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Tower Semiconductor Ltd – ‘F-2/A’ on 11/21/05

On:  Monday, 11/21/05, at 5:16pm ET   ·   Private-to-Public:  Document/Exhibit ¶  –  Release Delayed   ·   Accession #:  1178913-5-1620   ·   File #:  333-126909

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

11/21/05  Tower Semiconductor Ltd           F-2/A¶                12:1.2M                                   Z-K Global Ltd/FA

Document/Exhibit                   Description                      Pages   Size 

 1: F-2/A       Pre-Effective Amendment to Registration Statement   HTML    494K 
                          by a Foreign Private Issuer                            
12: CORRESP   ¶ Comment-Response or Other Letter to the SEC            3      5K 
 2: EX-3.1      Articles of Incorporation/Organization or By-Laws     44    147K 
 3: EX-4.1      Instrument Defining the Rights of Security Holders  HTML     85K 
 4: EX-4.2      Instrument Defining the Rights of Security Holders  HTML    384K 
 5: EX-4.3      Instrument Defining the Rights of Security Holders  HTML     14K 
 6: EX-4.4      Instrument Defining the Rights of Security Holders  HTML     15K 
 7: EX-5.1      Opinion re: Legality                                HTML     15K 
 8: EX-5.2      Opinion re: Legality                                HTML     16K 
 9: EX-5.3      Opinion re: Legality                                HTML     13K 
11: EX-23.2     Consent of Experts or Counsel                       HTML      8K 
10: EX-12.1     Statement re: Computation of Ratios                 HTML     37K 

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

AMENDMENT NO. 3
TO
FORM F-2

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

TOWER SEMICONDUCTOR LTD.
(Exact name of Registrant as specified in its charter)

P.O. Box 619
Migdal Haemek, Israel, 23105
972-4-650-6611
(Address and telephone number of Registrant's principal executive offices)

Tower Semiconductor USA
4300 Stevens Creek Blvd., Suite 175
San Jose, California 95129
Tel: 408-551-6500
Facsimile: 408-551-6509
(Name, address and telephone number of agent for service)

Approximate date of commencement of proposed sale to the public: From time to time after the effective date of this registration statement.

If the only securities being registered on this form are being offered pursuant to dividend or interest reinvestment plans, please check the following box: o

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, please check the following box: x

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: o

Calculation of Registration Fee

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

PROSPECTUS

DISTRIBUTION OF RIGHTS TO PURCHASE DEBENTURES CONVERTIBLE INTO ORDINARY SHARES

        We are distributing transferable rights to purchase up to $50 million of U.S. dollar denominated debentures that are convertible into up to 50,000,000 of our ordinary shares to those persons that, as of 5:00 p.m., New York City time (midnight, Israel time) on the record date of _____, 2005 (four Nasdaq trading days after the date of this prospectus) were either shareholders of our company or eligible employees holding options to purchase our ordinary shares under our share option plans that entitle option holders to participate in a rights offering. You will receive one right for each 138.99 ordinary shares and/or eligible employee options that you hold on the record date. If you hold 138 or fewer ordinary shares and/or eligible options on the record date, you will not receive any rights. Your rights will be aggregated for all the shares (and/or eligible employee options, as the case may be) that you own on the record date and then rounded down to the nearest whole number, so that you will not receive fractional rights. For example, if you own 139 shares on the record date, you will receive one right, and if you own 100,000 shares on the record date, you will receive 719 rights. Each right will entitle you to purchase, at a subscription price of $100.00, 100 U.S. dollar denominated debentures. The debentures will be convertible into our ordinary shares at a rate of one ordinary share per $1.00 aggregate principal amount of debentures. Each debenture is of $1.00 in principal amount, and bears annual interest at the rate of 5%. Principal, together with accrued interest, is payable in one installment on _______, 2011. The rights are exercisable during a 23-day period, beginning after 5:00 p.m., New York City time (midnight, Israel time) on _______ __, 2005 (the record date) and ending on _______ __, 2005 at 5:00 p.m., New York City time (midnight, Israel time)

        The payment of the principal of and interest on the debentures is subordinated to the prior payment of all amounts payable by us to Bank Hapoalim B.M. and Bank Leumi Le-Israel Ltd. under our credit facility agreement with them. The debentures are also effectively subordinated to amounts which we might owe to the Investment Center of the Israeli Ministry of Industry, Trade and Labor and to Siliconix Technology C.V., one of our customers.

        Commencing on the first trading day on the Tel Aviv Stock Exchange after the date on which the debentures begin to trade on the Tel Aviv Stock Exchange and until ______ __, 2011, the debentures are convertible into our ordinary shares at a conversion rate of one ordinary share per $1.00 aggregate principal amount of debentures. The conversion rate is subject to adjustment and the debentures will be subject to mandatory redemption by us in certain circumstances. For a detailed description of the debentures, see “Description of the Debentures.”

        Four of our major shareholders – Israel Corp., SanDisk Corporation, Alliance Semiconductor Corporation and Macronix International Co. Ltd. – have committed and are obligated to purchase an aggregate of $25.5 million of the $50 million principal amount of convertible debentures issuable upon exercise of the rights being distributed. The rights to be distributed to these major shareholders and to Quicklogic Corporation, the convertible debentures issuable upon exercise of such rights and our ordinary shares issuable upon the conversion of such debentures are not covered by the registration statement filed with the Securities and Exchange Commission of which this prospectus is a part, and are being issued in transactions pursuant to an exemption from the registration requirements of the Securities Act of 1933. These securities will be restricted securities and will not be transferable absent registration or an applicable exemption. We have agreed to register the resale of such securities by these major shareholders following the effective date of the registration statement of which this prospectus is a part.

        Our ordinary shares trade on the NASDAQ National Market under the symbol “TSEM” and on the Tel Aviv Stock Exchange in Israel under the symbol “TSEM.” The debentures will be listed on the NASDAQ Capital Market under the symbol “______” and the Tel Aviv Stock Exchange under the symbol “TSEM.C2” and may be identified on the Tel Aviv Stock Exchange as Debentures (Series B). On November 20, 2005, the last reported sale price of our ordinary shares on the NASDAQ National Market was $1.38 per share and on the Tel Aviv Stock Exchange was NIS 6.393 per share.

        The rights are transferable and will be listed for trading for a single day on the NASDAQ Capital Market under the symbol “______” and on the Tel Aviv Stock Exchange under the symbol “TSEM.R2". The trading day will be _______ __, 2005 (21 days after the record date). If you hold your rights through an Israeli brokerage company that holds the rights through the nominee company of the Tel Aviv Stock Exchange, you will be considered to have instructed your broker to sell all your rights on the Tel Aviv Stock Exchange with no price limit, if you fail to give your broker instructions regarding the exercise, non-exercise or sale of the rights prior to _______ __, 2005 (21 days after the record date).

        The offering is not secured by an underwriting commitment.

        This is a preliminary prospectus and is subject to change. As such, all pricing terms, including the aggregate principal amount of the convertible debentures, the rate of interest and the conversion rate are subject to change.

        The securities offered hereby involve a high degree of risk. See “Risk Factors” beginning on page 10.

        None of the U.S. Securities and Exchange Commission, the Israeli Securities Authority or any state securities commission have approved or disapproved of these securities or passed upon the adequacy, completeness or accuracy of this prospectus. Any representation to the contrary is a criminal offense under the laws of the United States and the laws of the State of Israel.

The date of this prospectus is _______ __, 2005

TABLE OF CONTENTS

        References to “Israel Corporation” or “Israel Corp.” include its wholly-owned subsidiary Israel Corporation Technologies (ICTech) Ltd. (“ICTech”).

[THIS PAGE INTENTIONALLY LEFT BLANK]

SUMMARY

This section answers in summary form some questions you may have about us and this rights offering. You should read the entire prospectus carefully.

QUESTIONS AND ANSWERS ABOUT TOWER SEMICONDUCTOR LTD.

        What do we do?

        We are a pure-play independent wafer foundry dedicated to the manufacture of semiconductors, strategically focused on embedded non-volatile memory, complementary metal oxide semiconductor (CMOS) image sensor, mixed signal and radio frequency CMOS (RFCMOS) technologies. 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 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 0.18-micron, while our 0.13-micron technology is expected to be ready for production by the end of 2005. We also provide complementary technical services and design support. 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.

        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. Depending on the process technology and product mix, as of September 30, 2005, Fab 1 is able to achieve capacity levels of approximately 16,000 wafers per month. 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. Production capacity at the end of September 2005 was 14,600 wafers per month. We currently expect to have production capacity of 15,400 wafers per month by the end of 2005, of which approximately 800 wafers per month are expected to be in 0.13-micron. 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 36,000 wafers per month.

        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 are to 200-mm wafers.

        Where are we located?

        Our manufacturing facilities and executive offices are located in the Ramat Gavriel Industrial Park, Post Office Box 619, Migdal Haemek, 23105 Israel, and our telephone number is 972-4-650-6611.

        Where can you find more information about us?

        Additional information about us and our operations may be found at our web site: www.towersemi.com. Information on our website is not incorporated by reference in this prospectus.

QUESTIONS AND ANSWERS ABOUT THE RIGHTS OFFERING

        What is an offering of rights to purchase convertible debentures?

        An offering of rights to purchase convertible debentures is an opportunity for our shareholders to purchase debentures convertible into our ordinary shares in an amount proportional to each shareholder’s existing interest in our ordinary shares. We are also distributing rights to our eligible employees who hold options under our share option plans that entitle option holders to participate in this offering.

        What securities may be purchased under each right?

        Each right entitles the holder to purchase, at a price of $100.00, one hundred U.S. dollar denominated debentures. Each debenture is of $1.00 in principal amount. The debentures will be convertible into our ordinary shares at a rate of one ordinary share per $1.00 aggregate principal amount of debentures.

        How many rights will you receive?

        Each person who, at the close of business at 5:00 p.m., New York City time (midnight, Israel time), on _____ __, 2005 (the record date), owns our ordinary shares and/or options under our employee share option plans that entitle option holders to participate in this offering will receive, at no charge, one right for each 138.99 ordinary shares and/or eligible options owned on the record date. The 138.99 ratio was derived by dividing the sum of the total number of our issued and outstanding ordinary shares and the number of options that entitle their holders to participate in the rights offering by the dollar amount being offered in the rights offering, multiplied by the subscription price. If you hold 138 or fewer ordinary shares and/or eligible options on the record date, you will not receive any rights. Your rights will be aggregated for all the shares (and/or eligible employee options, as the case may be) that you own on the record date and then rounded down to the nearest whole number, so that you will not receive fractional rights. For example, if you own 139 shares on the record date, you will receive one right, and if you own 100,000 shares on the record date, you will receive 719 rights. When you exercise a right, you choose to purchase the number of debentures that the right entitles you to purchase.

        How many securities are being offered upon exercise of the rights?

        One right entitles its holder to purchase, at a price of $100.00, one hundred debentures convertible into our ordinary shares. Each debenture is of $1.00 in principal amount. The debentures will be convertible into our ordinary shares at a rate of one ordinary share per $1.00 aggregate principal amount of debentures. When you exercise a right, you choose to purchase the number of debentures that the right entitles you to purchase. You may exercise all of your rights or a portion of your total rights, or you may choose not to exercise any of your rights. In addition, you may sell the rights on either the NASDAQ Capital Market or the Tel Aviv Stock Exchange, during one single trading day, on _______, 2005 (21 days after the record date). You may pay us the subscription price either in U.S. dollars, or if you are an Israeli resident, in New Israeli Shekels according to the U.S. dollar/NIS representative exchange rate published by the Bank of Israel on the day before payment of the subscription price.

        How will principal and interest be paid?

        The debentures will bear interest at the rate per annum of 5%. Principal of the debentures is payable, together with accrued interest, in one installment on _______, 2011. On _____, 2011, the cumulative interest rate on the debentures will be 34.0096%. Instruments representing the debentures will be issued in denominations of $1.00 and integral multiples thereof.

        Interest will initially accrue from the date following the last day rights may be exercised (______, 2005), and will be computed on the basis of a 365-day year.

        Accrued interest will not be payable upon conversion of the debentures into our ordinary shares and you will lose your right to any accrued interest upon conversion of the debentures into our ordinary shares.

        The payment of interest on and principal of the debentures may be postponed (with interest continuing to accrue at the rate of 5% per annum) under the terms of our bank credit facility agreement (See “Description of the Debentures – Subordination of Debentures”).

2

        How may the debentures be converted?

        Commencing on the first Tel Aviv Stock Exchange trading day after the date on which the debentures begin to trade on the Tel Aviv Stock Exchange and until ______ __, 2011 (inclusive) (16 days prior to the maturity date of the debentures, but if such date is not a trading day on the Tel Aviv Stock Exchange, then the last date to convert the debentures will be the first trading day on the Tel Aviv Stock Exchange after such date), the debentures are convertible into our ordinary shares at a conversion rate of one ordinary share per $1.00 aggregate principal amount of debentures. We will not issue fractional shares upon conversion of the debentures. We will round down the number of shares issuable upon conversion of the debentures to the nearest whole number and will not pay any cash adjustment in lieu of fractional shares.

        Under what circumstances will I not be able to convert the debentures?

        The debentures will no longer be convertible under the circumstances described under “Description of the Debentures - Conversion of Debentures - Election Not to Adjust Conversion Rate Following a Future Financing”.

        Could the conversion rate be adjusted and under what circumstances?

        Yes. The conversion rate will be adjusted if either of the two scenarios described under “Description of the Debentures – Conversion of Debentures – Adjustment to Conversion Rate Following a Future Financing” occurs. We may, in certain circumstances, elect not to make an otherwise required adjustment to the conversion rate, in which event the debentures would be subject to redemption by us under certain circumstances as described under “Description of the Debentures - Early Redemption of Debentures - Mandatory Redemption by the Company”.

        The conversion rate is also subject to customary adjustments following certain events such as the issuance of our capital stock as a dividend (bonus shares), subdivisions, combinations and reclassifications of our ordinary shares and future rights offerings.

        Must I convert the debentures I hold into ordinary shares?

        No. However, accrued interest will not be payable by us upon the conversion of the debentures into our ordinary shares and you will lose your right to any accrued interest upon conversion of the debentures into our ordinary shares.

        Can the debentures be mandatorily redeemed prior to their maturity date?

        Yes. We will redeem all of the outstanding debentures under the conditions described under “Description of the Debentures - Early Redemption of Debentures - Mandatory Redemption by the Company”. In addition, we may at our option announce the early redemption of the debentures or part thereof, subject to the conditions described under “Description of the Debentures – Optional Early Redemption of Debentures - Early Redemption at the Discretion of the Company.”

        Will the debentures be listed for trading?

        Yes. The debentures will be listed on the NASDAQ Capital Market under the symbol “______” and the Tel Aviv Stock Exchange under the symbol “TSEM.C2” and may be identified on the Tel Aviv Stock Exchange as Debentures (Series B).

        Are the debentures subordinated to our current indebtedness?

        Yes. The payment of the principal of and interest on the debentures is subordinated to the prior payment of all amounts payable by us to Bank Hapoalim B.M and Bank Leumi Le-Israel Ltd. under our credit facility agreement with them. Our indebtedness to our banks was $510.4 million as of September 30, 2005, and $518.1 million as of October 31, 2005. Payment of the principal and interest on the debentures is also effectively subordinated to our current and potential obligations to two secured creditors: the Investment Center of the Israeli Ministry of Industry, Trade and Labor, to whom we may have obligations related to $156.7 million in grants received through September 30, 2005 under the “Approved Enterprise” program, and Siliconix Technology C.V., one of our customers, which has a first ranking charge on a bank account into which Siliconix deposited in 2004, $20 million for the purchase of equipment and other expenses in connection with the performance of our obligations under our agreement with Siliconix (of which as of September 30, 2005, there is a balance of approximately $10 million) and over the equipment which has been or which may be subsequently purchased with such funds. As a result, upon any distribution to our creditors in liquidation or reorganization or similar proceedings, these senior and secured creditors will be entitled to be paid in full before any payment may be made with respect to the debentures. There may not be sufficient assets remaining to pay amounts due on any or all of the debentures then outstanding. In addition, if on a payment date of principal or interest on the debentures there exists an “Event of Default” 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. If, in such event, we reach an agreement with the banks (with respect to rescheduling our debt to the banks), the debenture holders may be bound thereby. The terms of the Indenture permit the Co-Trustees to initiate legal proceedings against us only in a limited number of cases, and always provided that advance notice is given to us and to the banks. (See “Description of the Debentures – Subordination of Debentures”).

3

        Although we are limited by the covenants in the facility agreement, we could enter into certain transactions that would increase the amount of our outstanding senior indebtedness. It is possible that all or part of these borrowings would be senior to the debentures.

        Why are we engaging in a rights offering?

        In July 2005, we entered into an amendment to the credit facility agreement with our banks. The amendment provides, among other things, for financing from our banks in the amount of up to an additional approximately $30 million under our credit facility agreement, subject to a similar amount being raised by us from investors through the issuance of shares or convertible debentures. Our four major shareholders have committed to invest an aggregate of $25.5 million in a rights offering towards this funding requirement through the purchase of debentures convertible into our ordinary shares. We are engaging in this rights offering in order to afford all of our shareholders (and eligible employees) the opportunity to purchase our securities on the same terms as our four major shareholders. We are also engaging in this rights offering to provide our company with an opportunity to raise funds towards our other fundraising obligation to our banks to raise an additional $26 million by June 30, 2006, and to provide us with an opportunity to raise additional capital for the ramp up and operations of Fab 2.

        How were the subscription price, the conversion rate and the minimum denomination of the debentures set?

        Based on the guidelines of this rights offering that were approved by the audit committee of our board of directors, our board of directors set all of the terms and conditions of the rights offering, including the subscription price, conversion rate and the minimum denomination of the debentures. Our board of directors’ objective in establishing the subscription price, conversion rate and the minimum denomination of the debentures was to reflect recent trading prices of our ordinary shares, raise the targeted proceeds and provide all of our shareholders with a reasonable opportunity to make an additional investment in our company. The audit committee of our board of directors consulted with a financial advisor in order to assist in the determination of the commercial terms. In establishing the commercial terms, including the subscription price, the conversion rate and the minimum denomination of the debentures, our board of directors and its audit committee considered the following factors: the strategic alternatives available to us for raising capital, the market price of our ordinary shares, the pro rata nature of the offering, pricing and terms of similar transactions, the advice of the financial advisor, our business prospects and general conditions in the securities markets. The subscription price, conversion rate and minimum denomination of the debentures, however, do not necessarily bear any relationship to our past or expected future results of operations, cash flows, current financial condition, or any other established criteria for value. Our board of directors believes that the minimum denomination of the debentures presents you with the ability to manage your investment in us following the exercise of your rights. For example, you may convert a relatively small portion of your aggregate investment into our shares, sell another relatively small portion of your debentures and continue to hold debentures.

        How long will the rights offering last?

        You will be able to exercise your rights only during a limited period. The rights are exercisable during a 23-day period, beginning after 5:00 p.m. New York City time (midnight, Israel time) on _____ __, 2005 (the record date) and ending at 5:00 p.m. New York City time (midnight, Israel time) on _____ __, 2005 (the second or third trading on the Tel Aviv Stock Exchange following the rights trading day) (the rights expiration date). If you hold your shares through a broker, dealer or other nominee (including through members of the Tel Aviv Stock Exchange), you will be required to comply with the procedural requirements of such nominee, including the procedures relating to the last time by which you may be required to provide notice of your intention to exercise your rights (which may be earlier than the final expiration date of the rights), as well as other procedural requirements described under the heading “The Rights Offering.” If you do not exercise your rights by the date and in accordance with the procedures applicable to you, your ability to exercise the rights and purchase the debentures will expire.

        How do you exercise your rights?

        Promptly after the date of this prospectus, we will send a rights certificate to each holder of our ordinary shares that is registered on our shareholder registry maintained at American Stock Transfer & Trust Co., the transfer agent for our ordinary shares. The rights certificate will evidence the number of rights applicable to each holder and will be accompanied by a copy of this prospectus.

        If you are a record holder of our ordinary shares and you wish to exercise your rights, you should complete the exercise form on the back of the rights certificate and send the certificate (or a notice of guaranteed delivery), accompanied by the subscription price following the record date, to the offices of American Stock Transfer & Trust Co., as our Rights Agent, to the attention of: Reorganization Department, to be received no later than the expiration date of the rights. The rights will expire on _________ __, 2005, at 5:00 p.m. New York time, (midnight, Israel time). You may make your payment to American Stock Transfer by wire transfer or cashier’s check or a money order drawn on a bank located in the United States payable to the order of “American Stock Transfer & Trust Co., as Rights Agent.” Payment made to American Stock Transfer & Trust Co. must be in U.S. dollars. We may agree to accept other forms of payment if requested and agreed to by us prior to payment.

4

        If you are a record holder of rights that resides in Israel, you may exercise your rights by delivering the completed exercise form on the back of the rights certificate to our offices in Migdal Haemek, Israel, following the record date, accompanied by evidence of a wire transfer or a cashier’s check or a money order drawn on a bank located in Israel payable to Tower Semiconductor Ltd. Payment to us may be either in U.S. dollars or in New Israeli Shekels in accordance with the representative exchange rate published by the Bank of Israel on the day before payment of the subscription price. The completed exercise form and payment must be delivered to us by midnight Israel time on _________ __, 2005 (the rights expiration date).

        If you are a beneficial owner of our ordinary shares and hold them through a broker, dealer or other nominee (including a member of the Tel Aviv Stock Exchange), see “What should you do if you want to participate in this rights offering, but your shares are held in the name of your broker, dealer or other nominee?” If you are a holder of eligible employee options that entitle you to receive rights, see “What should you do if you are entitled to participate in this rights offering as holder of employee options?"

        How do you transfer your rights?

        If you are a record holder of our ordinary shares and wish to transfer your rights to another person, you may do so by completing the transfer form on the back of your certificate and submitting it to American Stock Transfer & Trust Co., as Rights Agent, prior to _________ __, 2005 (3 New York business days prior to the rights expiration date). If you wish to sell your rights on the NASDAQ Capital Market or the Tel Aviv Stock Exchange, you should independently engage a broker to execute this sale on your behalf. The rights will be listed for trading on these exchanges during their regular trading hours for one day only on _____, 2005. In connection with our September 2002 rights offering which was conducted simultaneously on NASDAQ and the Tel Aviv Stock Exchange, in which we offered shares and warrants to purchase our shares, the rights were listed for trading on NASDAQ, although no bid or asked prices were ever quoted by any market makers and there was no trading.

        After you exercise your rights, can you change your mind?

        No. You cannot revoke the exercise of your rights, even if you later learn information about us that you consider to be unfavorable. You should not send the completed exercise form on the back of the rights certificate unless you are certain that you wish to purchase the debentures.

        Is exercising your rights risky?

        Yes. The exercise of your rights involves substantial risks. Exercising your rights means buying additional securities, and you should carefully consider this purchase as you would do with respect to any other debt or equity investments. Among other things, you should carefully consider the risks described under “Risk Factors.”

        Do you have to exercise your rights?

        No. However, if you do not exercise your rights and other shareholders do and then convert their debentures into ordinary shares, the percentage of our ordinary shares that you own will diminish, and your voting and other rights will be diluted.

        Can you sell or give away your rights?

        Yes. You may transfer or sell, at any time prior to the expiration date (_________ __, 2005, at 5:00 p.m. New York time, midnight, Israel time), all or a portion of the rights. You are responsible for all commissions, fees and other expenses, including brokerage commissions and transfer taxes, incurred in connection with the purchase or sale of rights. The unexercised rights will be listed for trading on the NASDAQ Capital Market and on the Tel Aviv Stock Exchange for one day only on ________ __, 2005. For further details regarding trading in our rights, please see “The Rights Offering—Transferability of Rights.”

5

        Some of the tax consequences of selling your rights for certain U.S. and Israeli shareholders are described herein under the heading “Material Income Tax Considerations.” You are, however, advised to seek specific tax advice from your personal tax advisor, as this prospectus does not summarize all tax consequences arising under U.S. state tax laws, tax laws outside of the U.S. and Israel or any tax laws relating to special tax circumstances or particular types of taxpayers.

        What are the federal income tax and Israeli income tax consequences of exercising your rights?

        The receipt and exercise of your rights are intended to be nontaxable; however, no ruling from the U.S. Internal Revenue Service or the Israeli Income Tax Authority will be sought. Therefore, you should seek specific tax advice from your personal tax advisor.

        Either the receipt of rights under our employee share option plans or the sale and exercise of rights received under our employee share option plans will be taxable in the U.S. (see “Material Income Tax Considerations–United States Tax Considerations”).The receipt of rights under our employee share option plans is not taxable in Israel, however, the sale and exercise of rights received under our employee share option plans are taxable in Israel (see “Material Income Tax Considerations–Israeli Tax Considerations”). We have requested a ruling from the Israeli Tax Authority providing that the exercise of rights received under our employee share option plans will not be taxed and that the employee will only be taxed upon the sale of the debentures or the sale of the shares issued pursuant to the conversion of the debentures. We cannot assure you that we will receive a favorable ruling from the Israeli Tax Authority or whether such ruling will be provided in a timely manner.        

Disclosure of the material income tax consequences in the United States resulting from the distribution of the rights to a U.S. holder, and related transactions by the U.S. holder, including the exercise or expiration of rights, the conversion of debentures and the disposition of rights, debentures or ordinary shares issuable upon conversion of the debentures is included under “Material Income Tax Considerations–United States Tax Considerations”. We have received an opinion of special U.S. tax counsel, Roberts & Holland LLP, regarding the material federal income tax consequences. This prospectus does not conclusively summarize tax consequences arising under U.S. state tax laws, tax laws outside of the U.S. and Israel or any tax laws relating to special tax circumstances or particular types of taxpayers.

        What happens if you choose not to exercise your rights?

        You will retain your current number of ordinary shares even if you do not exercise your rights. However, if you do not exercise your rights and other shareholders and/or eligible employee option holders who receive rights do and then convert their debentures into ordinary shares, the percentage of our ordinary shares that you own will diminish, and your voting and other rights will be diluted. For example, if only our major shareholders — Israel Corp., SanDisk Corporation, Alliance Semiconductor Corporation and Macronix International Co. Ltd., — exercise rights which they have committed to exercise for the purchase of an aggregate of $25.5 million principal amount of convertible debentures, and assuming the conversion of the $25.5 million principal amount of debentures purchased by these shareholders into our ordinary shares at a conversion rate of $1.00 per share, the percentage of our ordinary shares held collectively by these major shareholders will increase from approximately 63% to approximately 73.3% (the percentage of our ordinary shares held by Israel Corp. will increase from approximately 21.3% to approximately 37%), and the percentage of our ordinary shares held by our other shareholders will decrease from approximately 37% to approximately 26.7%. None of these major shareholders have indicated whether or not they intend to convert the debentures purchased by them in this rights offering.

        If you hold our shares through the nominee company of the Tel Aviv Stock Exchange (Hevra Le-Rishumim of Bank Leumi Le-Israel Ltd.) and you do not provide notice of your exercise of the rights or give any other instructions by the time determined by your broker on ____ __, 2005 (the rights trading day), under the rules of the Tel Aviv Stock Exchange, you will be considered to have provided an instruction to sell all your rights on the Tel Aviv Stock Exchange with no price limit.

        Has our board of directors made a recommendation regarding this offering?

        No. Our board of directors makes no recommendation to you about whether you should exercise any rights.

        What should you do if you want to participate in this rights offering, but your shares are held in the name of your broker, dealer or other nominee?

        If you are a beneficial owner of our ordinary shares and hold them through a broker, dealer or other nominee (including a member of the Tel Aviv Stock Exchange), you should expect your broker, dealer or other nominee to notify you of this rights offering and the procedures for exercising or transferring your rights. If you wish to exercise your rights, you will need to have your broker, dealer or other nominee act for you. To indicate your decision with respect to your rights, you should complete and return to your broker, dealer or other nominee the form provided to you accompanied by the subscription payment payable to your broker, dealer or other nominee. You should receive this form from your broker, custodian bank or other nominee. If you are a beneficial owner of our ordinary shares and hold them through a broker, dealer or other nominee (including a member of the Tel Aviv Stock Exchange), you should NOT return your exercise form or transfer the subscription payment directly to us. Your broker, dealer or other nominee will execute the exercise of your rights through the appropriate facilities. However, if you own your shares through a member of the Tel Aviv Stock Exchange, the rules of the Tel Aviv Stock Exchange provide that if no contrary instructions have been received from you by the time determined by your broker on ____ __, 2005 (the rights trading day), you will be considered to have instructed your broker to sell all your rights on the Tel Aviv Stock Exchange with no price limit.

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        What should you do if you are entitled to participate in this rights offering as a holder of eligible employee options?

        If you are a holder of employee options that entitle you to receive rights, you may receive upon request a copy of this prospectus from our Human Resources Department. The transfer and exercise of the rights granted to you by virtue of our employee share option plans are taxable (see “Material Income Tax Considerations–Israeli Tax Considerations”). As we are required to withhold the taxes that may apply to you if you exercise or transfer your rights, you must adhere to the procedures described under “The Rights Offering – Employee Option Holders.”

        What fees or charges apply if you exercise your rights?

        We are not charging any fee or sales commission to issue rights to you and we are not charging any fee or sales commission, other than the subscription price, to issue the debentures if you exercise your rights. If you exercise your rights through a broker, dealer or other nominee, you are responsible for paying any fees that may be charged thereby.

        How will this rights offering affect the price of our ordinary shares on the Tel Aviv Stock Exchange and on NASDAQ?

        NASDAQ may reduce the opening price of the ordinary shares at the opening of trading on the NASDAQ Ex-day, which is the first day that our ordinary shares will trade on NASDAQ without entitlement to receive the rights, in accordance with its rules and customary practices to reflect the value of the rights that are being issued. This reduction, if any, will reflect the fact that persons purchasing our shares after the record date will not receive rights. The NASDAQ Ex-day will be the first trading day on NASDAQ following the record date; the NASDAQ Ex-day for the rights offering will, therefore, be _____ __, 2005. In accordance with the rules of the Tel Aviv Stock Exchange, the Tel Aviv Stock Exchange will not reduce the opening price of the ordinary shares at the opening of trading on the Tel Aviv Stock Exchange Ex-day, which is the first day that our ordinary shares will trade on the Tel Aviv Stock Exchange following the record date.

        When will you receive your new securities?

        If you exercise your rights in this rights offering and the Rights Agent has received your duly completed exercise form and your payment has cleared, your purchase of debentures will be effected at 5:00 p.m., New York City time (midnight, Israel time) on _______ __, 2005 (the rights expiration date), and you will receive certificates representing the debentures purchased upon exercise of the rights as soon as practicable thereafter. Brokers may be unwilling to sell your debentures until you have received certificates representing your debentures. Trading in the debentures on the Tel Aviv Stock Exchange and NASDAQ will commence as soon as practicable after the rights expiration date (_________ __, 2005) in accordance with their respective rules.

        Can we withdraw the rights offering?

        Yes. Our board of directors may withdraw the rights offering in its sole discretion at any time prior to 5:00 p.m. New York City time (midnight, Israel time) on _________ __, 2005 (the record date), for any reason (including, without limitation, a change in the market price of our ordinary shares).

        How much money will we receive from the rights offering?

        The amount of gross proceeds from the rights offering depends on the number of rights that are exercised and, consequently, on the number of debentures convertible into our ordinary shares that are purchased. We will receive gross proceeds of $25.5 million from the purchase of convertible debentures by our four major shareholders as described under “The Rights Offering – Committed Purchases.” If all the rights are exercised, we will receive gross proceeds of $50 million.

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        Members of our management have not provided us with any indication as to whether they will exercise rights to be granted to them.

        How will we use the proceeds from the rights offering?

        We will use the proceeds generated from the exercise of rights in this rights offering towards the further ramp-up and deployment of Fab 2 and for marketing expenses for the sale of our products and services as well as for general corporate purposes, including working capital.

        How many shares will be outstanding after the rights offering if all the debentures are converted?

        As of the date of this prospectus, 66,932,056, of our ordinary shares were issued and outstanding. The issuance of debentures under this rights offering will not directly affect the number of our outstanding ordinary shares. However, the number of ordinary shares that will be outstanding after the conversion of the debentures depends on the number of rights that are exercised, as well as the conversion rate. If all the rights are exercised in full, and assuming that all of the debentures are converted into ordinary shares at a conversion rate of one ordinary share per each $1.00 of outstanding principal of debentures, 116,932,056 of our ordinary shares will be outstanding.

        If no debentures are purchased other than the $25.5 million of debentures which our four major shareholders have committed to purchase and all such debentures are converted into ordinary shares at a conversion rate of $1.00 per share, 92,432,056 of our ordinary shares will be outstanding..

        The above numbers do not take into account any adjustment to the conversion rate or the exercise or conversion of other outstanding options, warrants or other rights to purchase our ordinary shares.

RECENT DEVELOPMENTS

        In July 2005, we entered into an amendment to the credit facility agreement with our banks, which closed in August 2005. The amendment provides for financing from our banks in the amount of up to approximately $30 million, subject to a similar amount being raised by us from investors through the issuance of shares or convertible debentures. In connection with the amendment, our four major shareholders have agreed to invest an aggregate of $25.5 million towards this funding requirement in a rights offering.

        The amendment to the credit facility agreement contains the following material terms:

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RISK FACTORS

        An investment in our securities is speculative and involves a high degree of risk. Therefore, you should not invest in our securities unless you are able to bear a loss of your entire investment. You should carefully consider the following factors as well as the other information contained in this prospectus before deciding to invest in our debentures that are convertible into our ordinary shares. This prospectus 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. The information in this prospectus is complete and accurate as of this date, but the information may change after the date of this prospectus.

        Risks Affecting Our Business

If we do not raise the funds required by the amendment to our credit facility agreement, we may not be able to maintain our operations.

        In accordance with the July 2005 amendment to our credit facility agreement, which was further amended in September 2005 and in October 2005, in addition to $26 million which we are required to raise by the end of June 2006, we are required to raise $23.5 million by November 30, 2005, and an additional $6.5 million by March 31, 2006 through sales of equity or convertible debentures. If we are unable to raise the $23.5 million amount described above, we do not expect to have adequate liquidity to meet our short-term activities and liabilities during the next two to five months and may have to cease our operations. If we raise the $23.5 million and the $6.5 million amounts in accordance with our amended facility agreement, we will still need to raise additional funds in order to finance our short-term activities and liabilities in 2006, at least until we achieve positive cash flows from our operations. (For a description of the material terms of the July 2005 amendment to our credit facility agreement, see “Recent Developments” above.)

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If we do not complete the equipment installation, technology transfer and ramp-up of production in Fab 2, our business will be materially adversely affected.

        Fab 2 production capacity at the end of September 2005 was 14,600 200-mm wafers per month and we currently expect to have production capacity of 15,400 wafers per month by the end of 2005. 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 36,000 wafers per month. We have not completed the acquisition, installation, equipping and financing necessary in order for production at our Fab 2 facility to reach such levels. Our determination as to the timing of the increase in Fab 2‘s production levels is dependent on prevailing and forecasted market conditions and our ability to fund these increases. We need to complete the qualification process of the 0.13-micron technology transferred from Freescale Semiconductor, Inc. (formerly Motorola, Inc.) to Fab 2 and develop new process technologies for Fab 2 in order to suit our customers’ needs. The ramp-up of Fab 2 is a substantial and complex project. We have 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 and add to its cost, which would have a material adverse effect on our business and results of operations.

If we do not have sufficient funds to fully equip Fab 2, our business will be materially adversely affected.

        Fab 2‘s cost is estimated to be approximately $1.5 billion, including costs of construction, equipment, installation, libraries, intellectual property, technology transfers and other related ramp-up and pre-operation costs. However, the actual total cost of Fab 2 may exceed our estimates. If we cannot successfully raise sufficient funding to complete the ramp-up and to fund other related costs, we will be required to scale back our equipment purchases and capacity forecasts, and, as a result, we will not fully utilize the substantial investment made in constructing Fab 2, which will adversely affect our financial results.

If we do not meet conditions to receive the Israeli government grants and tax benefits approved for Fab 2, we may be required to seek alternative financing sources.

        In connection with Fab 2, we received approval for grants and tax benefits from the Investment Center of the government of Israel under its Approved Enterprise Program. Under the terms of the approval, we are eligible to receive grants of 20% of up to $1.25 billion invested in Fab 2 plant and equipment, or an aggregate of up to $250 million. As of September 30, 2005, we received $156.7 million in grants from the Investment Center. Our eligibility to receive grants is with respect to investments in Fab 2 plant and equipment made by the end of 2005. We do not expect to complete investments in the amount of $1.25 billion by the end of 2005, since we reduced our rate of annual investments as a result of our decision to slow-down the ramp-up of our Fab 2 facility in order to align our capital investments with market conditions in the semiconductor industry. Israeli law limits the ability of the Investment Center to extend this time limitation, unless approved through an expansion plan. Any failure by us to meet the conditions of our grants may result in the cancellation of all or a portion of our grants to be received and tax benefits and in the Investment Center requiring us to repay all or a portion of grants already received. Under Israeli law, our not completing investments in an amount of $1.25 billion by the end of 2005 may permit the Investment Center to require us to repay all or a portion of grants already received. We have been holding discussions with the Investment Center to achieve satisfactory arrangements to approve a new expansion program to commence on January 1, 2006. In 2005, at the Investment Center’s request, we submitted a revised business plan to the Investment Center for the period commencing on January 1, 2006. Currently, we cannot estimate when the Investment Center will conclude its review of our revised business plan, when we will receive a formal response to our request for a new expansion program to commence on January 1, 2006 or if the Investment Center will approve our request. While there can be no assurance that we will obtain the Investment Center's approval for the new expansion program, we believe that it is improbable that the Investment Center would demand that we repay all or a portion of grants already received due to our not completing investments in an amount of $1.25 billion by the end of 2005. If we would have to repay the Investment Center all or a portion of grants already received, we would need to seek alternative financing sources to refund the grants we received and if we do not succeed in finding such alternative financing sources, we may have to close our operations.

If our future operations do not increase or if we fail to raise additional funding, we may be unable to repay our debt on a timely basis.

        We may from time to time lack liquidity to finance our ramp up of Fab 2. Accordingly, there is no assurance that our future operations will increase or that we will succeed in raising the additional funding required for the completion of the ramp up of Fab 2. As a result, we may be unable to repay on time or repay at all our short-term and long-term debt consisting mainly of trade accounts payable, bank debt and convertible debentures. If we foresee that we will be unable to secure additional financing, we may have to revise our anticipated operations, or even cease our operations. We cannot assure you we will be successful at negotiating price reductions and arrangements to slow down or postpone payments to our suppliers and service providers when we have liquidity problems and any postponement of payments may delay our ramp-up of Fab 2 and therefore significantly harm our financial results.

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The cyclical nature of the semiconductor industry and the resulting periodic overcapacity have adversely affected our business in the past, resulting in a history of losses; 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 pressures characteristic of a prolonged downturn in the semiconductor market may not allow us to operate at a profit, even at full utilization, and could seriously harm our financial results and business.

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 for us to be profitable.

        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 be profitable. 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 which have not yet been offset by a sufficient increase in the level of our sales. If we do not succeed in operating our facilities at high utilization rates, we expect to operate at a loss for the foreseeable future, which may adversely affect our business and company.

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:

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        Due to the factors noted above and other risks discussed in this section, many of which are beyond our control, you 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.

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.

Our sales cycles may be long and, as a result, orders received may not meet our expectations which may adversely affect our operating results.

        Our sales cycles, which measure the time between our first contact with a customer and the first shipment of product orders to 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 may be adversely affected.

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

        We are ramping-up Fab 2 based on our expectations of customer demand and our financial resources. 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 revenues.

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

        For the nine months ended September 30, 2005, approximately 56% of our business was generated by five significant customers that contributed 23%, 12%, 11%, 5%, and 5% of our revenues, respectively. We expect to continue to receive a significant portion of our revenue from a limited number of customers in 2005. Loss or cancellation of business from, or decreases in, the sales volume or sales prices to our significant customers, could seriously harm our financial results 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 revenues in a timely manner, which could harm our financial results.

We depend on a 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 in 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. We cannot assure you that revenue generated from these products, individually or in the aggregate, will reach or exceed historical levels in any future period. A decrease in the price of, or demand for, any of these products could negatively impact our financial results.

If we do not receive orders from our wafer partners we may have excess capacity.

        We have committed a portion of our Fab 2 capacity for future orders. During the ramp-up of Fab 2, our capacity commitments to our wafer partners, which are SanDisk Corporation, Alliance Semiconductor Corporation, Macronix International Co. Ltd. and Quicklogic Corporation, are limited to approximately 50% of our Fab 2 capacity. Parties to whom we have committed capacity are generally not obligated to utilize or pay for all or any portion of their allocated capacity, and generally provide and confirm their orders to us less than one month before the production start date. If these parties do not place orders with us, and if we are unable to fill such unutilized capacity, our financial results may be adversely affected.

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

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

        In order to maintain our current customer base and attract new customers, we must continue to advance our manufacturing process technologies. We are developing and introducing to production specialized process technologies. Our ability to achieve and maintain profitable operations depends on the successful development and introduction to production of these processes, which we may not achieve at all or in a timely manner.

If we do not compete effectively, we will lose business to our competitors.

        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 new 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. Many of our competitors may have one or more of the following competitive advantages over us:

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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 October 31, 2005, we had $518.1 million of bank debt and approximately $25.7 million of debt in connection with our issuance of convertible debentures in January 2002. In addition, the debentures that may be issued in connection with this rights offering will increase our amount of long-term debt. Our current and future indebtedness could have significant negative consequences, including:

If we fail to satisfy the covenants set forth in our amended credit facility, our banks will be able to call our loans.

        Our credit facility, under which we have drawn down $518.1 million to date, requires that we comply with certain financial, capital raising and production milestone covenants. In the July 2005 amendment to our credit facility agreement, our banks agreed to amend our financial ratios and covenants through the third quarter of 2006. (For a description of the material terms of the July 2005 amendment to our credit facility agreement, see “Recent Developments” above.) Should we fail to comply with our revised covenants, and our banks do not waive our non-compliance, pursuant to the terms of the credit facility agreement, our banks may require us to immediately repay all loans made by them to us, plus penalties, and they would be entitled to exercise the remedies available to them under the credit facility, including enforcement of their lien against all our assets. This would have a material adverse effect on our company.

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Israeli banking laws may impose restrictions on the total debt that we may borrow from our banks.

        Pursuant to an amendment to a directive published by the Israel Supervisor of Banks, effective March 31, 2004, we may be deemed part of a group of borrowers comprised of the Ofer Brothers Group, 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 provides for limits on amounts that banks may lend to borrowers or groups of borrowers. Should our banks exceed these limitations, they may limit our ability to borrow other money in the future and may require us to return some or all of our outstanding borrowings (which were $518.1 million as of October 31, 2005), which may have a material adverse effect on our business, financial condition and results of operations.

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

        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 financial results and business.

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 complete the ramp-up of our Fab 2 facility and to maintain the quality of production in our facilities, we must procure new 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 currency exchange and interest rate fluctuations may increase our cost of operations.

        Almost all of our cash generated from operations and from our financing and investing activities is denominated in U.S. dollars and New Israeli Shekels, or 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.

        Our borrowings under our Fab 2 credit facility provide for interest based on a floating LIBOR rate, thereby exposing us to interest rate fluctuations. Furthermore, if our banks incur increased costs in financing our Fab 2 credit facility due to changes in law or the unavailability of foreign currency, our banks may exercise their right to increase the interest rate on our Fab 2 credit facility as provided for in the credit facility agreement.

        We regularly 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 and exchange rate fluctuations, which may increase the cost of our operating and financing activities.

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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 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, our customers’ design and production could be delayed, resulting in underutilization of our capacity. If any of our third party intellectual property right vendors go out of business, liquidate, merge with, or are 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 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 defend 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. There are no lawsuits currently pending against us regarding the infringement of patents or intellectual property rights of others nor are we currently a plaintiff in any such action against other parties. However, we have been subject to such claims in the past, all of which have been resolved through license agreements, the terms of which have not had a material effect on our business. One of these agreements expires at the end of 2005, and if we are unable to extend or renew it on similar terms, we may have to agree to less favorable terms or consider other alternatives, including designing around certain processes.

        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:

        Any one or several of these developments 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 and 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.

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        As of September 30, 2005, we held 54 patents worldwide. 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 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 relating to the use, discharge and disposal of toxic or otherwise hazardous materials used in our production processes. 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 losses 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 would 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 may have an adverse effect on our business and financial condition.

We may be required to repay grants to the Israel Investment Center that we received in connection with Fab 1.

        We received grants and tax benefits for Fab 1 under the government of Israel Approved Enterprise program. As of December 31, 2001, we completed our investments under our Fab 1 program and are no longer entitled to any further investment grants for future capital investments in Fab 1. We have agreed that if we do not achieve Fab 1 revenues of $90 million for 2003 and $100 million for 2004 and maintain at Fab 1 at least 600 employees for 2003 and 625 employees for 2004, subject to prevailing market conditions, we will, if demanded by the Investment Center, be required to repay the Investment Center up to approximately $2.5 million. Since our actual level of Fab 1 revenues and employees for 2003 and 2004 were not in compliance with the above mentioned levels, we may be required to repay the Investment Center up to approximately $2.5 million.

We are subject to risks related to our international operations.

        Since 2003, we have made substantial sales to customers located in Asia-Pacific and in Europe. Because of our international operations, we are vulnerable to the following risks:

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If our new executive officers are unable to fully transition into their new positions, our company may be adversely affected.

        We have made several changes to our senior management team in recent months. If our new executive officers are unable to fully transition into their new positions, or if such transition is significantly delayed, our company may be adversely affected.

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. We may need to review employee compensation competitiveness with the purpose of retaining our existing officers and employees and attracting and retaining additional personnel.

        Risks Related to Our Ordinary Shares

Our 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 our ordinary shares, regardless of our actual operating performance.

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

Issuance of additional shares pursuant to our Fab 2 financing arrangements and options granted to our Fab 2 building contractor, employees and directors may dilute the interest of our shareholders.

        In connection with Fab 2, we have issued as of October 31, 2005, 54,638,047 ordinary shares to our wafer and equity partners and other shareholders. In January 2001, we issued warrants to our banks exercisable into 400,000 ordinary shares with an exercise price of $6.20. In December 2003, we issued to our banks and to one of our shareholders warrants exercisable into 896,596 and 58,906 ordinary shares, respectively, with an exercise price of $6.17. In addition, in connection with the July 2005 amendment to our credit facility agreement, we issued warrants to our banks exercisable into 8,264,464 ordinary shares with an exercise price of $1.21, one-half of which shall only be exercisable if our banks agree to reschedule the repayment dates of the loans to be made available to us under the July 2005 amendment. Up to approximately 8.5 million additional ordinary shares may be issued upon the conversion of our outstanding convertible debentures and upon exercise of warrants held by some of our shareholders and others, our debenture holders and our Fab 2 contractor.

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        In addition, as of September 30, 2005, we had outstanding employee and directors options to purchase up to approximately 13.2 million shares at a weighted average exercise price of $4.19. We have also entered into a number of agreements which may result in our issuing large numbers of shares, particularly if we complete the transactions contemplated by these agreements at a time when our share price is low. For example, we have agreed that our three major wafer partners may elect to convert, on a quarterly basis through 2006, wafer credits we have issued to them into our ordinary shares rather than use these credits to reduce their cash payments for wafers manufactured in Fab 2, based on the average trading price of our ordinary shares during the 15 consecutive trading days preceding the relevant quarter. As of October 31, 2005, we had issued 1,286,574 of our ordinary shares to SanDisk Corporation and 62,849 ordinary shares to Alliance Semiconductor upon conversion of $2.33 million of wafer credits. As of October 31, 2005, an aggregate of $37.8 million of credits issued to our three major wafer partners were outstanding.

        In addition, we need to raise significant additional funds from other sources to finance our short-term activities and liabilities and negative cash flows from operations, as well as to complete the ramp-up of Fab 2. We are regularly engaged in discussions with potential investors in order to attract them to make investments in our company. No understandings have been reached with respect to the amount of any investment or the terms of any investment and there can be no assurance that any investment will be made. These investments may be for shares or for securities convertible into shares, which would materially dilute the holdings of our current shareholders.

Market sales of large amounts of our shares eligible for future sale may lower the price of our ordinary shares.

        Of our 66,932,056 outstanding ordinary shares as of October 31, 2005, 24,589,143 are freely tradable and held by non-affiliates, and an additional 108,951 shares held by non-affiliates are eligible for sale pursuant to Rule 144 under the Securities Act of 1933, subject to the time, volume and manner of sale limitations of Rule 144. In addition, certain of our affiliates (Israel Corp., SanDisk Corporation, Alliance Semiconductor, and Macronix International) hold 42,233,962 of our shares, of which 4,086,037 are registered for resale and are therefore freely tradable and 36,915,665 are currently eligible for sale subject to the time, volume and manner of sale limitations of Rule 144. An additional 1,232,260 shares held by SanDisk Corporation will become eligible for sale subject to the time, volume and manner of sale limitations of Rule 144 during 2005 and 2006. Shares held by these affiliates are subject to the share transfer restrictions set forth in the shareholders agreement to which they are a party and which remain in effect through January 2008. The sales of large amounts of our ordinary shares (or the potential for those sales even if they do not actually occur) may depress the market price of our ordinary shares. This could also impair our ability to raise capital through the sale of our equity securities.

Our principal shareholders collectively own a controlling interest in us and will be able to exercise their interest in ways which may be adverse to your interests.

        Our wafer partners and Israel Corp. collectively own approximately 63% of our outstanding shares. Under our articles of association, two shareholders holding together 33% of our outstanding shares constitute a quorum for conducting a shareholders meeting. Our wafer partners and Israel Corp. could constitute a quorum for purposes of conducting a shareholders meeting. While we have always solicited proxies from our shareholders prior to our shareholders meetings, we would have a sufficient quorum with two large shareholders even if none of our other shareholders were to participate in our shareholders meetings. If only two large shareholders, owning collectively at least 33% of our shares, were to participate in one of our shareholders meetings, these shareholders would determine the outcome of our shareholders meeting without the benefit of the participation of our other shareholders. In addition, even if our other shareholders were to participate in our shareholders meetings in person or by proxy, our wafer partners and Israel Corp. collectively control our company and may exercise this control in a manner adverse to the interests of our other shareholders.

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        Risks Related to the Rights Offering

If you do not exercise all of your rights, you may suffer significant dilution of your percentage ownership of our ordinary shares.

        This rights offering is designed to enable us to raise capital while allowing all shareholders on the record date to invest in our company. The interests of all shareholders, including those who exercise all of the rights we are distributing will be diluted to the extent that the eligible employee option holders exercise the rights being granted to them and convert the debentures purchased thereunder into our ordinary shares. In connection with the July 2005 amendment to our credit facility agreement, two of our major shareholders have committed and are obligated to exercise all or some of the rights distributed to them. Israel Corp., which as of the date of this prospectus owns approximately 21.3% of our outstanding share capital on a non-diluted basis, has committed and is obligated to exercise 100% of its rights for the purchase of approximately $10.26 million of debentures. SanDisk Corporation, which as of the date of this prospectus owns approximately 15.3% of our outstanding share capital on a non-diluted basis, has committed and is obligated to exercise approximately 47.6% of its rights for the purchase of $3.5 million of debentures. In addition, Alliance Semiconductor and Macronix International Co. Ltd., which as of the date of this prospectus own approximately 13.4% and 13.1%, respectively, of our outstanding share capital on a non-diluted basis, have committed to exercise approximately 15.5% and 15.8%, respectively, of their rights, for the purchase of $1 million each of debentures. In addition, SanDisk Corporation, Alliance Semiconductor, Macronix International Co. Ltd. and Quicklogic Corporation have agreed to transfer to Israel Corp. a portion of their unexercised rights, which Israel Corp. has committed and is obligated to exercise, such that Israel Corp. will purchase an aggregate of $20 million in debentures (including the $10.26 million referred to above). To the extent that you do not exercise your rights, but rights are exercised by other shareholders and/or eligible employee option holders who receive rights in this rights offering and the debentures purchased thereunder are converted into our ordinary shares, your percentage ownership of our expanded equity and voting rights will be diluted.

The payment of principal of and interest on the debentures is subordinated to our indebtedness to our banks and obligations to secured creditors.

        The payment of the principal of and interest on the debentures is subordinated to the prior payment of all amounts payable by us to Bank Hapoalim B.M and Bank Leumi Le-Israel Ltd. under our credit facility agreement with them, to any obligations to the Investment Center of the Israeli Ministry of Industry, Trade and Labor related to $156.7 million in grants received through September 30, 2005 under the Investment Center’s “Approved Enterprise” program, and to a first ranking charge in favor of Siliconix Technology C.V., on one of our bank accounts in which Siliconix Technology C.V. deposited in 2004 $20 million for the purchase of equipment and other expenses in connection with the performance of our obligations under our agreement with Siliconix (of which as of September 30, 2005, there is a balance of approximately $10 million) and over the equipment which has been or which may be subsequently purchased with such funds. As a result, upon any distribution to our creditors 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 the debentures issuable under this prospectus. In any of these circumstances, we may not have sufficient assets remaining to pay amounts due on any or all of the debentures then outstanding. In addition, if on a payment date of the principal of or interest on the debentures, an “Event of Default” exists under our facility agreement, the dates for payment of interest and principal on the debentures may be postponed, depending on various scenarios under the facility agreement. If, in such event, we reach an agreement with the banks (with respect to rescheduling our debt to the banks), the debenture holders may be bound thereby. The terms of the Indenture permit the Co-Trustees to initiate legal proceedings against us only in a limited number of cases, and always provided that an advance notice is given to us and to the banks (see “Description of the Debentures – Subordination of Debentures”).

We may incur additional indebtedness, including indebtedness that would be senior to our debentures.

        Although we are limited by the covenants in the facility agreement, we could enter into certain transactions that would increase the amount of our outstanding senior indebtedness. It is possible that all or part of these borrowings would be senior to the debentures. If new indebtedness is added to our current indebtedness levels, the related risks that we now face could intensify.

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The price of our ordinary shares may decline after debentures are converted into our ordinary shares.

        We cannot assure you that the public trading market price of our ordinary shares will not decline after you elect to convert your debentures. If the prevailing market price were to decline below the conversion rate of our debentures then you may not be able to sell your ordinary shares at a price equal to or greater than the conversion rate.

Once you exercise your rights, you may not revoke the exercise.

        Once you exercise your rights, you may not revoke the exercise, even if less than all of the rights that we are offering are actually exercised.

Neither the subscription price nor the conversion rate of the debentures is an indication of our present or future value.

        Our board of directors set all of the terms and conditions of the rights offering, including the subscription price and conversion rate. Our company's objective in establishing the subscription price and conversion rate was to reflect recent trading prices, raise the targeted proceeds and provide all of our shareholders with a reasonable opportunity to make an additional investment in our company. We consulted with a financial advisor in order to assist in the determination of the commercial terms. In establishing the commercial terms, including the subscription price and conversion rate, our board of directors and its audit committee considered the following factors: the strategic alternatives available to us for raising capital, the market price of our ordinary shares, the pro rata nature of the offering, pricing of similar transactions, the advice of the financial advisor, our business prospects and general conditions in the securities markets. The subscription price and conversion rate, however, do not necessarily bear any relationship to our past or expected future results of operations, cash flows, current financial condition, or any other established criteria for value.

        Neither the subscription price nor the conversion rate necessarily bears any relationship to the book value of our assets, past operations, cash flow, losses or financial condition. You should not consider either the subscription price for the rights nor the conversion rate of the debentures as an indication of our present or future value.

        Risks Related to Our Operations in Israel

Instability in Israel may harm our business.

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

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        Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors, as well as incidents of civil unrest. 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 subject to civil unrest and 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 have no impact on 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, our manufacturing facilities are located exclusively in Israel, which has been experiencing civil unrest, terrorist activity and military action. We could experience serious disruption of our manufacturing if acts associated with this conflict result in any serious damage to our 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.

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

        In the event of severe unrest or other conflict, 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 military reservists, and it is possible that there will be additional call-ups in the future. A large part of male Israeli citizens, including our employees, are subject to compulsory military reserve service through middle age. Our operations 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.

        In recent years, Israel has experienced periods of recession in economic activity, resulting in low growth rates and growing unemployment. Our operations could be adversely affected if the economic conditions in Israel deteriorate. In addition, due to significant economic measures proposed by the Israeli government, there have been several general strikes and work stoppages in 2003 and 2004, affecting all banks, airports and ports. These strikes have had an adverse effect on the Israeli economy and on business, 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 manufacturing facilities seven days a week is not renewed, our business will be adversely affected.

        We operate our 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 on December 31, 2005. In addition, a significant increase in the number of employees permitted to work under this exemption will be needed as we ramp-up production at Fab 2. If the exemption is not renewed and we are forced to close any or all of the 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, U.S. Holders will be subject to adverse U.S. 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, U.S. 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 U.S. 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 U.S. Holder, and any gain recognized by a U.S. Holder on a disposition or 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 U.S. 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 U.S. Holder to make a timely QEF election, unless the U.S. Holder qualifies under the applicable Treasury regulations to make a retroactive (late) election. U.S. 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 U.S. Holders who made a timely QEF or mark-to-market election.

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It may be difficult to enforce a U.S. judgment against us, our officers and directors and some of the experts named in this prospectus or to assert U.S. securities law claims in Israel.

        We are incorporated in Israel. Most of our executive officers and directors and our Israeli accountants and attorneys are nonresidents of the United States, and a majority of our 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 us or any of these persons, in U.S. or Israeli courts based on the civil liability provisions of the U.S. Federal securities laws. Additionally, it may be difficult for you to enforce civil liabilities under U.S. Federal securities laws in original actions instituted in Israel.

SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS

        The statements incorporated by reference or contained in this prospectus discuss our future expectations, contain projections of our results of operations or financial condition, and include other forward-looking information within the meaning of Section 27A of the Securities Act of 1933, as amended. Our actual results may differ materially from those expressed in forward-looking statements made or incorporated by reference in this prospectus. Forward-looking statements that express our beliefs, plans, objectives, assumptions or future events or performance may involve estimates, assumptions, risks and uncertainties. Therefore, our actual results and performance may differ materially from those expressed in the forward-looking statements. Forward-looking statements often, although not always, include words or phrases such as the following: “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “intends,” “plans,” “projection” and “outlook.”

        You should not unduly rely on forward-looking statements contained or incorporated by reference in this prospectus. Various factors discussed in this prospectus, including, but not limited to, all the risks discussed in “Risk Factors,” and in our other SEC filings may cause actual results or outcomes to differ materially from those expressed in forward-looking statements. You should read and interpret any forward-looking statements together with these documents.

        Any forward-looking statement speaks only as of the date on which that statement is made. We will not update any forward-looking statement to reflect events or circumstances that occur after the date on which such statement is made.

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RATIO OF EARNINGS TO FIXED CHARGES

        Our ratio of earnings to fixed charges in accordance with Israeli GAAP for the periods presented are as follows:

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CAPITALIZATION

        The following table sets forth our long-term debt, convertible debentures and capitalization as of September 30, 2005 on an actual basis, on an as adjusted basis to reflect the issuance of the debentures that are convertible into our ordinary shares issuable upon exercise of the rights we are distributing (excluding the conversion of the debentures) and on an adjusted basis to reflect only the issuance of the debentures that are convertible into our ordinary shares to our four largest shareholders pursuant to their commitments to purchase an aggregate of $25.5 million principal amount of convertible debentures (excluding the conversion of the debentures).

        The information set forth on an actual basis in the foregoing table excludes 224,447 ordinary shares that we issued in October, 2005. The information excludes as of September 30, 2005: (i) 13,200,849 ordinary shares issuable upon exercise of options granted to employees and directors at a weighted average exercise price of $4.19; (ii) up to 2,697,068 ordinary shares issuable upon conversion of unsecured, subordinated convertible debentures, net that we issued in January 2002 in the amount of NIS 117.4 million (or $25.6 million, as of September 30, 2005), which are convertible through December 31, 2008; (iii) 2,211,596 ordinary shares issuable upon exercise of options exercisable through January 20, 2006 at an exercise price of NIS 42.0, linked to the Israeli Consumer Price Index (or $9.1, as of September 30, 2005); (iv) 3,594,070 ordinary shares issuable upon exercise of warrants with an exercise price of $7.50; (v) 400,000 and 896,596 ordinary shares issuable upon the exercise of warrants issued to our banks in connection with our credit facility with exercise prices of $6.20 and $6.17 per share, respectively; (vi) 58,906 ordinary shares issuable upon exercise of warrants issued to Israel Corp. in connection with the November 2003 amendment to our facility agreement with an exercise price of $6.17 per share and exercisable until December 2008; (vii) 8,264,464 ordinary shares issuable upon exercise of the warrants we issued to our banks with an exercise price of $1.21 in connection with the July 2005 amendment to our facility agreement; and (viii) $7.7 million we borrowed under our credit facility agreement in October 2005.

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        This information does not take into account the following potential dilutive issuances of securities pursuant to our credit facility agreement and agreements with our major wafer partners and with Israel Corp. which cannot be calculated as of the date of this prospectus since the number of shares issuable will depend upon future transactions in which we may engage: (i) ordinary shares issuable upon conversion of up to $38.2 million in wafer prepayment credits (as of September 30, 2005) which we have issued our major wafer partners; (ii) ordinary shares issuable upon exercise of warrants issued to Israel Corp. and our banks in the event that we are required by our banks to complete a rights offering in connection with the arrangements agreed to in the November 2003 amendment to our facility agreement; and (iii) ordinary shares issuable upon conversion of securities we may be required to issue in connection with a rights offering and outside investor provisions agreed to in the November 2003 amendment to our facility agreement.

DILUTION; EFFECT OF THE RIGHTS OFFERING ON OUR OUTSTANDING
SHARES, OPTIONS, WARRANTS AND CONVERTIBLE SECURITIES

Dilution

        Assuming that all of the rights we are distributing are exercised and that all the debentures are converted into our ordinary shares at a conversion rate of one ordinary share per each $1.00 amount of outstanding principal, we will issue an additional 50,000,000 of our ordinary shares. This would represent an approximate 75% increase over our 66,932,056 issued and outstanding ordinary shares as of October 31, 2005, excluding: (i) adjustments to the conversion rate, (ii) shares issuable upon exercise of our outstanding options or warrants, (iii) the conversion by our wafer partners of their wafer credits into our ordinary shares, and (iv) the conversion of our convertible debentures already traded on the TASE, including all changes in the exercise price/conversion rate of such securities as a result of this rights offering. As of September 30, 2005, we had 13,200,849 outstanding options under our employee and directors share option plans, of which 2,562,385 are options that entitle their holders to receive rights in this offering. If all the rights we are distributing to our eligible employees under our employee share option plans are exercised and all the debentures are converted into our ordinary shares at a conversion rate of one ordinary share per each $1.00 amount of outstanding principal, we will issue approximately 1,845,000 of our ordinary shares to our eligible employees, which represents approximately 2.8% of our issued and outstanding shares.

        If you do not exercise your rights or if you exercise your rights but thereafter do not convert the debentures, the percentage of ordinary shares that you hold will decrease upon the conversion of the debentures issued in this rights offering into our ordinary shares by other shareholders and eligible employees.

Effect of This Rights Offering on Our Convertible Securities

        Employee Share Option Plans. Under our employee share option plans that were adopted prior to July 1, 2002, in the event of a rights offering, we are required to grant similar rights to all employees holding options on the record date (including unvested options). Accordingly, we are offering those employees holding options under these employee share option plans, one right for each 138.99 employee options held by them on the record date. Each right will entitle these persons to purchase one hundred debentures at a subscription price of $100.00. Each debenture is of $1.00 in principal amount. The debentures will be convertible into our ordinary shares at a rate of one ordinary share per $1.00 aggregate principal amount of debentures.

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        Our employee share option plans adopted after July 1, 2002 provide that in the event of a rights offering, new option holders will be entitled to an adjustment to the number of shares into which the options are exercisable based on the element of economic benefit of the rights offering, as such element is calculated by the Tel-Aviv Stock Exchange in accordance with its rules, (as is represented by the ratio between the price per share on the closing of trade on the Tel Aviv Stock Exchange on the record date and the Ex price determined by the Tel Aviv Stock Exchange to be the opening price on the subsequent trading day). In accordance with the rules of the Tel Aviv Stock Exchange, the Tel Aviv Stock Exchange will not set an Ex Price with respect to a rights offering of a new series of convertible debentures. Therefore, there will be no adjustment in the number of shares issuable upon exercise of the employee options as a result of this rights offering. As of September 30, 2005, we issued 10,293,425 options to our employees under these revised option plans.

        As of September 30, 2005, we had 13,200,849 outstanding options under our employee and directors share option plans, out of which 2,562,385 are options that entitle their holders to receive rights in this offering. If all the rights we are distributing to our eligible employees under our employee share option plans are exercised and all the debentures are converted into our ordinary shares at a conversion rate of one ordinary share per each $1.00 amount of outstanding principal, we will issue approximately 1,845,000 of our ordinary shares to our eligible employees, which represents approximately 2.8% of our issued and outstanding shares.

        Convertible debentures and Options (Series 1). We have a principal amount of NIS 110,579,800 ($24,049,543 as of September 30, 2005) in outstanding convertible debentures, which are convertible into 2,697,068 ordinary shares and 2,211,596 outstanding Options (Series 1). Both securities were issued under a prospectus published in Israel on January 15, 2002 and are traded on the Tel Aviv Stock Exchange. The debentures are convertible into our ordinary shares at a conversion rate of one ordinary share per each NIS 41 principal amount of the debentures linked to the CPI. Each Option (Series 1) is exercisable into one ordinary share for an exercise price linked to the Israeli Consumer Price Index (as of September 30, 2005 NIS 42.0; $9.1). Under the terms of their issuance, in the event of a rights offering, the number of shares issuable upon conversion of the convertible debentures and upon exercise of the Options (Series 1) will be adjusted to reflect the economic benefit component in the rights offering (as is represented by the ratio between the price per share on the closing of trade on the Tel Aviv Stock Exchange on the record date and the Ex price determined by the Tel Aviv Stock Exchange to be the opening price on the subsequent trading day). In accordance with the rules of the Tel Aviv Stock Exchange, the Tel Aviv Stock Exchange will not set an Ex price with respect to a rights offering of a new series of convertible debentures. Therefore there will be no adjustment in the number of shares issuable upon exercise of the Options (Series 1) and in the number of ordinary shares issuable upon the conversion of the convertible debentures.

USE OF PROCEEDS

        We intend to use the net proceeds from this rights offering towards the further ramp-up and deployment of Fab 2 and for marketing expenses for the sale of our products and services as well as for general corporate purposes, including working capital. Our gross proceeds from the rights offering will depend on the number of rights that are exercised. Four of our major shareholders – Israel Corp., SanDisk Corporation, Alliance Semiconductor Corporation and Macronix International Co. Ltd – have committed and are obligated to purchase an aggregate of $25.5 million in principal amount of debentures. Other than pursuant to these commitments, there can be no assurance that any of the rights will be exercised. If all of the rights are exercised, then we will receive immediate proceeds from the sale of our debentures of $50 million, before deducting estimated expenses payable by us of approximately $1 million.

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THE RIGHTS OFFERING

Before exercising any rights, you should read carefully the information set forth under “Risk Factors.” For a description of the debentures issuable in this rights offering, see “Description of the Debentures” below.

The Rights

        We are distributing transferable rights to shareholders who own our ordinary shares and to eligible employees who hold options to purchase our ordinary shares, granted under certain of our share option plans, at 5:00 p.m., New York time (midnight, Israel time) on _________ __, 2005, the record date, at no cost to the shareholders and eligible employees. We will distribute to you one right for each 138.99 ordinary shares and/or employee options that you own at 5:00 p.m. New York time (midnight, Israel time) on the record date, _________ __, 2005. If you hold 138 or fewer ordinary shares and/or eligible options on the record date, you will not receive any rights. Your rights will be aggregated for all the shares (and/or eligible employee options, as the case may be) that you own on the record date and then rounded down to the nearest whole number, so that you will not receive fractional rights. For example, if you own 139 shares on the record date, you will receive one right, and if you own 100,000 shares on the record date, you will receive 719 rights. Each right will entitle you to purchase, at a subscription price of $100.00, one hundred U.S. dollar denominated debentures. Each debenture is of $1.00 in principal amount. The debentures will be convertible into our ordinary shares at a rate of one ordinary share per $1.00 aggregate principal amount of debentures.

        The subscription price must be paid to American Stock Transfer & Trust Co., as Rights Agent, or directly to us under the procedures described herein. If you hold your shares through the nominee company of the Tel Aviv Stock Exchange (Hevra Le-Rishumim of Bank Leumi Le-Israel Ltd.), the subscription price is to be paid in New Israeli Shekels according to the representative exchange rate that will be published by the Bank of Israel on the day before payment of the subscription price.

        The rights are exercisable during a 23-day period, beginning after 5:00 p.m. New York City time (midnight, Israel time) on _________ __, 2005 (the record date) and ending at 5:00 p.m. New York City time (midnight, Israel time) on _________ __, 2005. We will issue to you certificates representing the debentures convertible into our ordinary shares purchased in this offering as soon as practicable after the rights expiration date (_______ __, 2005), provided that the Rights Agent has received your duly completed exercise form and your payment has cleared. If you hold your shares through a broker, dealer or other nominee (including through members of the Tel Aviv Stock Exchange), your time to exercise will be subject to the timing requirements of your broker, dealer or other nominee (which may be earlier than the final expiration date of the rights), in addition to other procedural requirements of your broker, dealer or other nominee, as described below.

No Fractional Entitlements

        The rights will be aggregated for all of the ordinary shares and eligible employee options you own on the record date and then rounded down to the nearest whole number. We will neither issue fractional rights nor pay cash in lieu thereof. Subscriptions will be accepted for a whole number of rights only.

Committed Purchases

        Four of our major shareholders – Israel Corp., SanDisk Corporation, Alliance Semiconductor Corporation and Macronix International Co. Ltd – have committed and are obligated to exercise all or some of their rights to purchase debentures. Israel Corp., which as of the date of this prospectus owns approximately 21.3% of our outstanding share capital on a non-diluted basis, and SanDisk Corporation, which as of the date of this prospectus owns approximately 15.3% of our outstanding share capital on a non-diluted basis, have committed, in connection with the July 2005 amendment to our credit facility agreement, and are obligated to exercise 100% and approximately 47.6%, of their rights, respectively, for the purchase of approximately $10.26 million and $3.5 million in debentures, respectively. In addition, Alliance and Macronix, which as of the date of this prospectus owned approximately 13.4% and 13.1%, respectively, of our outstanding share capital on a non-diluted basis, have committed to exercise approximately 15.5% and 15.8%, respectively, of their rights for the purchase by each of them of $1 million principal amount of debentures. In addition, SanDisk, Alliance, Macronix and Quicklogic Corporation have agreed to transfer to Israel Corp. a portion of their unexercised rights, which Israel Corp. has committed and is obligated to exercise, such that Israel Corp. will purchase an aggregate of $20 million in debentures ($10.26 million by the exercise of its own rights and approximately $9.74 million by the exercise of the rights transferred to it). Our four major shareholders together have committed and are obligated to purchase an aggregate of $25.5 million principal amount of convertible debentures. The purchase of debentures by these major shareholders will be effected at the same time as purchases of debentures which are covered by the registration statement filed with the Securities and Exchange Commission of which this prospectus is a part, and they will receive certificates representing the debentures purchased upon exercise of their rights as soon as practicable after _______ __, 2005.

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        The rights to be distributed to these major shareholders and to Quicklogic Corporation, the convertible debentures issuable upon exercise of such rights and our ordinary shares issuable upon the conversion of such debentures are not covered by the registration statement filed with the Securities and Exchange Commission of which this prospectus is a part, and are being issued in transactions pursuant to an exemption from the registration requirements of the Securities Act of 1933. These securities will be restricted securities and will not be transferable absent registration or an applicable exemption. We have agreed to register the resale of such securities by Israel Corp., SanDisk Corporation, Alliance Semiconductor Corporation and Macronix International Co. Ltd. following the effective date of the registration statement of which this prospectus is a part and intend to file a registration statement therefor within 30 days from the rights expiration date.

        In addition to the securities obtainable upon exercise of the rights being distributed to Israel Corp., SanDisk Corporation, Alliance Semiconductor Corporation, Macronix International Co. Ltd. and Quicklogic Corporation, these major shareholders may purchase from other rights holders, either in the open market or in private transactions, securities covered by the registration statement filed with the Securities and Exchange Commission of which this prospectus is a part. The resale of any securities so purchased by the major shareholders would require either a separate resale registration or compliance with the provisions of applicable securities laws relating to the sale of a company’s securities by its affiliates. Neither the major shareholders nor Quicklogic Corporation have an arrangement in the nature of a standby or any other arrangement with us or anyone else to purchase any of the securities covered by the registration statement.

No Recommendation to Rights Holders

        We are not making any recommendations as to whether or not you should exercise your rights. You should make your decision based on your own assessment of your best interests after reading this prospectus.

        As of September 30, 2005, our officers and directors as a group held an aggregate of 1,052 of our ordinary shares, held options exercisable for the purchase of 4,332,714 of our ordinary shares, (including a grant of options to our chief executive officer to purchase up to 1,325,724 shares approved by our board of directors and subsequently approved in October 2005 by our shareholders) of which 235,416 options entitle their holders to receive rights in this offering. If all the rights we are distributing to our officers and directors under this rights offering are exercised and all their debentures are converted into our ordinary shares at a conversion rate of one ordinary share per each $1.00 amount of outstanding principal, we will issue approximately 154,726 of our ordinary shares to our officers and directors.

Withdrawal Right

        Our board of directors may withdraw the rights offering in its sole discretion at any time prior to 5:00 p.m., New York City time (midnight, Israel time), on _________ __, 2005 (the record date) for any reason (including, without limitation, a change in the market price of our ordinary shares).

Determination of Subscription Price

        Based on the guidelines of this rights offering that were approved by the audit committee of our board of directors, our board of directors set all of the terms and conditions of the rights offering, including the subscription price. Our company's objective in establishing the subscription price was to reflect recent trading prices, raise the targeted proceeds and provide all of our shareholders with a reasonable opportunity to make an additional investment in our company. The audit committee of our board of directors consulted with a financial advisor in order to assist in the determination of the commercial terms. In establishing the commercial terms, including the subscription price, our board of directors and its audit committee considered the following factors: the strategic alternatives available to us for raising capital, the market price of our ordinary shares, the pro rata nature of the offering, pricing and terms of similar transactions, the advice of the financial advisor, our business prospects and general conditions in the securities markets. The subscription price, however, does not necessarily bear any relationship to our past or expected future results of operations, cash flows, current financial condition, or any other established criteria for value.

        The subscription price should not be considered an indication of our actual value, or the actual value of our ordinary shares or our debentures. We cannot assure you that the market price of our ordinary shares will not decline during the rights offering or that the market price of our ordinary shares or the debentures will not decline after the rights offering. We also cannot assure you that you will be able to sell the ordinary shares issuable upon conversion of the debentures at a price equal to or greater than the conversion rate at which your debentures may be converted. On November 20, 2005, the last reported sale price of our ordinary shares on the NASDAQ National Market was $1.38 per share and on the Tel Aviv Stock Exchange was NIS 6.393 per share. We urge you to obtain a current quote for our ordinary shares before exercising your rights or converting your debentures.

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Our Decision Will be Binding on You

        All questions concerning the timeliness, validity, form and eligibility of any exercise of rights will be determined by us in accordance with the terms of this prospectus, and our determinations will be final and binding. In our sole discretion, we may waive any defect or irregularity, or permit a defect or irregularity to be corrected within such time as we may determine, or reject the purported exercise of any right by reason of any defect or irregularity in such exercise. Subscriptions will not be deemed to have been received or accepted until all irregularities have been waived or cured within such time as we determine in our sole discretion. In determining whether to waive any defect or irregularity regarding the exercise of the rights, we will consider the materiality of the defect or irregularity. If we determine that any such defect or irregularity is material then the subscription will not be deemed to have been received or accepted until such defect or irregularity is cured within such time as we determine in our sole discretion. We will not be under any duty to notify you of any defect or irregularity in connection with the exercise of your rights or incur any liability for failure to give such notification. However, liabilities under the U.S. federal securities laws and Israeli securities laws cannot be waived.

No Revocation of Exercise of Rights

        After you have exercised your rights, you may not revoke that exercise. You should not exercise your rights unless you are certain that you wish to purchase our debentures.

Method of Exercise of Rights for Record Holders

        Shortly after the date of this prospectus, we will send by registered mail or personal delivery to each holder of our ordinary shares that is registered on our shareholder registry maintained at American Stock Transfer & Trust Co. a rights certificate conferring the number of rights applicable to each holder. The rights certificate will be accompanied by a copy of this prospectus, and on the back of the rights certificate will be a rights exercise form and a rights transfer form.

        During the subscription period ending on _________ __, 2005, if you are a record owner of our ordinary shares, you may exercise your rights by delivering a signed exercise form on the back of your rights certificate or a notice of guaranteed delivery to American Stock Transfer & Trust Co., our Rights Agent, at the address noted below together with payment in full of the subscription price for each right being exercised, by 5:00 p.m., New York City time (midnight Israel time), on _________ __, 2005. This rights offering will not be extended beyond the subscription period ending on _________ __, 2005, except as disclosed in this prospectus. We may agree to accept the exercise of rights by record owners by delivery to us of a signed exercise form, together with payment in full of the subscription price, if requested and agreed to by us.

        If you are a record owner and reside in Israel, you may also exercise your rights by delivering a signed exercise form on the back of your rights certificate to us at the address noted below, together with payment in full of the subscription price for each right being exercised, by midnight, Israel time, on _________ __, 2005.

        We and American Stock Transfer & Trust Co., our Rights Agent, as applicable, may refuse to accept improperly completed or delivered or unexecuted exercise forms. We and American Stock Transfer & Trust Co., our Rights Agent, as applicable, must receive payment in full of the subscription price for each right being exercised together with the exercise form (or notice of guaranteed delivery).

        If you are delivering your completed exercise form (or notice of guaranteed delivery) and payment for the exercise of your rights to American Stock Transfer & Trust Co., our Rights Agent, please do so by mail, overnight or hand delivery to one of the following addresses:

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        Record owners who reside in Israel, and who wish to deliver their completed exercise form and subscription payment for the exercise of their rights directly to us, must do so by mail, overnight courier or by hand, as follows:

        Any payments to American Stock Transfer & Trust Co., as Rights Agent, must be made in U.S. dollars by check drawn on a bank located in the United States and payable to “American Stock Transfer & Trust Co., as Rights Agent,” or by wire transfer of funds to the account maintained by American Stock Transfer & Trust Co., our Rights Agent, for this rights offering at JP Morgan Chase, 55 Water Street, New York, New York 10005, ABA No.021000021, Account No. 323-836933, reference Tower Semiconductor Ltd, Attention: Reorganization Department.

        Any payments to us shall be made in New Israeli Shekels according to the representative exchange rate published by the Bank of Israel on the day before payment of the subscription price and shall be by wire transfer or by check drawn on a bank located in Israel, and payable to “Tower Semiconductor Ltd.” Any wire transfer to us should be made to Bank Leumi Le Israel, Haifa Main Branch, 21 Jaffa St., Haifa, Israel, Branch # 876, Account # 130300/62, Swift Code: LUMIILITTLV. You will choose the method of delivery of exercise forms and payment of the subscription price and will bear the risk of such election. We may agree to accept other forms of payment or payments in U.S. dollars if requested and agreed to by us.

        IF YOU SEND YOUR COMPLETED EXERCISE FORM AND PAYMENTS BY MAIL, WE URGE YOU TO USE REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, AND TO ALLOW A SUFFICIENT NUMBER OF DAYS TO ENSURE DELIVERY AND CLEARANCE OF PAYMENT PRIOR TO THE EXPIRATION DATE. WE STRONGLY URGE YOU TO PAY, OR ARRANGE FOR PAYMENT, BY MEANS OF A CHECK DRAWN ON A BANK LOCATED IN THE UNITED STATES OR IN ISRAEL. We will not consider any payment by check, other than a cashier’s check or a money order, to have been made until the check clears through the account of American Stock Transfer & Trust Co., our Rights Agent, or to our account, as applicable, before the expiration date.

        Payments for the exercise of your rights made to American Stock Transfer & Trust Co., our Rights Agent, will be held in a segregated interest bearing money market account, and will be sent to us in accordance with our written instructions.

Guaranteed Delivery Procedures in the United States

        If you want to exercise your rights, but time will not permit your rights certificate to reach American Stock Transfer & Trust Co., our Rights Agent, prior to 5:00 p.m., New York City time (midnight, Israel time), on _________ __, 2005, you may exercise your subscription rights if you send, and the Rights Agent receives, (1) payment in full for each right being exercised, (2) a notice of guaranteed delivery, substantially in the form provided to you with your rights certificate, from a member firm of a registered national securities exchange or a member of the National Association of Securities Dealers, Inc., or a commercial bank or trust company having an office or correspondent in the United States, and (3) your properly completed and duly executed rights certificate, including any required signature guarantees, within three NASDAQ trading days following the date of your notice of guaranteed delivery. The notice of guaranteed delivery may be delivered to the Rights Agent in the same manner as your rights certificate as set forth herein, or may be transmitted to the Rights Agent by facsimile transmission, to facsimile number 718-234-5001. You can obtain additional copies of the form of notice of guaranteed delivery by requesting them from the Rights Agent.

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Transferability of Rights

        The rights are transferable. You may sell or otherwise transfer them to others. The unexercised rights will be eligible for trading on the NASDAQ Capital Market and the Tel Aviv Stock Exchange for one day only on _____, 2005. If you are one of our affiliates, you may transfer your rights only if there is an effective registration statement or exemption covering such transfer under the United States securities laws.

        Record holders wishing to transfer their rights to another person may do so by executing the rights transfer form on the back of the rights certificate and submitting it to American Stock Transfer & Trust Co. prior to _________ __, 2005 (3 New York business days prior to the rights expiration date) . Record holders wishing to sell their rights on the NASDAQ Capital Market or the Tel Aviv Stock Exchange, should independently engage a broker to execute this sale on their behalf.

        If no contrary instructions have been received by _________ __, 2005 and your rights remain unexercised, your rights will expire. If you hold your shares through the nominee company of the Tel Aviv Stock Exchange (Hevra Le-Rishumim of Bank Leumi Le-Israel Ltd.), the rules of the Tel Aviv Stock Exchange provide that if no contrary instructions have been received from you by the time determined by your broker on ______, 2005, you will be considered to have instructed your broker to sell all your rights on the Tel Aviv Stock Exchange with no price limit.

        You are responsible for all commissions, fees and other expenses, including brokerage commissions and transfer taxes, incurred in connection with the purchase, sale or exercise of rights.

Ambiguities in Exercise of Rights

        If you do not specify the number of rights being exercised, or if your payment is not sufficient to pay the total subscription price for all of the debentures that you indicated you wished to purchase, you will be deemed to have exercised the maximum number of rights that could be exercised for the amount of the payment received from you. If your payment exceeds the total subscription price for all of the rights you have elected to exercise, we will promptly refund to you the balance with no interest.

Issuance of Debentures

        We will issue to you notes evidencing the debentures issuable upon the exercise of the rights in this offering as soon as practicable after _______ __, 2005 provided that we or the American Stock Transfer & Trust Co., our Rights Agent, as applicable, has received your duly completed exercise form and your payment has cleared. Brokers may be unwilling to sell the debentures until these holders have received notes evidencing the debentures. Trading in the debentures on NASDAQ and the Tel Aviv Stock Exchange, respectively, will commence as soon as practicable after the rights expiration date (______ __, 2005) in accordance with their respective rules.

Beneficial Owners Who Are Not Record Holders

        If you are a beneficial owner of our ordinary shares and hold them through a broker, dealer or other nominee (including a member of the Tel Aviv Stock Exchange), you should expect your broker, dealer or other nominee to notify you of this rights offering and the procedures for exercising or transferring your rights. If you wish to exercise your rights, you will need to have your broker, dealer or other nominee act for you. To indicate your decision with respect to your rights, you should complete and return to your broker, dealer or other nominee the form provided to you accompanied by the subscription payment. You should receive this form from your broker, custodian bank or other nominee with the other rights offering materials. You should NOT return your subscription form or transfer the subscription payment directly to us.

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        Summarized below are the procedures for exercising your rights if you are a beneficial owner whose ordinary shares are held through the nominee company of the Tel Aviv Stock Exchange (Hevra Le-Rishumim of Bank Leumi Le-Israel Ltd.).

        Procedures Applicable to Holders of Shares Through the Nominee Company of the Tel Aviv Stock Exchange.

        If you hold your ordinary shares through the nominee company of the Tel Aviv Stock Exchange (Hevra Le-Rishumim of Bank Leumi Le-Israel Ltd.), you should expect to receive a letter regarding this rights offering from the member of the Tel Aviv Stock Exchange through which you hold your shares. In that letter, you will be requested to make ONE of the following three elections:

        (1)        Exercise your rights and subscribe for debentures that are convertible into our ordinary shares. If this alternative is elected, you may give a member of the Tel Aviv Stock Exchange through which you hold your shares an exercise notice commencing after 5:00 p.m., New York City time (midnight, Israel time), on _______ __, 2005 (the record date) and no later than the time determined by your broker on _______ __, 2005. You must attach the subscription payment to your notice. You will need to arrange with your broker the method of payment of your subscription payment. The subscription price is to be paid in New Israeli Shekels according to the representative exchange rate published by the Bank of Israel on the day before payment of the subscription price; or

        (2)        Sell the rights or any part of them on the Tel Aviv Stock Exchange. If you select this alternative, you may give your broker price limit instructions as to the sale of the rights; or

        (3)        Refrain from exercising your rights and from selling them.

        Your notice should reach the member of the Tel Aviv Stock Exchange through which you hold your shares by no later than _______ __, 2005 (the rights trading day) at the time determined by your broker. If notice is not received from you by such time, you will be considered to have instructed your broker to sell your rights on the Tel Aviv Stock Exchange, with no price limit.

        If you hold rights and wish to transfer them to another person, you may do so by executing the rights transfer form that will be made available to you by your broker.

        The rights will trade on the Tel Aviv Stock Exchange for one trading day, _______ __, 2005. Pursuant to the Tel Aviv Stock Exchange rules, if the trading of our ordinary shares or the rights is halted for a period in excess of 45 minutes, and the trading does not resume for the remainder of that day upon which the rights are traded on the Tel Aviv Stock Exchange, an additional trading day for the rights will take place, and the last day to exercise the rights will be accordingly extended. If on the day upon which the rights are traded on the Tel Aviv Stock Exchange the trading of our ordinary shares is halted, yet the cessation of trade continues for fewer than five consecutive trading days, your instructions with respect to the rights delivered to your broker shall remain in effect unless contrary instructions have been received by your broker from you. If the trading of our ordinary shares on the day upon which the rights are traded on the Tel Aviv Stock Exchange is halted for a period of more than five consecutive trading days, all prior instructions received by your broker will be cancelled.

        Holders of unexercised rights following the Tel Aviv Stock Exchange rights trading day may exercise them and subscribe for debentures that are convertible into our ordinary shares by notifying their broker and transferring the subscription payment. This notice must reach the broker by no later than _________ __, 2005 at the time determined by the broker. If this notice is not received on time, it will not be possible to exercise these rights.

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        Under the Tel Aviv Stock Exchange rules, Tel Aviv Stock Exchange members must submit to the Tel Aviv Stock Exchange Clearing House a written rights exercise (subscription) notice on behalf of all their clients wishing to exercise rights no later than 9:00 a.m. Israel time (2:00 a.m., New York City time) on _________ __, 2005. The rights of holders of our ordinary shares through the nominee company of the Tel Aviv Stock Exchange will expire if the brokers of these holders do not provide an exercise notice as described above. The Tel Aviv Stock Exchange rules further require brokers to transfer, on the same date, to the Tel Aviv Stock Exchange Clearing House the subscription payments with respect to their clients’ exercised rights, and the Tel Aviv Stock Exchange Clearing House thereafter will transfer these payments to us.

Employee Option Holders

        If you are a holder of employee options that entitle you to receive rights, you will receive, upon request, a copy of this prospectus from our Human Resources Department. The transfer and exercise of the rights granted to you by virtue of our employee share option plans are taxable (see “Material Income Tax Considerations–Israeli Tax Considerations”). As we are required to withhold the taxes that may apply to you if you exercise or transfer your rights, you must adhere to the following procedures:

        If you wish to exercise your rights (or any part thereof), you must do so through our corporate secretary at our offices and you may not do so through our Rights Agent.

        If you wish to sell your rights, you may only do so in the framework of an organized selling arrangement that we are implementing for our employees. You do not have to notify us of your wish to sell your rights. If by 5:00 p.m. (Israel time) on _______ __, 2005 (18 days after the record date), we do not receive a notice from you that you wish to exercise your rights, you will be considered to have instructed us to sell your rights and we will include your rights in the organized selling arrangement. Under the organized selling arrangement, we will engage a broker to sell all the unexercised rights on the day upon which the unexercised rights will trade on the Tel Aviv Stock Exchange (_______ __, 2005). We will instruct the broker to use his discretion in selling the rights with the aim of maximizing the total consideration received for the rights, but we will not specify any price limits. If the broker succeeds in selling the employees’ rights (or any part thereof), he will transfer to us the total consideration received from the sale (after deducting his fees as agreed with us). We will distribute this total consideration among the employees, pro-rata to the number of their unexercised rights. We will transfer your pro-rata share to you as soon as practicable together with your monthly salary and withhold from this amount all applicable taxes. All employees’ rights that are not sold by the broker will expire.

Nominee Holders

        If you are a broker, a trustee or a depositary for securities who holds our ordinary shares for the account of others as a nominee holder, as soon as possible, you should notify the respective beneficial owners of such shares of the issuance of the rights to find out such beneficial owners’ intentions. You should obtain instructions from the beneficial owner with respect to the rights, as set forth in the instructions we have provided to you for your distribution to beneficial owners. If the beneficial owner so instructs, you should complete the appropriate subscription certificates. A nominee holder that holds shares for the account(s) of more than one beneficial owner may exercise the number of rights to which all such beneficial owners in the aggregate otherwise would have been entitled if they had been direct record holders of our ordinary shares on the record date, so long as the nominee submits the appropriate subscription certificates and certifications and proper payment to us. If you are a member of the Tel Aviv Stock Exchange, you must comply with the rules of the Tel Aviv Stock Exchange with respect to providing notices to and receiving instructions from your clients.

Rights Agent

        We have appointed American Stock Transfer & Trust Company as Rights Agent for the rights offering.

        The Rights Agent’s telephone number is 718-921-8200 and its facsimile number is 718-234-5001; Attention: Reorganization Department. We will pay the fees and specified expenses of the Rights Agent.

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DESCRIPTION OF THE DEBENTURES

        The debentures will be issued under an indenture to be dated as of November __, 2005 between us and The Bank of New York and Hermetic Trust (1975) Ltd., as co-trustees. The terms of the debentures include all the terms required to be made part of the indenture under the Israel Securities Law – 1968 and the Trust Indenture Act of 1939, as amended. The debentures are subject to all the terms of the indenture, and holders of the debentures are referred to the indenture for a statement thereof.

        We have summarized selected provisions of the indenture below. This summary is not complete. The form of the indenture has been filed with the Israel Securities Authority (ISA), the Securities and Exchange Commission (SEC) and the Israeli Registrar of Companies and will be available for review at our registered office. You should read the entire indenture for provisions that may be important to you.

General; Accrual of Interest

        The debentures will be general unsecured obligations. The debentures will bear interest at the rate per annum of 5%. Principal of the debentures is payable, together with accrued interest, in one installment (in the aggregate maximum amount of approximately $67 million, assuming the exercise of all of the rights being distributed) on _______, 2011. On _____, 2011, the cumulative interest rate on the debentures will be 34.0096%. Instruments representing the debentures will be issued in denominations of $1.00 and integral multiples thereof.

        Interest will initially accrue from the date following the last day rights may be exercised (______, 2005), and will be computed on the basis of a 365-day year. Thereafter, interest will be computed on an annual compounded basis. Accrued interest will not be payable by us upon conversion of the debentures into our ordinary shares and you will lose your right to any accrued interest upon conversion of the debentures into our ordinary shares.

Conversion of Debentures

        Commencing on the first trading day on the Tel Aviv Stock Exchange after the date on which the debentures begin to trade on the Tel Aviv Stock Exchange and until ______ __, 2011 (inclusive) (16 days prior to the maturity date of the debentures, but if such date is not a trading day on the Tel Aviv Stock Exchange, then the last date to convert the debentures will be the first trading day on the Tel Aviv Stock Exchange after such date), the debentures are convertible into our ordinary shares at a conversion rate of one ordinary share per each $1.00 amount of outstanding principal of the debentures. Debentures may only be converted in integral multiples of $1.00 amounts. The debentures will not be convertible under the circumstances described below under “Election Not to Adjust the Conversion Rate Following a Future Financing”.

        We will not issue fractional shares upon conversion of the debentures. We will round down the number of shares issuable upon conversion of the debentures to the nearest whole number and will not pay any cash adjustment in lieu of fractional shares.

        Accrued interest will not be payable by us upon conversion of the debentures into our ordinary shares and you will lose your right to any accrued interest upon conversion of the debentures into our ordinary shares. Consequently, the effective conversion rate applicable to your debentures would be increased to reflect the amount of interest being forfeited upon conversion. For example, if you convert your debentures on ______ __, 2011 (the last day on which debentures may be converted), the effective conversion rate applicable to your debentures, assuming no adjustments are made to the conversion rate, would be approximately $1.34.

Adjustment to Conversion Rate Following a Future Financing

        The conversion rate will be adjusted if either of the following two scenarios occurs:

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        The adjusted conversion rate to the debentures shall under no circumstances be lower than $0.01.

        In addition, in the event that we execute prior to ______ __, 2006 one or more agreements, letters of intent, memorandums of understanding or similar agreements or understandings for a proposed $75 million financing that has not consummated prior to______ __, 2006, even if we receive gross proceeds of at least $5 million in a financing by ______ __, 2006, then the conversion rate will be subject to adjustment only following ______ __, 2007 (18 months after the record date) and if we consummate such $75 million financing by _____, 2007, the price per share in such financing will be taken into account for such purposes. However, we may elect not to adjust the conversion rate if we consummate a financing or series of related financings in which we receive gross proceeds of at least $75 million as described below under “Election Not to Adjust Conversion Rate Following a Future Financing.”

        A financing for purposes of adjustments to the conversion rate means:

        We will calculate the price per share for the purposes of the adjustment to the conversion rate as set forth below. The examples presented below are for illustration only and are not based on any forecasts, assumptions or actual calculations of economic values and should not be relied upon for any other purpose.

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        For the purposes of the adjustments set forth above, the “economic value” of the warrants will be calculated according to the Black and Scholes model as set forth in the Tel Aviv Stock Exchange Rules for registered companies based on the average closing price of our ordinary shares on NASDAQ (or such other stock exchange or quotation system on which our ordinary shares are listed in the event that they cease to be traded on NASDAQ) during the 15 consecutive trading days immediately prior to the date on which the financing agreement is signed. The interest rate for this calculation will be the interest rate as published by the Tel Aviv Stock Exchange on the date of the relevant financing.

        For the purposes of the adjustments set forth above, the “present value” will be calculated using the interest rate then applicable to the long term loans under our credit facility agreement. In the event that the financing or financings is denominated in a currency other than United States dollars, the amounts in the financing or financings will be converted to United States dollars according to the last known exchange rate on the date of the consummation of the relevant financing.

        The adjusted conversion rate to the debentures shall under no circumstances be lower than $0.01.

Election Not to Adjust the Conversion Rate Following a Future Financing

        In the event that by ______ __, 2006, or by ______ __, 2007 (in the event that we execute prior to ______ __, 2006 one or more agreements, letters of intent, memorandums of understanding or similar agreements or understandings for a proposed $75 million financing, as described above, even if we receive gross proceeds of at least $5 million in a financing by ______ __, 2006), we consummate a financing or series of related financings in which we receive gross proceeds of at least $75 million (excluding the proceeds from this rights offering), we may, at our discretion, elect that the adjustment to the conversion rate as described above under “Adjustment to Conversion Rate Following a Future Financing”, will not apply and no longer be applicable. If we so elect to cancel the adjustment mechanism to the conversion rate, then:

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        Following the signing of an agreement for a financing or series of related financings in which we may receive gross proceeds of at least $75 million, we will announce our decision to cancel the adjustment mechanism to the conversion rate, subject to the consummation of such financing, by filing a report on Form 6-K and in an immediate report in Israel, as well as a notice to be published in two Israeli newspapers. In addition, we will announce the consummation of the $75 million financing by filing a report on Form 6-K and in an immediate report in Israel, as well as a notice to be published in two Israeli newspapers.

        However, in the event that we do not elect that the adjustment mechanism no longer apply, then the conversion rate will be subject to adjustment as described above under “Adjustment to Conversion Rate Following a Future Financing”, following the 12 or 18 month period after the record date, as applicable.

        A financing for these purposes shall have the same meaning set forth under “Adjustment to Conversion Rate Following a Future Financing” above.

Adjustment to Conversion Rate Following Issuance of Bonus Shares, Rights Offerings and Other Events

        The conversion rate is also subject to adjustment as set forth in the indenture in certain events, including the issuance of our capital stock as a dividend (bonus shares), subdivisions, combinations and reclassifications of our ordinary shares and rights offerings. In the event of the distribution of bonus shares, the number of our ordinary shares issuable upon the conversion of each debenture will be increased by such number of our ordinary shares that the debenture holder would have received if such debenture holder had converted his debentures on the record date fixed for the bonus share distribution. In the event of a rights offering to our shareholders of any type of our securities at any time from the date of this prospectus but prior to the conversion of the debentures, the number of our ordinary shares to be issued upon the conversion of the debentures shall be adjusted to take into account the element of economic benefit in the future rights offering as is represented by the ratio between the price per share of our ordinary shares on the effective date of the future rights offering and the opening price per share of our ordinary shares that is established by the Tel Aviv Stock Exchange on the following trading day. If the Tel Aviv Stock Exchange does not establish an opening price per share of our ordinary shares, no adjustment in the number of shares issuable upon conversion of the debentures will be made with respect to such future rights offering. In the event of our consolidation or merger as a result of which our company is not the surviving entity, we will provide notice to the Trustees prior to the date of consummation of such consolidation or merger. The successor entity shall assume the obligation to repay the principal of and interest on the debentures in accordance with their terms. Debentures which are not converted prior to the date of consummation of such consolidation or merger shall no longer be convertible.

Early Redemption of Debentures

Mandatory Redemption by the Company

        In the event that (i) we elect to cancel the adjustment to the conversion rate mechanism of the debentures as described above under “Conversion of Debentures — Election Not to Adjust Conversion Rate Following a Future Financing”, and (ii) the closing price of our ordinary shares on NASDAQ (or such other stock exchange or quotation system on which our ordinary shares are listed in the event that they cease to be traded on NASDAQ) on the trading day immediately prior to the date on which we consummate the $75 million financing described above is equal to or is lower than $1.15, then we will redeem the debentures held of record on the date of our announcement of the consummation of such financing (and which are not subsequently converted). We will announce this redemption and the redemption date by filing a report on Form 6-K and in an immediate report in Israel, as well as a notice to be published in two Israeli newspapers. The redemption date shall be 21 days after the date of announcement. Conversion of the debentures will not be permitted during the 16 days prior to the redemption date.

        As soon as practicable after the redemption date, we will pay you an amount equal to the outstanding principal on your debentures, plus an early redemption premium in an amount equal to 15% of the amount of the outstanding principal on the debentures. Accrued interest will not be payable. For example, if the outstanding principal amount of the debentures that you hold on the redemption record date equals $10,000, as soon as practicable following the redemption date, we will pay you $11,500.

Early Redemption at the Discretion of the Company

        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. In the event we choose to redeem the debentures, the minimum portion of the debentures we will redeem is 100% of the then outstanding debentures. We will provide the debenture holders with advance notice of at least 30 days prior to any such redemption. Upon such early redemption, we will pay to the holders of the debentures the amount of outstanding principal of their debentures and interest accrued as of the redemption date. A resolution to announce an early redemption of the debentures will be adopted by our board of directors and we will provide notice of such resolution on Form 6-K, and in an immediate report in Israel as well as a notice to be published in two Israeli newspapers. The date of the early redemption will be between 30 to 45 days after the date of our notification.

        Under the facility agreement, we are not permitted to redeem debentures. Our banks have agreed that if we consummate a financing or series of related financings in which we receive gross proceeds of at least $75 million, we may redeem the debentures offered hereunder prior to their scheduled maturity date as described above, provided that if we issue convertible debentures in the financing or series of related financings, their terms and conditions are no less favorable to our banks than those of the debentures offered in this rights offering. We and our banks are preparing a formal agreement to such effect.

        Subordination of Debentures

        As described below, the payment of the principal of and interest on the debentures is subordinated to the prior payment of all amounts payable by us to the banks under the facility agreement, whether outstanding on the date of the indenture or thereafter created, incurred or assumed. Upon our dissolution, winding up, liquidation or reorganization, the banks will be entitled to receive payment in full of all amounts due to them under the facility agreement before the holders of debentures are entitled to receive any payment.

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Possible Postponement of Payments under the Debentures

        In addition to the subordination of the debentures to the amounts payable by us to the banks under the facility agreement, upon dissolution, winding up, liquidation or reorganization, the debentures and the indenture provide, in accordance with the requirements of the facility agreement, that the dates for payment of interest and principal on the debentures may be postponed (with interest continuing to accrue at regular rates), depending on various scenarios relating to our relations with the banks as detailed below. In the event of such postponement in payments on the debentures, we will extend the conversion period for the debentures and the record date for payment will be cancelled and we will announce a new record date, as applicable, at least 21 days prior to _____, 2011. The terms of the indenture permit the Co-Trustees to initiate legal proceedings against us only in a limited number of cases, and always provided that advance notice is given to us and to our banks. The indenture provides that each debenture holder waives any right or claim against the Co-Trustees based on the grounds that they should have initiated any proceeding or act in any other way in spite of such provisions of the indenture while claiming that such provisions do not comply with applicable law.

        Under the facility agreement, the payment dates of interest and principal to the banks fall on the last business day of each calendar quarter (a “Bank Payment Date”).

        In the event of the existence of an Event of Default, as such term is defined below, on a Bank Payment Date, then, subject to the provisions below, no payment of principal or interest on the debentures shall be made and the debenture holders and any person or entity acting on their behalf (including the Co-Trustees) shall not be entitled to take any action against us in connection with such non-payment, unless such non-payment shall continue for a period of more than 6 (six) months commencing on the applicable Bank Payment Date (a “Six Month Period”). To illustrate, if September 30, 2011 is a Bank Payment Date and on such date an Event of Default exists, the Six Month Period applicable to the payment to be made on the debentures on _______, 2011 will be calculated beginning on September 30, 2011. For a description of additional events of default contained in our facility agreement, see “Events of Default under the Facility Agreement.”

        The facility agreement further provides that after the conclusion of a Six Month Period, we may not make payments of principal and interest on the debentures unless we have either (i) paid the banks amounts then owing in full; or (ii) the holders of the debentures obtained a final judgment requiring us to make payment to them.

        During the aforementioned Six Month Period, the following shall apply:

        If during such period, we shall make any payment to the banks on account of interest or principal under the facility agreement, then, on the date of such payment to the banks, we shall make a payment on account of interest or principal (as the case may be) then due and payable in respect of the debentures, such payment to be made at the same percentage of the interest or principal then due and payable on the debentures proportionate to the portion of the payment actually made to the banks to the amount (interest or principal as the case may be) due and payable under the facility agreement as of the payment date;

        In the event that during such Six Month Period the banks and us shall reach an agreement regarding a rescheduling of payments by us to the banks under the facility agreement, such rescheduling (whether of principal or interest) shall apply pro rata also to payments of principal and/or interest, as the case may be, in respect of the debentures and the holders of the debentures shall be bound by such rescheduling agreement. It is agreed with the banks that such rescheduling agreement will apply only to payments (principal and interest) scheduled to be made on the debentures during the period of 12 (twelve) months beginning on the applicable Bank Payment Date, and shall postpone each payment on the debentures for no longer than 12 months. Pursuant to any such rescheduling agreement, we shall, in such 12 month period, pay to the holders of the debentures, such amounts on account of principal and/or interest at the same percentage of the scheduled repayments of principal or interest, during such 12 period in respect of the debentures, proportionate to the portion of the payments to be made to the banks during such 12 month period under such rescheduling agreement to the scheduled repayments of principal or of interest to the banks pursuant to the facility agreement for such 12 month period. Alternatively, such rescheduling agreement may provide that payments of principal and interest on account of the debentures shall, with effect from the termination of such Six Month Period, be made to the holders of the debentures in accordance with the original schedule under the terms of the debentures, provided that amounts not paid during such Six Month Period, or prior thereto shall be postponed to be paid pro rata to those payments not made to the banks during such Six Month Period or prior thereto and the holders of the debentures shall be bound by such an agreement. If during the rescheduling period another Event of Default under the facility agreement shall occur, the aforementioned provisions shall again apply. Notwithstanding the above, if, on a date scheduled for the payment of principal or interest on the debentures, any of the below events occur, then no amount of whatsoever nature shall be payable by us in respect of the debentures (whether in respect of principal, interest or any other amount) until all amounts owed by us under the facility agreement shall have been paid in full. In the event that, contrary to the above, the holders of the debentures (or, as applicable, any person or entity acting on their behalf, including a trustee) shall receive, during a period under which there is an Event of Default, any payment, distribution or benefit, the recipient thereof shall be deemed to hold same on trust for the banks and shall forthwith pay or transfer to the banks any payment, distribution or benefit so received. The events are as follows: (A) The existence of any of the following events: (i) our inability or admission of our inability to pay our debts as they fall due, (ii) the commencement of winding-up proceedings against us (including the granting of an order of receivership or any similar order against or in respect of us or any of our assets), provided that such proceedings are not cancelled or withdrawn within 60 days, (iii) any execution, attachment or sequestration or other process arises out of any third party claim against us where the amount being the subject of the relevant proceeding is in excess of $2.5 million; (B) If the banks shall declare that all loans and/or other credits received under the facility agreement are immediately due and payable, (C) In the event that the holders of the debentures (or any person or entity acting on their behalf, including the Co-Trustees), shall institute any legal proceedings against us other than in connection with excluded proceedings, and in accordance with the terms of the debentures. Excluded proceedings mean (i) proceedings where the sole claim relates to our failure to make payments of principal or interest on the debentures for more than 14 business days from the date on which we are required to make them, as these dates may be postponed in accordance with the above provisions; or (ii) proceedings in connection with a claim of “misleading information” in this prospectus.

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Subordination to Secured Obligations; Statutory Priorities

        Under the laws of the State of Israel, the following have priority over general unsecured creditors: unpaid wages to a specified limit plus severance payments to a specified limit if not covered by national insurance; certain past due taxes to the government; past due rent for a maximum of one year; and secured indebtedness in which the security interest (which may be a floating charge) is registered as required under the laws of Israel. As of September 30, 2005, we estimate that these statutory priorities would amount to approximately $5.4 million. As of the date of this prospectus, in addition to the first ranking charge which we granted to the banks under the facility agreement (see “Risk Factors – Risks Related to the Rights Offering — The payment of principal and interest on the debentures is subordinated to our indebtedness to our banks and obligations to secured creditors.”), our assets are subject to a second ranking floating charge in favor of the government of the State of Israel, which secures our compliance with the terms of our grants in connection with our government “Approved Enterprise” programs for Fab 1 and Fab 2 (approximately $262 million received and approximately $6.2 million receivables, as of September 30, 2005) and Siliconix Technology C.V., one of our customers, which has a first ranking charge on a bank account into which Siliconix deposited in 2004, $20 million for the purchase of equipment and other expenses in connection with the performance of our obligations under our agreement with Siliconix (of which as of September 30, 2005, there is a balance of approximately $10 million) and over the equipment which has been or which may be subsequently purchased with such funds. The indenture does not limit the amount of additional indebtedness which we can create, incur, assume or guarantee nor our ability to create any security to secure our obligations to any third party.

Events of Default under the Facility Agreement

        The following constitute Events of Default under our facility agreement:

(i)         Failure to make a payment: Our failure to pay any amount payable to our banks under the facility agreement within seven business days or ten days from the date of payment. Payments under the facility agreement include payments of principal and interest.

(ii)         Failure to meet production milestone: Fab 2 must reach production capacity of 33,000 wafers per month by December 31, 2007.

(iii)         Failure to raise additional funding within the agreed timetable:

        We are obligated to raise $26 million by June 30, 2006 from specified sources. The sources of this $26 million of funding are limited to: (i) investments in our equity; (ii) investments in excess of the $23.5 million and $6.5 million which are to be made by November 30, 2005 and March 31, 2006, respectively, as described below; (iii) proceeds, net of taxes paid and related expenses, from the sale of securities we own in Azalea Microelectronics Corporation; and (iv) wafer prepayments under certain prepayment contracts.

        If we fail to raise an aggregate of $26 million from the specified sources by June 30, 2006, our banks have the option to demand that we consummate a rights offering for convertible debentures for the amount that we failed to raise. If our banks exercise this option, Israel Corp., has undertaken to our banks to exercise all of the rights Israel Corp. receives in such rights offering. In addition, as part of Israel Corp.‘s commitment, it will purchase from us additional securities in a private placement on the same terms as the rights offering, in an amount equal to 50/93 of the difference between what we actually raised towards the failed financing obligation and what was to be raised, less amounts raised in such rights offering, if any (and less any amounts invested in the rights offering in connection with Israel Corp.‘s exercise of its own rights). An event of default under the facility agreement will occur if Israel Corp.‘s undertaking shall cease to be in full force and effect, if steps are taken for its liquidation, winding up or similar events or if Israel Corp. repudiates its undertaking. In connection with the July 2005 amendment to our facility agreement, our banks agreed that if Israel Corp. invests at least $14 million in this rights offering, its undertaking described above will be deemed to have been fulfilled.

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        In addition, pursuant to the July 2005 amendment to the facility agreement, which was further amended in September 2005 and in October 2005, we are obligated to raise $23.5 million dollars by November 30, 2005 and an additional $6.5 million by March 31, 2006. In connection with the July 2005 amendment to our facility agreement, Israel Corp. and SanDisk Corporation have undertaken to invest $20 million and $3.5 million, respectively, in a rights offering. An event of default under the facility agreement will also occur if Israel Corp.’s or SanDisk’s undertakings shall cease to be in full force and effect, if steps are taken for their liquidation, winding up or similar events or if they repudiate their respective undertaking.

(iv)         Investment Center Grants. We must comply with the terms and conditions of the approval to receive grants for Fab 2 from the Investment Center of the Israeli Ministry of Industry, Trade and Labor and must receive these Fab 2 grants in accordance with the timetable set forth in the amended facility agreement. The facility agreement allows us to replace up to $50 million of the Fab 2 grants with paid in equity or wafer prepayments.

(v)         Failure to comply with certain financial ratios and covenants: Under the terms of the amended facility agreement, we must meet certain financial ratios and covenants, including financial covenants relating to periodic sales, quarterly earnings before interest, taxes, depreciation and amortization (quarterly EBITDA), net cash flow as compared with total debt and equity as compared to total assets. In January 2005, we signed a waiver letter agreement with our banks according to which the banks waived our non-compliance with certain financial ratios and covenants for the fourth quarter of 2004 and which amended certain of the financial ratios and covenants for 2005. As of today, we are in full compliance with our financial ratios and covenants. Under the terms of the July 2005 amendment to our credit facility agreement, our banks agreed to amend our financial ratios and covenants through the third quarter of 2006. See “Risk Factors – If we fail to satisfy the covenants set forth in our amended credit facility, our banks will be able to call our loans.”

(vi)         Changes to and compliance with material contracts: We may not amend, cancel, terminate or waive any term of a material contract unless the aforementioned actions are not materially adverse to the interests of our banks. We also must materially comply with the terms of our material contracts. Subject to certain exceptions, certain of our material contracts must remain in full force and effect.

(vii)         Use of excess cash flow from Fab 2: We must invest the operating cash flow derived from Fab 2 in the Fab 2 project.

(viii)         Creation of encumbrances: We may not provide security interests in or otherwise encumber our assets, other than in favor of our banks or the government of the State of Israel in connection with grants from the Investment Center of the Ministry of Industry, Trade and Labor for Fab 1 and Fab 2 or unless approved by our banks, as was the case with the first ranking charges on certain of our Fab 1 assets in favor of Siliconix Technology C.V.

(ix)         Payment of dividends: We are not permitted to undertake to declare or pay a dividend or any other distribution (as defined in the Companies Law – 1999) or to redeem any of our shares or convertible securities (including the debentures being offered herein) unless the facility agreement specifically grants us this right. The facility agreement provides that we may declare and pay a dividend on or in respect of our share capital provided that: (a) no such distribution shall take place prior to January 1, 2008 and prior to any such distribution, we must have placed on deposit with our banks an amount equal to the debt service for the quarter in which the distribution is to be made and pledged such deposit in favor of our banks, and (b) we must have complied with certain financial ratios and covenants. In addition, we may only declare and pay a dividend provided that:

(x)         Incurrence of financial indebtedness: We may not incur any financial indebtedness, unless we are specifically permitted to do so under the facility agreement. Examples of financial indebtedness which we are permitted to incur according to the terms of the facility agreement are: an amount of up to $40 million in respect of a credit facility for Fab 1, an amount of up to $10 million in respect of operating leases relating to Fab 2, the debt we incurred in connection with the issuance of convertible debentures in September 2002 and the debt we are incurring in connection with the issuance of the debentures being offered herein.

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(xi)         Purchase of shares or assets of another company: We may not purchase any interest in the share capital or the business or assets constituting a separate business of another company unless the aggregate amount of all such investments or purchases does not exceed $5 million.

(xii)         Suspension or cancellation of approvals and permits: We must obtain all of the permits, approvals or licenses necessary for the performance of the Fab 2 project and must ensure that they are not suspended, cancelled, revoked or lapse without our having obtained adequate replacements. In addition, we must comply with the terms of such permits, approvals or licenses and their terms cannot be modified in a material adverse respect.

(xiii)         A “change of ownership”: The facility agreement provides that certain events would be considered to be a change of our ownership of our company and would constitute an event of default. These events include limitations of the number of our shares that the Israel Corp. and our major wafer partners (SanDisk Corporation, Alliance Semiconductor Corporation and Macronix Co. Ltd.) may sell or hold and the composition of our board of directors including that:

(xiv)         Purpose of Credits: We may not use the different forms of credits available under the facility agreement other than for the purposes permitted therefor, which generally relate to costs and expenses associated with the Fab 2 project.

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(xv)         Ranking: We may not create any obligations to any third party that rank senior in right and priority of payment to the banks or in priority of security to the banks, other than obligations which are mandatorily preferred by law applying to companies generally.

(xvi)         Insurance: All of our properties and assets must be insured with reputable insurance companies or underwriters approved by the banks. We must also maintain insurance which is generally and customarily maintained by companies carrying on a business similar to ours. The proceeds payable under the insurance polices in the event of loss of Fab 2 or the Fab 2 project must equal at least 110% of the aggregate amount of debt we owe our banks under the facility agreement at any given time. In addition, the insurance policies are to be assigned by way of charge in favor of the banks and the banks are to be joined as an additional insured.

(xvii)         Construction Contract: We may not terminate or exercise any right or suspension under our agreement with our Fab 2 contractor without the prior written consent of the banks. In addition, the suspension of performance under the agreement with our Fab 2 contractor for a continuous period of more than ninety days or the abandonment of the Fab 2 project or a material part thereof are events of default.

(xviii)         Agreements providing for wafer order rights: We must have binding agreements providing for a wafer order right providing for the sale of a minimum capacity in Fab 2 in aggregate of at least 15,733 wafer starts per month for the three year period commencing after Fab 2 reaches production capacity of 10,000 wafer starts per month. At the present time, this obligation is satisfied as a result of the foundry agreements with our wafer partners.

(xix)         Representation and warranties: Prior to the closing of the facility agreement with the banks, we made certain representations and warranties to the banks and we were deemed to have been repeated certain of those representations and warranties to the banks each time we delivered a request to borrow money under the facility agreement. We also made certain representations and warranties to the banks in connection with the amendments to our facility agreement. When made, the representations and warranties must have been correct and not misleading in a material manner.

(xx)         Continuous legal validity of the facility agreement: The facility agreement or any of its ancillary agreements shall not cease to be in full force and effect in any respect or fail to provide the intended perfected security over our assets in favor of our banks.

(xxi)         Liquidation; Insolvency: Our becoming insolvent or admitting to being insolvent or our commencement of negotiations with any one or more of our creditors with a view to a general readjustment or rescheduling of our indebtedness. In addition, any steps taken for our liquidation, winding up or similar events, including our seeking protection from our creditors, and any proceedings or orders with respect thereto must be cancelled or withdrawn within sixty days.

(xxii)         Cross acceleration of other indebtedness: We may not fail to make payments regarding any of our other financial indebtedness which aggregates $20 million or more. In addition, $20 million or more of our other financial indebtedness cannot become prematurely due and payable or be placed on demand.

(xxiii)         Breach of Convertible Debentures. Our default under or breach of any of the terms and conditions of the convertible debentures we issued in September 2002 or the convertible debentures being offered hereunder or our making any payment in relation thereto which is not permitted under the facility agreement or the institution by the holders of the debentures (or anyone acting on their behalf, including a trustee) of proceedings against us.

(xxiv)         Execution, Attachment, Sequestration: We may not permit any execution, attachment, sequestration or other similar process taken against us to subsist for more than 45 days.

(xxv)         Material adverse effect: The existence of any litigation or other proceedings involving us, or any event or series of events, which is likely to have a material adverse effect on our company.

(xxvi)         Fab 2 being declared a total loss: Fab 2 or a substantial portion thereof is rendered inoperable or declared by our insurers to be a total loss or a constructive total loss.

(xxvii)         Government action against us: Any nationalization, seizure or expropriation of all or any substantial or material part of our assets, including our share capital by any governmental authority.

(xxviii)         Restrictions on the free exchange of NIS for United States dollars: The imposition of restrictions by an Israeli governmental authority on the free exchange of NIS for United States dollars or United States dollars for NIS.

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(xxix)         Claim that we defaulted under certain prepayment contracts: The counter party to certain prepayment contracts makes a claim that we defaulted thereunder.

(xxxii)         Additional Restrictions: Without the prior written consent of our banks or as permitted under the facility agreement, we are restricted from:

        We must notify the banks of any event of default of which we are aware and report on the steps, if any, being taken by us to remedy such event of default. With respect to the majority of the aforementioned events of default, the facility agreement provides that if such event of default is capable of remedy, or if our failure to comply with other obligations under the facility agreement is capable of remedy, then such events will not entitle our banks to exercise their remedies under the facility agreement if we cure such breach within the period or time set forth in the facility agreement (generally 7 or 14 days).

Events of Default and Remedies Under the Debenture

        An Event of Default under the debenture is:

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        In accordance with the terms of the facility agreement, the indenture provides that no action may be taken by the debenture holders and/or the Co-Trustees with respect to an Event of Default under the debentures unless we have not remedied such Event of Default within 39 days after the later of (i) the date of our receipt of a demand to cure such default, and (ii) the date of the receipt by our banks of the copy of a demand to cure such default, which must be sent to our banks that are or become a party to the facility agreement on the same day as we receive service.

        A “Business Day” is a day on which the banks that are or become a party to the facility agreement are open for trading in Israel in US dollars and banks generally are open for trading in US dollars in London and New York.

        Holders of the debentures and the Co-Trustees on their behalf may not enforce the indenture or the debentures except as provided in the indenture. Subject to certain limitations, the holders of a majority of the aggregate principal amount of the debentures may direct the Co-Trustees in their exercise of any trust or power under the indenture. In addition to other documents that we are required to deliver to the Co-trustees under the Securities Law, we undertook in the indenture to provide the Co-Trustees (i) annually a statement regarding compliance with the indenture, and (ii) upon becoming aware of any default or Event of Default under the indenture, with a statement specifying such default and further stating what action we have taken, are taking or propose to take with respect to such default.

Amendment, Supplement and Waiver Debenture

        Subject to certain exceptions, the indenture or the debentures may be amended or supplemented at a duly convened meeting of the debenture holders with the approval of (a) at least 75% of the debenture holders participating in such meeting, and (b) the holders of a majority of the aggregate principal amount of the debentures. Subject to certain exceptions, an Event of Default under the indenture may be waived, by a duly convened meeting of the debenture holders, if (a) at least 75% of the debenture holders participating in such meeting and (b) the holders of a majority of the aggregate principal amount of the debentures, vote in favor of such waiver. We may not amend the conversion price, the manner in which the conversion rate may be adjusted, the number of shares issuable upon conversion of the debentures or the maturity date of the debentures, except as disclosed in this prospectus or by way of an arrangement pursuant to Section 350 and following of the Israeli Companies Law – 1999 or in the context of a statutory merger under the Companies Law.

DIVIDEND POLICY

        Since 1998, we have not declared or paid cash dividends on any of our shares and we have no current intention of paying any cash dividends in the future. The facility agreement that we entered into with our banks, as amended, prohibits the payment of dividends prior to January 1, 2008, and before any such distribution, we must have placed on deposit with our banks in an amount equal to the debt service for the quarter in which the distribution is to be made and charged such deposit in favor of our banks, and we must have complied with financial ratios and covenants. In addition, we may only declare and pay a dividend provided that:

The Companies Law also restricts our ability to declare dividends. We can only distribute dividends from profits (as defined in the law), provided that there is no reasonable suspicion that the dividend distribution will prevent us from meeting our existing and future expected obligations as they come due.

MATERIAL INCOME TAX CONSIDERATIONS

        The following is a summary of the material tax consequences in Israel and the United States to individual and corporate residents of Israel and the United States resulting from the distribution of the rights we are distributing, the purchase of the debentures that are convertible into our ordinary shares issuable pursuant to the exercise of the rights we are distributing or the sale of these rights or debentures that are convertible into our ordinary shares or ordinary shares issuable pursuant to the conversion of the debentures. Since our bank credit facility prohibits the payment of dividends on our ordinary shares, this summary does not discuss the tax consequences in Israel or the United States that would result from the payment of dividends. To the extent that the discussion is based on tax legislation that has not been subject to judicial or administrative interpretation, we cannot assure you that the tax authorities will accept the views expressed in this summary. This summary is not intended, and should not be construed, as legal or professional tax advice and is not exhaustive of all possible tax consequences that may be relevant to each person’s decision to exercise or sell the rights we are distributing, the convertible debentures to be issued once the rights are exercised, or the sale of our ordinary shares issued upon the conversion of the convertible debentures.

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        Prospective purchasers of our ordinary shares and other securities should consult their own tax advisors as to the United States, Israel or other tax consequences of the purchase, ownership and disposition of our securities, including, in particular, the effect of any foreign, state or local taxes.

        In August 2005, the Israeli parliament approved an amendment to the Israeli tax regime, to become effective on January 1, 2006 (“the 2006 Tax Reform”). Some applicable provisions of the 2006 Tax Reform will be discussed below.

Israeli Tax Considerations

        Israeli law imposes a capital gains tax on the sale of capital assets, including securities and debentures. In general, the distribution of the rights we are distributing, the exercise of the rights we are distributing and the conversion of the debentures into ordinary shares will not be subject to Israeli tax (different rules may apply to employees – see below).

        Before January 1, 2006, any gains from the sale of the rights we are distributing, the debentures convertible into ordinary shares issuable pursuant to the exercise of the rights and/or the ordinary shares issued pursuant to the conversion of the debentures are, in general, liable to capital gains tax of 15%. This will be the case so long as: our securities remain listed for trading on the Tel Aviv Stock Exchange or NASDAQ; the shareholder did not claim financial expenses related to the purchase of the securities; and these securities are not sold to a “relative” as defined under section 105k of the Israeli Income Tax Ordinance. In those cases where the 15% rate does not apply, the real capital gain from the sale of the securities will be subject to capital gains tax of 25%. Non-residents of Israel will be exempt from any capital gains tax from the sale of our securities, including those associated with this rights offering, so long as the gains are not derived through a permanent establishment that the non-resident maintains in Israel, and so long as our securities remain listed for trading as described above. A non-resident corporation will generally not enjoy this exemption if Israeli residents are: (1) its controlling shareholders, as defined for the purpose of section 105k of the Israeli Income Tax Ordinance, or (2) directly or indirectly eligible to receive or are beneficial owners of 25% or more of the income or the profits of the non-resident corporation.

        These provisions dealing with capital gains are not applicable to an Israeli resident whose gains from selling or otherwise disposing of our securities are deemed to be business income or whose taxable income is determined 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 (“Dollar Regulations”). In such cases, a regular rate on capital gains will apply, as follows: for corporations – 34% and for individuals – a tax rate of up to 49%.

        In any event, under the US-Israel Tax Treaty, a person who qualifies as a resident of the United States within the meaning of the Tax Treaty and who is entitled to claim benefits under the Treaty, may, in general, only be subject to Israeli capital gains tax on the sale of our ordinary shares (subject to the provisions of Israeli domestic law as described above) if that US treaty resident holds 10% or more of the voting power in our company.

        In computing a capital gain derived from the sale of our shares originating from a converted debenture, the “purchase date” and “balance of its original cost” will be deemed as the convertible debenture purchase date and cost (plus any additional related costs), respectively.

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        Interest and Original Issuance Discount (OID) earned before January 1, 2006 on our convertible debentures issued under this rights offering, will, in general, be subject to Israeli tax of up to 15% 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 recipient is a controlling shareholder of our company, or 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. In such cases the regular rate of tax on Interest and OID will apply – for corporations a rate of 34%and for individuals a tax rate of up to 49%.

        Withholding tax at source from debenture interest and OID paid to resident individuals will, in general, be at a rate of 15%, and corporations will be subject to a rate of 35%. 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, subject to any relevant tax 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 to a US treaty resident (other than a US bank, savings institution or company) is 17.5%.

        To the extent that payments upon early redemption are considered to be interest income and not proceeds of a capital nature, they will be subject to tax in the manner discussed above. In any case, interest accrued upon redemption or early redemption of the debentures will be deemed as part of the proceeds from the redemption and not as interest income, if the redemption resulted in a capital loss and it is not in the hands of a controlling shareholder or a holder of the debentures from allotment date and on – up to the ceiling of the capital loss.

        The following are the major changes regarding an Israeli resident included in the 2006 Tax Reform which are applicable to the distribution of the rights we are distributing, the purchase of the debentures that are convertible into our ordinary shares issuable pursuant to the exercise of the rights we are distributing, or the sale of these rights or debentures that are convertible into our ordinary shares, or ordinary shares issuable pursuant to the conversion of the debentures. The 2006 Tax Reform will not derogate from the special provisions applicable to non-residents, under Israeli tax law and the US-Israel Tax Treaty, as described in Parts A and B above. It should be presumed that the regulations governing amounts that may be required to be withheld at source as described in Parts A and B above will be amended to reflect the applicable tax rates pursuant to the 2006 Tax Reform.

        Individuals

        According to the 2006 Tax Reform, an individual will be subject to a 20% tax on real capital gains and real interest, so long the individual is not a controlling shareholder (generally a shareholder with 10% or more in the right to profits, right to nominate a director and voting rights) in the company constituting the origin of this income. This implies a lower tax rate for individuals on income deriving from the sale of securities not traded on a stock exchange and a reduction in the tax rate to 20% (from 25%) on dividends, with a concurrent increase in the tax on the gains from publicly traded securities and on certain interest income as explained above from 15% to 20%.

        A controlling shareholder will be subject to a tax of 25% in respect of real capital gains derived from the sale of securities issued by the controlled company. Interest received by an individual from such a company will be taxed based on the recipient’s marginal tax rates which will be reduced gradually from the current 49% rate to 44% in 2010. The determination of whether the individual is a controlling shareholder will be made on the date the shares are sold. Nevertheless, the individual will be viewed as a controlling shareholder even if at any time during the 12 months preceding this date he had been a controlling shareholder. The 2006 Tax Reform does not specify the date in which a controlling shareholder should be determined as such if that controlling shareholder receives interest.

        Despite the above, interest income in the hands of an individual will be taxed based on his marginal tax rate in the following instances: (i) the individual claimed interest expenses against this income; (ii) the interest income is business income in his hands or it is such that requires inclusion in the books; and (iii) special relations exist between the payer of the interest and its recipient (for example: that of supplier/customer/employee/relative).

        Corporations

        Corporations will be subject to corporate tax rates in respect of total income, including capital gains and interest, with the corporate tax rate reduced gradually from 34% in 2005 to 25% in 2010. However, between 2006 and 2009, taxable income that was taxed prior to the effective date of this Reform at a tax rate up to 25%, will be taxed at a rate of 25%.

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        Pursuant to the majority of our pre-2003 employees’ share option plans, we are also offering rights to our employees who hold options under these plans. The following discussion applies to Israeli resident employees only.

        Eligible employees who sell the rights received by virtue of their employee options issued to them under either section 102 or section 3(i) of the Israeli Income Tax Ordinance, will have taxable employment income equal to the consideration received from the sale of the rights. If the eligible employees exercise their rights, the amount by which the fair market value of the debentures convertible into ordinary shares received upon exercise of the rights exceeds the subscription price of the rights will be taxable employment income at the date in which such event occurs.

        Any future sale of the debentures or the shares issued upon conversion of the debentures will be subject to capital gains tax, as discussed above. The cost basis of the debentures will then be equal to the amount which was considered, for tax purposes, the fair market value of the debentures received upon the exercise of the rights. With respect to future sales of shares deriving from the conversion of the debentures, the cost basis will include any expenses, if any, associated with the conversion of the debentures.

        We advise our eligible employees to consult their own professional tax advisers with respect to the tax consequences of the exercise or sale of the rights relating to the particular circumstances of each eligible employee.

United States Tax Considerations

        The discussion of material United States federal income tax considerations below (other than statements as to whether we are a “passive foreign investment company,” statements regarding our earnings and profits, and statements regarding the likelihood that the debentures will or will not be redeemed prior to maturity) is based on an opinion of special U.S. tax counsel, Roberts & Holland LLP. Subject to the limitations described in the next paragraph, the following describes the material United States federal income tax consequences resulting from the distribution to a "U.S. Holder" and related transactions by the U.S. Holder, including the exercise or expiration of rights, the conversion of debentures and the disposition of rights, debentures or ordinary shares. For purposes of this discussion, a U.S. Holder means (1) any U.S. person who receives a distribution of rights pursuant to this rights offering and who holds such rights, debentures issued upon exercise of such rights, or ordinary shares issued upon the conversion of such debentures ("Initial U.S. Holder") and (2) any U.S. person other than an Initial U.S. Holder who acquires such rights, debentures issued upon exercise of such rights, or ordinary shares issued upon the conversion of such debentures from a prior holder ("Subsequent U.S. Holder"). For purposes of our discussion, a U.S. person is:

        The discussion is based on current provisions of the Internal Revenue Code of 1986, or the Code, as amended, current and proposed Treasury regulations promulgated thereunder, and administrative and judicial decisions as of the date hereof, all of which are subject to change, possibly on a retroactive basis. This discussion is not a representation of, nor does it address, all aspects of United States federal income taxation that may be relevant to any particular U.S. Holder based on such U.S. Holder’s individual circumstances. In particular, this discussion considers only U.S. Holders that will own rights, debentures, or ordinary shares as capital assets at all relevant times and does not address the potential application of the alternative minimum tax or U.S. federal income tax consequences to U.S. Holders that are subject to special treatment, including U.S. Holders that:

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        Additionally, the discussion does not consider the tax treatment of persons who hold rights, debentures, or ordinary shares through a partnership or other pass-through entity or the possible application of U.S. federal gift or estate tax.

        Finally, this discussion does not address any aspect of state, local or non-U.S. tax laws.

        Debt Characterization of the Debentures

        Certain characteristics of the debentures that may be received upon exercise of the rights raise an issue of whether such debentures should be treated as debt or equity for U.S. income tax purposes. Such characteristics include subordination, the absence of interest payments prior to maturity, provisions for optional conversion into our ordinary shares, and the absence, in certain circumstances, of a fixed maturity date. Tower intend to take the position that the debentures are characterized as debt for U.S. income tax purposes, but we have not obtained an opinion of counsel and this conclusion is not free of doubt. Due to the fact-intensive nature of the issue, and in particular to the characteristics described in the second preceding sentence, counsel is unable to opine as to whether the debentures should be characterized as debt for U.S. income tax purposes.

        In any case, if the debentures were determined to be characterized as equity for U.S. tax purposes, the U.S. income tax consequences to U.S. Holders generally should not be materially less favorable than those described herein. The consequences of the debentures being characterized as equity for U.S. tax purposes are addressed in greater detail below under the subheading "Tax Consequences if the Debentures Are Characterized as Equity."

        The discussion below, other than under the subheading “Tax Consequences if the Debentures Are Characterized as Equity” assumes that the debentures are characterized as debt for U.S. income tax purposes.

        Receipt of the Distribution; Allocation of Basis

        The discussion under this subheading applies only to Initial U.S. Holders and is qualified by the special rules for “U.S. Option Holders,” described below.

        A U.S. Holder will not be taxed on the distribution of rights, provided that Tower has no current or accumulated earnings and profits, as determined for U.S. income tax purposes, at any time during the taxable year in which the distribution is made, and provided that the U.S. Holder’s tax basis in the ordinary shares with respect to which the rights are distributed exceeds the fair market value of the rights. Tower considers it highly unlikely that it will have current or accumulated earnings and profits during the above-referenced period. If, contrary to our expectations, we were to have current or accumulated earnings and profits, then a U.S. Holder would recognize ordinary income (as a dividend) equal to the fair market value of the rights received (or, if less, the amount of such current and accumulated earnings and profits allocable to the distribution), unless the distribution is excluded from gross income under Section 305(a) of the Code. As discussed below, it is unclear whether the distribution will be excluded from gross income under Section 305(a).

        If the fair market value of the rights received by a U.S. Holder exceeds the sum of the current and accumulated earnings and profits (if any) allocable to the distribution and the U.S. Holder’s tax basis in the ordinary shares with respect to which the rights are distributed, and Section 305(a) of the Code does not exclude the distribution from gross income, the U.S. Holder will recognize capital gain in an amount equal to such excess.

        If the distribution is excluded from the gross income of each recipient under Section 305(a) of the Code, then a U.S. Holder’s tax basis in the rights so received will be zero unless (a) the fair market value of the rights distributed to the U.S. Holder is at least 15% of the fair market value of the ordinary shares with respect to which such rights are distributed or (b) the U.S. Holder elects to allocate the basis of the U.S. Holder’s ordinary shares between the ordinary shares and the rights in proportion to their relative fair market values on the date of distribution. Any allocation of basis under the preceding sentence will be given effect only if a U.S. Holder exercises or sells the rights. To make the election, a U.S. Holder must attach a statement to the U.S. Holder’s U.S. federal income tax return for the taxable year in which the rights are received. If the distribution is tax-free under Section 305(a), then the holding period of the rights received will include the holding period of the shares with respect which such rights were distributed.

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        If the distribution does not satisfy the requirements of Section 305(a) of the Code, then a U.S. Holder’s tax basis in any rights received in the distribution will be their fair market value on the date of distribution. In that event, the holding period of such rights will begin on the date of the distribution.

        A distribution of stock or stock rights to shareholders with respect to their stock in a corporation generally is excluded from gross income under Section 305(a) of the Code. It is unclear, however, whether this exclusion will apply to rights received pursuant to this rights offering. First, it is uncertain whether such rights constitute stock rights for this purpose, since the rights permit a holder to purchase convertible debentures, not shares. If the rights are not considered stock rights for this purpose, then Section 305(a) will not apply.

        In addition, Section 305(a) does not apply in the case of a distribution (or series of distributions) that has the result of a (1) the receipt of property by some shareholders and (2) an increase in the proportionate interests of other shareholders in the assets or earnings and profits of the corporation. This may be the effect here if, for example, some holders exercise their rights and retain their debentures while other holders exercise their rights and convert their debentures. Moreover, even if all holders who exercise their rights convert their debentures, we have other convertible debentures outstanding and, for certain purposes under Section 305, holders of convertible debentures are treated as shareholders. As a result, the receipt of interest payments by holders of our outstanding convertible debentures satisfies condition (1) above. Therefore, the distribution will be ineligible for tax-free treatment under Section 305(a) if holders who receive a distribution of rights with respect to their ordinary shares pursuant to this rights offering are considered to have an increased proportionate interest in our assets or earnings and profits.

        The applicable Treasury regulations provide that, if a corporation has convertible securities outstanding (such as our outstanding convertible debentures) and distributes stock or stock rights with respect to the stock into which such convertible securities may be converted (such as our ordinary shares), then the holders of such stock are considered to have an increased proportionate interest in the assets or earnings and profits of the corporation unless a “full adjustment” in the conversion ratio of the convertible securities is made. The Treasury regulations give examples of a qualifying “full adjustment” in conversion ratio but do not define this term. The anti-dilution provision of our outstanding convertible debentures differs from the formulas described in examples in the Treasury regulations, and it is therefore unclear whether the provision in our outstanding convertible debentures would qualify as providing for a “full adjustment” within the meaning of the Treasury regulations. There exists a similar concern with respect to outstanding rights to purchase our ordinary shares, such as the Options (Series 1). Thus, U.S. Holders who receive a distribution of rights with respect to their ordinary shares may be considered to have an increased proportionate interest in our assets or earnings and profits. In that event, Section 305(a) would not apply to the distribution.

        Exercise or Expiration of Rights; Purchase of Debentures Convertible into Ordinary Shares

        A U.S. Holder will not recognize gain or loss on the exercise of rights. If a U.S. Holder holds rights until expiration (without exercise), the U.S. Holder will recognize a capital loss upon the expiration of such rights in an amount equal to the U.S. Holder’s basis, if any, in such rights. The deductibility of capital losses is subject to limitations.

        If a U.S. Holder exercises rights, the U.S. Holder’s basis in the convertible debentures received upon such exercise will be determined by adding the U.S. Holder’s basis (if any) in the rights to the purchase price paid upon exercise of the rights.

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        Conversion of Debentures

        A U.S. Holder will not recognize gain or loss upon the conversion of the debentures (except with respect to any cash received in lieu of a fractional share). A U.S. Holder’s basis in the ordinary shares received upon conversion will equal the U.S. Holder’s basis in such debentures. A U.S. Holder's holding period for the ordinary shares received upon exercise of a debenture should include the U.S. Holder’s holding period for the debenture.

        Disposition of Rights, Debentures, or Ordinary Shares Issued Upon the Conversion of Debentures

        This discussion is qualified by the discussions below under the subheading “Tax Consequences if We Are a Passive Foreign Investment Company” and the subheading “Tax Consequences if the Debentures Are Characterized as Contingent Payment Debt Instruments.”

        Upon the sale, exchange or other disposition (other than by means of exercise or expiration) of rights, debentures, or ordinary shares issued upon the conversion of debentures, a U.S. Holder generally will recognize capital gain or loss in an amount equal to the difference between the amount realized and such U.S. Holder’s basis in the rights, debentures, or ordinary shares. In the case of a Subsequent U.S. Holder who purchases a debenture at a market discount, however, any gain attributable to accrued market discount will be treated as ordinary income. See the discussion below under the subheading "Original Issue Discount, Acquisition Premium and Market Discount."

        Capital gain from the sale, exchange or other disposition of rights, debentures, or ordinary shares for which the U.S. Holder has a holding period of more than one year will be long-term capital gain. In the case of a U.S. Holder that is an individual, estate or trust, long-term capital gains generally are eligible for taxation at reduced rates. For taxable years beginning before 2009, the maximum federal income tax rate for long-term capital gains earned by a noncorporate U.S. Holder is 15%. The deductibility of capital losses is subject to limitations.

        Gains and losses recognized by a U.S. Holder on a sale, exchange or other disposition of rights, debentures, or ordinary shares generally will have a U.S. source for foreign tax credit purposes.

        U.S. Option Holders

        The U.S. federal income tax consequences to U.S. Holders who receive rights in their capacity as eligible employees holding compensatory stock options (“U.S. Option Holders”) differ from those of other U.S. Holders.

        If the rights are considered to have a readily ascertainable fair market value at the time of grant, then a U.S. Option Holder will recognize ordinary income in the nature of compensation in an amount equal to the fair market value, if any, of the rights received. In that event, the U.S. Option Holder will have a tax basis in such rights equal to the amount of compensation included in ordinary income, and will not recognize income upon a subsequent exercise of the rights or conversion of the debentures.

        If the rights are not considered to have a readily ascertainable fair market value at the time of grant, then a U.S. Option Holder will not recognize income upon receipt of the rights. In that event, a U.S. Option Holder’s subsequent exercise of the rights will cause the U.S. Option Holder to recognize ordinary income in the nature of compensation in an amount equal to the excess, if any, of the fair market value of the debentures over the purchase price paid for such debentures. No additional income or gain will be recognized upon a subsequent conversion of the debentures.

        Under the applicable Treasury regulations, whether an option (such as the rights) has a readily ascertainable fair market value depends in part upon whether the option is actively traded on an established market; however, an option that is not actively traded nonetheless will generally have a readily ascertainable fair market value if all of the following conditions exist:

        The Treasury regulations provide that, in determining whether the fair market value of the option privilege is readily ascertainable, it is necessary to consider (1) whether the value of the property subject to the option can be ascertained, (2) the probability of any ascertainable value of such property increasing or decreasing, and (3) the length of the period during which the option can be exercised.

        At present it is not possible to predict whether the rights will be actively traded or satisfy the alternative requirements set forth above for having a readily ascertainable fair market value. Inasmuch as the rights will trade for only one day, however, we consider it unlikely that the rights will be actively traded. It is not possible to predict whether the above-described alternative requirements for having a readily ascertainable fair market value will be satisfied with respect to the rights or the debentures, because the Treasury regulations provide insufficient guidance to determine whether the fair market value of the option privilege of either the rights or the debentures will be readily ascertainable.

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        Original Issue Discount, Acquisition Premium and Market Discount

        A U.S. Holder of debentures will accrue original issue discount (“OID”), and include such OID in income on a current basis, regardless of the U.S. Holder’s regular method of accounting. The amount of OID accrued for each accrual period generally is determined by multiplying the debenture’s yield-to-maturity (adjusted for the length of the accrual period) by its adjusted issue price at the beginning of the accrual period. The amount of OID so determined will then be allocated on a ratable basis to each day in the accrual period on which the U.S. Holder holds the debenture. A U.S. Holder’s adjusted tax basis in the debenture will be increased by the amount of any OID included in income with respect thereto and decreased by any payments received thereon. The adjusted issue price of a debenture at the beginning of any accrual period is equal to the issue price of the debenture increased by the amount of OID accrued, and reduced by any interest paid, during all prior accrual periods.

        Special rules will apply to a Subsequent U.S. Holder who purchases a debenture for an amount other than its adjusted issue price. If the purchase price paid by the Subsequent U.S. Holder exceeds the adjusted issue price of the debenture, the debenture is considered to have “acquisition premium,” and the amount of OID otherwise allocable to an accrual period is reduced by a portion of such acquisition premium. If the purchase price paid by the Subsequent U.S. Holder is less than the adjusted issue price of the debenture, the debenture is considered to have “market discount.” Any gain recognized by a Subsequent U.S. Holder upon the disposition of a debenture purchased at a market discount will be treated as ordinary income to the extent of the market discount accrued through the date of the disposition. Market discount generally accrues ratably, i.e., with the same amount of discount allocable to each day during the holding period of the Subsequent U.S. Holder. Alternatively, a Subsequent U.S. Holder may elect to accrue market discount on the basis of a constant interest rate. Under this alternative method, market discount accrues under rules similar to the rules described above governing the accrual of OID. This election is irrevocable once made with respect to a debenture.

        Constructive Dividends

        As noted above, the conversion rate of the debentures is subject to adjustment under certain circumstances. Under Section 305 of the Code and applicable Treasury regulations, an adjustment to the conversion rate, or a failure to adjust the conversion rate, may in certain circumstances result in a constructive distribution to a U.S. Holder if, and to the extent that, such adjustment to the conversion rate, or failure to adjust the conversion rate, increases the proportionate interest of a U.S. Holder in our earnings and profits or assets, whether or not such U.S. Holder ever converts his, her or its debentures into ordinary shares. In particular, the cancellation of a certain adjustment to the conversion rate of our debentures, as described above under "Conversion of Debentures; Election Not to Adjust the Conversion Rate Following a Future Financing," could give rise to a constructive distribution to a U.S. Holder of our ordinary shares (or, in general, any other equity interest in the Company other than the debentures received upon exercise of the rights distributed pursuant to this rights offering). Any such constructive distribution would be taxable to the U.S. Holder as a dividend to the extent of our current or accumulated earnings and profits, as determined under U.S. federal income tax principles, with any excess treated as a tax-free return of capital up to such U.S. Holder’s tax basis in his, her or its debentures, and then as capital gain.

        Dividends generally are taxed as ordinary income. In the case of a noncorporate U.S. Holder, certain “qualified dividends” are taxable at the same reduced rates as are applicable to long-term capital gains for taxable years beginning before 2009. It is not clear whether a constructive dividend with respect to our ordinary shares would be treated as a qualified dividend eligible for such reduced rate. In addition, the reduced rate will not apply if we are treated as a passive foreign investment company in the year that a dividend (or constructive dividend) is paid or in the prior year. See the discussion below under the heading “Tax Consequences if We Are a Passive Foreign Investment Company.”

      Tax Consequences of an Early Redemption

        As discussed above under “Conversion of Debentures; Election Not to Adjust the Conversion Rate Following a Future Financing,” if we consummate a financing or series of financings in which we receive gross proceeds of at least $75 million (excluding the proceeds from this rights offering), we may elect to cancel a certain adjustment to the conversion rate of the debentures. In that event, if the closing price of our ordinary shares on the trading day immediately prior to the date on which we consummate such $75 million financing(s) is lower than $1.15, then we will redeem all debentures held of record on the date of our announcement of the consummation of such financing, unless such debentures are converted into our ordinary shares during the five-day period following such announcement. As discussed above under “Early Redemption of Debentures; Mandatory Redemption by the Company,” a holder who does not convert our debentures into ordinary shares during such five-day period will receive an amount equal to the outstanding principal amount of such debentures, plus a 15% redemption premium, but will not receive any accrued interest.

        A U.S. Holder will recognize gain or loss upon such redemption in an amount equal to the difference between the amount realized and such U.S. Holder’s tax basis in the debentures. It is possible, however, that, even in advance of the redemption, the above-described change in the terms of the debentures will be characterized for U.S. tax purposes as a deemed exchange of a U.S. Holder’s “old” debenture (immediately prior to the change in terms) for a “new” debenture (immediately following the change in terms). Such deemed exchange would be taxable.

        The applicable Treasury regulations provide that any significant modification of a debt instrument will be treated as a deemed exchange. A change in the terms of the debt instrument pursuant to a “unilateral” option, however, will not be considered a modification and thus will not trigger a deemed exchange. It is not clear whether our option to cancel a certain adjustment to the conversion rate will be considered unilateral for this purpose. Under the regulations, an issuer’s option to modify a debt instrument is not considered to be unilateral if the holder has a right to terminate the debt instrument. Guidance regarding the application of this rule is limited, however, and it is unclear whether a holder is considered to have a “right” to terminate a debt instrument that is subject to mandatory redemption.

        If our option to cancel a certain adjustment to the conversion rate is considered to be unilateral, then our exercise of such option will not result in a deemed exchange of the debentures.

        If our option to cancel a certain adjustment to the conversion rate is not considered to be unilateral, and consequently our exercise of such option causes a deemed exchange of “old” debentures for “new” debentures, then a U.S. Holder of debentures on the date we exercise such option will recognize gain or loss upon such deemed exchange in an amount equal to the difference between the fair market value of the “new” debentures and such U.S. Holder’s tax basis in the “old” debentures. A U.S. Holder of debentures on the date we exercise our option would recognize such gain or loss even if such U.S. Holder converts such debentures into our ordinary shares during the five-day period following our announcement of consummation of the $75 million financing(s).

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        Tax Consequences if We Are a Passive Foreign Investment Company

        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, U.S. 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 quarterly over the year and ordinarily determined based on fair market value and including the 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. Passive income includes amounts derived by reason of the temporary investment of funds raised in our public offerings. If we are a PFIC, and a U.S. Holder does not make an election to treat us as a qualified electing fund (as described below) or a mark to market election (as described below):

        The special PFIC rules described above will not apply to a U.S. Holder if the U.S. Holder makes an election to treat us as a qualified electing fund, or QEF, in the first taxable year in which the U.S. Holder owns (or is considered to own) ordinary shares and if we provide the Internal Revenue Service, or IRS, with information regarding our earnings; a late (retroactive) election may be made in limited circumstances. Instead, a shareholder of a qualified electing fund is required for each taxable year to include in income a pro rata share of the ordinary earnings of the qualified electing fund as ordinary income and a pro rata share of the net capital gain of the qualified electing fund as long-term capital gain, subject to a separate election to defer payment of taxes, which deferral is subject to an interest charge. We have agreed to supply U.S. Holders with the information needed to report income and gain pursuant to a QEF election in the event we are classified as PFIC. The QEF election is made on a shareholder-by-shareholder basis and can be revoked only with the consent of the IRS. A shareholder makes a QEF election by attaching a completed IRS Form 8621, including the PFIC annual information statement, to a timely filed U.S. federal income tax return or, if no federal income tax return is required to be filed, by filing such form with the IRS Service Center in Philadelphia, Pennsylvania. Even if a QEF election is not made, a shareholder in a PFIC who is a U.S. person must file a completed IRS Form 8621 every year.

        A U.S. Holder of ordinary shares may avoid application of the PFIC rules to shares of a lower-tier PFIC by making a separate QEF election for shares of the lower-tier PFIC for the first taxable year in which the U.S. Holder is considered to own shares of the lower-tier PFIC; this election may only be made, however, if the lower-tier PFIC provides the IRS with information regarding its earnings. A QEF election with respect to our shares does not constitute an election with respect to any lower-tier PFIC.

        As noted above, the proposed regulations would treat a U.S. Holder of a convertible debenture (or right) as if the holder held ordinary shares for purposes of the PFIC rules. A convertible debenture (or right) holder, however, may not make a QEF election. If we are considered a PFIC (presently or in the future), a U.S. Holder of a convertible debenture (or right) might be unable to make a timely QEF election for our shares or for shares of any lower-tier PFIC.

        A U.S. Holder of PFIC stock which is publicly traded could elect to mark the stock to market annually, recognizing as ordinary income or loss each year an amount equal to the difference as of the close of the taxable year between the fair market value of the PFIC stock and the holder’s adjusted basis in the PFIC stock. Losses would be allowed only to the extent of net mark-to-market gain previously included by the U.S. Holder under the election for prior taxable years. If the mark-to-market election were made, then the rules set forth above would not apply for periods covered by the election.

        We do not believe that we currently are a PFIC. We have not obtained an opinion of counsel confirming this conclusion because it is unclear how the relevant regulations would apply in our circumstances. However, our belief that we are not a PFIC is supported by a private letter ruling issued by the IRS to a company whose circumstances are substantially the same as ours, although such private letter ruling would not be binding on the IRS in determining our status. In addition, 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. Accordingly, there can be no assurance that we will not become a PFIC. If we determine that we have become a PFIC, we will notify our U.S. Holders and provide them with the information necessary to comply with the QEF rules. U.S. 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, subject to exceptions for U.S. Holders who made a timely QEF or mark-to-market election. U.S. Holders are urged to consult their tax advisors about the PFIC rules, including the consequences to them of making a mark-to-market or QEF election with respect to our ordinary shares in the event that we qualify as a PFIC.

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      Tax Consequences if the Debentures Are Characterized as Contingent Payment Debt Instruments

        A contingent payment debt instrument (“CPDI”) generally is defined as any debt instrument that provides for one or more contingent payments, unless an exception applies. The possibility that the debentures may be redeemed at a premium prior to maturity means that the debentures provide for one or more contingent payments. The debentures should not be characterized as CPDIs, however, if, as of the issue date, it is significantly more likely than not that they will not be redeemed prior to maturity. Tower considers it significantly more likely than not that the debentures will not be redeemed prior to maturity and, therefore, believes that the debentures should not be characterized as CPDIs.

        If the debentures were nevertheless characterized as CPDIs, the tax consequences to a U.S. Holder would change in the following respects:

        Interest accruals and adjustments generally are based on a projected payment schedule provided by the issuer. Tower does not intend to provide a projected payment schedule, however, because, as noted above, Tower does not believe that the debentures should be characterized as CDPIs. If the debentures were determined to be CDPIs, a U.S. Holder would be required to prepare its own projected payment schedule and to disclose this fact on a timely filed Federal income tax return for the year in which it acquired the debentures. U.S. Holders should consult their own tax advisors regarding the reporting requirements that would apply if the debentures were determined to be CDPIs.

      Tax Consequences if the Debentures Are Characterized as Equity

        If the debentures were characterized as equity for U.S. tax purposes, the U.S. income tax consequences to U.S. Holders generally would not be materially less favorable than those described herein. The principal consequences would be as follows:

      Receipt of the Distribution; Allocation of Basis

        If the debentures were characterized as equity for U.S. tax purposes, this would not increase the risk that an Initial U.S. Holder would be taxed on the distribution. In fact, such equity characterization might increase the possibility that the distribution could qualify for tax-free treatment under Section 305(a) of the Code. As noted above, one reason why Section 305(a) might not apply is that this provision only applies to stock and stock rights and it is uncertain whether the rights distributed pursuant to this rights offering will qualify as “stock rights.” If the debentures were characterized as equity, the rights clearly would qualify as stock rights.

        If the debentures were characterized as equity for U.S. tax purposes, this would not affect the rules described above regarding allocation of basis.

      Exercise or Expiration of Rights; Purchase of Debentures Convertible into Ordinary Shares

        If the debentures were characterized as equity for U.S. tax purposes, this would not affect the consequences to a U.S. Holder upon the exercise or expiration of rights.

      Conversion of Debentures

        If the debentures were characterized as equity for U.S. tax purposes, this would not affect the consequences to a U.S. Holder upon a conversion of debentures into our ordinary shares.

      Disposition of Rights, Debentures, or Ordinary Shares Issued Upon the Conversion of Debentures

        If the debentures were characterized as equity for U.S. tax purposes, this would not affect the consequences, as described above, to a U.S. Holder who disposes (other than by means of exercise or expiration) of rights, debentures or ordinary shares issued upon conversion of debentures, except that the special rules described above regarding market discount would not apply.

      U.S. Option Holders

        If the debentures were characterized as equity for U.S. tax purposes, this would not affect the special considerations described above for U.S. Option Holders.

      Original Issue Discount, Acquisition Premium and Market Discount; Constructive Dividends

        If the debentures were characterized as equity for U.S. tax purposes, the rules described above regarding original issue discount, acquisition premium and market discount would not apply. However, the excess of the amount to be paid at maturity to a U.S. Holder of a debenture over the issue price of the debenture (the “redemption premium”) likely would be treated as a constructive distribution to the U.S. Holder under Section 305 of the Code. Such redemption premium would be taken into account under timing rules similar to those discussed above governing the accrual of original issue discount on a debt instrument. It is also possible that, in certain circumstances, the characterization of the debentures as equity for U.S. tax purposes could affect the determination of whether, under Section 305 of the Code and the applicable Treasury regulations, an adjustment to the conversion rate, or a failure to adjust the conversion rate, results in a constructive distribution to a U.S. Holder.

      Tax Consequences if We Are a Passive Foreign Investment Company

        If the debentures were characterized as equity for U.S. tax purposes, this generally would not affect the application of the PFIC rules, except that a U.S. Holder of debentures would be able to make a QEF or mark-to-market election.

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FOREIGN EXCHANGE CONTROLS AND OTHER LIMITATIONS

        Israeli law limits foreign currency transactions and transactions between Israeli and non-Israeli residents. The Controller of Foreign Exchange at the Bank of Israel, through “general” and “special” permits, may regulate or waive these limitations. In May 1998, the Bank of Israel liberalized its foreign currency regulations by issuing a new “general permit” providing that foreign currency transactions are generally permitted, although some restrictions still apply. For example, foreign currency transactions by institutional investors are restricted, including futures contracts between foreign and Israeli residents if one of the base assets is Israeli currency, unless this is a fixed price forward contract for a period of less than one month. Investments outside of Israel by pension funds and insurers are also restricted. Under the new general permit, all foreign currency transactions must be reported to the Bank of Israel, and a foreign resident must report to his financial mediator about any contract for which Israeli currency is being deposited in, or withdrawn from, his account. We cannot currently assess what impact, if any, this liberalization will have on us. We also cannot predict its future impact on the value of the NIS compared to the dollar and the corresponding effect on our financial position and results of operations.

        The State of Israel does not restrict in any way the ownership or voting of ordinary shares of Israeli entities by non-residents of Israel, except with respect to subjects of countries that are in a state of war with Israel.

DESCRIPTION OF SHARE CAPITAL

Ordinary Shares

        Our authorized share capital consists of 500 million ordinary shares, par value NIS 1.00 per share. Under our articles of association, the ordinary shares do not have preemptive rights, however, we have granted preemptive rights to a number of our Fab 2 investors, regarding which we will seek waivers in connection with this offering. We may from time to time, by approval of a majority of our shareholders, increase our authorized share capital. All ordinary shares are registered shares, rather than bearer shares.

        The ownership or voting rights of our ordinary shares by non-residents of Israel is not restricted in any way by our memorandum of association or articles of association. The State of Israel does not restrict in any way the ownership or voting rights of ordinary shares of Israeli entities by non-residents of Israel, except with respect to subjects of countries that are in a state of war with Israel. Our ordinary shares do not have cumulative voting rights for the election of directors. The affirmative vote of the shareholders present in person or by proxy that represent more than 50% of the voting power present in person or by proxy have the power to elect all nominees up for election to our board of directors.

        In the event of our liquidation, after satisfaction of liabilities to creditors, our assets will be distributed to the holders of our ordinary shares in proportion to the nominal value of their respective holdings. This liquidation right may be affected by the grant of a preferential dividend or distribution right to the holder of a class of shares with preferential rights that may be authorized in the future. Dividends may be paid only out of profits, as defined in the Israeli Companies Law. Our Board of Directors is authorized to declare dividends, although our bank covenants currently in effect prohibit the payment of dividends on our ordinary shares, unless such payments are approved by our banks.

        Holders of ordinary shares have one vote for each ordinary share held on all matters submitted to a vote of shareholders. Subject to the provisions set forth in Section 46B of the Israeli Securities Law, these voting rights may be affected by the grant of any special voting rights to the holders of a class of shares with preferential rights that may be authorized in the future. Our major shareholders do not have different voting rights from each other or other shareholders.

        Resolutions of shareholders (e.g. resolutions amending our articles of association, electing or removing directors, appointing an independent registered public accounting firm, authorizing changes in capitalization or the rights attached to our shares or approving a wind-up or merger) require the affirmative vote (at a meeting convened upon advance notice of twenty one days) of shareholders present in person or by proxy and holding shares conferring, in the aggregate, at least a majority of the votes actually cast on such resolutions.

        The quorum required for a meeting of shareholders is at least two shareholders present, in person or by proxy, within half an hour of the time fixed for the meeting’s commencement that together hold shares conferring in the aggregate more than 33% of the total voting power of our shares. A meeting adjourned for lack of a quorum is adjourned to the same day in the following week at the same time and place. At the reconvened meeting, in the event a quorum is not present within half an hour of the time fixed for the meetings commencement, the persons present shall constitute a quorum.

        Our registration number at the Israeli Registrar of Companies is 52-004199-7.

        The objective stated in our articles of association is to engage in any lawful activity.

        Modification or abrogation of the rights of any existing class of shares requires either the written consent of all of the holders of the issued shares of such class or the adoption of a resolution by an ordinary majority of a general meeting of holders of such class. The quorum required for a class meeting is at least two shareholders present, in person or by proxy, within half an hour of the time fixed for the meetings commencement that together hold shares conferring in the aggregate at least 33% of the total voting power of the issued shares of such class. If no quorum is present, the meeting shall be adjourned to another time and at the adjourned meeting a quorum shall be constituted in the presence of any number of participants, regardless of the number of shares held by them.

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        As of December 31, 2004, 65,699,796 of our ordinary shares were outstanding. As of October 31, 2005, 66,932,056 of our ordinary shares were outstanding. The above numbers of outstanding ordinary shares do not include 1.3 million treasury shares held by us as of such dates in an account with Bear Stearns & Co.

        The transfer agent and registrar for our ordinary shares is American Stock Transfer & Trust Company, 59 Maiden Lane, New York, New York 10007.

UNDERTAKING TO REFRAIN FROM ACTIONS
NOT DISCLOSED IN THIS PROSPECTUS

        By signing this prospectus, we and our directors undertake as follows:

LEGAL MATTERS

        The validity of the securities offered in this prospectus will be passed upon for us by Yigal Arnon & Co., our Israeli counsel, and by Eilenberg & Krause LLP, New York, New York, our United States counsel. Certain matters set forth herein under “Material Income Tax Considerations – United States Tax Considerations” will be passed upon for us by Roberts & Holland LLP, our special United States tax counsel.

EXPERTS

        The consolidated financial statements incorporated in this prospectus by reference from the company’s Annual Report on Form 20-F for the year ended December 31, 2004 have been audited by Brightman Almagor & Co., a member firm of Deloitte Touche Tohmatsu, an independent registered public accounting firm, as stated in their report, which is incorporated herein by reference (which report expressed an unqualified opinion and included an explanatory paragraph about the differences between accounting principles generally accepted in Israel and in the United States of America), and have been so incorporated in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.

ENFORCEABILITY OF CIVIL LIABILITIES AND
AGENT FOR SERVICE OF PROCESS IN THE UNITED STATES

        We are incorporated in Israel, most of our executive officers and directors and the Israeli experts named herein are nonresidents of the United States, and a substantial portion of our assets and of such persons’ are located outside the United States. For further information regarding enforceability of civil liabilities against us and other persons, see “Risk Factors– It may be difficult to enforce a U.S. judgment against us, our officers and directors and some of the experts named in this prospectus or to assert U.S. securities law claims in Israel.”

THE ISRAEL SECURITIES AUTHORITY EXEMPTION

        This prospectus has been prepared based on the requirements of the Securities Act 1933 and in accordance with the requirements of the Securities and Exchange Commission’s for Registration Statements on Form F-2. This prospectus, as will be filed and published in Israel, is identical to the Registration Statement on Amendment No. 3 to Form F-2, filed with the United States Securities and Exchange Commission (File No.333-126909) with the exception of the letter of consent of our external auditors (comprising Exhibit 23.2 to the prospectus to be filed and published in Israel) which is substantially similar to the letter of consent of our external auditors comprising Exhibit 23.2 to the Registration Statement.

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        Section 35(29) of the Israeli Securities Law authorizes the Israel Securities Authority to grant an exemption from the application of the Securities Regulations (Prospectus Details, Format and Form), 1969, to companies whose shares are dually listed on the Tel Aviv Stock Exchange and certain foreign stock exchanges, that offer their securities to the public in Israel under a prospectus. Based on the aforesaid, we received such an exemption in connection with the offering under this prospectus.

        Both the Tel Aviv Stock Exchange and NASDAQ approved the listing of the debentures and ordinary shares issuable upon the conversion of the debentures and the rights for trade for only one day on both the NASDAQ Capital Market and the Tel Aviv Stock Exchange. Nothing in these approvals should be interpreted as a verification of the information contained herein, an approval of the accuracy or completeness of such information or an expression of any view as to the quality of the securities we are distributing.

        We obtained all the approvals and permits required under applicable law for the distribution of the debentures and for the publication of this prospectus. The debentures are not being distributed in any jurisdiction where the offer is not permitted.

WHERE YOU CAN FIND MORE INFORMATION; INCORPORATION OF
INFORMATION BY REFERENCE

        We have filed a registration statement on Form F-2 with the Securities and Exchange Commission in connection with this offering. In addition, we file annual reports with, and furnish information to, the Securities and Exchange Commission. You may read and copy the registration statement and any other documents we have filed at the Securities and Exchange Commission’s Public Reference Room at 100 F Street N.E., Washington, D.C. 20549. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the Public Reference Room. Our Securities and Exchange Commission filings are also available to the public at the Securities and Exchange Commission’s Internet site at “http://www.sec.gov.”

        This prospectus is part of the registration statement and does not contain all of the information included in the registration statement. Whenever a reference is made in this prospectus to any of our contracts or other documents, the reference may not be complete and, for a copy of the contract or document, you should refer to the exhibits that are a part of the registration statement.

        The Securities and Exchange Commission allows us to “incorporate by reference” into this prospectus the information we file with it, which means that we can disclose important information to you by referring you to those documents. Information incorporated by reference is part of this prospectus. Later information filed with the Securities and Exchange Commission will update and supersede this information.

        This prospectus will be deemed to incorporate by reference the following documents previously filed by us with the Securities and Exchange Commission:

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        Copies of these filings are annexed to this prospectus.

        As a foreign private issuer, we are exempt from the rules under Section 14 of 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 request a copy of these filings, at no cost, by contacting us at: Ramat Gavriel Industrial Park, Post Office Box 619, Migdal Haemek, 23105 Israel, Attn: Corporate Secretary, telephone number: 972-4-650-6611.

        A copy of this registration statement, our articles of association and the documents filed as exhibits are available for inspection at our offices at Hamada Avenue, Ramat Gavriel Industrial Park, Migdal Haemek, Israel.

        A copy of this prospectus, the Israel Securities Authority permit pursuant to which this prospectus has been published, our memorandum of association, our articles of association and the documents filed as exhibits, are available for inspection at our offices at Hamada Avenue, Ramat Gavriel Industrial Park, Migdal Haemek, Israel.

        Form F-2 Registration Statement. We have filed with the Securities and Exchange Commission a registration statement on Form F-2 under the Securities Act with respect to the debentures offered in this prospectus. This prospectus, which is part of the registration statement, does not contain all of the information that you can find in the registration statement. Some parts of the registration statement are omitted from the prospectus in accordance with the rules and regulations of the Securities and Exchange Commission. The statements we make in this prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete. With respect to each such document filed as an exhibit to the registration statement, you should refer to the exhibit for a more complete description of the matter involved. The registration statement may be read and copied at the Securities and Exchange Commission’s public reference rooms as indicated above. In accordance with the requirements of the Israeli Securities Authority, those parts of the Form F-2 that are not part of the prospectus, will be attached to the copies of this prospectus that will be distributed in Israel.

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PROSPECTUS

DISTRIBUTION OF RIGHTS
TO PURCHASE
DEBENTURES CONVERTIBLE
INTO ORDINARY SHARES

You should rely only on the information incorporated by reference or provided in this prospectus. We have not authorized anyone to provide you with different information. We are not making any offer to sell or buy any of the securities in any state where the offer is not permitted. You should not assume that the information in this prospectus is accurate as of any date other than the date that appears below.

November __, 2005

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

        The Israeli Companies Law-1999, or the Companies Law, which entered into effect on February 1, 2000 and was amended most recently in March 2005, provides that a company may include in its articles of association provisions allowing it to:

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        The Companies Law provides that a company’s articles of association may provide for indemnification of an office holder post-factum and may also provide that a company may undertake to indemnify an office holder in advance, as described in:

        The Companies Law provides that a company may not indemnify or exempt the liabilities of an office holder or enter into an insurance contract which would provide coverage for the liability of an office holder with respect to the following:

        Under the Companies Law, the term “office holder” includes a director, managing director, general manager, chief executive officer, executive vice president, vice president, other managers directly subordinate to the managing director and any other person fulfilling or assuming any such position or responsibility without regard to such person’s title.

        The grant of an exemption, an undertaking to indemnify or indemnification of, and procurement of insurance coverage for, an office holder of a company requires, pursuant to the Companies Law, the approval of the company’s audit committee and board of directors, and, in certain circumstances, including if the office holder is a director, the approval of the company’s shareholders.

        We have entered into an insurance contract for directors and officers and have procured indemnification insurance for our office holders to the extent permitted by our Articles of Association. We have never had the occasion to indemnify any of our office holders.

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EXHIBIT INDEX

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    (a)        The undersigned Registrant hereby undertakes:

    (1)        To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement:

provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed with or furnished to the Commission by the Registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in this Registration Statement.

    (2)        That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered herein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

    (3)        To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

    (4)        To file a post-effective amendment to the Registration Statement to include any financial statements required by item 8.A. of Form 20-F at the start of any delayed offering or throughout a continuous offering. Financial statements and information otherwise required by Section 10(a)(3) of the Act need not be furnished, provided, that the Registrant includes in the prospectus, by means of a post-effective amendment, financial statements required pursuant to this paragraph (a)(4) and other information necessary to ensure that all other information in the prospectus is at least as current as the date of those financial statements. Notwithstanding the foregoing, with respect to Registration Statements on Form F-3, a post-effective amendment need not be filed to include financial statements and information required by item 8.A. of Form 20-F if such financial statements and information are contained in periodic reports filed with or furnished to the Commission by the Registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the Form F-3.

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    (c)        The undersigned registrant hereby undertakes to deliver or cause to be delivered with the prospectus, to each person to whom the prospectus is sent or given, the latest annual report to security holders that is incorporated by reference in the prospectus and furnished pursuant to and meeting the requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of 1934; and, where interim financial information required to be presented by Article 3 of Regulation S-X are not set forth in the prospectus, to deliver, or cause to be delivered to each person to whom the prospectus is sent or given, the latest quarterly report that is specifically incorporated by reference in the prospectus to provide such interim financial information.

    (d)        Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in such Act and will be governed by the final adjudication of such issue.

    (e)        The undersigned registrant hereby undertakes to file an application for the purpose of determining the eligibility of the trustee to act under subsection (a) of section 310 of the Trust Indenture Act (“Act”) in accordance with the rules and regulations prescribed by the Commission under Section 305(b)2 of the Act.

    (f)        The undersigned registrant hereby undertakes to deliver or cause to be delivered with the prospectus, to each person to which the prospectus is sent or given, the registrant’s latest filing on Form 20-F and any filing on Form 6-K incorporated by reference into the prospectus.

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SIGNATURES

        Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form F-2 and has duly caused this Amendment No. 3 to the Registration Statement on Form F-2 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Migdal Haemek, Israel, on November 21, 2005.

        Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:

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EXHIBIT INDEX

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Dates Referenced Herein   and   Documents Incorporated by Reference

				Referenced-On Page
This ‘F-2/A’ Filing		Date		First		Last			Other Filings
		9/30/11		44
		12/31/08		30					20-F,  20-F/A
		1/1/08		46		50
		12/31/07		45					20-F
		12/31/06		14					20-F
		9/30/06		14
		6/30/06		9		45			NT 20-F
		3/31/06		13		46
		1/30/06		47					SC 13G/A
		1/29/06		47
		1/20/06		30
		1/1/06		15		52
		12/31/05		14		27			20-F,  NT 20-F
		11/30/05		13		46			6-K
Filed on:		11/21/05		70		71
		11/20/05		3		34
		11/8/05		63					6-K
		11/7/05		63					6-K/A
		10/31/05		8		61
		10/27/05		67		72
		9/30/05		6		45
		9/29/05		67
		9/22/05		63					6-K,  6-K/A,  F-2/A
		8/3/05		63					6-K
		7/24/05		67		72
		6/29/05		62					20-F
		12/31/04		29		62			20-F,  20-F/A
		3/31/04		20
		1/29/04		47
		12/16/03		47
		7/1/02		31		32			6-K
		1/15/02		32
		12/31/01		22					20-F,  20-F/A,  ARS
		1/18/01		47
		2/1/00		65
									List all Filings

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1 Subsequent Filing that References this Filing

As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 2/29/24 Tower Semiconductor Ltd. S-8 2/29/24 4:232K Z-K Global Ltd./FA

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