We have invented and patented a technology that we refer to as nitride-read-only memory, or NROM, that we believe is leading a revolutionary shift in the non-volatile semiconductor memory market.

Unlike volatile semiconductor memory devices which lose stored information after electrical power is turned off, non-volatile semiconductor memory devices retain stored information even without a power source. We believe that our NROM technology represents a breakthrough in the non-volatile memory market because it offers a number of significant advantages over existing non-volatile memory technology. Although the semiconductor market has periodically experienced cyclicality, we believe overall demand in the industry will continue to remain strong. According to market estimates from Web-Feet Research, a market research firm in the electronics and the semiconductor industry, the code flash and data flash devices that our technology addresses accounted for sales of $17.1 billion in 2004 and are expected to grow to $53.9 billion by 2010, representing a compound annual growth rate of 21.1%. Web-Feet Research estimates that the embedded flash and serial flash devices that our technology addresses accounted for sales of $1.8 billion in 2004 and are expected to grow to $4.7 billion by 2010, representing a compound annual growth rate of 17.5%. Taken as a whole, our NROM technology can be applied in semiconductor memory devices that in 2004 accounted for sales of $18.9 billion and that are expected to grow to $58.7 billion by 2010, representing a compound annual growth rate of 20.8%.

We have a business model with two revenue streams. Our primary source of revenue is licensing our intellectual property. We also derive revenues from design and product development services that we provide to our licensees. In order to accelerate implementation of our NROM technology, our strategy has been initially to concentrate our efforts on a small number of licensees that are market leaders, including Spansion LLC (formerly known as Fujitsu AMD Semiconductor LLC), Infineon Technologies AG, Matsushita Electric Industrial Co., Ltd., Macronix International Co., Ltd., Sony Corporation and Semiconductor Manufacturing International Corporation. This strategy has led us to depend on a relatively small number of licensees for revenues. We have not yet derived significant revenues from Sony Corporation or Matsushita Electric Industrial Co., Ltd. or any revenues from Semiconductor Manufacturing International Corporation.

In 2004, we had revenues of $32.2 million and operating income of $4.5 million, and for the six months ended June 26, 2005, we had revenues of $44.9 million (including $16.5 million of non-cash license fees recognized in connection with the exit in December 2004 from our former joint venture with Infineon Technologies) and operating income of $25.1 million. Our net loss of $37.9 million in 2004 resulted primarily from our share of the losses of our former joint venture as well as from a capital loss resulting from our exit from the joint venture. Following the exit from our former joint venture, we had net income of $25.1 million for the six months ended June 26, 2005.

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We were incorporated under the laws of the State of Israel in November 1996 and commenced operations in July 1997. Our principal executive offices are located at ELROD Building, 45 Hamelacha Street, Sappir Industrial Park, Netanya 42504, Israel, and our telephone number is +972 (9) 892-8444. Our web site address is www.saifun.com.