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Saifun (NYSE:SFUN)

Q4 2005 Earnings Conference Call

February 15th 2006, 8:30 AM.

Executives

Dr. Boaz Eitan, Chairman and CEO

Igal Shany, Chief Financial Officer

Kobi Rozengarten, President

Todd Fromer, Investor Relations

Operator

Good day, my name is Jackie and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Saifun Fourth Quarter 2005 Earnings Conference Call. All lines have been placed on a listen-only mode for the duration of the conference. It is now my pleasure to turn the floor over to Todd Fromer. Sir you may begin your conference.

Todd Fromer, Investor Relations

Thank you, and thank you all for joining us this morning for the Saifun Semiconductors Fourth Quarter 2005 Earnings Conference Call. Before I begin, I would like to read the following regarding forward-looking statements. During the course of this conference call, the company may make forward-looking statements regarding future events. We wish to caution you that such statements reflect only the company’s current expectations and that actual events or results may differ materially. You are kindly referred to the risks factors and cautionary language contained in the company’s final prospectus filed on November 10, 2005 with the US Securities and Exchange Commission in connection with the company’s initial public offering. The company undertakes no obligation to update any projections or forward-looking statements in the future. The company will not be providing guidance or opening the conference for questions and answers after the presentation. Although, the company expects to do so following its next earnings call. We will now turn the call over to Dr. Boaz Eitan, Chairman and CEO of Saifun Semiconductors. Boaz, the floor is yours.

Dr. Boaz Eitan, Chairman and CEO

Thank you Todd, and welcome to Saifun Fourth Quarter Earnings Conference Call. And our first conference call is a public conference. We are pleased to be able to share with you our accomplishments over the year and offer some insight into our business. For those who are new to our story, allow me to give a little explanation of what we do. Saifun provides intellectual property solution for the non-volatile memory, most commonly called Flash memory.

We market our NROM technology, which enable semiconductor manufacturers to deliver a variety of products at a lower cost per megabit with more data size, higher density, higher scalability, and better yield compared to the standard technology used today. 2005 was a remarkable year for Saifun. We established the company as a major IP provider in the NVM space. We increased NROM penetration by our licensees, and saw a number of NROM-based product on the market grow.

In addition, we maintain our technological leadership with the launch of the Quad NROM, a unique technology that enables the storage of 4-bit per cell. Quad NROM technology is a breakthrough in the NVM phase, one that we believe will generate even greater value for our licensees, as they bring Quad NROM-based product to the market.

Our results for the quarter were very strong. In the fourth quarter, we completed our IPO on the NASDAQ grade approximately $135 million. These additional capital enhances Saifun’s already strong balance sheet and better positions us to achieve our long-term strategic object. With that, I would like to turn the call over to our CFO, Igal Shany, who will provide the detailed overview of our results for the quarter. Following the financial overview, our President, Kobi Rozengarten will provide details on the overall market for NVM technology and Saifun’s role in this market. Igal.

Igal Shany, Chief Financial Officer

Thank you Boaz. Looking at the full year ‘05 our GAAP revenues were $78.6 million. The GAAP revenues including $19.2 million of non-cash revenues resulting from our former joint venture with Infineon. In the fourth quarter ‘05, we concluded recognizing these non-cash revenues, therefore unless specifically stated otherwise, the results we discuss on this call disregard these non-cash revenues. The adjusted revenues for the full year ‘05 were $59.4 million, an increase of 94% compared to $30.6 million for the full year 2004. In ‘05, we achieved a growth margin of 80% and an operating profit of approximately 60%. In addition, in ‘05, we discontinued our direct product selling activity and we believe we will not incur additional profit and losses with regards to this activity.

Looking at the fourth quarter of ‘05, revenue-- $9.4 million for the fourth quarter of 2004. Our revenues are made up of licensing and service revenues as follows: Licensing revenues for the fourth quarter were $12.6 million or 77% of our total revenues. The majority of our licensing revenues this quarter continues to be derived from Infineon, Macronix, and Spansion.

Service revenues for the fourth quarter was $3.7 million or 23% of our total revenues. This quarter will derive service revenues from five of our licensees, including Infineon, SMIC, and Spansion. Gross margin for the fourth quarter was 77% or 79% excluding stock-based compensation. Operating expense for the fourth quarter was $5.6 million or 34% of revenues, which included 12% of revenues R&D, and 22% of revenues SG&A. R&D together with cost of services in the fourth quarter was $5.8 million or 35% of revenues and $19.5 million or 33% for the whole year. Stock-based compensation was 1.8 for the fourth quarter and $4.3 million for the full year ‘05. This year’s increase in stock-based compensation compared to ‘04 where we had $0.6 million expenses was primarily due to two items. The first is the increase in the liability of stock appreciation wise, but we assume as part of the joint venture exit. And the second is the increase in the average fair value for an option granted in ‘05 compared to ‘04.

Net income for the fourth quarter was $8.2 million or 51% of revenues excluding non-cash revenues. Our proforma EPS gives effect to the conversion of the preferred shares on a one-to-one basis and is based on GAAP revenues. In the fourth quarter, GAAP EPS was $0.15 and the proforma EPS was $0.30 per diluted share. For the full year ‘05 GAAP EPS was $0.16 and the proforma EPS was $1.70 per diluted share. Total shares outstanding at the end of Q4 were 29.5 million shares. Finally, as of December 31st ‘05, cash and held-to-maturity marketable securities were $181.1 million. This included net proceeds of approximately $123 million from our IPO, which we completed in November ‘05. Now, I would like to turn it back to Kobi, our President.

Kobi Rozengarten, President

Thank you Igal. 2005 was an exciting year for Saifun and for the Flash market. Flash continues to be the fastest growing segment of the semiconductor industry. Our NROM technology addresses all major segments of the NVM market, mainly Code known as NOR, Data known as NAND, and Embedded Flash. I would like to address each of these three segments and our activity to capture market share. The first is Code, the market is being driven by high-end wireless application and we believe that NROM offers the best cost performance technology for growth on the market. So as our licensees have been developing Code products based on NROM since 2000, and we are well positioned to lead this market. We are very pleased with the progress and commitment expansion made to our NROM technology and with the decision of one of our Japanese licensee to extend its license to Code application.

The second segment is data. The demand for Data is growing significantly. Being driven by a variety of high-density application including digital cameras, media player, USB pen drive, and mobile handsets. Our 4-bit Quad NROM is well suited for these applications. We are currently working on several Data projects with our licensees using this new generation of 4-bit technology. Our licensees Infineon and SMIC are well positioned and committed to the Data market. SMIC, the largest foundry in China is the latest licensee to join us.

In addition, we believe that NROM has the potential to support new entrants in the approach to penetrate this lucrative market. We can offer a total cost-effective solution while speaking the time to market. And the third segment is embedded, where we offer our IM solution, especially well suited for embedded microcontroller and security application. Hereto, we have committed licensees like Matsushita and Sony.

As we look at 2006, we believe that Saifun is well positioned to benefit from increased demands for high-density and high-performance Code and Data product. As our licensee come to the market with a variety of products based on NROM 2-bit and 4-bit technologies. As we go forward, we will continue to invest in our technology. Our licensees are already reporting 30% higher silicon efficiency, 40% reduction in critical manufacturing steps and 10% Ifab (phonetic) throughput. We will continue to work to increase the NROM advantages even farther. We will continue to work on advance design will leveraging the advantage of our trapping technology to scale down even farther. Our expertise and design services have led to product development opportunities, which resulted in an increase in our service revenue in the last quarter. We expect to maintain this higher level of services revenue during 2006.

To summarize, I would like reiterate that we are excited about Saifun’s future. I apologize that we will not be able to take your questions, but I sincerely thank you for joining us today and for the continued support of Saifun.

Operator

Thank you. This does conclude today’s teleconference. You may now disconnect your line and have a wonderful day.

Question-and-Answer Session

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