notes 12B and 16A(3)
(vi) the exercise of all Banks warrants and (vii) the conversion of Jazzs
convertible debentures and the exercise of Jazzs outstanding warrants into the
Companys ordinary shares, see Note 3. Holders of ordinary shares are entitled to
participate equally in the payment of cash dividends and bonus share (stock dividend)
distributions and, in the event of the liquidation of the Company, in the distribution of
assets after satisfaction of liabilities to creditors. Each Ordinary Share is entitled to
one vote on all matters to be voted on by shareholders.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 56

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 17 |  | SHAREHOLDERS EQUITY (Cont.)
|------- | - | ----------------------------

| | B. | Share
Option Plans
| | -- | ------------------

| | (1) | Employee,
Former Chairman of the Board of Directors, ChiefExecutive Officer and Director Share
Options (Cont.)
| | --- | --------------------------------------------------------------------------------------------------------------

| | (a) | General
| | --- | -------

| | The
Company has granted to its employees and Jazzs employees options to purchase its
ordinary shares under several option plans adopted by the Company since 1995. The
particular provisions of each plan and grant vary as to vesting period, exercise price,
exercise period and other terms. Generally, the options are granted at an exercise price
which equals the market value of the ordinary shares immediately prior to the date of
grant, vest over a two to four-year period according to various vesting schedules, and
are not exercisable beyond ten years from the grant date.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | Options
to the Former Chairman of the Companys Board of Directors
| | --- | ------------------------------------------------------------------

| | The
former chairman served as the chairman of the Companys Board of Directors until
January 5, 2009. Pursuant to his appointment as chairman, in December 2006, the Audit
Committee and Board of Directors of the Company approved granting him options to purchase
3,158,090 ordinary shares of the Company, which constituted 1% of the Companys
issued and outstanding share capital on a fully diluted basis as of December 2006, the
date the Board of Directors approved the grant. The exercise price is $1.88, which was
the closing price of the Companys ordinary shares on the NASDAQ Global Market on
the trading day immediately prior to the date of approval of the grant by the
Shareholders of the Company. The options vest over 4 years, 25% on the 12 month
anniversary of the shareholders approval date and 6.25% on each 3 month anniversary of
the first vesting date until fully vested. The options grant to the former chairman of
the Board of Directors was approved by the shareholders of the Company in January 2007.
The compensation cost of the options granted was determined based on the fair value at
the grant dates and amounted to $3,568. Such amount is expensed on an accelerated basis
over the vesting periods of the options. Upon termination of the Companys chairman,
all unvested options immediately expire and all vested options are exercisable within a
24-month period following termination.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 57

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 17 |  | SHAREHOLDERS EQUITY (Cont.)
|------- | - | ----------------------------

| | B. | Share
Option Plans (Cont.)
| | -- | --------------------------

| | (1) | Employee,
Former Chairman of the Board of Directors, ChiefExecutive Officer and Director Share
Options (Cont.)
| | --- | --------------------------------------------------------------------------------------------------------------

| | (c) | Options
to the Companys Chief Executive Officer andDirector
| | --- | ------------------------------------------------------------

| | In
April 2005, the Companys Board of Directors approved the grant of options to
purchase up to 1,325,724 ordinary shares to the Companys Chief Executive Officer (CEO),
who also serves as a director, which was further approved by the Companys
shareholders in October 2005. These options are exercisable at an exercise price of
$1.56, which was the closing market price of the Companys shares on the last
trading day prior to the board approval of the grant. These options will vest over a
four-year period, with 25% vesting over each year of employment. The options granted
are exercisable for a period of ten years from the date of grant.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
May 2006, the Companys Audit Committee and Board of Directors approved the grant of
options to the CEO, in addition to the options granted to him in 2005, such that in
total, the CEO will hold options to purchase shares that represent 4% of the Companys
shares on a fully diluted basis during the two-year period from the approval of the Audit
Committee. The exercise price of the initial grant of the additional options was $1.45,
the 90-day average closing price of the Companys shares prior to the Board of
Directors approval. Dilutive events following May 2006 and until May 2008 also
entitled him to additional options grants with an exercise price equal to the price per
share of the newly issued securities. The additional options granted during the two-year
period, will vest in equal amounts over 4 years of employment commencing from May 2006.
The options are exercisable for a period of 10 years from the date of grant. The new
grant of options and its terms were approved by the Companys shareholders in
September 2006.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of the balance sheet date, a total of 14,861,813 options were outstanding to the CEO. The
compensation cost of the total options granted to the CEO was determined based on the
fair value at the grant dates and amounted to $11,702. Such amount is expensed on an
accelerated basis over the vesting periods of the options.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 58

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 17 |  | SHAREHOLDERS EQUITY (Cont.)
|------- | - | ----------------------------

| | B. | Share
Option Plans (Cont.)
| | -- | --------------------------

| | (1) | Employee,
Former Chairman of the Board of Directors, ChiefExecutive Officer and Director Share
Options (Cont.)
| | --- | --------------------------------------------------------------------------------------------------------------

| | (d) | Employee
Options
| | --- | ----------------

| | In
May 2006, the Companys board of directors approved a plan to offer each of the
Companys employees the opportunity to exchange their existing options to purchase
ordinary shares for new options with an exercise price of $1.45, which is the average
closing price of the Companys shares on the NASDAQ during the 90 consecutive
trading days prior to the board of directors approval. Accordingly, 4,299,250
options were exchanged. The new options were granted based on terms similar to the
existing employee option plan with new vesting periods, starting May 2006. The cost of
the new options was determined based on the fair value at the grant dates in and amounted
to $1,726. Such amount is amortized as an expense on an accelerated basis over the
vesting periods of the new options. The Board of Directors further approved that if the
total number of employee options, including the options to the CEO, during the two-year
period from May 2006 will represent less than 8% of the Companys shares on a fully
diluted basis, additional options will be allocated for grants to the Companys
employees. As of the balance sheet date, approximately 1,332,000 options are available
for future grant of options to employees.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (e) | Options
Granted to Directors
| | --- | ----------------------------

| | During
2001, the Audit Committee, the Board of Directors of the Company and the shareholders of
the Company approved a stock option plan pursuant to which certain of the Companys
directors will be granted options to purchase up to 400,000 ordinary shares of the
Company (40,000 to each eligible director appointed to the Board of Directors) at an
exercise price equal to the market price of the Companys shares on the grant dates.
In accordance with this option plan, 80,000 options were granted in 2007 to two directors
who were appointed in 2007 at an average exercise price of $1.74, which equals the market
price of the Companys shares on the grant date. As of December 31, 2008, 120,000
options were outstanding under the plan with a weighted average exercise price of $1.58.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Options
granted under the plan vest over a four-year period according to various vesting
schedules, and generally may not be exercised beyond five years from the date they first
become exercisable. So long as the Independent Directors Option Plan described below
remains in effect, no new independent director, following January 2007, will be entitled
to receive options under the 2001 director options plan.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 59

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 17 |  | SHAREHOLDERS EQUITY (Cont.)
|------- | - | ----------------------------

| | B. | Share
Option Plans (Cont.)
| | -- | --------------------------

| | (1) | Employee,
Former Chairman of the Board of Directors, ChiefExecutive Officer and Director Share
Options (Cont.)
| | --- | --------------------------------------------------------------------------------------------------------------

| | (f) | Independent
Directors Option Plan
| | --- | ---------------------------------

| | In
November 2006, the Companys Board of Directors approved, following the approval by
the Audit Committee, the grant to each independent director options to purchase ordinary
shares (Initial Options) that shall equal 150,000 less the number of options
to purchase ordinary shares held by such independent director as of January 31, 2007, the
date the shareholders approved the grant (the Initial Grant Date) and which,
as of the Initial Grant Date, have not vested. The Initial Options shall vest over 3
years, one third will vest on the 12 month anniversary of the Initial Grant Date, and
thereafter, the remaining two thirds will vest on a monthly basis until fully vested. The
exercise price of the Initial Options was $1.88, which was the closing price of the
Companys ordinary shares on the NASDAQ on the trading day immediately prior to the
Initial Grant Date. Each new independent director appointed after the Initial Grant Date
shall be granted 150,000 options to purchase ordinary shares (Subsequent Options),
which, shall vest over 3 years, one third on the 12 month anniversary of the date on
which such independent director shall have served on the Board of Directors of the
Company, the remaining two thirds will vest on a monthly basis until fully vested. The
exercise price per Subsequent Option shall be the closing price of the Companys
ordinary shares on the NASDAQ on the trading day immediately prior to the relevant date
of appointment.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Upon
each 36 month anniversary of a previous grant of options to an independent director (each
a Tenure Grant Date), each such independent director shall be granted an
additional 150,000 options to purchase ordinary shares (Tenure Options),
which will vest over 3 years on a monthly basis until fully vested. The exercise price
per Tenure Option shall be the closing price of the Companys ordinary shares on the
NASDAQ on the trading day immediately prior to the relevant Tenure Grant Date. Subject to
certain conditions, the Initial Options, Subsequent Options and Tenure Options that have
vested shall be exercisable by an Independent Director for a period of ten years
following the date on which the Initial Options, Subsequent Options or Tenure Options, as
the case may be, first vested. So long as this option plan remains in effect, no future
grants will be made to independent directors under the plan described in -(e) above.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2008 713,328 options were outstanding under the plan with a weighted
average exercise price of $1.05.
| | ------------------------------------------------------------------------------------------------------------------------

F - 60

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 17 |  | SHAREHOLDERS EQUITY (Cont.)
|------- | - | ----------------------------

| | B. | Share
Option Plans (Cont.)
| | -- | --------------------------

| | (1) | Employee,
Former Chairman of the Board of Directors, ChiefExecutive Officer and Director Share
Options (Cont.)
| | --- | --------------------------------------------------------------------------------------------------------------

| | (f) | Independent
Directors Option Plan (Cont.)
| | --- | -----------------------------------------

| | The
compensation cost of the total options granted to the directors and to independent
directors under the plans described in (e) above was determined based on the fair value
at the grant dates and amounted to $483. Such amount is expensed on an accelerated basis
over the vesting periods of the options.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Summary
of the Status of all the Companys Employee and Director Share Options
| | --- | ------------------------------------------------------------------------------

# 

| | A
summary of the status of all employee and director share option plans as of December 31,
2008, 2007 and 2006, as well as changes during each of the years then ended, is presented
below (for options granted to the Banks, a related party and a consultant, see B(5)
below):
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                 | 2008 | 2007 | 2006
|-------------------------------- | ---- | ---- | ----
|
|
|
|
|Outstanding as of beginning of   |      |      |     
|year                             |      |      |     
|Granted                          |      |      |     
|Exercised                        |      |      |     
|Terminated                       |      |      |     
|Forfeited                        |      |      |     
|                                 |      |      |     
|Outstanding as of end of year    |      |      |     
|                                 |      |      |     
|                                 |      |     
|Options exercisable as of end of |      |     
|year                             |      |      |     
|                                 |      |      |     

F - 61

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 17 |  | SHAREHOLDERS EQUITY (Cont.)
|------- | - | ----------------------------

| | B. | Share
Option Plans (Cont.)
| | -- | --------------------------

| | (3) | Summary
of Information about Employee Share Options Outstanding
| | --- | ---------------------------------------------------------------

| | The
following table summarizes information about employee share options outstanding as of
December 31, 2008:
| | ------------------------------------------------------------------------------------------------------------

| | Outstanding as of December 31, 2008 | Exercisable as of
December 31, 2008
| | ----------------------------------- | -----------------------------------
|
|
|
|
| | $ 0.32-$ 0.54                       |                                    
| | 0.61-0.69                           |                                    
| | 0.84-0.95                           |                                    
| | 1.06                                |                                    
| | 1.16-1.40                           |                                    
| | 1.45                                |                                    
| | 1.46-1.59                           |                                    
| | 1.6-1.78                            |                                    
| | 1.8-1.83                            |                                    
| | 1.88-1.98                           |                                    
| | 2.02-2.28                           |                                    
| | $ 3.25-$ 25.00                      |                                    
| |                                     |                                    
| |                                     |                                    
| |                                     |                                    

| | (4) | Weighted
Average
| | --- | ----------------

| | Grant-Date
Fair Value of Options Granted to Employees
| | -----------------------------------------------------

| | The
weighted average grant-date fair value of the options granted during 2008, 2007 and 2006
to employees and directors amounted to $0.43, $0.87 and $0.81 per option, respectively.
The Company utilized the Binomial lattice model since 2006 and the Black-Scholes
option-pricing model in 2005. Jazz utilizes the Black-Scholes model. The Company and Jazz
estimated the fair value, utilizing the following assumptions for the years 2008, 2007
and 2006 (all in weighted averages):
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                            | 2008        | 2007        | 2006       
| | -------------------------- | ----------- | ----------- | -----------
|
|
|
|
| | Risk-free interest rate    | 2.61%-4.27% | 3.61%-6.09% | 4.44%-4.81%
| | Expected life of options   | 10 years*   | 10 years    | 10 years   
| | Expected annual volatility | 51%-72%     | 55%-65%     | 65%-67%    
| | Expected dividend yield    | None        | None        | None       
| |                            |             |             |            

| | (*) | Expected
life of options for options granted to Jazz employees was 6 years.
| | --- | ---------------------------------------------------------------------------

F - 62

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 17 |  | SHAREHOLDERS EQUITY (Cont.)
|------- | - | ----------------------------

| | B. | Share
Option Plans (Cont.)
| | -- | --------------------------

| | (5) | Non-Employee
Warrants
| | --- | ---------------------

| | (a) | Banks
Warrants
| | --- | --------------

| | As
of December 31, 2008, 11,631,648 warrants to purchase ordinary shares of the Company, at
terms described below, were outstanding and exercisable, at a weighted average exercise
price of $1.77 per share. 9,161,060 of the warrants are exercisable until September 2011
and 2,470,588 exercisable through March 2010.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
cost of the 9,161,060 warrants issued to the Banks, determined based on the fair value at
the grant and amendment dates in accordance with SFAS 123, amounted to a total of
$10,886. Such amount was amortized as deferred financing charges over the terms of the
loans under the Facility Agreement.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
September 2007, as part of the Companys credit line agreement with the Banks
described in Note 12B, the Banks received an aggregate of 2,470,588 warrants to purchase
ordinary shares of the Company at an exercise price of $2.04 per share. All the warrants
are exercisable until March 2010. The cost of the warrants, determined based on the fair
value at the grant and amendment dates in accordance with SFAS 123R, amounted to a total
of $608. Such amount was amortized as deferred financing charges over the term of the
loans under the Facility Agreement.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
lieu of paying the exercise price in cash, the Banks are entitled to exercise their
warrants on a cashless basis, i.e. by forfeiting part of the warrants in
exchange for ordinary shares equal to the aggregate fair market value of the shares
underlying the warrants forfeited less the aggregate exercise price.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | Warrants
Granted to TIC
| | --- | -----------------------

| | The
Company issued TIC warrants for the purchase of 58,906 of the Companys ordinary
shares. The exercise price for the warrants is $6.17 per share, the 15-day average
closing price of the Companys ordinary shares prior to the date the November 2003
amendment with the Banks was signed. The warrants were exercisable for a five-year period
ending December 2008, none of which were exercised. The cost of the warrants award
granted to TIC, determined based on the fair value at the grant date in accordance with
SFAS 123, amounted to a total of $259. Such amount was allocated to other assets as
deferred financing charges and was amortized a financing expense over the term of the
loans under the Facility Agreement with the Banks.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 63

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 17 |  | SHAREHOLDERS EQUITY (Cont.)
|------- | - | ----------------------------

| | B. | Share
Option Plans (Cont.)
| | -- | --------------------------

| | (5) | Non-Employee
Warrants (Cont.)
| | --- | -----------------------------

| | (b) | Warrants
Granted to TIC (Cont.)
| | --- | -------------------------------

| | In
September 2007, as part of the Companys credit line agreement with TIC described in
Note 12B, TIC received an aggregate of 2,941,176 warrants to purchase ordinary shares of
the Company at an exercise price of $2.04 per share. All the warrants are exercisable
until March 2010. The cost of the warrants, determined based on the fair value at the
grant and amendment dates in accordance with SFAS 123R, amounted to a total of $723. Such
amount was amortized as deferred financing charges over the term of the loans under the
Facility Agreement.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C. | Equity-Equivalent
Capital Notes
| | -- | -------------------------------

| | (1) | BanksEquity-Equivalent
Capital Notes
| | --- | -------------------------------------

| | For
information regarding the equity equivalent capital notes to the Banks, see Note 12B.
| | -----------------------------------------------------------------------------------------

| | (2) | TICs
Equity-Equivalent capital notes
| | --- | -------------------------------------

| | For
information regarding the equity equivalent capital notes to TIC, see Note 16A(3).
| | --------------------------------------------------------------------------------------

| | D. | Treasury
Stock
| | -- | --------------

| | During
1998, the Board of Directors of the Company authorized, subject to certain conditions,
the purchase of up to 1,400,000 ordinary shares of the Company to facilitate the exercise
of employee stock options under the Companys share option plans. During 1999 and
1998, the Company funded the purchase by a trustee of 142,500 and 1,157,500,
respectively, of the Companys ordinary shares.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | E. | Dividend
Distributions
| | -- | ----------------------

| | According
to the Facility Agreement, as amended to date, the Company undertook not to distribute
any dividends prior to the date that all amounts payable under the Facility Agreement
have been paid in full.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 64

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 17 |  | SHAREHOLDERS EQUITY (Cont.)
|------- | - | ----------------------------

| | F. | Rights
Offering  December 2005
| | -- | -------------------------------

| | In
December 2005, the Company filed in Israel and the U.S. a prospectus for the distribution
of transferable rights to purchase up to $50,000 U.S. dollar denominated debentures
Series B that are convertible into up to 45,454,545 of the Companys ordinary
shares. The rights were distributed to the shareholders of record of the Company on
December 20, 2005 (the record date), and to certain employees who on the record date held
options to purchase the Companys ordinary shares under share options plans that
entitle the options holders to participate in a rights offering. Each 138.98 ordinary
shares and/or eligible employee options held on the record date entitled their holder to
one right. The rights were exercisable until January 12, 2006. Each right entitled its
holder to purchase, at a subscription price of $0.1, 100 U.S. dollar denominated
convertible debentures.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
connection with the exercise of the rights, the Company raised $48,169 and issued
convertible debentures under terms described in Note 13C. As of the balance sheet date,
following conversions made, $10,681 are outstanding out of the $48,169.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
investment by Primary Wafer Partners and TIC see also Note 13C. For the conversion of the
debentures Series B held by TIC into equity equivalent capital notes, as part of the
September 2008 definitive agreements with the Companys Banks and TIC see Note 12B.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | G. | Public
Offering In Israel  June 2006
| | -- | -------------------------------------

| | In
June 2006 the Company completed an underwritten public offering of the Companys
securities on the Tel-Aviv Stock Exchange resulting in immediate gross proceeds of
approximately NIS 140,000,000 (approximately $31,000). The units sold consisted of (i)
convertible debentures Series C in the face amount of NIS 163,800,000 (approximately
$36,661), (ii) 390,000 options each exercisable for the three months ended September 27,
2006 for NIS 100 principal amount of convertible debentures at an exercise price equal to
85% of their face amount, (iii) 10,920,000 warrants each exercisable for the three months
ended September 27, 2006 for one Ordinary Share of the Company at a price of NIS 6.75
(approximately $0.00157, and (iv) 5,460,000 warrants Series 4 each exercisable for three
years ending on June 28, 2009 for one Ordinary Share of the Company at a price of NIS
7.40 (approximately $0.00195). The convertible debentures are convertible into the Companys
ordinary shares at a conversion rate of one Ordinary Share per NIS 4.31 (approximately
$0.00113) principal amount of convertible debentures, following the reduction in the
conversion price which was effected in 2008, see Note 13D. The convertible debentures
carry a zero coupon with principal payable at maturity in December 2011, at a premium of
37% over face value, linked to the CPI.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 65

---

---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 17 |  | SHAREHOLDERS EQUITY (Cont.)
|------- | - | ----------------------------

| | G. | Public
Offering In Israel  June 2006 (Cont.)
| | -- | ---------------------------------------------

| | Through
September 2006, 391,500 options to purchase convertible debentures described in (ii)
above were exercised and 350,000 short term warrants described in (iii) above were
exercised into ordinary shares, totaling in proceeds of approximately $8,000.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
net proceeds received were allocated to each of the components in the units sold using
the relative fair value method prescribed in APB Opinion No. 14. The Company determined
the fair values of each component using the average quoted prices at the first 2 days of
trading. The allocation to each component was as follow:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                              | Fair Values | Amount allocated
| | ------------------------------------------------------------ | ----------- | ----------------
|
|
|
|
| | Total net proceeds received for the units issued as of       |             |                 
| | issuance date                                                |             |                 
| |                                                              |             |                 
| | Proceeds allocated to convertibles debentures as of issuance |             |                 
| | date based on relative fair value                            |             |                 
| | Proceeds allocated to short term options to purchase         |             |                 
| | additional debentures                                        |             |                 
| | Proceeds allocated to long term warrants                     |             |                 
| | Proceeds allocated to short term warrants                    |             |                 
| |                                                              |             |                 
| | Total allocated                                              |             |                 
| |                                                              |             |                 

| | As
described in Note 13D, the Company further bifurcated the conversion feature from the
convertible debt using the method prescribed in DIG issue No. B16. That bifurcation was
done, as a next step, after the determination of the allocated proceeds described above.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | H. | Private
Placement In Israel  November 2006
| | -- | -------------------------------------------

| | In
the fourth quarter of 2006, the Company received and accepted orders from Israeli
investors in private placements for 11,615,000 ordinary shares and 5,227,500 warrants (Series
5 Warrants). The price of the ordinary shares was equal to the closing price of the
Companys shares on the Tel-Aviv Stock Exchange prior to the relevant private
placements and the warrants were issued for no consideration. Total immediate gross
proceeds amounted to approximately $22,000. Each of the Series 5 Warrants is exercisable
at any time during a period of four years ending in December 2010 at a price per share
equal to a 25% premium to the market price of the Companys shares at the date the
prospectus is published. As of December 28, 2006, following the publication of the
prospectus, the exercise price was finalized and determined to be NIS 9.48 linked to the
CPI. Series 5 Warrants have been classified to equity.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 66

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TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 17 |  | SHAREHOLDERS EQUITY (Cont.)
|------- | - | ----------------------------

| | I. | Private
Placement In the US  March 2007
| | -- | ----------------------------------------

| | In
March 2007, the Company completed a private placement of its securities in which it sold
ordinary shares and warrants for the purchase of ordinary shares, raising a total of
approximately $29,000 in gross proceeds. In the private placement, the Company issued
approximately 18.8 million shares and warrants exercisable into approximately 9.4 million
shares at an exercise price of $2.04 (subject to possible adjustments under certain
circumstances) exercisable until March 15, 2012 (Series I Warrants). The
Company also issued short-term warrants at an exercise price of $1.70 (Series II
Warrants), however all Series II Warrants were not exercised and fully expired as
of December 31, 2007.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | J. | Long-Term
Debentures Issued in Israel  2007
| | -- | --------------------------------------------

| | In
the second half of 2007, the Company consummated a private placement with Israeli
institutions of long-term convertible and non-convertible debentures and warrants, which
was expanded in September 2007, by which the Company raised gross proceeds of
approximately $54,000. In the funding, the Company sold units comprised of: (i) NIS
115,795,000 principal amount of long-term non-convertible-debentures, (approximately
$27,224) (series D); (ii) NIS 121,584,750 principal amount of long-term
convertible-debentures (approximately $28,585) with a 17.2 NIS conversion price (series
E), and (iii) 2,686,444 warrants Series 6, each exercisable until 2011, for one
Ordinary Share of the Company at a price of $2.04. The conversion and exercise prices are
subject to reduction in certain limited circumstances.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | K. | U.S
Shelf Prospectus
| | -- | --------------------

| | In
January 2008, the Company filed a shelf registration statement on Form F-3 with the U.S.
Securities and Exchange Commission, registering the possible offer and sale from time to
time of up to $40,000 of securities which the Company may elect to so offer and sell
during the three years following the effective date of the registration statement. The
registration form was declared effective in February 2008. The Company has made no
decisions as to when, if at all, it will actually raise funds under this registration
statement.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 67

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TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 17 |  | SHAREHOLDERS EQUITY (Cont.)
|------- | - | ----------------------------

| | L. | Securities
Issuance Pursuant to the Merger with Jazz
| | -- | ----------------------------------------------------

| | On
September 19, 2008, pursuant to the terms of the merger signed on May 19, 2008, the
Company acquired all of Jazzs outstanding capital in a stock-for-stock transaction.
See Note 3.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
accounting purposes, the purchase price for the acquisition of Jazzs stock was
reconciled against all consideration made to date as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------

| |                              | 
| | ---------------------------- | 
|
|
|
|
| | Stock consideration          | 
| | Other equity consideration   | 
| |                              | 
| | Total merger consideration   | 
| | Transaction costs            | 
| |                              | 
| | Total revised purchase price | 
| |                              | 
| |                              | 

| | Pursuant
to the merger, Jazzs outstanding stock options immediately prior to September 19,
2008, whether vested or unvested, were converted to options to purchase the Companys
ordinary shares on the same terms and conditions as were applicable to such options, with
adjusted exercise prices and numbers of shares to reflect the exchange ratio of the
common stock. This conversion was accounted for as a modification in accordance with SFAS
No. 123(R) with the fair value of the outstanding options of $1,290 being included
as part of the purchase price.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Pursuant
to the merger, all outstanding warrants to purchase the shares of Jazzs common
stock that were outstanding immediately prior to September 19, 2008, became exercisable
for the Companys ordinary shares. The fair value of the outstanding warrants of
$6,265 was included as part of the purchase price.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys transaction costs of $3,326 primarily consist of fees for financial
advisors, attorneys, accountants and other advisors incurred in connection with the
merger.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 18 |  | INFORMATION ON GEOGRAPHIC AREAS AND MAJOR CUSTOMERS
|------- | - | ---------------------------------------------------

| | A. | Revenues
by Geographic Area  as percentage of total sales
| | -- | ----------------------------------------------------------

| |               | Year ended December 31,
| | ------------- | -----------------------
|
|
|
|
| | United States |                        
| | Israel        |                        
| | Asia Pacific  |                        
| | Europe        |                        
| |               |                        
| | Total         |                        
| |               |                        
| |               |                        

F - 68

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TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 18 |  | INFORMATION ON GEOGRAPHIC AREAS AND MAJOR CUSTOMERS (Cont.)
|------- | - | -----------------------------------------------------------

| | B. | Long-Lived
Assets by Geographic Area  Substantially all of the                Companys
long-lived assets are located in Israel and substantially all of                Jazzs
long-lived assets are located in the United States.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C. | Major
Customers  as percentage of total Customers
| | -- | --------------------------------------------------

| | Accounts
receivable from significant customers representing 10% or more of the net accounts
receivable balance as of December 31, 2008 and December 31, 2007 consist of the
following customers:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |            | As of December 31,
| | ---------- | ------------------
|
|
|
|
| | Customer 1 |                   
| | Customer 2 |                   
| | Customer 3 |                   
| | Customer 4 |                   
| |            |                   

| | D. | Major
Customers  as percentage of total sales
| | -- | ----------------------------------------------

| |                       | Year ended December 31,
| | --------------------- | -----------------------
|
|
|
|
| | Customer A            |                        
| | Customer B            |                        
| | Customer C (*)        |                        
| | Customer D            |                        
| | Customer E (*) (**)   |                        
| | Other customers (***) |                        
| |                       |                        

| | (*)
Related party
| | -----------------

| | (**)
Including its affiliates
| | -----------------------------

| | (***)
           Represents sales to one customer who accounted for 8% of sales during 2008; to
          two different customers each of whom accounted for between 5% and 6% of sales
          during 2007 and to three different customers each of whom accounted for between
          5% and 6% of sales during 2006.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 19 |  | FINANCING EXPENSES, NET
|------- | - | -----------------------

| | Financing
expenses, net consist mainly of Banks loans interest (see Note 12), and interest
and other financing expenses in connection with our debentures (see Note 13).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 69

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TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 20 |  | INCOME TAXES
|------- | - | ------------

| | A. | Approved
Enterprise Status
| | -- | --------------------------

| | Substantially all of the
Companys existing facilities and other capital investments through December 31, 2005
have been granted approved enterprise status, as provided by the Israeli Law for the
Encouragement of Capital Investments  1959 (Investments Law). See also
Note 7C.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The tax benefits derived from
approved enterprise status relate only to taxable income attributable to each approved
enterprise investments program. Pursuant to the Investments Law and the approval
certificates, the Companys income attributable to its various approved enterprise
investments is taxed at a rate of up to 25% through 2012. Taxable income attributable to
the Fab 2 approved program shall be tax-exempt for the first two profitable years for tax
purposes. The portion of the Companys taxable income that is not attributable to
approved enterprise investments is taxed at a rate of 27% in 2008 (regular Company
Tax). The regular Company Tax rate is to be gradually reduced to 25% until 2010.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The tax benefits are also conditioned
upon fulfillment of the requirements stipulated by the Investments Law and the regulations
promulgated thereunder, as well as the criteria set forth in the certificates of approval.
In the event of a failure by the Company to comply with these conditions, the tax benefits
could be canceled, in whole or in part, and the Company would be required to refund the
amount of the canceled benefits, plus interest and certain inflation adjustments. In the
Companys opinion, the Company has been in compliance with the conditions through the
approval date of the financial statements. See Notes 7C and 16A(6).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Income
Tax provision is as follows:
| | -- | -----------------------------------

| |                       | Year ended December
31, 2008
| | --------------------- | ----------------------------
|
|
|
|
| | Current tax expense:  |                             
| | Federal               |                             
| | State                 |                             
| | Foreign               |                             
| |                       |                             
| | Total current         |                             
| |                       |                             
| | Deferred tax expense: |                             
| | Federal               |                             
| | State                 |                             
| |                       |                             
| | Total deferred        |                             
| |                       |                             
| | Income tax provision  |                             
| |                       |                             

F - 70

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---

TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 20 |  | INCOME TAXES (Cont.)
|------- | - | --------------------

| | C. | Components
of Deferred Tax Asset/Liability
| | -- | ------------------------------------------

| | The
following is a summary of the components of the deferred tax benefit and liability
reflected on the balance sheets as of the respective dates:
| | --------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                        | As of December 31,
| | ------------------------------------------------------ | ------------------
|
|
|
|
| | Deferred tax benefit - current                         |                   
| | Employees benefits and compensation                    |                   
| | Accruals, reserves and others                          |                   
| |                                                        |                   
| |                                                        |                   
| | Valuation allowance                                    |                   
| |                                                        |                   
| | Total current deferred tax benefit                     |                   
| |                                                        |                   
| |                                                        |                   
| | Net deferred tax benefit - long-term                   |                   
| | Deferred tax assets -                                  |                   
| | Net operating loss carryforwards                       |                   
| | Employees benefits and compensation                    |                   
| | Research and development                               |                   
| |                                                        |                   
| |                                                        |                   
| | Valuation allowance                                    |                   
| |                                                        |                   
| |                                                        |                   
| | Deferred tax liability - depreciation and amortization |                   
| | Intangible assets                                      |                   
| | Investment basis difference                            |                   
| | Others                                                 |                   
| |                                                        |                   
| | Total net long-term deferred tax benefit               |                   
| |                                                        |                   
| |                                                        |                   

| | Deferred
tax assets in the amount of $4,095 is presented in Other Current Assets. Deferred tax
liability in the amount of $11,749 is presented in other Long-Term Liabilities.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Jazz
establishes a valuation allowance for deferred tax assets, when it is unable to conclude
that it is more likely than not that such deferred tax assets will be realized. In making
this determination Jazz evaluates both positive and negative evidence as well as
potential tax planning strategies. At December 31, 2008 Jazz has not recorded a valuation
allowance against its deferred tax assets. Jazzs determination to not record a
valuation allowance at December 31, 2008 is primarily based on the projected reversal of
taxable temporary differences.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
valuation allowance of $177,034 at December 31, 2008 and $153,079 as of December 31, 2007
has been recorded to offset the related net deferred tax assets as the Company is unable
to conclude that it is more likely than not that such deferred tax assets will be
realized.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 71

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TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 20 |  | INCOME TAXES (Cont.)
|------- | - | --------------------

| | D. | Effective
Income Tax Rates
| | -- | --------------------------

| | The
reconciliation of the statutory tax rate to the effective tax rate is as follows:
| | -------------------------------------------------------------------------------------

| |                                                | Year ended December 31,
| | ---------------------------------------------- | -----------------------
|
|
|
|
| | Tax benefit computed at statutory rates        |                        
| | Reduced tax rate for approved enterprise       |                        
| | Tax benefits for which deferred taxes were not |                        
| | recorded                                       |                        
| | State tax, net of federal benefit              |                        
| | In-process research and development            |                        
| | Permanent differences and other, net           |                        
| |                                                |                        
| | Income tax provision                           |                        
| |                                                |                        
| |                                                |                        

| | E. | Net
Operating Loss Carryforward
| | -- | -------------------------------

| | As
of December 31, 2008, the Company had net operating loss carryforwards for tax purposes
of approximately $1 billion, which may be carried forward for an unlimited period of time.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
December 31, 2008, Jazz had federal and state net operating loss carry forwards of
approximately $23,500. The federal and state tax loss carry forwards will begin to expire
in 2021, unless previously utilized. The future utilization of the Jazzs net
operating loss carry forwards to offset future taxable income may be subject to an annual
limitation as a result of ownership changes that may have occurred previously or that
could occur in the future. Jazz has had two change in ownership events that
limit the utilization of net operating loss carry forwards. The first change in
ownership event occurred in February 2007 upon the acquisition of Jazz
Semiconductor. The second change in ownership event occurred on September 19,
2008, the date of the merger by the Company. Currently, the net operating loss limitation
for the change in ownership which occurred in September 2008 is in the process of being
determined and accordingly, the amount of Jazzs net operating losses which may be
available to offset future taxable income is not finalized. Jazz expects it will not be
able to utilize a significant portion of its net operating loss carry forwards,
potentially eliminating the vast majority of the entire future benefits of such net
operating loss carryforwards, as such have adjusted its net operating loss carryforwards
to reflect its current estimated utilization limited to $1,000. However, Jazz has
currently not finalized its analysis of this matter. Once the final information is
available, the purchase accounting impact on the deferred tax assets and liabilities will
be recognized and disclosed.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 72

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TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 20 |  | INCOME TAXES (Cont.)
|------- | - | --------------------

| | F. | Final
Tax Assessments
| | -- | ---------------------

| | The
Company possesses final tax assessments through the year 1998. In addition, the tax
assessments for the years 1999-2004 are deemed final.
| | ---------------------------------------------------------------------------------------------------------------------------------------------

| | Jazz
and its subsidiaries are subject to U.S. federal income tax as well as income tax in
multiple state and foreign jurisdictions. With few exceptions, Jazz is no longer subject
to U.S. federal income tax examinations for years before 2005; state and local income tax
examinations before 2004; and foreign income tax examinations before 2004. However, to
the extent allowed by law, the tax authorities may have the right to examine prior
periods where net operating losses were generated and carried forward, and make
adjustments up to the amount of the net operating loss carryforward amount. Jazz is not
currently under Internal Revenue Service (IRS) tax examination. Jazz is not
currently under examination by any other state, local or foreign jurisdictions.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company and its subsidiaries account for uncertain tax positions in accordance with
Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting
for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109 (FIN
48) and recognize interest and penalties that would be assessed in relation to the
settlement value of unrecognized tax benefits as a component of income tax expense.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 21 |  | RELATED PARTIES BALANCES AND TRANSACTIONS
|------- | - | -----------------------------------------

| | A. | Balances
| | -- | --------

|                                            | The nature of the relationships involved | As of December 31,
|------------------------------------------- | ---------------------------------------- | ------------------
|
|
|
|
|Trade accounts receivable                   |                                          |                   
|                                            |                                          |                   
|                                            |                                          |                   
|Long-term investment                        |                                          |                   
|                                            |                                          |                   
|                                            |                                          |                   
|Current liabilities- Due to related parties |                                          |                   
|                                            |                                          |                   
|                                            |                                          |                   
|Debentures                                  |                                          |                   
|                                            |                                          |                   
|                                            |                                          |                   
|Long-term customers' advances               |                                          |                   
|                                            |                                          |                   
|                                            |                                          |                   
|Other long-term liabilities                 |                                          |                   
|                                            |                                          |                   
|                                            |                                          |                   
|Capital notes                               |                                          |                   
|                                            |                                          |                   
|                                            |                                          |                   

F - 73

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TOWER SEMICONDUCTOR
LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(dollars
in thousands, except share data and per share data)

|NOTE 21 |  | RELATED PARTIES BALANCES AND TRANSACTIONS (Cont.)
|------- | - | -------------------------------------------------

| | B. | Transactions
| | -- | ------------

|                                                                   | Description of the transactions | As of December 31,
|------------------------------------------------------------------ | ------------------------------- | ------------------
|
|
|
|
|Revenues                                                           |                                 |                   
|                                                                   |                                 |                   
|                                                                   |                                 |                   
|Financing expenses                                                 |                                 |                   
|                                                                   |                                 |                   
|                                                                   |                                 |                   
|General and Administrative expenses                                |                                 |                   
|                                                                   |                                 |                   
|                                                                   |                                 |                   
|Customer's advance conversion into Equity - see Note 16A(4)        |                                 |                   
|                                                                   |                                 |                   
|                                                                   |                                 |                   
|Customer advance conversion into Long-term loans - see Note 16A(4) |                                 |                   
|                                                                   |                                 |                   
|                                                                   |                                 |                   
|Loans repayment                                                    |                                 |                   
|                                                                   |                                 |                   
|                                                                   |                                 |                   
|Long-term loan received                                            |                                 |                   
|                                                                   |                                 |                   
|                                                                   |                                 |                   
|Capital Notes                                                      |                                 |                   
|                                                                   |                                 |                   
|                                                                   |                                 |                   
|Capital Notes                                                      |                                 |                   
|                                                                   |                                 |                   

| | C. | For
commitments, contingencies and other transaction relating to Fab 2 Wafer
               Partner and TIC agreements, see Note 16A.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------

F - 74

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