10-Q

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark one)

[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2000

OR

[   ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ________ to ________

0-26734
Commission File Number

SANDISK CORPORATION
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)

77-0191793
(I.R.S. Employer
Identification No.)

140 Caspian Court,
Sunnyvale, California
(Address of principal executive offices)

94089
(Zip code)

(408) 542-0500
(Registrant’s telephone number, including area code)

(Former name, former address, and former fiscal year, if changed since last report.)

             Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [  ]

             Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of
September 30, 2000

Common Stock, $0.001 par value
Class

67,304,244
Number of shares

SANDISK CORPORATION
TABLE OF CONTENTS

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets    September 30, 2000 and December 31, 1999	3
	Condensed Consolidated Statements of Income    Three and nine months ended September 30, 2000 and 1999	4
	Condensed Consolidated Statements of Cash Flows    Nine months ended September 30, 2000 and 1999	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition    and Results of Operations	10
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	30
Item 2.	Changes in Securities	30
Item 3.	Defaults upon Senior Securities	30
Item 4.	Submission of Matters to a Vote of Security Holders	30
Item 5.	Other Information	30
Item 6.	Exhibits and Reports on Form 8-K	30

SIGNATURES 33

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PART I. FINANCIAL INFORMATION

Item 1.   Condensed Consolidated Financial Statements

SANDISK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)

	September 30,			December 31,
	2000			1999*
	(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	172,261		$	146,170
Short-term investments		258,934			312,278
Investment in UMC		166,809			—
Accounts receivable, net		133,561			52,434
Inventories		67,323			35,679
Deferred tax assets		—			17,000
Prepaid expenses and other current assets		5,985			4,829
Total current assets		804,873			568,390
Property and equipment, net		38,265			31,788
Investment in UMC		197,688			51,208
Investment in joint venture		36,926			—
Deposits and other assets		29,267			6,338
Total Assets	$	1,107,019		$	657,724
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable	$	65,120		$	30,734
Accrued payroll and related expenses		15,521			8,259
Income taxes payable		18,743			5,843
Other accrued liabilities		21,614			11,378
Deferred tax liability		40,535			—
Deferred revenue		41,877			29,383
Total current liabilities		203,410			85,597
Deferred tax liability		68,317			—
Other liabilities		1,859			—
Total Liabilities		273,586			85,597
Stockholders' Equity:
Common stock		535,045			524,131
Retained earnings		316,939			47,797
Accumulated other comprehensive income		(18,551	)		199
Total stockholders' equity		833,433			572,127
Total Liabilities and
Stockholders' Equity	$	1,107,019		$	657,724

______________

   *   Information derived from the audited Consolidated Financial Statements.

The accompanying notes are an integral part of these condensed consolidated financial statements.

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SANDISK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2000			1999		2000		1999
Revenues:
Product	$	151,816		$	57,624	$	371,638	$	135,850
License and royalty		19,023			9,910		52,519		28,369
Total revenues		170,839			67,534		424,157		164,219
Cost of sales		101,874			43,897		254,146		101,264
Gross profits		68,965			23,637		170,011		62,955
Operating expenses:
Research and development		13,018			6,943		32,838		18,162
Sales and marketing		12,505			6,647		34,568		17,575
General and administrative		7,907			3,091		18,667		8,381
Total operating expenses		33,430			16,681		86,073		44,118
Operating income		35,535			6,956		83,938		18,837
Interest income		5,855			1,447		17,291		4,280
Gain on investment in foundry		—			—		344,168		—
Other income (expense), net		(438	)		1,306		661		1,542
Income before taxes		40,952			9,709		446,058		24,659
Provision for income taxes		15,349			3,204		176,916		8,137
Net income	$	25,603		$	6,505	$	269,142	$	16,522
Net income per share
Basic	$	0.38		$	0.12	$	4.04	$	0.31
Diluted	$	0.35		$	0.11	$	3.70	$	0.28
Shares used in computing net income per share
Basic		67,142			54,632		66,685		54,018
Diluted		72,638			60,994		72,817		59,550

The accompanying notes are an integral part of these condensed consolidated financial statements.

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SANDISK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

	Nine Months Ended
	September 30,
	2000			1999
Cash flows from operating activities:
Net income	$	269,142		$	16,522
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		11,691			5,931
Deferred taxes		138,435			—
Gain on investment in foundry		(344,168	)		—
Loss on disposal of equipment		858
Changes in operating assets and liabilities:
Accounts receivable, net		(81,127	)		(23,299	)
Inventories		(31,644	)		(11,762	)
Prepaid expenses and other assets		(4,085	)		(1,345	)
Accounts payable		34,386			18,868
Accrued payroll and related expenses		7,262			3,388
Income taxes payable		12,900			5,364
Other accrued liabilities		10,236			5,383
Deferred revenue		12,494			(3,349	)
Other liabilities		1,859			—
Total adjustments		(230,903	)		(821	)
Net cash provided by operating activities		38,239			15,701
Cash flows from investing activities:
Purchases of short term investments		(288,389	)		(88,178	)
Proceeds from sale of short term investments		341,279			89,850
Investment in foundry		(20,000	)		—
Investment in joint venture		(36,926	)
Acquisition of capital equipment		(19,026	)		(17,258	)
Net cash used in investing activities		(23,062	)		(15,586	)
Cash flows from financing activities:
Sale of common stock		10,914			6,970
Net cash provided by financing activities		10,914			6,970
Net increase in cash and cash equivalents		26,091			7,085
Cash and cash equivalents at beginning of period		146,170			15,384
Cash and cash equivalents at end of period	$	172,261		$	22,469

The accompanying notes are an integral part of these condensed consolidated financial statements.

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SANDISK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

             1. These interim condensed consolidated financial statements are unaudited but reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly the financial position of SanDisk Corporation and its subsidiaries (the “Company”) as of September 30, 2000, and the results of operations for the three and nine month periods ended September 30, 2000 and 1999 and cash flows for the nine month periods ended September 30, 2000 and 1999. Because all the disclosures required by generally accepted accounting principles are not included, these interim condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto in the Company’s annual report on Form 10-K as of, and for, the year ended December 31, 1999. The condensed consolidated balance sheet data as of December  31, 1999 was d erived from the audited financial statements.

             The Company’s results of operations for the three and nine month periods ended September 30, 2000 and 1999 and cash flows for the nine month periods ended September 30, 2000 and 1999 are not necessarily indicative of results of operations and cash flows for any future period.

             2. The Company’s fiscal year ends on the Sunday closest to December 31, and each fiscal quarter ends on the Sunday closest to March  31, June 30, and September 30. The third fiscal quarter of 2000 and 1999 ended on October 1, 2000 and September 26, 1999, respectively. Fiscal year 2000 is 52 weeks long and ends on December 31, 2000. Fiscal year 1999 was 53 weeks long and ended on January 2, 2000. For ease of presentation, the accompanying financial statements have been shown as ending on the last day of the calendar month.

             3. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

             4. The components of inventory consist of the following:

	September 30, 2000		December 31, 1999
	(in thousands)
Raw materials	$	17,784	$	10,387
Work-in-process		43,689		20,708
Finished goods		5,850		4,584
	$	67,323	$	35,679

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             5. The following table sets forth the computation of basic and diluted earnings per share:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2000		1999		2000		1999
	(in thousands, except per share amounts)
Numerator:
Numerator for basic and diluted net income per         share—net income	$	25,603	$	6,505	$	269,142	$	16,522
Denominator for basic net income per share:
Weighted average common shares		67,142		54,632		66,685		54,018
Shares used in computing basic net income per share		67,142		54,632		66,685		54,018
Basic net income per share	$	0.38	$	0.12	$	4.04	$	0.31
Denominator for diluted net income per share:
Weighted average common shares		67,142		54,632		66,685		54,018
Employee stock options and warrants to purchase         common stock		5,496		6,362		6,132		5,532
Shares used in computing diluted net income per share		72,638		60,994		72,817		59,550
Diluted net income per share	$	0.35	$	0.11	$	3.70	$	0.28

             For the three and nine month periods ended September 30, 2000, options to purchase 468,063 and 263,266 shares of common stock, respectively have been excluded from the earnings per share calculation, as their effect is antidilutive. For the three and nine month periods ended September 30, 1999, options to purchase 51,852 and 109,714 shares of common stock, respectively have been excluded from the earnings per share calculation, as their effect is antidilutive.

             6. The Company relies on a combination of patents, trademarks, copyright and trade secret laws, confidentiality procedures and licensing arrangements to protect its intellectual property rights. There can be no assurance that there will not be disputes regarding the Company’s intellectual property rights. Specifically, there can be no assurance that any patents held by the Company will not be invalidated, that patents will be issued for any of the Company’s pending applications or that any claims allowed from existing or pending patents will be of sufficient scope or strength or be issued in the primary countries where the Company’s products can be sold to provide meaningful protection or any commercial advantage to the Company. Additionally, competitors of the Company may be able to design around the Company’s patents.

             To preserve its intellectual property rights, the Company believes it may be necessary to initiate litigation with one or more third parties, including but not limited to those the Company has notified of possible patent infringement. In addition, one or more of these parties may bring suit against the Company.

             In March 1998, we sued Lexar in the Northern District of California alleging that Lexar’s CompactFlash and PC Cards infringe our U.S. Patent No. 5,602,987 (“‘987 Patent”). Lexar disputed this claim and asserted various counter claims, including unfair competition, violation of the Lanham Act, patent misuse, interference with prospective economic advantage, trade defamation, unenforceability and fraud. On November 14, 2000, in resolution of these actions, Lexar stipulated that SanDisk’s ‘987 Patent is valid and infringed by Lexar’s current CompactFlash and PC Cards. Lexar will make a lump sum payment of $8.0 million for royalties due on the ‘987 Patent, through March 31, 2001. Subject to Lexar’s representations and warranties relating to Lexar’s newly designed CompactFlash and PC Cards, SanDisk has stipulated that these designs do not infringe SanDisk’ s ‘987 Patent. Lexar entered into a 4% royalty-bearing license agreement for certain Lexar products that may use the ‘987 Patent beyond March 31, 2001. SanDisk and Lexar have agreed to dismiss with prejudice all pending claims of patent infringement and counterclaims involving claims of false advertising, unfair competition and patent misuse.

             In September 2000, Lexar sued SanDisk in the District of Delaware alleging that our SmartMedia products infringe Lexar’s United States Patent No. 5,479,638 (“‘638 Patent”). In resolution of this action, we will pay Lexar a lump sum payment of $2.0 million for a fully-paid up license for use of the ‘638 Patent in SmartMedia products.

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             Under the settlement, Lexar has provided us with an option for a royalty bearing license to its patents for use in certain future products.

             SanDisk and Lexar have agreed to resolve any future disputes relating to the use by Lexar of the ‘987 Patent through binding arbitration. We have also agreed that for a period of seven years, neither SanDisk nor Lexar shall seek injunctive relief against the other in any patent lawsuit. However, at all times, we retain the right to seek injunctive relief to enforce the payment of royalties pursuant to an arbitrator’s ruling.

             On March 21, 2000, Mitsubishi Denki Co. Ltd. (Mitsubishi Electric) filed a complaint in Tokyo District Court against SanDisk K.K., SanDisk’ s wholly-owned subsidiary in Japan. The complaint alleges that SanDisk K.K., based in Yokohama, Japan, infringes on three Mitsubishi Japanese patents. The Mitsubishi patents in question are #JP2099342, #JP2129071 and #JP2138047. Based on preliminary information, SanDisk believes that these patents are related primarily to the mechanical construction of memory cards built with a separate connector. In the complaint, Mitsubishi asked the court for a preliminary injunction halting the sale of SanDisk CompactFlash and flash ATA memory cards in Japan. Although the Company cannot predict the ultimate outcome of the case, it believes that Mitsubishi’s claims are without merit. The Company and SanDisk K.K. will vigorously defend itself against Mitsubishi’s claims.

             From time to time, the Company has been contacted by various other parties who have alleged that certain of the Company’s products infringe on patents that such parties claim to hold. To date no legal actions have been filed in connection with any such infringement, other than as discussed above.

             In the event of an adverse result in any such litigation, the Company could be required to pay substantial damages, cease the manufacture, use and sale of infringing products, expend significant resources to develop non-infringing technology or obtain licenses to the infringing technology, or discontinue the use of certain processes.

             From time to time the Company agrees to indemnify certain of its suppliers and customers for alleged patent infringement. The scope of such indemnity varies but may in some instances includes indemnification for damages and expenses, including attorney’s fees. The Company may from time to time be engaged in litigation as a result of such indemnification obligations. Third party claims for patent infringement are excluded from coverage under the Company’s insurance policies. There can be no assurance that any future obligation to indemnify the Company’s customers or suppliers, will not have a material adverse effect on the Company’s business, financial condition and results of operations.

             Compaq Corporation has opposed in several countries, including the United States, our attempting to register CompactFlash as a trademark. We do not believe that our failure to obtain registration for the CompactFlash mark will materially harm our business.

             Litigation frequently involves substantial expenditures and can require significant management attention, even if the Company ultimately prevails. In addition, the results of any litigation matters are inherently uncertain. Accordingly, there can be no assurance that any of the foregoing matters, or any future litigation, will not have a material adverse effect on the Company’s business, financial condition and results of operations.

             7. Certain of the Company’s balance sheet accounts and purchase commitments are denominated in Japanese Yen. The Company enters into foreign exchange contracts to hedge against changes in foreign currency exchange rates. The effects of movements in currency exchange rates on these instruments are recognized when the related operating revenues and expenses are recognized. The impact of movements in currency exchange rates on foreign exchange contracts substantially mitigates the related impact on the underlying items hedged. At September 30, 2000, forward contracts to sell Japanese Yen with a notional amount of $4.9 million were outstanding. In the third quarter of 2000, the Company had a net foreign currency transaction loss of $0.5 million, primarily due to transaction losses on its Japanese yen based assets.

             8. Accumulated other comprehensive income presented in the accompanying balance sheet consists of the accumulated unrealized gains and losses on available-for-sale marketable securities, net of the related tax effects, for all periods presented.

8

	Three Months Ended September 30,						Nine Months Ended September 30,
	2000			1999			2000			1999
	(in thousands)
Net income	$	25,603		$	6,505		$	269,142		$	16,522
Unrealized gain (loss) on available-for-sale securities:
Loss due to change in market value		(29,604	)		(550	)		(55,356	)		(684	)
Gain from stock dividend received		—			—			36,606			—
Comprehensive income	$	(4,001	)	$	5,955		$	250,392		$	15,838

             Accumulated other comprehensive income (loss) was ($18.6) million and $0.2 million at September 30, 2000 and December 31, 1999, respectively.

             9. On June 30, 2000, the Company and Toshiba closed a transaction providing for the joint development and manufacture of 512 megabit and 1 gigabit flash memory chips and Secure Digital Memory Card controllers. As a part of this transaction, the Company and Toshiba formed and contributed initial funding to FlashVision LLC, a joint venture to equip and operate a silicon wafer manufacturing line in Virginia. The cost of equipping the Virginia wafer manufacturing line is estimated at between $700 million and $800 million. The Company, as part of its 50% ownership of the joint venture, expects to invest up to $150 million in cash and guarantee equipment lease lines up to an additional $250 million. In addition, the Company will share certain research and development costs. SanDisk contributed $15.0 million of this investment in FlashVision LLC in the second quarter of 2000 and an additional $22.0 million in the third quarter of 2000. The Company does not expect any material revenues from the 512 megabit technology for at least one year, and from the 1 gigabit technology for at least two years.

             10. On January 3, 2000, the USIC foundry was merged into UMC. The Company had invested $51.2 million in USIC. In exchange for its USIC shares, the Company received 111 million UMC shares. These shares were valued at approximately $396 million at the time of the merger, resulting in a pretax gain of $344.2 million ($203.9 million after-tax) in the first quarter of 2000. All of the UMC shares received by the Company as a result of the merger are subject to trading restrictions imposed by UMC and the Taiwan Stock Exchange. The trading restrictions expired on one-half of the shares on July 3, 2000. The remaining shares will become available for sale over a two year period beginning in January 2002. When the shares are ultimately sold, it is likely that the Company will recognize additional gains or losses due to fluctuations in the price of the UMC shares.

             In May 2000, the Company received a stock dividend from UMC of 200 shares for every 1,000 shares of UMC owned, resulting in its ownership of 22 million additional shares of UMC. The shares received as a stock dividend and the 50% of the shares received as a result of the merger that became unrestricted in July 2000 were treated as available-for-sale securities under Statement of Financial Accounting Standards 115, Accounting for Certain Investments in Debt and Equity Securities, at September 30, 2000. At September 30, 2000, these shares were adjusted to market value and the resulting unrealized loss of $49.4  million dollars in the third quarter of 2000 was included in accumulated other comprehensive income. In addition, on September 18, 2000, UMC completed its American Depositary Shares (“ADRs”) offering. In connection with this offering, SanDisk signed a lock-up agreement that prohibits the sale of all but 5 million of these unrestricted UMC shares for a period of 90 days following the completion of the offering. The remaining 50% of the shares received as a result of the merger, that will be restricted from sale until 2002, are accounted for at their historical cost until such time as the related restrictions lapse.

             11. In July 2000, SanDisk entered into a definitive agreement to make a $75 million equity investment in Tower Semiconductor (“ Tower”) in Israel, resulting in approximately 10% ownership of Tower. In exchange for its investment, SanDisk will receive one seat on the board of directors and a guaranteed portion of the wafer output from the advanced fab Tower plans to build in Migdal Haemek, Israel. Under the terms of the agreement, SanDisk will make its investment over a period of approximately 18 months if key milestones related to the construction, equipping and wafer production at the new wafer fab are met. Such contribution will take the form of mandatory warrant exercises at an exercise price of $30.00 per share. In the event the key milestones are not achieved, the exercise of such warrants will not be mandatory and the warrants will expire five years from the date of grant. The closing of the transaction is subject to several conditions including the timely approval of a financial incentive

9

package for Tower from the Israeli government, Tower’s ability to secure additional financing from other foundry partners and financial institutions, timely commencement of fab construction and the approval of Tower’s board. During the third quarter, SanDisk transferred the first $20 million of this investment to an escrow account pending the completion of all conditions required for the closing. On October 10, 2000, the Israel Finance Minister recommended the approval of a $250 million grant for the construction of the wafer foundry. We expect to close this transaction in the fourth quarter of 2000. We expect first wafer production to commence at the new fab in 2002.

             12. On August 9, 2000, SanDisk entered into a joint venture, Digital Portal Inc., (“DPI”), with Photo-Me International (“PMI” ) for the manufacture, installation and service of self-service, digital photo printing labs, or kiosks, bearing the SanDisk brand name. Under the agreement, SanDisk and PMI will each make an initial investment of $4 million and secure lease financing for the purchase of the kiosks. The total value of the lease financing will depend on the number of kiosks deployed by the joint venture. The Company estimates that it will guarantee equipment lease arrangements of approximately $40 million over the first two years of the agreement. PMI will manufacture the kiosks for the joint venture and will install and maintain the kiosks under contract with the joint venture. The first kiosks are expected to be deployed in retail stores in the United States in the fi rst half of 2001.

             13. On November 2, 2000, SanDisk made a strategic investment of $7.2 million in Divio, Inc., a privately-held manufacturer of digital imaging compression technology and products. Under the agreement, SanDisk will own approximately 10% of Divio and is entitled to one board seat.

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

             Certain statements in this discussion and analysis are forward looking statements under Section 21E of the Securities and Exchange Act of 1934 as amended based on current expectations, and entail various risks and uncertainties that could cause actual results to differ materially from those expressed in such forward looking statements. Such risks and uncertainties are discussed below and in our Form 10-K for the year ended December 31, 1999 under the heading “Factors That May Affect Future Results.” Readers are cautioned not to place undue reliance on these forward looking statements, which speak only as of the date hereof. We undertake no obligation to update these forward looking statements to reflect events or circumstances occurring after the date hereof. The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto.

Overview

             SanDisk was founded in 1988 to develop and market flash data storage systems. We sell our products to the consumer electronics and ind ustrial/communications markets. In the first nine months of fiscal 2000, approximately 77% of our product sales were attributable to the consumer electronics market, particularly sales of CompactFlash for use in digital camera applications. Our CompactFlash products have lower average selling prices and gross margins than our higher capacity FlashDisk and FlashDrive products. In addition, a substantial portion of our CompactFlash products are sold into the retail channel, which usually has shorter customer order lead-times than our other channels. A majority of our sales to the retail channel are turns business, with orders received and fulfilled in the same quarter, thereby decreasing our ability to accurately forecast future production needs. We believe sales to the consu mer market will continue to represent a majority of our sales as the popularity of consumer applications, including digital cameras, increases.

             Our operating results are affected by a number of factors including the volume of product sales, availability of foundry capacity, variations in manufacturing cycle times, fluctuations in manufacturing yields and manufacturing utilization, the timing of significant orders, competitive pricing pressures, our ability to match supply with demand, changes in product and customer mix, market acceptance of new or enhanced versions of our products, changes in the channels through which our products are distributed, timing of new product announcements and introductions by us and our competitors, the timing of license and royalty revenues, fluctuations in product costs, increased research and development expenses, and exchange rate fluctuations. In addition, as the proportion of our products sold for use in consumer electronics applications increases, our revenues may become subject to seasonal declines in the fir st quarter of each year. See “Factors That May Affect Future Results—Our Operating Results May Fluctuate Significantly Which May Adversely Affect Our Stock Price” and “—There is Seasonality in Our Business.”

             Beginning in late 1995, we adopted a strategy of licensing our flash technology, including our patent portfolio, to third party manufacturers of flash products. To date, we have entered into patent cross-license agreements with several companies, and intend to pursue opportunities to enter into additional licenses. Our current

10

license agreements provide for the payment of license fees, royalties, or a combination thereof. In some cases, the compensation to us may be partially in the form of guaranteed access to Flash Memory manufacturing capacity from the licensee company. The timing and amount of royalty payments and the recognition of license fees can vary substantially from quarter to quarter depending on the terms of each agreement and, in some cases, the timing of sales of products by the other parties. As a result, license and royalty revenues have fluctuated significantly in the past and are likely to continue to fluctuate in the future. Given the relatively high gross margins associated with license and royalty revenues, gross margins and net income are likely to fluctuate more with changes in license and royalty revenues than with changes in product revenues.

             We market our products using a direct sales organization, distributors, manufacturers’ representatives, private label partners, OEMs and retailers. We expect that sales through the retail channel will comprise an increasing share of our total revenues in the future, and that a substantial portion of our sales into the retail channel will be made to participants that will have the right to return unsold products. Our policy is to defer recognition of revenues from these sales until the products are sold to the end customers.

             Historically, a majority of our sales have been to a limited number of customers. We expect that sales of our products to a limited number of customers will continue to account for a substantial portion of our product revenues for the foreseeable future. We have also experienced significant changes in the composition of our customer base from year to year and expect this pattern to continue as market demand for our customers’ products fluctuates. The loss of, or significant reduction in purchases by any of our major customers, could have a material adverse effect on our business, financial condition and results of operations. See “ Factors That May Affect Future Results—Sales to a Small Number of Customers Represent a Significant Portion of Our Revenues”.

             All of our products require silicon wafers, the majority of which are currently manufactured by UMC in Taiwan. Industry-wide demand for semiconductors increased significantly in 1999 and the first nine months of 2000, due to increased demand in the consumer electronics and cellular phone markets. This increased demand has caused supply constraints for most of this year. However, semiconductor manufacturers, including UMC and Toshiba have been adding new advanced wafer fab capacity, which in 2001 we expect will ease the tight supply situation of the past year. If industry-wide demand for our products falls below the industry-wide available supply, the excess capacity could adversely affect our product prices and significantly hurt our profitability. Under our wafer supply agreements, there are limits on the number of wafers we can order and our ability to change that quantity is restricted. Accordingly, ou r ability to react to significant fluctuations in demand for our products is limited. If customer demand exceeds our forecasts, we may be unable to obtain an adequate supply of wafers to fill customer orders, which could result in lost sales and lower revenues. If we are unable to obtain adequate quantities of flash memory wafers with acceptable prices and yields from our current and future wafer foundries, our business, financial condition and results of operations could be harmed. If customer demand falls below our forecast and we are unable to reschedule or cancel our wafer orders, we may end up with excess wafer inventories, which could result in higher operating expenses and reduced gross margins. We have from time to time taken write downs for excess inventories. These adjustments decrease gross margins and have resulted, and could in the future result, in fluctuations in gross margins on a quarter-to-quarter basis. See “Factors That May Affect Future Results—Our Operating Results May Fluctua te Significantly.”

             Export sales are an important part of our business. Our sales may be impacted by changes in economic conditions in our international markets. Economic conditions in our international markets, including the European Union, may adversely effect our revenues to the extent that demand for our products in these regions declines. Given the recent economic conditions in the European Union and the weakness of the Euro currency relative to the United States dollar, our products may be relatively more expensive in Europe, which could result in a decrease of our sales in that region. While most of our sales are denominated in U.S. Dollars, we invoice certain Japanese customers in Japanese Yen and are subject to exchange rate fluctuations on these transactions which could affect our business, financial condition and results of operations. See “Factors That May Affect Future Results—Our international operat ions make us vulnerable to changing conditions and currency fluctuations.”

             For the foreseeable future, we expect to realize a significant portion of our revenues from recently introduced and new products. Typically, new products initially have lower gross margins than more mature products because the manufacturing yields are lower at the start of manufacturing each successive product generation. In addition, manufacturing yields are generally lower at the start of manufacturing any product at a new foundry. To remain competitive, we are focusing on a number of programs to lower manufacturing costs, including development of future generations of D2 flash and advanced technology wafers. There can be no assurance that we will successfully

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develop such products or processes or that development of such processes will lower manufacturing costs. In addition, if the industry wide supply of flash memory products grows faster than customer demand, we could experience increased price competition in the future, which could result in decreased average selling prices and lower gross margins. See “Factors That May Affect Future Results—We Must Achieve Acceptable Manufacturing Yields.”

Results of Operations

             Product Revenues. Our product revenues were $151.8 million in the third quarter of 2000, up $94.2 million or 163% from the third quarter of 1999. Product revenues for the nine months ended September 30, 2000 were $371.6 million, up $235.8 million or 174% from the same period of the prior year. During the three and nine month periods ended September 30, 2000, total flash memory product units sold increased approximately 230% and 193%, respectively, over the same periods in 1999. The largest increases in both periods came from sales of MultiMediaCard and CompactFlash products. CompactFlash products represented 46% of product revenues and MultiMediaCards 25% of product revenues for the third quarter of 2000. For the nine month period ended September 30, 2000, CompactFlash products represented 46% of product revenues and MultiMediaCards represented 22% of product reve nues. Flash memory product average selling prices decreased 15% in the third quarter of 2000 and 5% for the first nine months of 2000 compared to the same periods of the prior year due primarily to an increase in sales of our MultiMediaCard product which have lower average selling prices than our higher capacity products. We expect fourth quarter product revenues to increase between 15% and 20% from third quarter product revenues.

             Sales to the consumer market represented approximately 81% and 77%, respectively, of product revenues for the three and nine month periods ended September 30, 2000, with sales to the telecommunications/industrial market accounting for the remaining 19% and 23%, respectively. Sales to the retail channel represented 25% of product revenues in the third quarter of 2000, up from 23% for the same period of the previous year. Our mix of products sold varies from quarter to quarter and will continue to vary in the future, affecting our overall average selling prices and gross margins.

             Export sales represented 56% and 54%, respectively, of our product revenues for the three and nine month periods ended September 30, 2000, compared to 53% and 47%, respectively, for the same periods of the previous year. We expect international sales to continue to represent a significant portion of our product revenues. For the three month period ended September 30, 2000, our top ten customers represented approximately 56% of our product revenues compared to 55% for the same period in 1999. In the third quarter of 2000, sales to one customer exceeded 10% of product sales. One customer also represented more than 10% of product sales in the third quarter of 1999. We expect that sales to a limited number of customers will continue to represent a substantial portion of our product revenues for the foreseeable future.

             License and Royalty Revenues. We currently earn patent license fees and royalties under several cross-license agreements. License and royalty revenues from patent cross-license agreements were $19.0 million in the third quarter of 2000, up from $9.9 million in the same period of the previous year, due primarily to an increase in royalty revenues. In the first nine months of 2000, revenue from patent license and royalties was $52.5 million, up from $28.4 million for the same period of the prior year. Revenues from licenses and royalties decreased to 11% of total revenues in the third quarter of 2000 from 15% in the third quarter of 1999. In the third quarter of 2000, we entered into new cross-license agreements with Hitachi and TDK. Our revenues from patent license and royalties fluctuate quarterly based on the timing of revenue recognition under our various agreements. We expect license a nd royalty revenues to be approximately $18 million in the fourth quarter of 2000.

             Gross Profits. In the third quarter of 2000, gross profits were $69.0 million, or 40% of total revenues compared to $23.6 million, or 35% of total revenues in the same period of 1999. Gross profits for the first nine months of 2000 were $170.0 million compared to $63.0 million for the same period of the previous year. Gross margin was 40% of total revenues for the nine month period ended September 30, 2000 compared to 38% for the same period of 1999.

             Product gross margin increased to 33% of product revenues in the third quarter of 2000 compared to 24% for the same period in 1999. For the nine month period ended September 30, 2000, product gross margins grew to 32% from 26% for the same period in the prior year. These increases in gross margins were primarily due to the lower cost per megabyte of our 256 Mbit flash memory products which represented a majority of our shipments in the first

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nine months of 2000. We currently expect product gross margins to improve by approximately one-half percent in the fourth quarter of 2000 based on anticipated continuing improvements in manufacturing yields for our 256Mbit  .24 micron technology.

             Research and Development. Research and development expenses consist principally of salaries and payroll related expenses for design and development engineers, prototype supplies and contract services. Research and development expenses were $13.0 million in the third quarter of 2000, up $6.1 million or 87% from $6.9 million in the same period of 1999. In the first nine months of 2000, research and development expenses increased to $32.8 million, up $14.7 million or 81% from $18.2 million in the same period of 1999. These increases were primarily due to increased salary and related expenses associated with additional personnel, increased project expenses to support the development of new generations of flash data storage products including the 512Mbit and 1 Gigabit flash memory co-development with Toshiba, and increased depreciation and amortization expenses. Resear ch and development expenses represented 8% of total revenues in the third quarter of 2000 compared to 10% in the third quarter of 1999. For the first nine months of 2000, research and development expenses represented 8% of total revenues compared to 11% for the same period of the prior year. We expect our research and development expenses to continue to increase in future quarters to support the development and introduction of new generations of flash data storage products, including the 512Mbit and 1 Gigabit flash memory co-development and manufacturing joint venture with Toshiba and the development of advanced controller chips.

             Sales and Marketing. Sales and marketing expenses include salaries, sales commissions, benefits and travel expenses for our sales, marketing, customer service and applications engineering personnel. These expenses also include other selling and marketing expenses, such as independent manufacturer’s representative commissions, advertising and tradeshow expenses. Sales and marketing expenses were $12.5 million in the third quarter of 2000, up $5.9 million or 88% from $6.6 million in the third quarter of 1999. In the first nine months of 2000, sales and marketing expenses increased to $34.6 million, up $17.0 million or 97% from $17.6 million in the same period of 1999. These increases were primarily due to increased salary and related expenses due to additional personnel, higher sales commission expenses due to increased product revenues, and increased marketing expe nses. Sales and marketing expenses represented approximately 7% of total revenues in the third quarter of 2000 compared to 10% in the third quarter of 1999. For the first nine months of 2000, sales and marketing expenses represented 8% of total revenues compared to 11% for the same period of the prior year. We expect sales and marketing expenses to continue to increase as sales of our products grow, as we continue to develop the retail channel and brand awareness for our products and as we increase our market development activities for our Secure Digital Memory Card products.

             General and Administrative. General and administrative expenses include the cost of our finance, information systems, human resources, stockholder relations, legal and administrative functions. General and administrative expenses were $7.9 million in the third quarter of 2000, up $4.8 million or 156% from $3.1 million in the third quarter of 1999. In the first nine months of 2000, general and administrative expenses increased to $18.7 million, up $10.3 million or 123% from $8.4 million in the same period of 1999. These increases were primarily due to increased salary and related expenses associated with additional personnel, increased legal fees and an increase in the allowance for doubtful accounts related to higher trade accounts receivable balances from increased revenues. General and administrative expenses represented 5% and 4%, respectively, of total revenues for the three and nine month periods ended September 30, 2000 compared to 5% for the same periods in 1999. In the fourth quarter, we expect general and administrative expenses to continue to grow due primarily to increased legal fees related to the Lexar trial. See “Factors That May Affect Future Results—Risks Associated with Patents, Proprietary Rights and Related Litigation.” General and administrative expenses could also increase substantially in the future if we continue to pursue litigation to defend our patent portfolio. In addition, we expect general and administrative expenses to continue to increase as our general and administrative functions grow to support our overall growth.

             We expect total operating expenses in the fourth quarter of 2000 to be between 20% and 25% higher than in the third quarter.

             Interest Income. Interest income was $5.9 million in the third quarter of 2000 compared to $1.4 million in the third quarter of 1999. The increase in 2000 was due primarily to higher interest income due to the investment of the proceeds from the sale of common stock in our November 1999 follow-on public offering. We expect interest income to decrease in the fourth quarter as we continue to use cash to invest in the FlashVision Joint Venture and the Tower foundry investment.

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             Gain on Investment in Foundry. In the first quarter of 2000, we recognized a gain of $344.2 million as a result of the merger of United Silicon, Inc. (“USIC”) and United Microelectronics Corporation (“UMC”). We had invested $51.2 million in USIC. We received 111 million shares of UMC in exchange for our USIC shares. These shares were valued at $396 million at the time of the merger. All of the UMC shares are were subject to trading restrictions imposed by UMC and the Taiwan Stock Exchange. The trading restrictions expired on one-half of the shares on July 3, 2000. The remaining shares will become available for sale over a two year period beginning in January 2002. When the shares are ultimately sold, it is likely that we will recognize additional gains or losses. In May 2000, we received a stock dividend of 200 UMC shares for every 1,000 shares of UMC owned, resulting in our ownership of 22 million additional UMC shares.

             Other Income, Net. Other expense, net was $438,000 in the third quarter of 2000 compared to other income of $1.3 million for the same period of the prior year. The expense in the third quarter was primarily due to foreign exchange losses on our Japanese Yen related transactions.

             Provision for Income Taxes. In the third quarter of 2000, we increased our effective tax rate to 36% for fiscal 2000, exclusive of the gain on foundry investment, based on our current assessment of our US and foreign tax obligations. This compares to an effective tax rate of 33% in 1999. The lower effective tax rate in 1999 reflects greater benefits from federal and state tax credits. In the first quarter of 2000, an additional tax of $140.2 million was provided for the gain on foundry investment.

Liquidity and Capital Resources

             As of September 30, 2000, we had working capital of $601.5 million, which included $172.3 million in cash and cash equivalents and $258.9 million in short-term investments. Operating activities provided $38.2 million of cash in the nine month period ended September 30, 2000 primarily from net income and an increase in accounts payable of $34.4 million, which were partially offset by an increase in accounts receivable of $81.1 million and inventories of $31.6 million.

             Net cash used in investing activities in the first nine months of 2000 of $23.1 million consisted of our $36.9 million investment in FlashVision LLC, our foundry joint venture with Toshiba and capital equipment purchases of $19.0 million. In addition, we paid $20.0 million of our planned $75 million investment in Tower Semiconductor. This $20.0 million will be held in escrow until all conditions of closing of the purchase agreement are met. These uses of cash were partially offset by net proceeds from short term investments of $52.9 million. In the first nine months of 2000, cash provided by financing activities of $10.9 million came primarily from the sale of common stock through our stock option and employee stock purchase plans.

             On June 30, 2000, we closed a transaction with Toshiba providing for the joint development and manufacturing of 512 megabit and 1  gigabit flash memory chips and Secure Digital Memory Card controllers. As part of this transaction, SanDisk and Toshiba formed FlashVision LLC, a joint venture to equip and operate a silicon wafer manufacturing line in Virginia. The cost of equipping the Virginia wafer manufacturing line is estimated at between $700 million and $800 million. We, as part of our 50% ownership of the joint venture, expect to invest up to $150 million in cash, and guarantee equipment lease lines up to an additional $250 million. In addition, we will share certain research and development costs. We made contributions totaling $36.9 million to the joint venture during the second and third quarters of 2000.

             In July 2000, we entered into a definitive agreement to make a $75 million equity investment in Tower Semiconductor resulting in approximately 10% ownership of Tower. In exchange for its investment, SanDisk will receive one seat on the board of directors and a guaranteed portion of the wafer output from the advanced fab Tower plans to build in Migdal Haemek, Israel. Under the terms of the agreement, SanDisk will make its investment over a period of approximately 18 months if key milestones related to the construction, equipping and wafer production at the new wafer fab are met. We expect first wafer production to commence at the new fab in 2002. The closing of the transaction is subject to several conditions including the timely approval of a financial incentive package for Tower from the Israeli government, Tower’s ability to secure additional financing from other foundry partners and financial institutions, timely commencement of fab construction and the approval of Tower’s board. During the third quarter, we transferred the first $20 million of this investment to an escrow account pending the completion of all conditions required for the closing. The additional investment will take the form of mandatory warrant exercises at an exercise price of $30.00 per share. In the event the key milestones are not achieved, the exercise of such warrants will not be mandatory and the warrants will expire five years from the date of grant. On October 10, 2000, the Israeli Finance

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Minister recommended the approval of a $250 million grant for the construction of the wafer foundry. We expect the remaining conditions to closing to be completed in the fourth quarter of 2000.

             On August 9, 2000, SanDisk entered into a joint venture, Digital Portal Inc , (“DPI”), with Photo-Me International (“PMI”) for the manufacture, installation and service of self-service, digital photo printing labs, or kiosks, bearing the SanDisk brand name. Under the agreement, SanDisk and PMI will each make an initial investment of $4 million in the DPI joint venture, and secure lease financing for the purchase of the kiosks. The total value of the lease financing will depend on the number of kiosks deployed by the joint venture. We estimate that we will guarantee equipment lease arrangements of approximately $40  million over the first two years of the agreement. PMI will manufacture the kiosks for the joint venture and will install and maintain the kiosks under contract with the joint venture. The first kiosks are expected to be deployed in retail stores in the United States in the first half of 2001.

             On November 2, 2000, SanDisk made a strategic investment of $7.2 million in Divio, Inc., a privately-held manufacturer of digital imaging compression technology and products. Under the agreement, SanDisk will own approximately 10% of Divio and be entitled to one board seat.

             Depending on future demand for our products, we may make additional investments, which could be substantial, in assembly and test manufacturing equipment or foundry capacity to support our business in the future. We believe our existing cash and cash equivalents and short-term investments along with the planned capital equipment lease arrangements currently in negotiation related to our FlashVision LLC and Digital Portal, Inc. joint ventures will be sufficient to meet our currently anticipated working capital, capital equipment expenditure and joint venture and Tower foundry investment requirements for, at least the next twelve months.

             On January 3, 2000, the USIC foundry was merged into UMC. We previously invested $51.2 million in USIC. In exchange for our USIC shares, we received 111 million UMC shares. These shares were valued at approximately $396 million at the time of the merger, resulting in a pretax gain of $344 million ($204 million after-tax). All the UMC shares we received as a result of the merger are subject to trading restrictions imposed by UMC and the Taiwan Stock Exchange. The trading restrictions expired on one-half of the shares on July 3, 2000. The remaining shares will become available for sale over a two year period beginning in January 2002. In addition, in May 2000 we received a stock dividend of 200 UMC shares for every 1,000 shares owned, resulting in the ownership of an additional 22 million shares. In addition, on September 18, 2000, UMC complet ed its American Depositary Shares (“ADRs”) offering. In connection with this offering, SanDisk signed a lock-up agreement that prohibits the sale of all but 5 million of the unrestricted UMC shares for a period of 90 days following the completion of the offering. At September 30, 2000, the unrealized loss on the available-for-sale portion of our UMC investment was $30.9 million. When the shares are ultimately sold, it is likely that we will report additional gains or losses. To the extent we can liquidate the UMC shares, we will plan to use such funds to support our operations and capital expenditures.

Impact of Currency Exchange Rates

             A portion of our revenues are denominated in Japanese yen. We enter into foreign exchange forward contracts to hedge against changes in foreign currency exchange rates. At September 30, 2000, a forward contract with a notional amount of $4.9 million was outstanding. Future exchange rate fluctuations could have a material adverse effect on our business, financial condition and results of operations.

Factors That May Affect Future Results

Our operating results may fluctuate significantly which may adversely affect our stock price.

             Our quarterly and annual operating results have fluctuated significantly in the past and we expect that they will continue to fluctuate in the future. This fluctuation is a result of a variety of factors, including the following:

• unpredictable demand for our products;

• decline in the average selling prices of our products due to competitive pricing pressures;

• seasonality in sales of our products;

• adverse changes in product and customer mix;

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• slower than anticipated market acceptance of new or enhanced versions of our products;

• competing flash memory card standards which displace the standards used in our products;

• changes in our distribution channels;

• timing of license and royalty revenue;

• fluctuations in product costs, particularly due to fluctuations in manufacturing yields and utilization;

• availability of sufficient silicon wafer foundry capacity to meet customer demand;

• shortages of components such as capacitors and printed circuit boards required for the manufacturing of our products;

• excess capacity of flash memory from our competitors and our own new flash wafer capacity;

• significant yield losses which could affect our ability to fulfill customer orders and could increase our costs;

• manufacturing flaws affecting the reliability, functionality or performance of our products which could increase our product costs, reduce demand for our products or require product recalls;

• lengthening in manufacturing cycle times due to our suppliers operating at peak capacity;

• increased research and development expenses;

• exchange rate fluctuations, particularly the U.S. dollar to Japanese yen exchange rate;

• changes in general economic conditions, particularly in Japan and the European Union;

• natural disasters affecting the countries in which we conduct our business, particularly Taiwan, Japan and the United States;

• difficulty of forecasting and management of inventory levels and

• expenses related to obsolescence of unsold inventory.

Difficulty of estimating silicon wafer needs

             When we order silicon wafers from our foundries, we have to estimate the number of silicon wafers needed to fill product orders several months into the future. If we overestimate this number, we will build excess inventories, which could harm our gross margins and operating results. If we underestimate the number of silicon wafers needed to fill product orders, we may be unable to obtain an adequate supply of wafers, which could harm our product revenues. Because our largest volume products, CompactFlash and MultiMediaCard, are sold into emerging consumer markets, it has been difficult to accurately forecast future sales. A substantial majority of our quarterly sales have historically been from orders received and fulfilled in the same quarter. In addition, our product order backlog may fluctuate substantially from quarter to quarter.

Anticipated growth in expense levels

             We increased our expense levels in the first nine months of fiscal 2000 to support our growth. We expect operating expenses to continue to increase in the fourth quarter of fiscal 2000 and beyond as a result of the need to hire additional personnel to support expected growth in sales unit volumes, sales and marketing efforts and research and development activities, including our collaboration with Toshiba providing for the joint development of 512 megabit and 1 gigabit flash memory chips. We have significant fixed costs and we cannot readily reduce these expenses over the short term. If revenues do not increase proportionately to operating expenses, or if revenues decrease or do not meet expectations for a particular period, our business, financial condition and results of operations will be harmed.

Variability of average selling prices and gross margins

             Our product mix varies quarterly, which affects our overall average selling prices and gross margins. Our CompactFlash and MultiMediaCard products, which currently represent the majority of our product revenues, have

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lower average selling prices and gross margins than our higher capacity FlashDisk and FlashDrive products. We believe that sales of CompactFlash and MultiMediaCard products will continue to represent a significant percentage of our product revenues as consumer applications, such as digital cameras and digital music players, become more popular. In the first nine months of 2000, average selling prices decreased 5% compared to the same period in 1999, reflecting the Flash memory supply shortages which prevailed during this period helping to keep prices relatively stable. Current indications are that the Flash supply in the market for our products may be coming more into balance with forecasted demand sometime in 2001. If this situation materializes in 2001, we expect that price declines for our products could be significant on an annualized basis. If we cannot reduce our product manufacturing costs in 2001 to offset these reduced prices, our gross margins and net profitability will s uffer.

Variability of license fees and royalties

             Our intellectual property strategy is to cross-license our patents to other manufacturers of flash products. Under these arrangements, we earn license fees and royalties on individually negotiated terms. The timing of revenue recognition from these payments is dependent on the terms of each contract and on the timing of product shipments by the third parties. This may cause license and royalty revenues to fluctuate significantly from quarter to quarter. Because these revenues have higher gross margins than product revenues, gross margins and net income fluctuate significantly with changes in license and royalty revenues.

In transitioning to new processes and products, we face production and market acceptance risks.

General

             Successive generations of our products have incorporated semiconductor devices with greater memory capacity per chip. Two important factors that have enabled us to decrease the cost per megabyte of our flash data storage products are the development of higher capacity semiconductor devices and the implementation of smaller geometry manufacturing processes. A number of challenges exist in achieving a lower cost per megabyte, including:

• overcoming lower yields often experienced in the early production of new semiconductor devices;

• overcoming manufacturing flaws with new processes including manufacturing processes at our subcontractors which may be extremely complex;

• problems with design and manufacturing of products that will incorporate these devices; and

• production delays.

             Because our products are complex, we periodically experience significant delays in the development and volume production ramp up of our products. Similar delays could occur in the future and could harm our business, financial condition and results of operations.

D2 flash technology

             We have developed new products based on D2 flash technology, a new flash architecture designed to store two bits in each flash memory cell. High density flash memory, such as D2 flash, is a complex technology that requires strict manufacturing controls and effective test screens. Problems encountered in the shift to volume production for new flash products could impact both reliability and yields, and result in increased manufacturing costs and reduced product availability. We may not be able to manufacture future generations of our D2 products with yields sufficient to result in lower costs per megabyte. If we are unable to bring future generations of our 256 megabit flash memory into full production as quickly as planned or if we experience unplanned yield or reliability problems, we will not be able to meet our customers’ forecasted demand, which would result in lost sales, reduced revenues a nd reduced margins.

MultiMediaCard products

             The MultiMediaCard presents new challenges in assembly and testing. For example, in the third quarter of 1999, during the MultiMediaCard production startup phase, we experienced fluctuations in yields which reduced MultiMediaCard product availability, increased manufacturing costs and reduced product margins for this product family. We are currently unable to meet all customer demand for our MultiMediaCard products. Future yield

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problems with our MultiMediaCard products could result in lost sales and reduced revenues. In addition, our gross margins may be harmed by any problems we encounter in the production of our MultiMediaCard products.

Secure Digital Memory Card products

             In the third quarter of 1999, we announced a memorandum of understanding under which we, along with Matsushita and Toshiba, will jointly develop and promote the Secure Digital Memory Card. The Secure Digital Memory Card is an enhanced version of our MultiMediaCard that will incorporate advanced security and copyright protection features required by the emerging markets for the electronic distribution of music, video and other copyrighted works. We expect to begin sampling our Secure Digital Memory Card products to key customers in the fourth quarter of 2000 and to begin volume production in the first half of 2001.

             The Secure Digital Memory Card will incorporate a number of new features, including SDMI compliant security and copy protection, a mechanical write protect switch and a high data transfer rate. We have never built products incorporating these features. Any problems or delays in establishing production capabilities or ramping up production volumes of our Secure Digital Memory Card products could result in lost sales or increased manufacturing costs in 2001 and beyond. In addition, we cannot be sure that manufacturers of consumer electronic products will develop new products that use the Secure Digital Memory Card or that content providers such as music studios will agree to distribute their copyrighted content for storage on Secure Digital Memory Cards. For example, in the past two quarters the major US based content providers have had significant success in U.S. courts in their litigation with Napster.Co m and MP3.Com, and this may have slowed down the widespread distribution of digital music on the internet. Although the Secure Digital Card is designed specifically to address the copy protection rights of the content providers, there can be no assurance that these content providers will all agree to support it. Furthermore, there is no assurance that consumers will widely adopt Secure Digital Memory Cards because of the requirement to purchase copyrighted content. Conversely, broad acceptance of our Secure Digital Memory Card by consumers may reduce demand for our MultiMediaCard and CompactFlash card products. See “—The success of our business depends on emerging markets and new products.”

We depend on third party foundries for silicon wafers.

             All of our products require silicon wafers. We rely on UMC in Taiwan to supply the majority of our silicon wafers. We depend on UMC to allocate a portion of its capacity to meet our needs, produce acceptable quality wafers with acceptable manufacturing yields and deliver our wafers on a timely basis at a competitive price. If UMC is unable to satisfy these requirements, our business, financial condition and operating results may suffer. For example, in September 1999, both UMC foundries producing our flash memory wafers were damaged and temporarily shut down by an earthquake in Taiwan. Future earthquakes, aftershocks or other natural disasters in Taiwan could preclude us from obtaining an adequate supply of wafers to fill customer orders, and could significantly harm our business, financial condition and results of operations.

             In January 2000, the USIC foundry was merged into UMC. Before the merger, we owned 10% of USIC, had the right to appoint one of its directors and were entitled to 12.5% of its total wafer production. As a result of the merger, we received UMC shares in exchange for our USIC shares. However, we do not have a right to a seat on the board of directors of the combined company. We have received assurances from the senior management of UMC that it intends to continue to supply us the same wafer capacity at the prices we currently enjoy under our agreement with USIC. UMC has fulfilled its obligations to us in each of the past three quarters. However, there can be no assurance that we will be able to maintain our current wafer capacity and competitive pricing arrangement in our future supply negotiations with UMC.

             Under the terms of our wafer supply agreements with UMC, we are obligated to provide a rolling forecast of anticipated purchase orders for the next six calendar months. Generally, the estimates for the first three months of each forecast are binding commitments. The estimates for the remaining months may only be changed by a certain percentage from the previous month’s forecast. This limits our ability to react to fluctuations in demand for our products. For example, if customer demand falls below our forecast and we are unable to reschedule or cancel our wafer orders, we may end up with excess wafer inventories, which could result in higher operating expenses and reduced gross margins. Conversely, if customer demand exceeds our forecasts, we may be unable to obtain an adequate supply of wafers to fill customer orders, which could result in dissatisfied customers, lost sales and lower revenues. In ad dition, in February 2000, we entered into a capacity and reservation deposit agreement with UMC. To reserve additional foundry capacity under this agreement, we paid UMC a reservation deposit. This deposit will

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be refunded to us on a quarterly basis, over the agreement term, if we purchase the full wafer capacity reserved for us. We may forfeit part of our deposit if we are unable to utilize our reserved capacity within four quarters of the end of the agreement term. If we are unable to obtain scheduled quantities of wafers with acceptable price and yields from any foundry, our business, financial condition and results of operations could be harmed.

             In the third quarter of 2000, we completed qualifications and began volume production of the 256 Mbit D2 .24 micron technology in two UMC fabs. We now have three UMC fabs producing our .24 micron wafers. The yields on these wafers vary from fab to fab due to the relative stage of start-up or production ramp. The third UMC fab to begin production is a new UMC fab and we have been experiencing lower yields than the two other fabs. There can be no assurances that we will not experience delays in wafer availability, low yields, or undetected manufacturing flaws which may adversely impact the reliable operation of our products. Any such difficulties may adversely impact our product availability and gross margins.

Our investment in new flash memory wafer production may result in increased expenses and fluctuations in operating results.

             On June 30, 2000, we closed a transaction with Toshiba to jointly develop future flash memory products and jointly manufacture such product, once developed. Under this agreement, we expect to invest $150 million in cash and guarantee up to $250 million in equipment lease lines to equip Toshiba’s Dominion Semiconductor manufacturing clean room with advanced wafer processing equipment. Toshiba is obligated to invest an equal amount and each of us will equally share the startup expenses and the wafer output. We will use the new production capacity at Dominion to manufacture primarily NAND flash memory wafers with minimum lithographic feature size of 0.16 micron initially, moving to 0.13 micron in the future. Such minimum feature sizes are considered today to be among the most advanced for mass production of silicon wafers and have never been used for the high volume manufacture of flash memory chips. Therefore, it is difficult to predict how long it will take to equip and commence production at the new facility and achieve adequate yields, reliable operation, and economically attractive product costs based on our new designs. We have not operated our own wafer fabrication facility in the past and therefore do not have any experience in addressing these challenges. With our investments in the Dominion facility, we are now exposed to the adverse financial impact of any delays or manufacturing problems associated with the wafer production line. Any problems or delays in commencing production at the new Dominion facility could adversely impact our operating results in fiscal year 2001 and beyond.

             We expect to incur substantial start up expenses related to the hiring and training of manufacturing personnel, facilitizing the clean room and installing equipment. During the ramp-up period, equipment depreciation begins and line operating expenses increase substantially. While the wafer output is still relatively low, the cost of wafers from the Dominion facility is expected to be significantly higher than the cost of wafers from our other suppliers. This may negatively impact our overall product gross margins until flash wafer output from Dominion reaches an optimum level, which may never occur. Under the agreement with Toshiba, we are committed to purchase 50% of the output from the Dominion facility. We will incur startup costs and pay our share of ongoing operating activities even if we do not utilize our full share of the Dominion output. Should customer demand for NAND flash products be less than our available supply, we may suffer from reduced revenues and increased expenses, which could adversely affect our operating results. Furthermore, in order for us to sell NAND based CompactFlash, MultiMediaCards and SD Cards, we will have to develop new controllers, printed circuit boards and test algorithms because the architecture of NAND flash is significantly different from our current NOR flash designs. Any delays in the development of these elements could prevent us from taking advantage of the available NAND output and could adversely affect our results of operations.

             In July 2000, SanDisk entered into a definitive agreement to make a $75 million equity investment in Tower Semiconductor in Israel. In exchange for its investment, SanDisk will receive one seat on the board of directors and a guaranteed portion of the wafer output from the advanced fab Tower plans to build in Migdal Haemek, Israel with .18 micron process technology which Tower licensed from Toshiba. We plan to use the Tower wafers for the future manufacture of a portion of our controller chips that are being designed at our design center in Israel. Under the terms of the agreement, SanDisk will make its investment over a period of approximately 18 months if key milestones related to the construction, equipping and wafer production at the new wafer fab are met. First wafer production is expected at the new fab in 2002. The closing of the transaction is subject to several conditions incl uding the timely approval of a financial incentive package for Tower from the Israeli government, Tower’s ability to secure additional financing from other foundry partners and financial institutions, timely commencement of fab construction and the approval of Tower’s board. During the third quarter of fiscal 2000, we transferred the

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first $20 million of this investment to an escrow account pending the completion of all conditions required for the closing. Also during the third quarter, the Israeli Government announced that it will provide Tower with a grant of up to $250 million to help fund the construction and equipping of the new fab. The current political unrest in the region does not represent a security problem for Tower since Migdal Haemek is in a secure geographic location. Nevertheless it may cause unforeseen schedule delays. We cannot assure you that the Tower facility will be completed or will begin production as scheduled, or that the processes needed to fabricate our wafers will be qualified at the new facility. Moreover, we cannot assure you that this new facility will be able to achieve acceptable yields or deliver sufficient quantities of wafers on a timely basis at a competitive price.

The success of our business depends on emerging markets and new products.

             In order for demand for our products to grow, the markets for new products that use CompactFlash and the MultiMediaCard, such as portable digital music players and smart phones, must develop and grow. If sales of these products do not grow, our revenues and profit margins could level off or decline.

             Because we sell our products for use in many new applications, it is difficult to forecast demand. For example, in 1999 and the first half of 2000, demand for our MultiMediaCard for use in portable digital music players grew faster than anticipated and we were unable to fill all customer orders. During the third quarter, the U.S. Courts ruled against Napster.Com and MP3.Com in two cases involving unlicensed distribution of copyrighted digital music over the internet. This action is being carefully studied by the original equipment manufacturers, or OEMs, who have been developing MP3 players using Flash memory cards such as our MultiMediaCards for storage of music. If these OEMs reduce their production of digital music players in response to these recent court decisions or other factors, demand for our products will decrease. In addition, we believe that these OEMs may redesign their platforms to work with our Secure Digital Memory Card, which we plan to start sampling in the fourth quarter of 2000. Accordingly, we may experience a drop in demand from our MultiMediaCard customers before the new anticipated demand for our Secure Digital Memory Card picks up.

Secure Digital Memory Card products

             In the third quarter of 1999, we announced a collaboration under which we will jointly develop the Secure Digital Memory Card, an enhanced version of our MultiMediaCard, which will incorporate advanced security and copyright protection features required by the emerging markets for the electronic distribution of music, video and other copyrighted works. We expect to begin shipping customer samples of our Secure Digital Memory Cards in 32 and 64 megabyte capacities in the fourth quarter of 2000. The Secure Digital Memory Card is slightly thicker and uses a different interface than our MultiMediaCard. Because of these differences, the Secure Digital Memory Card will not work in current products that include a MultiMediaCard slot. In order for the market for our Secure Digital Memory Card to develop, manufacturers of digital audio/video and portable computing products must include a Secure Digital Memory Card compatible slot in their products and acquire a license to the security algorithms. If OEM’s do not incorporate Secure Digital Memory Card slots in their products or do not buy our Secure Digital Memory Cards, our business, financial condition and results of operations may be harmed. In addition, consumers may postpone or altogether forego buying products that utilize our MultiMediaCard in anticipation of new products such as MP3 players and digital camcorders that will incorporate the Secure Digital Memory Card. If this occurs, sales of our MultiMediaCard products may be harmed. The main competition for the Secure Digital Memory Card is expected to come from the Sony Memory Stick. Sony has substantially greater financial and other resources than we do and extensive marketing and sales channels and brand recognition. We cannot assure you that our Secure Digital Memory Card will be successful in the face of such competition.

             In addition, the market for portable digital music players is very new and it is uncertain how quickly consumer demand for these players will grow. If this market does not grow as quickly as anticipated or our customers are not successful in selling their portable digital music players to consumers, our revenues could be adversely affected. In addition, it is often the case with new consumer markets that after an initial period of new market formation and initial acceptance by early adopters, the market enters a period of slow growth as standards emerge and infrastructure develops. In the event that this occurs in the portable digital music player market or other emerging markets, sales of our products would be harmed.

             The success of our new product strategy will depend upon, among other things, the following:

• our ability to successfully develop new products with higher memory capacities and enhanced features at a lower cost per megabyte;

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• the development of new applications or markets for our flash data storage products;

• the adoption by the major content providers of the copy protection features offered by our Secure Digital Memory Card products;

• the extent to which prospective customers design our products into their products and successfully introduce their products; and

• the extent to which our products or technologies become obsolete or noncompetitive due to products or technologies developed by others.

512 megabit and 1 gigabit flash memory card products

             On June 30, 2000, we closed a transaction with Toshiba providing for the joint development and manufacture of 512 megabit and 1  gigabit flash memory chips and Secure Digital Memory Card controllers. As part of this collaboration, we and Toshiba plan to employ Toshiba’s 0.16 micron and future 0.13 micron NAND flash integrated circuit manufacturing technology and SanDisk’s multilevel cell flash and controller system technology. During the third quarter, we announced with Toshiba the completion of the joint development of the 512 Mbit NAND Flash chip employing Toshiba’s .16 micron manufacturing process technology. We expect cards employing this advanced technology to commence customer shipments in the first half of 2001. The development of 512 megabit and 1 gigabit flash memory chips and Secure Digital Memory Card controllers is expected to be complex an d incorporates SanDisk and Toshiba technology that is still under development. We cannot assure you that we and Toshiba will successfully develop and bring into full production with acceptable yield and reliability these new products or the underlying technology, or that any development or production ramp will be completed in a timely or cost-effective manner. If we are not successful in any of the above, our business, financial condition and results of operations could suffer.

We may be unable to maintain market share.

             We may be unable to increase our production volumes at a sufficiently rapid rate so as to maintain our market share. Ultimately, our growth rate depends on our ability to obtain sufficient flash memory wafers and other components to meet demand. If we are unable to do so in a timely manner, we may lose market share to our competitors. Currently, our supply constraints are forcing some of our largest customers to seek alternate sources of supply to meet their growing flash memory product needs.

Our selling prices may be affected by future excess capacity in the market for flash memory products.

             Currently, industry wide demand for flash memory products exceeds the available supply. This has been primarily driven by an explosion in the growth of cellular phones and the accelerating shift in consumer electronics from analog to digital devices. This strong demand manifested itself in improved bookings visibility and a more stable pricing environment. All major flash memory suppliers, including SanDisk, have responded to this strong demand by significantly increasing investments in new advanced flash memory production capacity. Current indications are that the Flash supply in the market for our products may be coming more into balance with forecasted demand sometime in 2001. If this situation materializes in 2001, we expect that price declines for our products could be significant on an annualized basis. If we cannot reduce our product manufacturing costs in 2001 to offset these reduced prices, our g ross margins and net profitability will suffer. If one or several of our target markets fail to grow as anticipated, there may be excess supply in the markets for our products. This excess capacity, even if temporary in nature, could cause average selling prices to drop more than expected, thereby adversely impacting our sales, product gross margins and operating results in future quarters.

Our international operations make us vulnerable to changing conditions and currency fluctuations.

Political risks

             Currently, the majority of our flash memory wafers are produced by three UMC foundries in Taiwan. We also use a third-party subcontractor in Taiwan for the assembly and testing of our MultiMediaCard products. We may therefore be affected by the political, economic and military conditions in Taiwan. Taiwan is currently engaged in various political disputes with China and in the past both countries have conducted military exercises in or near the other’s territorial waters and airspace. The Taiwanese and Chinese governments may escalate these disputes,

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resulting in an economic embargo, a disruption in shipping routes or even military hostilities. This could harm our business by interrupting or delaying the production or shipment of flash memory wafers or MultiMediaCard products by our Taiwanese foundries and subcontractor. See “— We depend on our suppliers and third party subcontractors.”

             We use a third-party subcontractor in China for the assembly and testing of our CompactFlash products. As a result, our business could be harmed by the effect of political, economic, legal and other uncertainties in China. Under its current leadership, the Chinese government has been pursuing economic reform policies, including the encouragement of foreign trade and investment and greater economic decentralization. The Chinese government may not continue to pursue these policies and, even if it does continue, these policies may not be successful. The Chinese government may also significantly alter these policies from time to time. In addition, China does not currently have a comprehensive and highly developed legal system, particularly with respect to the protection of intellectual property rights. As a result, enforcement of existing and future laws and contracts is uncertain, and the implementation and interpretation of such laws may be inconsistent. Such inconsistency could lead to piracy and degradation of our intellectual property protection.

             In addition, while the political unrest in Israel has not yet posed a direct security risk to our engineering design center or our foundry investment in Tower Semiconductor due to their geographic location, it may nevertheless cause unforeseen delays in the development of our products or the construction of the Tower wafer foundry.

Economic risks

             We price our products primarily in U.S. dollars. As a result, if the value of the U.S. dollar increases relative to foreign currencies, our products could become less competitive in international markets. For example, our products are relatively more expensive in Asia because of the weakness of many Asian currencies relative to the US dollar. In addition, we currently invoice some of our customers in Japanese yen. Therefore, fluctuations in the Japanese yen against the U.S. dollar could harm our business, financial condition and results of operations. Similarly, the weakness of the Euro may make our products less competitive in Europe relative to Japanese flash memory suppliers.

             Our sales are also highly dependent upon global economic conditions. In fiscal 1998, sales to Japan declined to 31.6% of total product sales from 38.1% in 1997. In 1999, sales to Japan represented 22.4% of product revenue. We believe these declines were primarily due to the Japanese recession.

General risks

             Our international business activities could also be limited or disrupted by any of the following factors:

• the need to comply with foreign government regulation;

• general geopolitical risks such as political and economic instability, potential hostilities and changes in diplomatic and trade relationships;

• natural disasters affecting the countries in which we conduct our business, particularly Taiwan and Japan;

• imposition of regulatory requirements, tariffs, import and export restrictions and other barriers and restrictions, particularly in China;

• longer payment cycles and greater difficulty in accounts receivable collection, particularly as we increase our sales through the retail distribution channel;

• potentially adverse tax consequences;

• less protection of our intellectual property rights; and

• delays in product shipments due to local customs restrictions.

We depend on our suppliers and third party subcontractors.

             We rely on our vendors, some of which are sole source suppliers, for several of our critical components. We do not have long-term supply agreements with some of these vendors. Our business, financial condition and

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operating results could be significantly harmed by delays or reductions in shipments if we are unable to develop alternative sources or obtain sufficient quantities of these components. For example, we rely on UMC for the majority of our flash memory wafers and NEC to supply 100% of certain designs of microcontrollers. In September 1999, both UMC foundries producing our flash memory wafers were damaged and temporarily shut down by an earthquake in Taiwan. In addition, due to industry-wide increasing demand for semiconductors, we have been unable to obtain price reductions from some of our important suppliers. See “-—We depend on third party foundries for silicon wafers.” We have experienced longer order lead times and spot shortages on standard components due to high industry demand. Shortages of any of these standard components could result in higher manufacturing costs or lower revenues due to production delays or reduced product shipments. Additionally, where possible, we are building buffer inventories of critical components. If we accumulate excess inventories or these buffer inventories become obsolete, we will have to write down inventories which will adversely affect our gross margins and results of operations.

             We also rely on third-party subcontractors to assemble and test the memory components for our products. We have no long-term contracts with these subcontractors and cannot directly control product delivery schedules. This could lead to product shortages or quality assurance problems which could increase the manufacturing costs of our products and have adverse effects on our operating results.

             During the second half of 1999, we transferred a substantial portion of wafer testing, packaged memory final testing, card assembly and card testing to Silicon Precision Industries Co., Ltd. in Taiwan and Celestica, Inc. in China. In the second quarter of 2000, we began using Amkor, in the Philippines, as an additional subcontractor for card assembly and testing. In fiscal 2000, we expect that these three subcontractors will be assembling and testing a majority of our mature, high-volume products. This increased reliance on subcontractors is expected to reduce manufacturing costs and give us access to increased production capacity. During the transition period, we will continue full operations at our Sunnyvale production facility while simultaneously transferring test equipment and training personnel of our subcontractors. However, we do not have sufficient duplicative production testing equipment at Sunn yvale and at our subcontractors. Therefore, any significant problems in this complex transfer of operations may result in a disruption of production and a shortage of product to meet customer demand in the fourth quarter of 2000.

Continuing declines in our average sales prices may result in declines in our gross margins.

             In 1999, the average unit selling prices of our products declined 22% compared to 1998. In the first nine months of fiscal 2000, average unit selling prices declined 5%. Because flash data storage markets are characterized by intense competition and price reductions for our products are necessary to meet consumer price points, we expect that market-driven pricing pressures will continue or even accelerate. This will likely result in a further decline in average sales prices for our products. We believe that we may be able to offset declining average unit sales prices by achieving manufacturing cost reductions and developing new products that incorporate more advanced technologies, include more advanced features and can be sold at stable average gross margins despite continued declines in average selling price per megabyte. However, if we are unable to achieve such cost reductions and technological advance s, this could result in lost sales and declining gross margins, and as a result, our business, financial condition and results of operations could suffer.

             The semiconductor industry is cyclical and we believe it is currently in a recovery from one of its most severe down cycles. During most of 1997 and 1998, the semiconductor industry experienced significant production over capacity, which reduced margins for substantially all flash memory suppliers. Currently, the markets for our products are supply constrained and our selling prices have stayed relatively stable. However, many of the leading manufacturers of Flash Memory, including ourselves, have been adding significant amounts of new production capacity, and this may result in excess supply beginning sometime in 2001. If that trend materializes, it could result in increased competition and reduced average selling prices for our products.

Our markets are highly competitive.

Flash memory manufacturers and memory card assemblers

             We compete in an industry characterized by intense competition, rapid technological changes, evolving industry standards, declining average selling prices and rapid product obsolescence. Our competitors include many large domestic and international companies that have greater access to advanced wafer foundry capacity,

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substantially greater financial, technical, marketing and other resources, broader product lines and longer standing relationships with customers. Our primary competitors include:

• storage flash chip producers such as Hitachi Ltd., Samsung Electronics Company Ltd. and Toshiba Corporation;

• socket flash, linear flash and component manufacturers such as Advanced Micro Devices, Inc., Atmel Corporation, Fujitsu Corporation, Intel Corporation, Macronix International Co., Ltd., Micron Technology, Inc., Mitsubishi Electronic Corporation, Sharp Electronics Corporation and STMicroelectronics NV; and

• module or card assemblers such as Lexar Media, Inc., M-Systems, Inc., Pretec Electronics Corp., Simple Technology Inc., Sony Corporation, Kingston Technology Company, Panasonic Consumer Electronic Company, Silicon Storage Technology, Inc., TDK Corporation, Matsushita Battery, Inc. Delkin Devices, Inc., Silicon Tek and Viking Components, Inc., who combine controllers and flash memory chips developed by others into flash storage cards.

             In addition, many companies have been certified by the CompactFlash Association to manufacture and sell their own brand of CompactFlash. We believe additional manufacturers will enter the CompactFlash market in the future.

             We have announced an agreement with Matsushita and Toshiba to jointly develop and promote a next generation flash memory card called the Secure Digital Memory Card. Under this agreement, Secure Digital Memory Card royalty-bearing licenses will be granted to other flash memory card manufacturers, which will increase the competition for our Secure Digital Memory Card, CompactFlash and MultiMediaCard products. In addition, Matsushita and Toshiba have commenced selling Secure Digital Memory Cards that will compete directly with our products. While other flash card manufacturers will be required to pay the SD Association license fees and royalties which will be shared between Matsushita, Toshiba and SanDisk, there will be no royalties or license fees payable among the three companies for their respective sales of the Secure Digital Memory Card. Thus, we will forfeit potential royalty income from Secure Digital Memory Card sales by Matsushita and Toshiba.

             On June 30, 2000, we closed a transaction with Toshiba providing for the joint development and manufacture of 512 megabit and 1  gigabit flash memory chips and Secure Digital Memory Card controllers. We and Toshiba will each separately market and sell any products developed and manufactured under this relationship. Accordingly, we will compete directly with Toshiba for sales of these advanced chips and controllers.

             We have entered into patent cross-license agreements with several of our leading competitors including Hitachi, Samsung, Toshiba, Intel, SST, Sharp, SmartDisk and TDK. Under these agreements, each party may manufacture and sell products that incorporate technology covered by the other party’s patents related to flash memory devices. As we continue to license our patents to certain of our competitors, competition will increase and may harm our business, financial condition and results of operations. Currently, we are engaged in licensing discussions with several of our competitors. There can be no assurance that we will be successful in concluding licensing agreements under terms, which are favorable to us.

Alternative storage media

             Competing products have been introduced that promote industry standards that are different from our CompactFlash and MultiMediaCard products including Toshiba’s SmartMedia, Sony Corporation’s Memory Stick, Sony’s standard floppy disk used for digital storage in its Mavica digital cameras, Panasonic’s Mega Storage cards, Iomega’s Clik drive, a miniaturized, mechanical, removable disk drive, and M-Systems’ Diskonchip for embedded storage applications and the Secure MultiMediaCard from Hitachi and Infineon. Each competing standard is mechanically and electronically incompatible with CompactFlash and MultiMediaCard. If a manufacturer of digital cameras or other consumer electronic devices designs in one of these alternative competing standards, CompactFlash or MultiMediaCard will be eliminated from use in that product.

             IBM’s microdrive, a rotating disk drive in a Type II CompactFlash format competes directly with our Type II CompactFlash memory cards for use in high-end professional digital cameras. M-Systems’ Diskonchip 2000 Millennium product competes against our Flash ChipSet products in embedded storage applications such as set top boxes and networking appliances.

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             According to independent industry analysts, Sony’s Mavica digital camera captured a considerable portion of the United States market for digital cameras in 1998 and 1999. The Mavica uses a standard floppy disk to store digital images and therefore uses no CompactFlash, or any other flash cards. Our sales prospects for CompactFlash cards have been adversely impacted by the success of the Mavica. Recently, Sony has shifted its focus to the use of its flash Memory Stick in its latest digital camera models.

             Our MultiMediaCard products also have faced significant competition from Toshiba’s SmartMedia flash cards and we expect to face similarly significant competition from Sony’s Memory Stick. Sony has licensed its proprietary Memory Stick to other companies. If it is adopted and achieves widespread use in future products, sales of our MultiMediaCard and CompactFlash products may decline. Recently, Hitachi, Infineon, Sanyo and Fujitsu have proposed their Secure MultiMediaCard which provides the copy protection function that is included in our Secure Digital Memory Card. Should this initiative gain industry wide acceptance, it may reduce the widespread adoption of the Secure Digital Memory Card.

             In the first quarter of 2000, Sanyo announced that it is developing a miniature magneto-optical storage device for use in future digital cameras, music players and camcorders. There can be no assurance that this device will not be adopted by some of our OEM customers.

Alternative flash technologies

             We also face competition from products based on multilevel cell flash technology such as Intel’s 64 megabit and 128 megabit StrataFlash chips and Hitachi’s 256 megabit multilevel cell flash chip. These products compete with our D2 multilevel cell flash technology. Multilevel cell flash is a technological innovation that allows each flash memory cell to store two bits of information instead of the traditional single bit stored by the industry standard flash technology. In the second quarter of 1999, Intel announced their new 128 megabit multilevel cell chip and Hitachi is currently shipping CompactFlash and MultiMediaCard products employing their multilevel cell 256 megabit flash chip. In addition, Toshiba has begun customer shipments of 32 and 64 megabyte SmartMedia cards employing their new 256 megabit flash chip. Although Toshiba has not incorporated multilev el cell flash technology in their 256 megabit flash chip, their use of more advanced lithographic design rules may allow them to achieve a more competitive cost structure than that of our 256 megabit D2 flash chip.

             Furthermore, we expect to face competition from existing competitors and from other companies that may enter our existing or future markets that have similar or alternative data storage solutions which may be less costly or provide additional features. Price is an important competitive factor in the market for consumer products. Increased price competition could lower gross margins if our average selling prices decrease faster than our costs and could also result in lost sales.

Our business depends upon consumer products.

             In 1999 and the first nine months of 2000, we received more product revenue and shipped more units of products destined for consumer electronics applications, principally digital cameras, than for any other application. We believe that these products will encounter intense competition and be more price sensitive than products sold into our other target markets. In addition, we must spend more on marketing and promotion in consumer markets to establish brand name recognition and preference.

             A significant portion of sales to the consumer electronics market is made through distributors and to retailers. Sales through these channels typically include rights to return unsold inventory. As a result, we do not recognize revenue until after the product has been sold to the end user. If our distributors and retailers are not successful in this market, there could be substantial product returns, which would harm our business, financial condition and results of operations.

Sales to a small number of customers represent a significant portion of our revenues.

             More than half of our revenues come from a small number of customers. For example in the first nine months of 2000, sales to our top 10 customers accounted for approximately 49% of our product revenues. In fiscal 1999, sales to our top 10 customers represented 57% of our product revenues, with sales to one customer accounting for more than 10% of product sales. If we were to lose any of these customers or experience any material reduction in orders from these customers, our revenues and operating results would suffer. Our sales are generally made by

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standard purchase orders rather than long-term contracts. In addition, the composition of our major customer base changes from year to year as the market demand for our customers’ products change.

Our multiple sales channels may compete for a limited number of customer sales.

             Web based sales of our products today represent a small but growing portion of our overall sales. Sales on the Internet tend to undercut the traditional distribution channels and may dramatically change the way our consumer products are purchased in future years. We cannot assure you that we will successfully manage the inherent channel conflicts between our retail channel customers and customers that wish to purchase directly on the Internet.

There may be seasonality in our business.

             Sales of our products, in particular the sale of CompactFlash products, in the consumer electronics applications market may be subject to seasonality. As a result, product sales may be impacted by seasonal purchasing patterns with higher sales generally occurring in the second half of each year. In addition, in the past we have experienced a decrease in orders in the first quarter from our Japanese OEM customers primarily because most customers in Japan operate on a fiscal year ending in March and prefer to delay purchases until the beginning of their next fiscal year. For example, our product revenues were 24% lower in the first quarter of 1998 than in the fourth quarter of 1997, mostly due to these seasonal factors. Although we did not experience this seasonality in the first quarter of 2000, we cannot assure you that we will not experience seasonality in the future.

We must achieve acceptable wafer manufacturing yields.

             The fabrication of our products requires wafers to be produced in a highly controlled and ultra clean environment. Semiconductor companies that supply our wafers sometimes have experienced problems achieving acceptable wafer manufacturing yields. Semiconductor manufacturing yields are a function of both our design technology and the foundry’s manufacturing process technology. Low yields may result from design errors or manufacturing failures. Yield problems may not be determined or improved until an actual product is made and can be tested. As a result, yield problems may not be identified until the wafers are well into the production process. The risks associated with yields are even greater because we rely on independent offshore foundries for our wafers which increases the effort and time required to identify, communicate and resolve manufacturing yield problems. If the foundries cannot achieve th e planned yields, this will result in higher costs and reduced product availability, and could harm our business, financial condition and results of operations.

             Under the terms of our definitive agreement with Toshiba, SanDisk and Toshiba formed FlashVision LLC, a joint venture which will equip and operate a silicon wafer manufacturing line in Virginia (the Dominion facility) to manufacture 512 megabit and 1 gigabit flash memory chips. However, we cannot assure you that this manufacturing line will produce satisfactory quantities of wafers with acceptable prices, reliability and yields. Any failure in this regard could materially harm our business, financial condition and results of operations. In addition, the construction and operation of this line will cause us to incur significant expense and may result in the diversion of resources from other important areas of our business. We cannot assure you that we or Toshiba will be able to secure sufficient funding to support this manufacturing line. In addition, we have no experience in operating a wafer ma nufacturing line and we intend to rely on the existing manufacturing organization at the Dominion facility. This organization will be trained in NAND flash manufacturing by Toshiba, but we cannot assure you that they will be successful in manufacturing these advanced NAND flash products on a cost-effective basis or at all. We are committed to purchase 50% of the output from the Dominion facility, and therefore, should the customer demand for NAND flash products be below our available supply, our results of operations could be adversely affected. Furthermore, in order for us to sell NAND based CompactFlash, MultiMediaCards and Secure Digital Memory Cards, we will have to develop new controllers, printed circuit boards and test algorithms because the architecture of NAND flash is significantly different from our current NOR flash designs. Any delays in the development of these elements could prevent us from taking advantage of the available NAND output and could adversely affect our results of operations.

Risks associated with patents, proprietary rights and related litigation.

General

             We rely on a combination of patents, trademarks, copyright and trade secret laws, confidentiality procedures and licensing arrangements to protect our intellectual property rights. In the past, we have been involved in

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significant disputes regarding our intellectual property rights and claims that we may be infringing third parties’ intellectual property rights. We expect that we may be involved in similar disputes in the future. We cannot assure you that:

• any of our existing patents will not be invalidated;

• patents will be issued for any of our pending applications;

• any claims allowed from existing or pending patents will have sufficient scope or strength;

• our patents will be issued in the primary countries where our products are sold in order to protect our rights and potential commercial advantage; or

• any of our products may infringe on the patents of other companies.

             In addition, our competitors may be able to design their products around our patents.

             We intend to vigorously enforce our patents but we cannot be sure that our efforts will be successful. If we were to have an adverse result in any litigation, we could be required to pay substantial damages, cease the manufacture, use and sale of infringing products, expend significant resources to develop non-infringing technology, discontinue the use of certain processes or obtain licenses to the infringing technology. Any litigation is likely to result in significant expense to us, as well as divert the efforts of our technical and management personnel. For example, the Lexar litigation described below has resulted in cumulative litigation expenses of approximately $4.3 million.

Cross-licenses and indemnification obligations

             If we decide to incorporate third party technology into our products or if we are found to infringe on others’ intellectual property, we could be required to license intellectual property from a third party. We may also need to license some of our intellectual property to others in order to enable us to obtain cross-licenses to third party patents. Currently, we have patent cross-license agreements with several companies, including Hitachi, Intel, Samsung, Sharp, SST, SmartDisk, TDK and Toshiba and we are in discussions with other companies regarding potential cross-license agreements. We cannot be certain that licenses will be offered when we need them, or that the terms offered will be acceptable. If we do obtain licenses from third parties, we may be required to pay license fees or royalty payments. In addition, if we are unable to obtain a license that is necessary to the manufacture of our produ cts, we could be required to suspend the manufacture of products or stop our wafer suppliers from using processes that may infringe the rights of third parties. We cannot assure you that we would be successful in redesigning our products or that the necessary licenses will be available under reasonable terms.

             We have historically agreed to indemnify various suppliers and customers for alleged patent infringement. The scope of such indemnity varies, but may, in some instances, include indemnification for damages and expenses, including attorney’s fees. We may periodically engage in litigation as a result of these indemnification obligations. We are not currently engaged in any such indemnification proceedings. Our insurance policies exclude coverage for third party claims for patent infringement. Any future obligation to indemnify our customers or suppliers could harm our business, financial condition or results of operations.

Litigation risks associated with our intellectual property

             From time to time, it may be necessary to initiate litigation against third parties to preserve our intellectual property rights. These parties could in turn bring suit against us. In March 1998, we sued Lexar in the Northern District of California alleging that Lexar’s CompactFlash and PC Cards infringe our U.S. Patent No. 5,602,987 (“‘987 Patent”). Lexar disputed this claim and asserted various counter claims, including unfair competition, violation of the Lanham Act, patent misuse, interference with prospective economic advantage, trade defamation, unenforceability and fraud. On November 14, 2000, in resolution of these actions, Lexar stipulated that SanDisk’s ‘987 Patent is valid and infringed by Lexar’s current CompactFlash and PC Cards. Lexar will make a lump sum payment of $8.0 million for royalties due on the ‘987 Patent, through March 31, 2001. Subject to L exar’s representations and warranties relating to Lexar’s newly designed CompactFlash and PC Cards, SanDisk has stipulated that these designs do not infringe SanDisk’s ‘987 Patent. Lexar entered into a 4% royalty-bearing license agreement for certain Lexar products that may use the ‘987 Patent beyond March 31, 2001. SanDisk and Lexar have

27

agreed to dismiss with prejudice all pending claims of patent infringement and counterclaims involving claims of false advertising, unfair competition and patent misuse.

             In September 2000, Lexar sued SanDisk in the District of Delaware alleging that our SmartMedia products infringe Lexar’s United States Patent No. 5,479,638 (“‘638 Patent”). In resolution of this action, we will pay Lexar a lump sum payment of $2.0 million for a fully-paid up license for use of the ‘638 Patent in SmartMedia products.

             Under the settlement, Lexar has provided us with an option for a royalty bearing license to its patents for use in certain future products.

             SanDisk and Lexar have agreed to resolve any future disputes relating to the use by Lexar of the ‘987 Patent through binding arbitration. We have also agreed that for a period of seven years, neither SanDisk nor Lexar shall seek injunctive relief against the other in any patent lawsuit. However, at all times, we retain the right to seek injunctive relief to enforce the payment of royalties pursuant to an arbitrator’s ruling.

             On March 21, 2000, Mitsubishi Denki Co. Ltd. (Mitsubishi Electric) filed a complaint in Tokyo District Court against SanDisk K.K., SanDisk’ s wholly-owned subsidiary in Japan. The complaint alleges that SanDisk K.K., based in Yokohama, Japan, infringes on three Mitsubishi Japanese patents. The Mitsubishi patents in question are #JP2099342, #JP2129071 and # JP2138047. Based on preliminary information, we believe that these patents are related primarily to the mechanical construction of memory cards built with a separate connector. In the complaint, Mitsubishi asked the court for a preliminary injunction halting the sale of our CompactFlash and flash ATA memory cards in Japan. SanDisk and SanDisk K.K. will vigorously defend itself against Mitsubishi’s claims. From time to time, we have been contacted by various parties who have alleged that certain of our products infringe on patents that such parties claim to hold. To date no legal actions have been filed in connection with any such infringement, other than as discussed above.

             In the event of an adverse result in any such litigation, we could be required to pay substantial damages, cease the manufacture, use and sale of infringing products, expend significant resources to develop non-infringing technology or obtain licenses to the infringing technology, or discontinue the use of certain processes. Litigation frequently involves substantial expenditures and can require significant management attention, even if we ultimately prevail. In addition, the results of any litigation matters are inherently uncertain. Accordingly, there can be no assurance that any of the foregoing matters, or any future litigation, will not have a material adverse effect on our business, financial condition and results of operations.

Our rapid growth may strain our operations.

             We are currently experiencing rapid growth which has placed and continues to place, a significant strain on our personnel and other resources. To accommodate this growth, we must continue to hire, train, motivate and manage our employees. We are having difficulty hiring the necessary engineering, sales, marketing and finance personnel to support our growth. In addition, we must make a significant investment in our existing internal information management systems to support increased manufacturing, as well as accounting and other management related functions. Our systems, procedures and controls may not be adequate to support our rapid growth, which could in turn harm our business, financial condition and results of operations.

Our success depends on key personnel, including our executive officers, the loss of whom could disrupt our business.

             Our success greatly depends on the continued contributions of our senior management and other key research and development, sales, marketing and operations personnel, including Dr. Eli Harari, our founder, President and Chief Executive Officer. Our success will also depend on our ability to recruit additional highly skilled personnel. We cannot assure you that we will be successful in hiring or retaining such key personnel, or that any of our key personnel will remain employed with us.

Anti-takeover provisions in our charter documents, stockholder rights plan and in Delaware law could prevent or delay a change in control and, as a result, negatively impact our stockholders.

             We have taken a number of actions that could have the effect of discouraging a takeover attempt. For example, we have adopted a stockholder rights plan that would cause substantial dilution to a stockholder who attempts to acquire us on terms not approved by our board of directors. In addition, our certificate of incorporation

28

grants the board of directors the authority to fix the rights, preferences and privileges of and issue up to 4,000,000 shares of preferred stock without stockholder action. Although we have no present intention to issue shares of preferred stock, such an issuance could have the effect of making it more difficult and less attractive for a third party to acquire a majority of our outstanding voting stock. Preferred stock may also have other rights, including economic rights senior to the common stock that could have a material adverse effect on the market value of the common stock. In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law. This section provides that a corporation shall not engage in any business combination with any interested stockholder during the three-year period following the time that such stockholder becomes an interested stockholder. This provision could have the effect of delaying or preventi ng a change of control of SanDisk.

Our stock price has been, and may continue to be, volatile.

             The market price of our stock has fluctuated significantly in the past and is likely to continue to fluctuate in the future. For example, in the twelve month period ended September 30, 2000, our stock price has fluctuated from a low of $18.875 to a high of $169.625. We believe that such fluctuations may continue as a result of future announcements concerning us, our competitors or principal customers regarding technological innovations, new product introductions, governmental regulations, litigation or changes in earnings estimates by analysts. In addition, in recent years the stock market has experienced significant price and volume fluctuations and the market prices of the securities of high technology companies have been especially volatile, often for reasons outside the control of the particular companies. These fluctuations as well as general economic, political and market conditions may have an adverse affect on the market price of our common stock.

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

             Please refer to the Company’s Form 10-K for the year ended December 31, 1999.

29

PART II. OTHER INFORMATION

Item 1.   Legal Proceedings

             The information required by this item is set forth in Note 6 of the Notes to the Condensed Consolidated Financial Statements on pages 7 to 8 and under “Factors That May Affect Future Results – Risks Associated with Patents, Proprietary Rights and Related Litigation” on pages 27 to 28 of this Form 10-Q for the quarterly period ended September 30, 2000, and is incorporated herein by reference.

Item 2.   Changes in Securities

             None

Item 3.   Defaults upon Senior Securities

             None

Item 4.   Submission of Matters to a Vote of Security Holders

             None

Item 5.   Other Information

             None

Item 6.   Exhibits and Reports on Form 8-K

        A.  Exhibits

Exhibit Number	Exhibit Title
3.1	Certificate of Incorporation of the Registrant, as amended to date.(2),(13)
3.2	Form of Amended and Restated Certificate of Incorporation of the Registrant.(2)
3.3	Bylaws of the Registrant, as amended.(2)
3.4	Form of Amended and Restated Bylaws of the Registrant.(2)
3.5	Certificate of Designation for the Series A Junior Participating Preferred Stock, as filed with the Delaware Secretary of State on April 24, 1997.(4)
4.1	Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4.(2)
4.3	Amended and Restated Registration Rights Agreement, among the Registrant and the investors and founders named therein, dated March 3, 1995.(2)
4.5	Series F Preferred Stock Purchase Agreement between Seagate Technology, Inc. and the Registrant dated January 15, 1993.(2)
4.8	Rights Agreement, dated as of April 18, 1997, between the Company and Harris Trust and Savings Bank.(4)
4.9	First Amendment to Rights Agreement dated October 22, 1999, between Harris Trust and the Registrant.(11)
9.1	Amended and Restated Voting Agreement, among the Registrant and the investors named therein, dated March 3, 1995.(2)
10.10	License Agreement between the Registrant and Dr. Eli Harari, dated September 6, 1988.(2)
10.13	1989 Stock Benefit Plan.(2)
10.14	1995 Stock Option Plan.(2)
10.15	Employee Stock Purchase Plan.(2)
10.16	1995 Non-Employee Directors Stock Option Plan.(2)
10.18	Lease Agreement between the Registrant and G.F. Properties, dated March 1, 1996.(3)
10.21	Amendment to Lease Agreement between the Registrant and G.F. Properties, dated April 3, 1997.(5)
10.23	Foundry Venture Agreement between the Registrant and United Microelectronics Corporation, dated June 27, 1997.(1),(6)

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10.24	Written Assurances Re: Foundry Venture Agreement between the Registrant and United Microelectronics Corporation, dated September 13, 1995.(1), (6)
10.25	Side Letter between Registrant and United Microelectronics Corporation, dated May 28, 1997.(1), (6)
10.27	Clarification letter with regards to Foundry Venture Agreement between the Registrant and United Microelectronics Corporation dated October 24, 1997.(7)
10.28	Lease Agreement between the Registrant and G.F. Properties, dated June 10, 1998.(8)
10.29	Trade Finance Agreement between the Registrant and Union Bank of California, dated July 15, 1998.(9)
10.30	1995 Stock Option Plan Amended and Restated as of December 17, 1998.(12)
10.31	1995 Non-Employee Directors Stock Option Plan Amended and Restated as of December 17, 1998.(12)
10.32	1995 Employee Stock Purchase Plan Amended and Restated as of December 17, 1998. (12)
10.33	Master Agreement, dated as of May 9, 2000, by and among the Registrant, Toshiba Corporation and Semiconductor North America, Inc.(13),(+)
10.34	Operating Agreement dated as of May 9, 2000, by and between the Registrant and Semiconductor North America, Inc.(13)
10.35	Common R&D and Participation Agreement, dated as of May 9, 2000, by and between the Registrant and Toshiba Corporation.(13),(+)
10.36	Product Development Agreement, dated as of May 9, 2000, by and between the Registrant and Toshiba Corporation.(13),(+)
10.37	Share Purchase Agreement, dated as of July 4, 2000, by and between the Registrant and Tower Semiconductor Ltd.(*)
10.38	Escrow Agreement, dated as of August 14, 2000, by and between the Registrant, Tower Semiconductor Ltd. and Union bank of California, N.A.(*)
10.39	Additional Purchase Obligation Agreement, dated as of July 4, 2000, by and between the Registrant and Tower Semiconductor Ltd.(*)
10.40	Shareholders Agreement, dated as of July 4, 2000, by and between the Registrant and the Israel Corporation.(*)
10.41	Definitive Agreement to Form Vending Business, dated August 7, 2000, by and between the Registrant and Photo-Me International, Plc.(*),(+)
10.42	Non-Solicitation Agreement, dated August 7, 2000, by and between the Registrant, DigitalPortal Inc. and Photo-Me International, Plc.(*),(+)
10.43	Exclusive Product Purchase Agreement, dated as of August 7, 2000, by and between Photo-Me, International Plc., and DigitalPortal Inc. (*),(+)
10.44	Stockholders’ Agreement, dated as of August 7, 2000, by and among the Registrant, DigitalPortal Inc. and Photo-Me, International, Plc.(*),(+)
10.45	Bylaws of DigitalPortal Inc.(*),(+)
21.1	Subsidiaries of the Registrant. (10)
27.1	Financial Data Schedule for the quarter ended September 30, 2000. (In EDGAR format only)(*)

______________

   *   Filed herewith.

   1.   Confidential treatment granted as to certain portions of these exhibits.

   2.   Previously filed as an Exhibit to the Registrant’s Registration Statement on Form S-1 (No. 33-96298).

   3.   Previously filed as an Exhibit to the Registrant’s 1995 Annual Report on Form 10-K.

   4.   Previously filed as an Exhibit to the Registrant’s Current Report on Form 8-K/A dated April 18, 1997.

   5.   Previously filed as an Exhibit to the Registrant’s Form 10-Q for the quarter ended June 30, 1997.

   6.   Previously filed as an Exhibit to the Registrant’s Current Report on form 8-K dated October 16, 1997.

   7.   Previously filed as an Exhibit to the Registrant’s Form 10-Q for the quarter ended September 30, 1997.

   8.   Previously filed as an Exhibit to the Registrant’s Form 10-Q for the quarter ended June 30, 1998.

   9.   Previously filed as an Exhibit to the Registrant’s Form 10-Q for the quarter ended September 30, 1998.

   10.   Previously filed as an Exhibit to the Registrant’s Annual Report on Form 10-K.

   11.   Previously filed as an Exhibit to the Registrant’s Current Report on Form 8-K dated January 1, 1999.

   12.   Previously filed as an Exhibit to the Registrant’s Form 10-Q for the quarter ended March 31, 1999.

   13.   Previously filed as an Exhibit to the Registrant’s Form 10-Q for the quarter ended June 30, 2000,

   +   Confidential treatment has been requested for certain portions thereof.

31

        B.  Reports on Form 8-K

             During the quarter ended September 30, 2000, we filed a Current Report on Form 8-K dated July 17, 2000 reporting our collaboration with Toshiba and our investment in Tower Semiconductor.

32

SIGNATURES

             Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

		SANDISK CORPORATION (Registrant)
Dated:   November 15, 2000	By:	/s/  Frank Calderoni
		Frank A. Calderoni Senior Vice President, Finance and Administration and Chief Financial Officer (On behalf of the Registrant and as Principal Financial Officer.)

33
EX-10.37 2 ex10-37.htm EXHIBIT 10-37

EXHIBIT 10.37

SHARE PURCHASE AGREEMENT

             This Share Purchase Agreement (“Agreement”) is made as of July 4, 2000, by SanDisk Corporation, a Delaware corporation (“Buyer”), and Tower Semiconductor Ltd., an Israeli corporation (the “Company”).

RECITALS

             The Company desires to sell, and Buyer desires to purchase, an interest in the Company through the acquisition of 866,551 ordinary shares, par value NIS1.00 each (the “Shares”) of the Company and through the issuance and delivery of Addtional Purchase Obligations for the purchase by Buyer of additional Ordinary Shares of the Company, on the terms and subject to the conditions set forth in this Agreement and in the Addtional Purchase Obligation Agreement in the form of Exhibit B hereto.

             NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and for other good and valuable consideration the receipt and adequacy of which are hereby acknowledged, the parties agree as follows:

1.  Definitions

        For purposes of this Agreement, the following terms have the meanings specified or referred to in this Section 1:

        “Additional Financings” – as defined in Section 3.5.

        “Additional Financing Plan” – a detailed written plan, approved by the Board and detailing, among other things, the significant financial terms and timetable under which the Company will obtain the financings listed in Section 7.6 hereto, all as set forth in Section 10 to the Business Plan.

        “Ancillary Agreements” – as defined in Section 3.2.4.

        “Applicable Contract”- any Contract (a) under which the Company or any Subsidiary has or may acquire any rights, (b) under which the Company or any Subsidiary has or may become subject to any obligation or liability, or (c) by which the Company or any Subsidiary or any of the assets owned or used by them is or may become bound.

        “Assets” – as defined in Section 3.6.

        “Balance Sheet”- as defined in Section 3.4.2.

        “Business Plan” means the Business Plan, dated July 4, 2000, of the Company with respect to the proposed construction, deployment and operation by the Company of Fab 2.

        “Buyer”- as defined in the first paragraph of this Agreement.

        “Closing”- as defined in Section 2.3.

        “Closing Date”- the date and time as of which the Closing actually takes place.

        “Company”- as defined in the first paragraph of this Agreement.

        “Consent”- any approval, consent, ratification, waiver, or other authorization (including any Governmental Authorization).

        “Contemplated Transactions”- all of the transactions contemplated by this Agreement, the Transaction Documents and the Ancillary Agreements.

        “Contract”- any agreement, contract, obligation, promise, or undertaking whether oral or written that is legally binding.

        “Damages”- as defined in Section 10.2.

        “Encumbrance”- any charge, claim, community property interest, condition, equitable interest, lien, option, pledge, security interest, right of first refusal, or restriction of any kind, including any restriction on use, voting, transfer, receipt of income, or exercise of any other attribute of ownership.

        “Escrow Agreement”- as defined in Section 2.4.

        “Escrow Agent”- as defined in the Escrow Agreement.

        “Exchange Act” means the U.S. Securities Exchange Act of 1934, as amended, and any rules or regulations issued pursuant to that Act or any successor law.

        “Excluded Securities” means Ordinary Shares or options to purchase Ordinary Shares issued to bona fide employees, directors or consultants of the Company or any Subsidiary thereof.

        “Fab 2” – The Company’s new Fab project to be constructed in Migdal Haemek in Israel, all as further set forth in the Business Plan.

        “Facilities”- any real property, leaseholds, or other interests currently owned or operated by the Company and any buildings, plants, structures, or equipment currently owned or operated by the Company.

        “GAAP”- generally accepted Israel accounting principles, applied on a basis consistent with the basis on which the Balance Sheet and the other financial statements referred to in Section 3.4 were prepared.

        “Governmental Authorization”- any approval, consent, license, permit, waiver, or other authorization issued, granted, given, or otherwise made available by or under the authority of any Governmental Body or pursuant to any Legal Requirement.

        “Governmental Body”- any U.S. or Israeli federal, state, local, municipal or other government, governmental or quasi-governmental authority of any nature (including any governmental agency, branch, department, official or entity and any court or other tribunal), or body exercising or entitled to exercise any administrative, executive, judicial, legislative, police, regulatory or taxing authority or power of any nature.

        “Intellectual Property Assets” - as defined in Section 3.20.

        “Interim Balance Sheet”- as defined in Section 3.4.2.

        “Investment Center” – the Investment Center of the Ministry of Trade and Commerce of the Israeli Government.

        “Knowledge” or “knowledge”- a person will be deemed to have “Knowledge” or “knowledge” of a particular fact or other matter if any individual who is serving as a Named Director or Officer has, or at any time had, knowledge of such fact or other matter.

        “Legal Requirement”- any U.S. or Israeli federal, state, local, municipal or administrative or other order, constitution, law, ordinance, principle of common law, regulation, statute, or treaty.

        “Named Officers and Directors”- as defined in Section 3.3.2.

        “OCS” – as defined in Section 3.21.

        “Order”- any award, decision, injunction, judgment, order, ruling, subpoena, or verdict entered, issued, made, or rendered by any court, administrative agency, or other Governmental Body or by any arbitrator.

        “Ordinary Course of Business”- an action taken by a Person will be deemed to have been taken in the “Ordinary Course of Business” only if:

Such action is consistent with the past practices of such Person and is taken in the ordinary course of the normal day-to-day operations of such Person; and

        Such action is similar in nature and magnitude to actions customarily taken in the ordinary course of the normal day-to-day operations of other Persons that are in the same line of business as such Person.

        “Ordinary Shares” – the ordinary shares of the Company, par value NIS1.00 per share.

        “Organizational Documents”- (a) the memorandum of association, articles of association, certificate of incorporation and/or the bylaws of a corporation; (b)  the partnership agreement and any statement of partnership of a general partnership; (c) the limited partnership agreement and the certificate of limited partnership of a limited partnership; (d) any charter or similar document adopted or filed in connection with the creation, formation, or organization of a Person; and (e) any amendment to any of the foregoing.

        “Person”- any individual, corporation (including any non-profit corporation), general or limited partnership, limited liability company, joint venture, estate, trust, association, organization, labor union, or other entity or Governmental Body.

        “Proceeding”- any action, arbitration, audit, hearing, investigation, litigation, or suit (whether civil, criminal, administrative, investigative, or informal) commenced, brought, conducted, or heard by or before, or otherwise involving, any Governmental Body or arbitrator.

        “Representative”- with respect to a particular Person, any director, officer, employee, agent, consultant, advisor, or other representative of such Person, including legal counsel, accountants, and financial advisors.

        “Schedule” means a schedule comprising part of the disclosure schedule delivered by the Company to Buyer concurrently with the execution and delivery of this Agreement.

        “Securities Act”- the U.S. Securities Act of 1933 as amended, and regulations and rules issued pursuant to that Act or any successor law.

        “Shares”- as defined in the Recitals of this Agreement.

        “Steering Committee” – a committee to be formed immediately upon the signing of this Agreement and dissolved upon the Closing and comprised of three members including one representative of each of the Buyer, TIC and the Company, none of whom needs to be a member of the Board. The Steering Committee shall oversee the development, assessment and implementation, and, if applicable, any modification of the Business Plan as specified in Sections 5.6.5 of this Agreement. The Steering Committee shall not be deemed to be a committee of the Board and its members shall not have a fiduciary duty to the Company. The Steering Committee shall consider, in making decisions pursuant to Sections 5.6.5 and 7.3 hereunder, (a) the construction schedule of Fab 2 as set forth in the Business Plan and any changes thereto, (b) the Additional Financing Plan as set forth in the Business Plan and any failure to comply with the schedule for such f inancings or changes to the Additional Financing Plan, (c) any significant increase in the cost of Fab 2 beyond that set forth in the Business Plan and (d) the production capacity schedule of Fab 2 as set forth in the Business Plan and any changes thereto.

        “Subsidiary”- any corporation or other Person of which securities or other interests having the power to elect a majority of that corporation’s or other Person’ s board of directors or similar governing body, or otherwise having the power to direct the business and policies of that corporation or other Person (other than securities or other interests having such power only upon the happening of a contingency that has not occurred) are held by the Company or one or more of its Subsidiaries.

        “Tax Return”- any return (including any information return), report, statement, schedule, notice, form, or other document or information filed with or submitted to, or required to be filed with or submitted to, any Governmental Body in connection with the determination, assessment, collection, or payment of any Tax or in connection with the administration, implementation, or enforcement of or compliance with any Legal Requirement relating to any Tax.

        “TIC”- The Israel Corporation Ltd.

        “Threatened”- a claim, Proceeding, dispute, action, or other matter will be deemed to have been “Threatened” if either (a) any demand or statement has been made in writing or any notice has been given in writing or any other event has occurred or any other circumstance exists, that actually leads any Named Officer and Director to believe that such a claim, will be filed or otherwise pursued in the future or (b) any demand or statement has been made orally or any notice has been given orally to the effect that such a claim, Proceeding, dispute, action or other matter will be asserted, commenced, taken or otherwise pursued in the future.

3

        “Transaction Documents” – collectively, the Foundry Agreement, the Addtional Purchase Obligation Agreement, the Escrow Agreement (all as defined in Section 2.4), the Shareholders Agreement and the Registration Rights Agreement (as defined in Section 2.5.1.5.).

         “Wafer Partner” – a wafer manufacturer that either invests in the equity of the Company and enters into an agreement with the Company providing for a wafer order right or that enters into a wafer manufacturing agreement with the Company on a “take or pay” basis or on a “pre-payment” basis, in each case in accordance with the provisions of Sections 7.6(ii) and 7.7 hereof.

        “Additional Purchase Obligations” – Conditional obligations to purchase Ordinary Shares of the Company issued under the Additional Purchase Obligation Agreement.

        Additional Defined Terms

6K Reports	Section 3.4.1	Material Adverse Effect	Section 3.1.1
Additional Incentive Plans	Section 1.14	Offered Securities	Section 11.8.1
Additional Purchase Obligation Agreement	Section 2.4	Patents	Section 3.20.1
Additional Purchase Obligation Shares	Section 2.4	Project Committee	Section 11.4
Additional Wafer Partner Financing Date	Section 7.6	Pro Rata Share	Section 11.8.1
Annual Report	Section 3.4.1	Purchase Price	Section 2.2
Articles	Section2.5.1.2	Registration Right Agreement	Section 2.5.1.5
Board	Section 2.4	Rights in Mask Works	Section 3.10.1
Copyrights	Section 3.20.1	SEC	Section 3.4.1
Debt Financing Term Sheet	Section 5.6.4	Shareholders Agreement	Section 2.5.1.5
Environmental Study	Section 3.5.1	SEC Documents	Section 3.4.1
Executed Transaction Documents	Section 3.2.1	Steering Committee	Section 5.10
Grants	Section 3.2.1	Taxes
Indemnified Persons	Section 10.2	Toshiba Agreement	Section 3.2.3
Foundry Agreement	Section 2.4	Wafer Commitments	Section 7.7
Marks	Section3.20.1	Wafer Partner Differential	Section 7.6

2.  Sale and Transfer of Shares; Purchase Price; Closings

        2.1.  Delivery. Subject to the terms and conditions of this Agreement, at the Closing, the Company shall issue to the Buyer the Shares, validly authorized, duly issued, fully paid and nonassesable entitled to all rights and privileges assigned to such Shares in this Agreement and in the Articles and free of any Encumbrances (other than arising solely by or through actions of Buyer), in consideration for the release of the Purchase Price (as defined below) from the Escrow Agent to the Company.

        2.2.  Purchase Price. The per share purchase price will be $23.08 (all references herein to “$” are to United States dollars) representing an aggregate purchase price (the “Purchase Price”) for the Shares of $20,000,000. Within 14 days of the execution of this Agreement, the Purchase Price will be deposited in escrow pursuant to the terms and conditions of the Escrow Agreement with an escrow agent to be appointed by the parties. At the Closing, subject to the fulfillment or waiver of all closing conditions hereto, the Purchase Price will be released from escrow to the Company all in accordance with the terms and conditions of this Agreement and the Escrow Agreement and all interest accrued with respect to the Purchase Price during the escrow period will be released to the Company.

        2.3.  Closing. The closing provided for in this Agreement (the “ Closing”) will take place at the offices of Meitar, Liquornik, Geva & Co. at 16 Abba Hillel Silver Road, Ramat Gan, 52506, Israel at 10:00 a.m. (local time) on the date that is seven days following satisfaction of all the conditions specified in Sections 7 and 8, unless the parties otherwise agree, provided that the Closing may not, in any event, take place after January 31, 2001, unless the parties otherwise agree. In the event that the Closing fails to take place by January 31, 2001, or such later

4

date as the parties may agree, or otherwise terminates pursuant to section 9.1, then all interest accrued with respect to the Purchase Price and the Purchase Price shall be retained by Buyer.

        2.4.  Other Agreements; Company’s Resolutions. Concurrently with the execution of this Agreement, (a) the parties hereto are executing and entering into the Foundry Agreement in the form of Exhibit A hereto (the “Foundry Agreement”) and the Addtional Purchase Obligation Agreement in the form of Exhibit B hereto (the “Addtional Purchase Obligation Agreement”), each of which shall provide that they shall only be effective upon the Closing, (b) the Company is delivering to the Buyer certified resolutions of the Company’s board of directors (the “Board”) authorizing and approving the execution, delivery and performance of the Transaction Documents and the consummation of the Contemplated Transactions, including without limitation, the issuance of the Shares to the Buyer and all shares issuable upon exercise of the Addtional Purchase Obligations under the Addtional Purchase Obligatio n Agreement (the “Addtional Purchase Obligation Shares”) (subject, in relation to the issuance of the Shares and the Addtional Purchase Obligation Shares, to Company shareholder approval pursuant to a general meeting of the Company) and (c) the Company is delivering to the Buyer a certificate dated the date hereof signed by the co-Chief Executive Officer of the Company identified in Schedule 7.15 to the effect set forth in Section 7.15. The parties shall enter into the Escrow Agreement in the form of Exhibit C hereto (the “Escrow Agreement”) within 14 days of the date hereof. Buyer and TIC will execute and enter into the Shareholders Agreement in the form of Exhibit D hereto (the “Shareholders Agreement”) within 14 days of the date hereof.

        2.5.  Closing Obligations. At the Closing:

              2.5.1.  The Company will deliver to Buyer:

                     2.5.1.1.  Certified copies of resolutions of the Company’s shareholders relating to, among other things, an increase in the Company’s registered share capital and the issuance of the Shares and the Addtional Purchase Obligation Shares, and the Board authorizing and approving the Ancillary Agreements and the transactions contemplated therein;

                     2.5.1.2.  Certified copies of the Company’s Articles of Association (the “ Articles”) as amended through the Closing Date;

                     2.5.1.3.  A certificate duly executed by two executive officers of the Company in the form set forth in Schedule 2.5.1.3, dated as of the date of the Closing;

                     2.5.1.4.  The opinion of Yigal Arnon & Co., counsel to the Company, in the form reasonably satisfactory to Buyer and its counsel to be attached hereto as Schedule 2.5.1.4, dated as of the date of the Closing;

                     2.5.1.5.  Executed copies of the Registration Rights Agreement substantially in the form of Exhibit E hereto (the “Registration Rights Agreement”), which shall provide an equal number of Demand Rights (as defined in such agreement) to Buyer and TIC.

                     2.5.1.6.  Validly executed certificates representing the Shares, issued in the name of the Buyer and a certificate of the secretary of the Company confirming that the Shares were registered in the share register of the Company in the name of Buyer;

                     2.5.1.7.  Copies of documents evidencing all Consents and approvals required under Section 7.3 hereof;

                     2.5.1.8.  Copies of all the Ancillary Agreements duly executed and delivered and in accordance with Section 7 hereof;

                     2.5.1.9.  The written consent of the OCS and the Investment Center to the execution of this Agreement and the issuance of the Shares to the Buyer.

                     2.5.1.10.  The certificate required to be delivered under Section 7.15 hereof.

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              2.5.2.  Buyer will deliver to the Company:

                     2.5.2.1.  A copy of a letter from Buyer to the Escrow Agent irrevocably authorizing the release of the Purchase Price to the account of the Company pursuant to the terms of the Escrow Agreement;

                     2.5.2.2.  A certificate duly executed by two executive officers of Buyer in the form set forth in Schedule 2.5.2.2, dated as of the date of the Closing.

                     2.5.2.3.  Executed copies of the Shareholders Agreement and the Registration Rights Agreement .

3.  Representations and Warranties of the Company

        The Company hereby represents and warrants to Buyer as of the date hereof and as of the Closing and as otherwise provided in the Addtional Purchase Obligation Agreement as follows:

        3.1.  Organization and Good Standing

              3.1.1.  The Company and each Subsidiary is a corporation duly organized, validly existing, and in good standing under the laws of its jurisdiction of incorporation, with full corporate power and authority to conduct its business as it is now being conducted and as currently approved by the Board to be conducted in the future and to own or use its properties and assets. The Company has all requisite corporate power to perform all its obligations under Applicable Contracts including, but not limited to, the Ancillary Agreements, subject, with respect to the issuance of the Shares and the Addtional Purchase Obligation Shares, to receipt of the shareholder resolutions referred to in Section 2.5.1.1. The Company and each Subsidiary is duly qualified to do business as a foreign corporation and is in good standing under the laws of each state or other jurisdiction in which either the ownership or use of the properties owned or used by it, or the nature of the activities conducted by it or proposed to be conducted by it, requires such qualification, unless such non-qualifications would not have a material adverse affect on the business, financial conditions, assets, operations and prospects of the Company and its Subsidiaries taken as a whole (a “Material Adverse Effect”). Schedule 3.1 contains a complete and accurate list for the Company and each Subsidiary of its name, its jurisdiction of incorporation, other jurisdictions in which it is authorized to do business, and its capitalization, including (i) in connection with each Subsidiary, the identity of each shareholder and the number of shares held by such shareholder, and (ii) in connection with the Company, the identity of each shareholder who to the knowledge of the Company holds more than 5% of the issued and outstanding share capital of the Company and the number of shares of the Company held by each such shareholders. Also enclose d in Schedule 3.1 is a copy of the list of shareholders maintained by the Company’s transfer agent as of a date within 5 days prior to the date hereof.

              3.1.2.  The Company has delivered to Buyer copies of (i) the Organizational Documents of the Company and each Subsidiary, as currently in effect, and (ii) minutes of all meetings of the directors and shareholders of the Company and each Subsidiary held since January 1, 1995 and all resolutions passed by the directors or shareholders since January 1, 1995.

        3.2.  Authority; No Conflict; Consents and Approvals

              3.2.1.  Each of this Agreement, the Addtional Purchase Obligation Agreement, the Addtional Purchase Obligations, the Escrow Agreement and the Foundry Agreement (the “Executed Transaction Documents”) has been duly authorized, executed and delivered by the Company (subject, with respect to the increase in the Company’s registered share capital and issuance of the Shares and the Addtional Purchase Obligation Shares, to receipt of shareholder approval by Closing) and, assuming the due execution and delivery hereof and thereof by Buyer, constitutes the legal, valid, and binding obligation of the Company, enforceable against the Company in accordance with its terms. Upon the execution and delivery by the Company of the Transaction Documents and the other Ancillary Agreements (where applicable), and assuming the due execution and delivery thereof by the other parties thereto, the Transaction Documents and the other Ancillary Agreements (where applicable) will constitute the legal, valid, and binding obligations of the Company, enforceable against the Company in accordance with their respective terms. The Company has the absolute and unrestricted right, power, authority, and capacity to execute and deliver this Agreement and the Transaction Documents and the other Ancillary Agreements (where applicable) and to perform its obligations under this Agreement, the Transaction Documents and the other Ancillary Agreements (where applicable) (subject, with respect to the issuance of the Shares and the Addtional Purchase Obligation Shares, to receipt of Company shareholder approval by Closing) and

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has taken all corporate action necessary to consummate the transactions contemplated hereby and thereby and to perform its obligations hereunder and thereunder.

              3.2.2.  Except as set forth in Schedule 3.2, neither the execution and delivery of this Agreement, any of the Transaction Documents or any of the other Ancillary Documents nor the consummation or performance of any of the foregoing is or will, directly or indirectly (with or without notice or lapse of time):

                     3.2.2.1.  contravene, conflict with, or result in a violation of (A) any provision of the Organizational Documents of the Company or any Subsidiary, or (B) any resolution adopted by the board of directors or the shareholders of the Company or any Subsidiary; or

                     3.2.2.2.  contravene, conflict with, or result in a violation of, or give any Governmental Body or other Person the right to challenge or to exercise any remedy or obtain any relief under, any Legal Requirement or any Order to which the Company or any Subsidiary, or any of the assets owned or used by the Company or any Subsidiary, may be subject, the breach of or default under which could have a Material Adverse Effect or could materially adversely affect the consummation of the Contemplated Transactions; or

                     3.2.2.3.  contravene, conflict with, or result in a violation of any of the terms or requirements of, or give any Governmental Body the right to revoke, withdraw, suspend, cancel, terminate or modify any Governmental Authorization that is held by the Company or any Subsidiary or that otherwise relates to the business of, or any of the assets owned or used by, the Company or any Subsidiary, the effect of which would have a Material Adverse Effect or materially adversely affect the consummation of the Contemplated Transactions; or

                     3.2.2.4.  contravene, conflict with, or result in a violation or breach of any provision of, or give any Person the right to declare a default or exercise any remedy under, or to accelerate the maturity or performance of, or to cancel, terminate, or modify, any Applicable Contract, the effect of which could have a Material Adverse Effect or materially adversely affect the consummation of the Contemplated Transactions; or

                     3.2.2.5.  result in the imposition or creation of any Encumbrance upon or with respect to any of the Asset owned or used by the Company or any Subsidiary, the effect of which could have a Material Adverse Effect or materially adversely affect the consummation of the Contemplated Transactions.

              3.2.3.  Except as set forth in Schedule 3.2.3, no notice to, filing with or Consent from any Person or Governmental Body is or will be required to be made or obtained in connection with the execution and delivery of (i) this Agreement, (ii) the Transaction Documents, (iii) the Technology License Agreement, effective April 7, 2000 between the Company and Toshiba Corporation (the “Toshiba Agreement”) and (iv) the Additional Incentive Plans (as defined in Section 7.14) or the consummation or performance of any of the transactions contemplated hereby or thereby.

              3.2.4.  To the best knowledge of the Company and based on the Company’s investigation as of the date hereof, except as set forth in Section 5.2 to the Business Plan and Schedule 3.2.3, no notice to, filing with or Consent from any Person or Governmental Body is or will be required to be made or obtained in connection with (a) the construction, deployment and operation of Fab 2 in accordance with the Business Plan, (b) the implementation of the Additional Financing Plan (as defined), provided that the representation made in this clause (b) is given to the actual Knowledge of the Company on the date hereof in respect of equity financings to be provided by Wafer Partners, and (c) the execution, delivery and performance of the agreements entered into or to be entered into by the Company in connection therewith (such agreements, together with the agreements referred to in clauses (i)- (iv) of Section 3.2.3, the “Ancillary Agreements”), other than, in respect of each of the foregoing clauses, notices, filings or Consents, the failure of which to be made or obtained would not, individually or in the aggregate have a material adverse affect on the construction and operation of Fab 2.

        3.3.  Capitalization; Issuance of Shares; Officers and Directors.

              3.3.1.  The authorized share capital of the Company, immediately prior to the Closing, including the proposed increase in share capital referred to in Section 2.4, will consist of 70,000,000 Ordinary Shares, of which 12,207,007 shares are issued and outstanding and 1,784,804 are reserved for issuance of outstanding options to employees, officers and directors and 1,615,500 are reserved for future grants of options to employees, officers and directors. All of the outstanding Ordinary Shares have been duly authorized and validly issued and are fully paid and nonassessable. Schedule 3.3 sets forth the list of the Company’s shareholders of record as maintained by the

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transfer agent and a list of all the options outstanding, the vesting schedules of such options and the exercise prices thereof. Except as set forth in Schedule 3.3, there are no Contracts relating to the issuance, or to the Knowledge of the Company, sale, transfer, or Encumbrance (other than arising solely by or through actions of Buyer) of any equity securities or securities convertible or exchangeable into equity securities of the Company. When the Shares shall have been issued and delivered to Buyer as part of the Closing, such Shares will: (i) have been duly authorized for issuance by the Company’s Board, (ii) upon delivery of the consideration therefor in accordance with the terms of this Agreement and the Escrow Agreement, be duly and validly issued, fully paid and nonassessable and (iii) be free and clear of any Encumbrances, and not the subject of any preemptive or other participation rights.

              3.3.2.  The Company’s and its Subsidiaries current officers and directors are those persons whose names are set forth in Schedule 3.3.2 (the “Named Officers and Directors”).

              3.3.3.  Neither the Company nor any Subsidiary has any agreement, obligation or commitment with respect to the election of any Person to the Company’s Board and/or any Subsidiary’s board of directors and to the actual knowledge of the Company, there is no voting agreement or other arrangement among the Company’s shareholders or the Subsidiaries’ shareholders, and there are no agreements or arrangements between any Person which affects or relates to the voting or giving written consents with respect to the Company’s or any Subsidiaries’ securities including with respect to the nomination of a director and/or officer of the Company and/or the Subsidiary.

              3.3.4.  There are no agreements, commitments and understandings, whether written or oral, with respect to any compensation to be provided by the Company and/or the Subsidiary to any of the Named Officers and Directors, and, to the best knowledge of the Company, to be provided by any third party to any of the Named Officers and Directors, except as set forth in Schedule 3.3.4.

              3.3.5.  Except as set forth in Schedule 3.3.5 (a) and in the Registration Rights Agreement to be entered into hereunder, the Company is not under any obligation to register for trading on any securities exchange any of its currently outstanding securities or any of its securities which may hereafter be issued. Since its incorporation there has been no declaration or payment by the Company of dividends, or any distribution by the Company of any assets of any kind to any of its shareholders in redemption of or as the purchase price for any of the Company’s securities except as set forth in Schedule 3.3.5 (b).

        3.4.  SEC Documents; Financial Statements

              3.4.1.  The Company has furnished to Buyer copies of the Company’s Annual Report on Form 20-F for the year ended December 31, 1999 (the “Annual Report”) as filed with the U.S. Securities and Exchange Commission (“SEC”) on March 20, 2000. The Company represents and warrants to Buyer that: (i) the Annual Report has been duly filed with the SEC, and when filed was in compliance in all material respects with the requirements of the Exchange Act and the rules and regulations of the SEC applicable to such Annual Report; and (ii) the Annual Report was complete and correct in all material respects as of its date and, as of its date, did not contain any untrue statement of material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements made therein, in light of the circumstances under which they were made, not mislea ding. The Company has provided the Buyer with a copy of each document submitted to the SEC on Form 6-K since January 1, 1999 (the “6K Reports” and together with the Annual Report, the “SEC Documents”). The Company represents and warrants to Buyer that: (i) the 6K Reports have been duly submitted to the SEC, and when submitted were in compliance in all material respects with the requirements of the Exchange Act and the rules and regulations of the SEC applicable to such 6K Reports; and (ii) the 6K Reports were complete and correct in all material respects as of their respective dates and, as of such dates, did not contain any untrue statement of material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. The Company represents that it has filed all the reports that the Company was required to file with the SEC since January 1, 1998, according to the requirements of the Exchange Act.

              3.4.2.  The Company has delivered to Buyer: (a) audited consolidated balance sheets of the Company as at December 31 in each of the years 1998 through 1999 (the December 31, 1999 balance sheet being hereinafter referred to as the “Balance Sheet”) and the related audited consolidated statements of income, changes in shareholders’ equity, and cash flow for each of the fiscal years then ended, together with the report thereon of Brightman Almagor, independent certified public accountants, and (b) an unaudited consolidated balance sheet of the Company as at March 31, 2000 (the “Interim Balance Sheet”) and the related unaudited consolidated statements

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of income, changes in shareholders’ equity, and cash flow for the three months then ended, including in each case the notes thereto. Such financial statements and notes fairly present the financial condition and the results of operations, changes in shareholders’ equity, and cash flow of the Company as at the respective dates of and for the periods referred to in such financial statements, all in accordance with GAAP, subject, in the case of interim financial statements, to normal recurring year-end adjustments (the effect of which will not, individually or in the aggregate, be materially adverse); the financial statements referred to in this Section 3.4.2 reflect the consistent application of such accounting principles throughout the periods involved.

        3.5.  Business Plan; Additional Financing Plan

              True and correct copies of the Business Plan and of the Environmental Study submitted to the District Zoning Authority (the “ Environmental Study”) are attached hereto as Schedule 3.5. The Company has conducted reasonable research and surveys in preparing the Business Plan and the Environmental Study and consulted with reputable experts in the field as is reasonably appropriate in these circumstances. The Company believes that the opinions, assumptions and timetables contained in the Business Plan (including both the alternate case assumptions and the base assumptions, as defined therein, and without giving effect to any risk factors included therein) and in the Environmental Study are reasonable. The financial, business and other projections set out in the Business Plan (including both the alternate case assumptions and the base assumptions, as defined therein, and without giving effect t o any risk factors included therein) have been reasonably prepared with due diligence, care and consideration. To the Company’s knowledge, each of the Business Plan and the Environmental Study is complete and correct in all material respects and does not contain any untrue statement of material fact. To the best of the Company’s knowledge, after conducting reasonable research and surveys as is reasonably appropriate in these circumstances and after consulting with reputable experts in the field, the financings contemplated in Section 7.6 hereto (the “Additional Financings”) together with the Purchase Price and the proceeds to be paid to the Company upon exercise of the Addtional Purchase Obligations, will be sufficient to complete the construction, deployment and operation of Fab 2 in accordance with the Business Plan according to the base scenario under which management of the Company currently contemplates implementing the Business Plan. There are no other facts or matters of which the Company is aware which could render any such opinions, assumptions, timetables or projections materially misleading; provided, however, that no assurance can be or is given that any of the forecast projections will be attained or that the assumptions contained therein will not change.

        3.6.  Title to Properties; Encumbrances. Except as set forth in Schedule 3.6, the Company and its Subsidiaries have good and marketable title, free and clear of all Encumbrances (other than Encumbrances for current Taxes not yet due and minor Encumbrances, if any, which in the aggregate do not materially detract from the value of the Assets (as hereinafter defined) or materially impair the conduct of business of the Company as currently conducted and as currently approved by the Board to be conducted in the future), to all of the assets, real property, interests in real property, rights, franchises, patents, trademarks, copyrights, mask works, trademarks, trade names, licenses and properties tangible or intangible, real or personal, wherever located which are used in the conduct of the business conducted and as currently approved by the Board to be conducted in the future by the Company (the “Assets”), other than property that is leased or licensed. Except as set forth in Schedule 3.6, the Company has valid and enforceable leases or licenses, as the case may be, with respect to the Assets consisting of property that is leased or licensed, under which there exists no default, event of default or event which, with notice or lapse of time or both, would constitute a default, except for such defaults which could not have a Material Adverse Effect. Except as set forth on Schedule 3.6, with respect to real property owned or leased by the Company or any Subsidiary, there are not any rights of way, building use restrictions exceptions, variances, reservations, or limitations of any nature which materially impair or could reasonably be expected to materially impair the business of the Company as conducted and as currently approved by the Board to be conducted in the future, other than such which would not have a Material Adverse Effect. All buildings, plants, and structures owned or leased by the Company or any Subsidia ry do not encroach upon the property of, or otherwise conflict with the property rights of, any other Person in a material manner.

        3.7.  Condition and Sufficiency of Assets. The buildings, plants, structures, and equipment of the Company and its Subsidiaries are structurally sound, are in good operating condition and repair, and are adequate for the uses to which they are being put, and none of such buildings, plants, structures, or equipment is in need of maintenance or repairs except for ordinary, routine maintenance and repairs that are not material in nature or cost. Except as set forth in Schedule 3.7, the building, plants, structures and equipment of the Company and its Subsidiaries are sufficient for the continued conduct of the Company’s businesses after the Closing in substantially the same manner as conducted prior to the Closing.

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        3.8.  Customers and Suppliers. Since January 1, 2000, there has not been any adverse change in the business relationship of the Company with any material customer or material supplier of the Company.

        3.9.  Inventory. Inventories of raw materials, work in progress and finished goods of the Company and its Subsidiaries are in good condition and of a quality useable and saleable in the Ordinary Course of Business or have had appropriate financial reserves established.

        3.10.  No Undisclosed Liabilities. Except as set forth in Schedule 3.10, neither the Company nor any Subsidiary has any liabilities or obligations of any nature (whether absolute, accrued, contingent or otherwise) except for liabilities or obligations reflected or reserved against in the Balance Sheet or the Interim Balance Sheet and current liabilities incurred in the Ordinary Course of Business since the respective dates thereof.

        3.11.  Taxes

              3.11.1.  The Company and each Subsidiary has filed or caused to be filed (on a timely basis since January 1, 1994) all Tax Returns that are or were required to be filed by or with respect to it, pursuant to applicable Legal Requirements. The Company and each Subsidiary has paid, or made provision for the payment of, all Taxes that have or may have become due pursuant to those Tax Returns or otherwise, or pursuant to any assessment received by the Company, except such Taxes, if any, as are listed in Schedule 3.11 and are being contested in good faith and as to which adequate reserves (determined in accordance with GAAP) have been provided in the Balance Sheet and the Interim Balance Sheet.

              3.11.2.  Except as set forth in Schedule 3.11.2, the relevant state tax authorities have audited all such Tax Returns or such Tax Returns are closed by the applicable statute of limitations for all taxable years through December 31, 1999. All deficiencies proposed as a result of such audits have been paid, reserved against, settled, or, as described in Schedule 3.11, are being contested in good faith by appropriate proceedings. Except as described in Schedule 3.11, neither the Company nor any Subsidiary has given or been requested to give waivers or extensions (or is or would be subject to a waiver or extension given by any other Person) of any statute of limitations relating to the payment of Taxes of the Company or for which the Company may be liable.

              3.11.3.  All Taxes that the Company and any Subsidiary is or was required by Legal s to withhold or collect have been duly withheld or collected and, to the extent required, have been paid to the proper Governmental Body or other Person.

              3.11.4.  All Tax Returns filed by (or that include on a consolidated basis) the Company and any Subsidiary are true, correct, and complete in all material respects. There is no tax sharing agreement that will require any payment by the Company after the date of this Agreement.

        3.12.  No Material Adverse Change. Except as set forth in Schedule 3.12, since the date of the Balance Sheet, there has not been any material adverse change in the business, operations, properties, assets or condition of the Company (financial or other), including in the prospects of the construction, deployment and operation of Fab 2 in accordance with the Business Plan, and no event or development has occurred or circumstance exists that may result in such a material adverse change.

        3.13.  Employee Benefits; Labor

              3.13.1.  Except as set forth in Schedule 3.13.1, neither the Company nor any Subsidiary is a member of any employers union or a party to any collective bargaining contract, collective labor agreement or other contract or arrangement with a labor union, trade union or other organization or body involving any of its employees, or is otherwise required (under any legal requirement, including under any profit sharing, bonus, deferred compensation, savings, insurance, pension, retirement, or other employee benefit plan for or with any employees of the Company or any of its Subsidiaries, except for the respective personal employment agreements) to provide benefits or working conditions beyond the minimum benefits and working conditions required by law. Neither the Company nor any Subsidiary has recognized or received a demand for recognition from any collective bargaining representative with res pect to any of its employees. Except as set forth in Schedule 3.13.1, neither the Company nor any Subsidiary are subject to, and no employee of the Company or any Subsidiary benefits from, any extension order (tzavei harchava) or any arrangement or custom with respect to employment or termination thereof. All of the Company’s and the Subsidiaries’ employees are “at will” employees and neither the Company nor any Subsidiary has any obligation to employ any employee for a specified period.

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              3.13.2.  Except as set forth in Schedule 3.13.2, there are no claims or complaints that are pending or that have been threatened against the Company or any Subsidiary by any person who is or has been an employee or director of the Company or any Subsidiary, that may, individually or in the aggregate, have a Material Adverse Effect.

              3.13.3.  Since January 1, 1995, (i) there has been no labor strike, slowdown or stoppage pending or threatened against or affecting the Company or any Subsidiary and (ii) there has been no material dispute between the Company or any Subsidiary and any group of its employees which was not resolved.

              3.13.4.  Except as set forth in Schedule 3.13.4, the Company’s and its Subsidiaries’ obligations to provide severance pay to its employees are fully funded or have been properly provided for in the Financial Statements in accordance with GAAP including, by contribution to appropriate insurance funds. All other liabilities of the Company or any Subsidiary (absolute or contingent) relating to their employees were properly accrued in the Financial Statements in accordance with GAAP.

              3.13.5.  All amounts that the Company or any Subsidiary is legally or contractually required either (i) to deduct from its employees’ salaries or to transfer to such employees’ pension or provident, life insurance, manager insurance, incapacity insurance, continuing education fund or other similar fund or (ii) to withhold from their employees’ salaries and pay to any Governmental Entity as required by Israeli Legal Requirements relating to any tax or any other compulsory payment have, in each case, been duly deducted, transferred, withheld and paid.

              3.13.6.  The Company and each Subsidiary is in compliance in all material respects with all applicable Legal Requirements and contracts relating to employment, employment practices, wages, bonuses and other compensation matters and terms and conditions of employment.

              3.13.7.  Schedule 3.13.7 sets forth true and complete details of payment by the Company or any of its Subsidiaries since January 1, 2000 of any bonuses, salaries or other compensation to any shareholder or Named Director or Officer (except in the Ordinary Course of Business) or entry into any employment, severance, or similar Contract with any Named Director or Officer.

        3.14.  Compliance with Legal Requirements; Governmental Authorizations

              3.14.1.  Except as set forth in Schedule 3.14 (i) the Company and its Subsidiaries are, and at all times since January 1, 1997 have been, in full compliance with each Legal Requirement that is or was applicable to them or to the conduct or operation of their business or the ownership or use of any of their assets, except for such non-compliance which would not have a Material Adverse Effect and (ii) neither the Company nor any of its Subsidiaries have received, at any time since January 1, 1997, any notice or other communication (whether oral or written) from any Governmental Body or any other Person regarding any actual, alleged, possible, or potential violation of, or failure to comply with, any Legal Requirement except for such notices and communications which could not have a Material Adverse Effect.

              3.14.2.  The Company and each Subsidiary has all Governmental Authorizations necessary to permit the Company and its Subsidiaries to lawfully conduct and operate their business as currently conducted and as approved by the Board to be conducted in the future, except for such authorizations, the failure to possess which would not have a Material Adverse Effect. The Company and its Subsidiaries are and have been in full compliance with all of the terms and requirements of each Governmental Authorization that is held by the Company and its Subsidiaries or that otherwise relates to the business of the Company and its Subsidiaries as presently conducted and as approved by the Board to be conducted in the future, or to any of the assets owned or used by the Company and its Subsidiaries, except for such non-compliance which would not have a Material Adverse Effect. Each Governmental Authorization referred to in the foregoing sentence is valid and in full force and effect. No event has occurred or circumstance exists that may constitute or result directly or indirectly in a violation of or a failure to comply with any term or requirement of any such Governmental Authorization or result directly or indirectly in the revocation, withdrawal, suspension, non-renewal, cancellation, or termination of, or any modification to, any such Governmental Authorization and no notice has been received by the Company or any Subsidiary with respect to the foregoing, other than those events, circumstances or notices which would not have a Material Adverse Effect. To the best knowledge of the Company, the Company and its Subsidiaries can obtain all such renewals and Governmental Authorizations on a timely basis as needed for their respective operations and business, other than those the failure of which to be obtained could not have a Material Adverse Effect.

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        3.15.  Legal Proceedings; Orders. Except as set forth in Schedule 3.15, there is no pending Proceeding (i) that has been commenced by or against the Company or that otherwise relates to or may affect the business of, or any of the assets owned or used by, the Company or any Subsidiary in a material manner; or (ii) that challenges, or that may have the effect of preventing, delaying, making illegal, or otherwise interfering with, any of the Contemplated Transactions.

              3.15.1.  In addition, (A) no such Proceeding has been Threatened, and (B) no event has occurred or circumstance exists that may give rise to or serve as a basis for the commencement of any such Proceeding.

              3.15.2.  Except as set forth in Schedule 3.15, (i) there is no Order to which the Company or any of its Subsidiaries, or any of the assets owned or used by the Company or any of its Subsidiaries, is subject; and (ii) the Company or any of its Subsidiaries are not subject to any Order that relates to its business as presently conducted or as approved by the Board to be conducted, or any of the assets owned or used by, the Company or any of its Subsidiaries.

              3.15.3.  Except as set forth in Schedule 3.15, the Company and all its Subsidiaries are, and at all times have been, in full compliance with all of the terms and requirements of each Order to which it, or any of the assets owned or used by it, is or has been subject, other than any non-compliance which would not have a Material Adverse Effect

        3.16.  Absence of Certain Changes and Events. Except as set forth in Schedule 3.16, since the date of the Balance Sheet, the Company and all its Subsidiaries have conducted their businesses only in the Ordinary Course of Business and there has not been any:

              3.16.1.  entry into, termination of, or receipt of notice of termination of (i) any license, distributorship, dealer, sales representative, joint venture, credit, or similar agreement, or (ii) any Contract or transaction involving a total remaining commitment by or to the Company or any of its Subsidiaries of at least $2,000,000; or

              3.16.2.  sale (other than sales of inventory in the Ordinary Course of Business), lease, or other disposition of any asset or property of the Company or any of its Subsidiaries for at least $2,000,000 or mortgage, pledge, or imposition of any lien or other encumbrance on any material asset or property of the Company or any of its Subsidiaries, including the sale, lease, or other disposition of any of the Intellectual Property Assets except in the Ordinary Course of Business; or

              3.16.3.  cancellation or waiver of any claims or rights with a value to the Company or any of its Subsidiaries in excess of $2,000,000; or

              3.16.4.  material change in the accounting methods used by the Company or any of its Subsidiaries; or

              3.16.5.  agreement, whether oral or written, by the Company or any of its Subsidiaries to do any of the foregoing.

        3.17.  Contracts; No Defaults

              3.17.1.  Except as set forth in Schedule 3.17.1 and except for agreements, instruments, arrangements and contracts which are exhibits to the SEC Documents, as of the date of this Agreement, there is no Applicable Contract that:

                            3.17.1.1.  involves performance of services or delivery of goods or materials by or to the Company or any of its Subsidiaries of an amount or value in excess of $1,000,000; or

                     3.17.1.2.  was not entered into in the Ordinary Course of Business and that involves expenditures or receipts of the Company or any of its Subsidiaries in excess of $2,000,000; or

                     3.17.1.3.  affects the ownership of, leasing of, title to, use of, or any leasehold or other interest in, any real or personal property (except personal property leases and installment and conditional sales agreements having a value per item or aggregate payments of less than $500,000 and with terms of less than one year); or

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                     3.17.1.4.  relates to patents, trademarks, copyrights, or other intellectual property, except for standard agreements with current or former employees, consultants, or contractors regarding the appropriation or the non-disclosure of any of the Intellectual Property Assets; or

                     3.17.1.5.  constitutes a collective bargaining agreement or other commitment to or with any labor union or other employee representative of a group of employees; or

                     3.17.1.6.  involves a sharing of profits, losses, costs, or liabilities by the Company or any of its Subsidiaries with any other Person; or

                     3.17.1.7.  contains covenants that in any way purport to restrict the business activity of the any of its Subsidiaries or limit the freedom of the Company or any of its Subsidiaries to engage in any line of business or to compete with any Person; or

                     3.17.1.8.  provides for payments to or by any Person based on sales, purchases, or profits, other than direct payments for goods; or

                     3.17.1.9.  constitutes a currently effective and outstanding power of attorney; or

                     3.17.1.10.was entered into other than in the Ordinary Course of Business and that contains or provides for an express undertaking by the Company or any of its Subsidiaries to be responsible for consequential damages; or

                     3.17.1.11.is for capital expenditures of the Company or any of its Subsidiaries in excess of $1,000,000; or

                     3.17.1.12.  represents a written warranty, guaranty, and or other similar undertaking with respect to contractual performance extended by the Company or any of its Subsidiaries other than in the Ordinary Course of Business.

              3.17.2.  Each Contract identified in Schedule 3.17.1 is in full force and effect in all respects and is valid and enforceable in accordance with its terms. No event has occurred or circumstance exists that (with or without notice or lapse of time) may materially contravene, conflict with, or result in a material violation or breach of, or give the Company or any other Person the right to declare a default or exercise any remedy under, or to accelerate the maturity or performance of, or to cancel, terminate, or modify, any Contract listed on Schedule 3.17.1,

              3.17.3.  Except as set forth in Schedule 3.17.3, there are no renegotiations of any material amounts paid or payable to the Company or any of its Subsidiaries under current or completed Contracts listed on Schedule 3.17.1 with any Person and no such Person has made written demand for such renegotiations.

        3.18.  Insurance. The properties, assets, employees, business and operations of the Company and its Subsidiaries are insured by policies which are in full force and effect against such risks, casualties and contingencies and of such types and amounts as are reasonable and customary for the size and scope of the Company’s and its Subsidiaries business as now conducted and as approved to be conducted by the Board in the future. All premiums due and payable for insurance policies held by the Company have been duly paid; and, except as listed in Schedule 3.18, such policies or extensions, renewals or replacements thereof (on comparable terms to the extent available) in such amounts will be outstanding and in full force and effect without interruption until the Closing Date. The Company or any of its Subsidiaries have not received any notice from any insurer, agent or broker with respect to any pending or threatened t erminations or increases in premiums other than increases contemplated by existing policies, and the consummation of the transactions contemplated by this Agreement and the Transaction Documents will not result in the termination of any such policy, or cause a material increase in any premiums thereunder, pursuant to the express terms of such policy.

        3.19.  Environmental Matters. Except for (i) matters disclosed in the SEC Documents or (ii) matters disclosed in Schedule 3.19:

              3.19.1.  The Company and its Subsidiaries are in material compliance with all applicable Environmental Laws and Environmental Permits. Neither the Company or any of its Subsidiaries has received any written communication from a Governmental Body or Person that alleges that the Company is not in compliance with or has liability under any applicable Environmental Law, nor does the Company or any of its Subsidiaries have a basis to expect any such actual or Threatened communication. On the date of this Agreement, there are no

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circumstances or conditions that may prevent or interfere with compliance in the future with Environmental Laws and Environmental Permits in effect as of the date of this Agreement. The Company and its Subsidiaries have all Environmental Permits required under applicable Environmental Laws to operate the business of the Company as presently conducted and as approved by the Board to be conducted in the future, except as would not have a Material Adverse Effect.

              3.19.2.  There is no Environmental Claim pending or, to the best of the Company’s knowledge, Threatened against the Company or its Subsidiaries or against any Person whose liability for such an Environmental Claim the Company or its Subsidiaries have or may have retained or assumed whether contractually or by operation of law.

              3.19.3.  To the best of the Company’s knowledge, there are no Materials of Environmental Concern present in or at the facilities of the Company or any of its Subsidiaries or at any geologically or hydrological adjoining property, including any Materials of Environmental Concern contained in barrels, above or underground storage tanks, landfills, land deposits, dumps, equipment (whether moveable or fixed) or other containers, either temporary or permanent, and deposited or located in land, water, sumps, or any other part of the facilities of the Company or any of its Subsidiaries or such adjoining property, or incorporated into any structure therein or thereon.

              3.19.4.  The Company has delivered to Buyer true and complete copies and results of any reports, studies, analyses, tests, or monitoring possessed or initiated by the Company pertaining to Materials of Environmental Concern in, on, or under the facilities of the Company or any of its Subsidiaries, or concerning compliance by the Company, or any other Person for whose conduct it is or may be held responsible, with Environmental Laws.

              3.19.5.  As used herein, the following terms shall have the meaning set forth below:

              “Environmental Claim” means any claim, action, cause of action, administrative proceeding, investigation or notice by any Person alleging potential liability (including, without limitation, potential liability for investigative costs, cleanup costs, governmental response costs, natural resources damages, property damages, personal injuries, or penalties) arising out of, based on or resulting from (a) the presence, or release into the environment, of any Materials of Environmental Concern at any location, whether or not owned by the Company or its Subsidiaries or (b) circumstances or conditions forming the basis of any violation, or alleged violation, of any Environmental Law.

              “Environmental Laws” means all U.S. and Israeli laws, regulations, ordinances, codes, rules, orders, decrees, directives and standards relating to pollution or protection of human health or the environment (including, without limitation, ambient air, surface water, ground water, land surface, subsurface strata), including, without limitation, laws, regulations, ordinances, codes, rules, orders, decrees, directives and standards relating to the manufacture, processing, distribution, use, treatment, storage, transport, planning and building or handling of Materials of Environmental Concern.

              “Environmental Permits” means permits, licenses, authorizations and registrations required pursuant to the Environmental Laws.

              “Materials of Environmental Concern” means any hazardous chemicals, pollutants, contaminants, hazardous wastes, toxic substances, hazardous substances, as defined under applicable Environmental Laws or any other substance defined or regulated pursuant to Environmental Laws, including, without limitation, fluoride, asbestos, PCBs, petroleum or petroleum derived substances.

              “Release” means any spilling, leaking, pumping, pouring, emitting, discharging, injecting, escaping, leaching, dumping or disposing into the environment, including, without limitation, the abandonment or discarding of barrels, containers and other closed receptacles containing Materials of Environmental Concern.

        3.20.  Intellectual Property

              3.20.1.  Intellectual Property Assets- The term “Intellectual Property Assets” means all such rights set forth in Sections 3.20.1.1 – 3.20.1.4, and all know-how, trade secrets, confidential information, customer lists, software, technical information, data, process technology, plans, drawings, and blue prints (collectively, “Trade Secrets”); owned, used or licensed by the Company or its Subsidiaries as licensee or licensor which are, in each

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case, used in or are necessary for the conduct of the Company’s and its Subsidiaries’ respective businesses as now conducted and as approved by the Board to be conducted, including, without limitation, the operation of Fab-2 in accordance with the Business Plan. Schedule 3.20.1 sets forth a list of the Intellectual Property Rights, other than Trade Secrets and unregistered Copyrights:

                     3.20.1.1.  trading names, registered and unregistered trademarks, service marks, and applications (collectively, “Marks”);

                     3.20.1.2.  all patents, patent applications, and inventions and discoveries that may be patentable (collectively, “Patents”); and

                     3.20.1.3.  all copyrights in both published works and unpublished works (collectively, “Copyrights”).

              3.20.2.  Agreements- Schedule 3.20.2 contains a complete and accurate list and summary description, including any royalties paid or received by the Company or its Subsidiaries, of all Contracts relating to the Intellectual Property Assets to which the Company or its Subsidiaries is a party or by which the Company or its Subsidiaries are bound, except for any license implied by the sale of a product and perpetual, paid-up licenses for commonly available software programs with a value of less than $5,000,000 under which the Company or any of its Subsidiaries is the licensee. There are no outstanding or Threatened disputes or disagreements with respect to any such agreement.

              3.20.3.  Know-How Necessary for the Business

                     3.20.3.1.  To the Company’s best Knowledge, the Intellectual Property Assets are all those necessary for the operation of the Company’s and its Subsidiaries’ business as it is currently conducted and as is approved by the Board to be conducted, including, without limitation, in connection with the operation of Fab-2 in acordance with the Business Plan, except as would not have a Material Adverse Effect. Except as set forth in Schedule 3.20.3, the Company is the owner of all right, title, and interest in and to each of the Intellectual Property Assets, to the Company’s best Knowledge, free and clear of all, Encumbrances, equities, and other adverse claims, and has the right to use without payment to a third party all of the Intellectual Property Assets, except as would not have a Material Adverse Effect.

                     3.20.3.2.  Except as set forth in Schedule 3.20.3.2, all former and current employees of the Company and all other Persons having access to any Intellectual Property Asset have executed written Contracts with the Company and its Subsidiaries respectively, that assign to the Company and its Subsidiaries, respectively, all rights to Intellectual Property Asset including any inventions, improvements, discoveries, or information relating to the business of the Company. To the Company’s Knowledge, no employee of the Company and its Subsidiaries has entered into any Contract which requires the employee to transfer, assign or disclose information concerning his work for the Company and its Subsidiaries to anyone other than the Company and its Subsidiaries.

              3.20.4.  Patents; Trademarks; Copyrights; Mask Works

                     3.20.4.1.  Schedule 3.20.1 contains a complete and accurate list and summary description of all Patents, Trademarks and registered Copyrights. The Company owns all right, title, and interest in and to each of the Patents, Trademarks and Copyrights, free and clear of all liens, security interests, charges, encumbrances, entities, and other adverse claims.

                     3.20.4.2.  Except as set forth in Schedule 3.20.4.2, all of the (i) issued Patents, (ii) Marks that have been registered with any trademark office and (iii) registered Copyrights are (with respect to issued Patents relating to wafer fabrication technology, to the best Knowledge of the Company) currently in compliance with formal legal requirements, are valid and enforceable, and are not subject to any maintenance fees or taxes.

                     3.20.4.3.  No Patent has been or is now involved in any interference, reissue, reexamination, or opposition proceeding. To the best of the Company’s knowledge, there is no potentially interfering patent or patent application or trademark or trademark application of any third party. No Mark has been or is now involved in any opposition, invalidation, or cancellation and no such action is Threatened with the respect to any of the Marks.

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                     3.20.4.4.  No Patent, Mark or Copyright is (with respect to issued Patents relating to wafer fabrication technology, to the best knowledge of the Company) infringed or, to the best of the Company’s knowledge, has been challenged or threatened in any way. To the best knowledge of the Company, none of the products manufactured and sold, nor any process or know-how used, by the Company infringes or is alleged to infringe any patent or other proprietary right of any other Person; to the best knowledge of the Company, none of the Marks used by the Company or any of its Subsidiaries infringes or is alleged to infringe any trade name, trademark, or service mark of any third party; and to the best knowledge of the Company, none of the subject matter of any of the Copyrights infringes or is alleged to infringe any copyright of any third party or is a derivative work based on the work of a third party.

              3.20.5.  Trade Secrets

                     3.20.5.1.  With respect to each Trade Secret, the documentation relating to such Trade Secret is current, accurate, and sufficient in detail and content to identify and explain it and to allow its full and proper use without reliance on the knowledge or memory of any individual.

                     3.20.5.2.  The Company and its Subsidiaries have taken all reasonable precautions to protect the secrecy, confidentiality, and value of its Trade Secrets to the extent that the maintenance of any such Trade Secret as a legally protectible trade secret under applicable law is material to the Company.

                     3.20.5.3.  The Company and its Subsidiaries have good title and an absolute (but not necessarily exclusive) right to use the Trade Secrets to the extent that the maintenance of any such Trade Secret as a legally protectible trade secret under applicable law is material to the Company. The Trade Secrets, the maintenance of any of which as a legally protectible trade secret under applicable law are material to the Company, are not part of the public knowledge or literature, and, to the Company’s Knowledge, have not been used, divulged, or appropriated either for the benefit of any Person or to the detriment of the Company or its Subsidiaries. No Trade Secret, the maintenance of which as a legally protectible trade secret under applicable law is material to the Company, is subject to any adverse claim or has been challenged or threatened in any w ay.

              3.21.  Grants, Incentives and Subsidies. Schedule 3.21 provides a correct and complete list of the aggregate amount of pending and outstanding grants from each Governmental Body of the State of Israel, or from any other Governmental Body, to the Company or any Subsidiary, net of royalties paid, and any tax incentive or subsidy granted to the Company or any Subsidiary, including the material terms and benefit periods thereof (collectively, “Grants”) including, without limitation, (i) Approved Enterprise Status from the Israeli Investment Center; and (ii) Grants from the Office of the Chief Scientist of the Israel Ministry of Industry and Trade (“OCS”). The Company has made available to Buyer, prior to the date hereof, correct and complete copies of all letters of approval, and supplements thereto, granted to the Company or any Subsidiary relating to Approve d Enterprise Status from the Investment Center and Grants under from the OCS. Except for undertakings set forth in such letters of approval and undertakings under applicable laws and regulations, there are no material undertakings of the Company or any Subsidiary given in connection with the Grants. The Company and each of Subsidiary are in compliance, in all material respects, with the terms and conditions of such Grants and, except as disclosed in Schedule 3.21, have duly fulfilled, in all material respects, all the undertakings relating thereto. The Company’s application to the Israeli Investment Center with respect to Fab-2 was submitted on May 17, 2000 and was previously provided to Buyer (the “Investment Center Application”). To the extent that there are changes to the assumptions contained in the Investment Center Application as submitted, they are reflected in the Business Plan. The Investment Center Application complies as to form with all Legal Requirements.

              3.22.  Disclosure

                     3.22.1.  No representation or warranty of the Company in this Agreement and no statement in the Schedules omits to state a material fact necessary to make the statements herein or therein, in light of the circumstances in which they were made, not misleading.

                     3.22.2.  No notice given pursuant to Section 5.5 will contain any untrue statement or omit to state a material fact necessary to make the statements therein or in this Agreement, in light of the circumstances in which they were made, not misleading.

              3.23.  Relationships with Related Persons. Except as described on Schedule 3.23 or in the SEC Documents, and except for any employment and consulting contracts listed on Schedule 3.23, there are no loans,

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guarantees, contracts, transactions, understandings or other arrangements of any nature outstanding between or among the Company or any of its Subsidiaries, on the one hand, and any shareholder, or any current or former director, officer or controlling person of the Company or any of their respective Affiliates, on the other hand. Except as set forth on Schedule 3.23 or in the SEC Documents, since the date of the Annual Report, no event has occurred that would be required to be reported by Company pursuant to Item 13 of Form 20-F promulgated by the SEC under the Exchange Act .

              3.24.  Brokers or Finders. The Company and its agents have incurred no obligation or liability, contingent or otherwise, for brokerage or finders’ fees or agents’ commissions or other similar payment in connection with the Contemplated Transactions.

4.  Representations and Warranties of Buyer

        Buyer represents and warrants to the Company as of the date hereof and as of the Closing and except as otherwise provided in the Addtional Purchase Obligation Agreement as follows:

        4.1.  Organization and Good Standing. Buyer is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware with full corporate power and authority to conduct its business as it is now being conducted and as currently proposed to be conducted, to own or use the properties and assets that it purports to own or use, and to perform all its obligations under the Transaction Documents.

        4.2.  Authority; No Conflict

              4.2.1.  This Agreement constitutes the legal, valid, and binding obligation of Buyer, enforceable against Buyer in accordance with its terms. Upon the execution and delivery by Buyer of the Transaction Documents, and assuming the due execution and delivery thereof by the other parties thereto, the Transaction Documents will constitute the legal, valid, and binding obligations of Buyer, enforceable against Buyer in accordance with their respective terms. Buyer has the absolute and unrestricted right, power, and authority to execute and deliver this Agreement and the Transaction Documents and to perform its obligations under this Agreement and the Transaction Documents.

              4.2.2.  Except as set forth in Schedule 4.2, neither the execution and delivery of this Agreement by Buyer nor the consummation or performance of any of the Contemplated Transactions by Buyer will give any Person the right to prevent, delay, or otherwise interfere with any of the Contemplated Transactions pursuant to:

                     4.2.2.1.  any provision of Buyer’s Organizational Documents;

                     4.2.2.2.  any resolution adopted by the board of directors or the stockholders of Buyer;

                     4.2.2.3.  any Legal Requirement or Order to which Buyer may be subject; or

                     4.2.2.4.  any Contract to which Buyer is a party or by which Buyer may be bound.

                     Except as set forth in Schedule 4.2, Buyer is not and will not be required to obtain any Consent from any Person in connection with the execution and delivery of this Agreement or the consummation or performance of any of the Contemplated Transactions.

        4.3.  Investment Intent; No Registration

              4.3.1.  Buyer is acquiring the Shares for its own account and not with a view to their distribution within the meaning of Section 2(11) of the Securities Act. Buyer has requisite knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of an investment in the Company and is an accredited investor as defined under Regulation D as promulgated by the United States Securities and Exchange Commission; and

              4.3.2.  Buyer understands that none of the Shares have been registered under the Securities Act, the Israeli Securities Law or the laws of any jurisdiction, and agrees that the Shares may not be sold, offered for sale, transferred, pledged, hypothecated or otherwise disposed of except in compliance with the Securities Act, Israeli Securities Law or any applicable securities laws of any jurisdiction and the terms of this Agreement. Buyer also acknowledges that the Shares, upon issuance, will bear the following legend:

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              THESE SECURITIES HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR ANY STATE OR OTHER JURISDICTION’S SECURITIES LAWS. THESE SECURITIES MAY NOT BE SOLD, OFFERED FOR SALE OR PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER THE ACT OR AN OPINION OF COUNSEL (SATISFACTORY IN FORM AND SUBSTANCE TO THE COMPANY) THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OF THE ACT.

        4.4.  Certain Proceedings. There is no pending Proceeding that has been commenced against Buyer and that challenges, or may have the effect of preventing, delaying, making illegal, or otherwise interfering with, any of the Contemplated Transactions. To Buyer’s knowledge, no such Proceeding has been Threatened.

        4.5.  Due Diligence. Subject to compliance by the Company with Section 3.22 and provision to the Buyer of all materials and information requested in its due diligence review of the Company and assuming that all information and material provided to the Buyer in its due diligence review was true and accurate and did not include any material misstatement or omit to include any information requested by Buyer, (a) the Buyer has had an opportunity to ask questions and receive answers concerning the legal, financial and technical condition of the Company and has had full access to such information concerning the Company as the Buyer has requested and (b) the Buyer hereby represents and warrants that the legal, technical and financial due diligence of Buyer has been completed and that the results of the Buyer’s business, technical, legal and financial review of the books, records, agreements and other legal documents and business organization of the Company are satisfactory to the Buyer. Notwithstanding the foregoing representations and warranties of the Buyer, nothing in this Section 4.5 shall derogate from the representations and warranties of the Company in Section 3 above.

        4.6.  Brokers or Finders. Buyer and its officers and agents have incurred no obligation or liability, contingent or otherwise, for brokerage or finders’ fees or agents’ commissions or other similar payment in connection with the Contemplated Transactions.

5.  Covenants of the Company Prior to Closing

        5.1.  Access and Investigation. Between the date of this Agreement and the Closing Date, the Company will, and will cause its Representatives to, (i) afford Buyer and its Representatives (collectively, “Buyer’s Advisors”) full and free access to the Company’s personnel, properties, contracts, books and records, and other documents and data, (ii) furnish Buyer and Buyer’s Advisors with copies of all such contracts, books and records, and other existing documents and data as Buyer may reasonably request, and (iii) furnish Buyer and Buyer’s Advisors with such additional financial, operating, technical and other data and information as Buyer may reasonably request. All information so provided to Buyer and its representatives will be subject to the Non-Disclosure Agreement dated April 4, 2000 between the parties (except for Section 6 thereof which shall expire upon signing of this Agree ment).

        5.2.  Operation of the Company’s Business. Between the date of this Agreement and the Closing Date, the Company will:

              5.2.1.  conduct its business only in the Ordinary Course of Business; and

              5.2.2.  use its best efforts to preserve intact the current business organization of the Company and its Subsidiaries, keep available the services of the current Named Officers, employees, and agents of the Company and its Subsidiaries, and maintain the relations and good will with suppliers, customers, landlords, creditors, employees, agents, and others having business relationships with the Company and its Subsidiaries; and

              5.2.3.  otherwise report periodically to Buyer concerning the status of the business, operations, finances and prospects of the Company and its Subsidiaries; and

              5.2.4.  not (i) take or agree or commit to take any action other than in the Ordinary Course of Business that would make any representation or warranty of the Company hereunder inaccurate in any respect at, or as of any time prior to, the Closing Date, provided that no such action taken in the Ordinary Course of Business that Buyer has not consented to in writing shall be taken into account in consideration of whether the conditions set forth in Section 7 below have been complied with or (ii) omit or agree or commit to omit to take any action within its control necessary to prevent any such representation or warranty from being inaccurate in any material respect at any such time.

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        5.3.  Negative Covenant. Except as otherwise expressly permitted by this Agreement or as is consistent with the Ordinary Course of Business, between the date of this Agreement and the Closing Date, the Company will not, without the prior written consent of Buyer, take any affirmative action, or fail to take any reasonable action within their or its control, as a result of which any of the changes or events listed in Section 3.16 is likely to occur.

        5.4.  Consents; Required Approvals; Construction. The Company will, as promptly as practicable after the date of this Agreement, take all action required to obtain as promptly as practicable all necessary Consents and agreements of, and to give all notices and make all other filings with, any third parties, including Governmental Bodies, necessary to authorize, approve or permit the consummation of the transactions contemplated hereby, the Contemplated Transactions and the transactions contemplated by the Ancillary Agreements, including, without limitation, all Consents, approvals and waivers referred to in Section 5.2 to the Business Plan and all Consents, approvals and waivers referred to in Section 7.3 hereof and the updated Business Plan referred to in Section 7.17 (which the parties shall endeavor to complete within 60 days from the date hereof). The Company will periodically update Buyer as to the matters discussed in the preceding sentence. Between the date of this Agreement and the Closing Date, the Company will (i) cooperate with Buyer with respect to all filings that Buyer elects to make or is required by Legal Requirements to make in connection with the Contemplated Transactions, and (ii) cooperate with Buyer in obtaining all consents identified in Schedule 4.2. In addition, the Company will, as promptly as practicable after the date of this Agreement, take all action required to select contractors and other experts and enter into agreements with such parties and take other necessary actions in order to facilitate the implementation of the construction of Fab 2 in accordance with the time table set forth in the Business Plan.

        5.5.  Notification. Between the date of this Agreement and the Closing Date, the Company will promptly notify Buyer in writing if the Company becomes aware of any fact or condition that causes or constitutes a material breach of any of the Company’s representations and warranties as of the date of this Agreement (except that such representations and warranties specifically qualified by materiality shall be read for purposes of this Section 5.5 so as not to require an additional degree of materiality), or if the Company becomes aware of the occurrence after the date of this Agreement of any fact or condition that could (except as expressly contemplated by this Agreement) cause or constitute a breach of any such representation or warranty had such representation or warranty been made as of the time of occurrence or discovery of such fact or condition (except for such representations and warranties that are e xpressly correct as of the date of this Agreement). Should any such fact or condition require any change in the Schedules if the Schedules were dated the date of the occurrence or discovery of any such fact or condition, the Company will promptly deliver to Buyer a supplement to the Schedules specifying such change. During the same period, the Company will promptly notify Buyer of the occurrence of any breach of any covenant of the Company in this Section 5 or of the occurrence of any event that may make the satisfaction of the conditions in Section 7 below impossible or unlikely.

        5.6.  Financings.

              5.6.1.  Between the date of this Agreement and the Closing Date, the Company will use its best efforts to achieve each of the conditions set forth in Section 7.4 and 7.6 in relation to the Additional Financings.

              5.6.2.  The Company shall provide to the Investment Center such other information and data, in addition to the information and data contained in the Investment Center Application, as reasonably necessary in order to secure the approval of the grant referred to in Section 7.4.

              5.6.3.  The proceeds from each of the equity financing sources referred to in clauses (ii) and (iii) of Section 7.6 with respect to Wafer Partners shall be obtained only from parties acceptable to Buyer upon Buyer’s prior approval. In addition, in the event that the underlying agreements with respect thereto contain any terms or conditions (including, without limitation, (a) pricing terms and (b) other economic terms taken as a whole) more favorable (the “Terms of the Other Agreements”) than those provided hereunder and in the Transaction Agreements, the terms and conditions of this Agreement and the Transaction Agreements, as the case may be, shall be automatically amended, without further action by the parties hereto and thereto, to provide such terms and conditions that are at least equally favorable to the Buyer as the Terms of the Other Agreements. The Company shall not enter into any agreement with respect to the equity financings referred to in clauses (ii) and (iii) of Section 7.6 if any of such agreements contain provisions that would impede the ability of the Company to effect the terms of the preceding sentence.

              5.6.4.  The proceeds from each of the debt financing sources referred to in clause (i) of Section 7.6 and the underlying agreements with respect thereto shall be obtained only on terms and conditions that are

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materially consistent with the terms and conditions to be set forth in a term sheet or similar agreement or document relating to such financing (a “Debt Financing Term Sheet”). The Company shall consult with Buyer in advance of execution of any Debt Financing Term Sheet and shall enter into such Debt Financing Term Sheet only upon the consent of Buyer which shall not be unreasonably withheld. The terms and conditions of such debt financing shall not be in conflict with the terms of the Contemplated Transactions and shall be consistent with the terms and conditions contained in the Additional Financing Plan and the Business Plan. The Company shall provide to the Buyer the transaction documents of each debt financing (the “Debt Fnancing Documents”) in the form presented to the Board for its approval, at least 10 business days prior to the execution thereof, in order to enable Buyer to review such documents and confirm that the terms thereof are consistent with the Debt Financing Term Sheet previously approved by Buyer. The Buyer shall deliver to the Company its written approval or other response to the Debt Financing Documents within 5 business days from its receipt of the Debt Financing Documents; Buyer’s failure to provide its written response to the Company within such period of time shall be deemed Buyer’s approval of the Debt Financing Documents.

              5.6.5.  Between the date of this Agreement and the Closing Date, the Company shall not change or modify or agree to change or modify any of the terms and conditions listed in the Additional Financing Plan, the Business Plan or the Investment Center Application without the prior written unanimous approval of all members of the Steering Committee if any such change, modification or agreement would or would reasonably be expected to (a) change the construction schedule of Fab 2 as set forth in the Business Plan, (b) change the Additional Financing Plan as set forth in the Business Plan or result in a failure to comply with the schedule for the financings described therein, (c) significantly increase the cost of Fab 2 beyond that set forth in the Business Plan or (d) change the production capacity schedule of Fab 2 as set forth in the Business Plan. Any change, modification or agreement to ch ange or modify the Business Plan, the Additional Financing Plan or the Investment Center Application which does not require written unanimous approval of all members of the Steering Committee pursuant to the preceding sentence shall require written approval of a majority of the members of the Steering Committee.

        5.7.  Shareholders Agreement. The Company will use its best efforts to ensure that any entity purchasing equity securities or securities exchangeable or convertible into equity securities comprising five percent (5%) or more of the outstanding Ordinary Shares of the Company pursuant to the Additional Financing Plan (other than investors purchasing any such securities in connection with a public offering conducted by the Company as part of the Additional Financing) shall execute the Shareholders Agreement as a counterparty or a similar agreement whose provisions, among other things, provide for such entity to take such actions as may be necessary to vote for the election of Buyer’s, TIC’s, and any other entity’s representative(s) to the Board, in accordance with the terms of the Shareholders Agreement.

        5.8.  No Negotiation. Until the later of (i) such time, if any, as this Agreement is terminated pursuant to Section 9, and (ii) the Closing Date, the Company will not, and will cause its Representatives not to, directly or indirectly solicit, initiate, or encourage any inquiries or proposals from, discuss or negotiate with, provide any non-public information to, or consider the merits of any unsolicited inquiries or proposals from, any Person (other than Buyer) relating to any transaction involving the sale of all or a substantial portion of the business or assets, or any of the capital stock of the Company (other than (i) in the Ordinary Course of Business; (ii) in connection with issuances of stock options or shares upon the exercise thereof under the Company’s employee stock incentive plans and (iii) in connection with issuances of equity securities in accordance with Section 7.6 (ii) and (iii) below p ursuant to the Additional Financing Plan and in accordance therewith), or any merger, consolidation, business combination, or similar transaction involving the Company or any of its Subsidiaries pursuant to which the shareholders of the Company immediately prior to such merger, consolidation, business combination, or similar transaction do not continue to hold a majority of the outstanding equity of the continuing or resulting entity.

        5.9.  Board of Directors. As long as Buyer has a representative on the Board, each committee of the Board shall include at least one representative of Buyer and, so long as TIC has a representative on the Board, one representative of TIC. The Company will ensure that the time period between each annual shareholders meeting shall not exceed 15 months. The Board shall meet at least once in every three months and notice of each Board meeting shall be provided in writing in English to all Board members at least 10 days in advance. All communications to the Directors will be provided in English. The quorum for each meeting of the Board shall include at least one representative of Buyer, so long as Buyer has at least two representatives on the Board. Notwithstanding the preceding sentence, in the event that quorum is not present at a meeting of the Board solely because a representative of Buyer was not present and s uch meeting is adjourned, the failure of a representative of Buyer to be present at the adjourned meeting shall not constitute lack of quorum. The Company acknowledges that

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the representatives of Buyer on the Board may at any time participate or fail to participate in any Board action concerning this Agreement if in their view such action is appropriate under applicable law.

        5.10.  Steering Committee. The Steering Committee shall be established within fifteen days after the date hereof. The Steering Committee will receive from the Company’s management reports on the progress on the Fab 2 project, the Business Plan and the approvals necessary for commencement of construction and for the operation of Fab 2. The Steering Committee shall meet at least once in every four weeks.

        5.11.  Company Shareholders Meeting. As soon as practicable after the date hereof, the Company shall take all necessary action to call an extraordinary general meeting of the Company’s shareholders and shall solicit proxies in order to obtain the approval of the Company’s shareholders to the issuance of the Shares and the Addtional Purchase Obligation Shares to Buyer in accordance with all aplicable laws, regulations and rules of any stock exchange and to an amendment to the Articles which shall provide that the Chairman of the Board shall be appointed by the Shareholders and to obtain any other shareholder approval which is necessary in order to execute, and consummate the transactions contemplated by, this Agreement and the Transaction Documents.

6.  Covenants of Buyer Prior to Closing Date

        6.1.  Approvals of Governmental Bodies. As promptly as practicable after the date of this Agreement, Buyer will make all filings required by Legal Requirements to be made by it to consummate the Contemplated Transactions. Between the date of this Agreement and the Closing Date, Buyer will cooperate with the Company with respect to all filings that the Company is required by Legal Requirements to make in connection with the Contemplated Transactions, and will cooperate with the Company in obtaining all consents identified in Section 5.2 to the Business Plan.

7.  Conditions Precedent to Buyer’s Obligation at Closing

        Buyer’s obligation to take the actions required to be taken by Buyer at the Closing is subject to the satisfaction, at or prior to the Closing, of each of the following conditions (any of which may be waived by Buyer, in whole or in part, in its sole discretion):

        7.1.  Accuracy of Representations. All of the Company’s representations and warranties in this Agreement and the Transaction Agreements (considered collectively, without giving effect to any supplement to the Schedules), and each of these representations and warranties (considered individually) must have been accurate in all material respects as of the date of this Agreement and must be accurate in all material respects as of the Closing Date as if made on the Closing Date (except to the extent such representations and warranties are only given as of the date hereof), without giving effect to any supplement to the Schedules, provided that any inaccuracies in such representations and warranties will be disregarded if the circumstances giving rise to all such inaccuracies (considered collectively) do not constitute, and are not reasonably expected to result in, a Material Adverse Effect (it being understoo d that any materiality qualifications contained in such representations and warranties shall be disregarded for this purpose).

        7.2.  Company’s Performance

              7.2.1.  All of the covenants and obligations that the Company is required to perform or to comply with pursuant to this Agreement at or prior to the Closing (considered collectively), and each of these covenants and obligations (considered individually), must have been duly performed and complied with in all material respects.

              7.2.2.  Each of the Transaction Documents and the Ancillary Agreements shall have been duly executed by the Company and shall have been in full force and effect and no party to such document (other than Buyer) shall be in a breach thereof. The Shareholders Agreement shall have been executed by Buyer and The Israel Corporation.

              7.2.3.  Each document required to be delivered by the Company pursuant to Section 2.5.1 must have been delivered.

        7.3.  Consents; Approvals; Other Requirements. (i) Each of the Consents, approvals or other requirements identified in Section 5.2 of the Business Plan, shall have been duly obtained or satisfied (in accordance with the schedule set forth therein), (ii) the Company shall have entered into construction agreements with respect to

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the supervising, management and implementation of the construction of Fab 2 in accordance with the Business Plan in accordance with the schedule contained therein, and (iii) the Business Plan, the financial data and project cost included therein, the list of necessary approvals and Consents included in Section 5.2 of the Business Plan, the timetable for construction of Fab 2 and the Financial Plan, all as set forth in the Business Plan attached to this Agreement as amended from time to time with the unanimous or majority consent, as the case may be, of the Steering Committee in accordance with Section 5.6.5 hereof, shall continue to be true and correct in all material respects. The condition included in this Section 7.3 shall be deemed to be satisfied only if the Steering Committee shall have unanimously decided, first, that all of the conditions included in clauses (i) - (iii) have been satisfied and second, to the extent that any of (i) – (iii) are not satisfied, that constr uction of Fab 2 by the Company in accordance with the Business Plan should properly commence. The Steering Committee shall consider, in its decision of whether the conditions set forth in this Section 7.3 have been met, the factors listed in Section 1 hereto under the definition of “Steering Committee.”

        7.4.  Investment Center Approval. The Company shall have obtained a final Certificate of Approval from the Investment Center which shall be comprised of the following factors (i) granting an “Approved Enterprise” status to Fab 2 within the Grant Course under the Law for the Encouragement of Capital Investments - 1959; (ii) providing for governmental grants of at least $250,000,000, which shall constitute at least 20% of the entire qualified project cost for the construction, deployment and operation of Fab 2 in accordance with the Business Plan as it exists on the date of this Agreement, provided that in the event that such project cost changes after the date of this Agreement in accordance with Section 5.6.5, the aggregate of such grants provided for in the Certificate of Approval shall equal at least 20% of the changed total project cost; (iii) the maximum required percentage of capital investments in Fab 2 which is required to be financed by equity will be 30%; and (iii) providing that the performance term under the Certificate of Approval shall be at least 5 years from the Closing.

        7.5.  OCS Approval. The Company has obtained the approval of the OCS with respect to the consummation of the Contemplated Transactions.

        7.6.  Additional Financings. The Company shall have (i) entered into binding definitive agreements in accordance with Section 5.6.4 providing for loans in an aggregate amount of at least $550,000,000 from reputable financial institutions solely for the purposes of the construction of Fab 2, as described in Section 10.4 of the Financing Plan, (ii) entered into binding definitive agreements providing for at least $225,000,000 in wafer partner pre-payments or equity financing from Wafer Partners (other than Buyer) obtained in accordance with the terms of Section 5.6.3 and provided to the Company by Wafer Partners pursuant to which all closing conditions have been satisfied and at least 15% of the equity of each equity investor has been transferred to or placed in escrow for the benefit of the Company subject only to the closing of this Agreement and the balance of such financing shall be forwarded automatically u pon the occurrence of specified milestones relating to the construction and operation of Fab-2, which milestones are generally similar to the milestones described in the Addtional Purchase Obligation Agreement, (iii) in the event that the Company only satisfies the condition in the preceding clause (ii) in relation to at least $150,000,000 of the $225,000,000 referred to above (such difference being the “Wafer Partner Differential”), entered into binding definitive agreements providing for at least the Wafer Partner Differential through non-Wafer Partner equity investors; provided, however, that the Company shall be required no later than October 1, 2001 (the “Additional Wafer Partner Financing Date”) to enter into binding definitive agreements with respect to the Wafer Partner Differential from additional Wafer Partners as a condition to the exercise of Addtional Purchase Obligations not exercised prior to such time pursuant to the Addtional Purchase Obligation Agreement on the Additiona l Wafer Partner Financing Date, pursuant to which agreement(s) all closing conditions have been satisfied and at least 15% of the equity of each equity investor has been transferred to or placed in escrow for the benefit of the Company and the balance of such financing shall be forwarded automatically upon the occurrence of specified milestones relating to the construction and operation of Fab-2, which milestones are generally similar to the milestones described in the Addtional Purchase Obligation Agreement and (iv) provided to Buyer a commitment in writing to provide $100,000,000 from the Company’s own cash resources, including, but not limited to, proceeds from the exercise of employee stock options, existing cash reserves, proceeds from sales of private equity securities, royalties and sales; in the event that the Company shall close on the basis of section (iii) above, at such time as the Wafer Partner Differential shall have been raised by the Additional Wafer Partner Financing Date , the Company & #146;s commitment to provide $100,000,000 under this clause (iv) shall be reduced by the Wafer Partner Differential.

        7.7.  Wafer Partners. The Company shall have entered into binding agreements, either on a “take or pay” basis or a “pre-payment” basis or, if the other party to any such agreement is making an equity investment pursuant to Section 7.6(ii), providing a wafer order right, for a term of at least 3 years (“Wafer Commitments”)

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providing for the sale of a minimum capacity in Fab 2 of at least 12,000 wafers per month if the Closing shall occur under Section 7.6 (ii) above or at least 8,000 wafers per month if the Closing shall occur under Section 7.6 (iii) above, in which case the Company shall have entered into Wafer Commitments providing that the aggregate Wafer Commitments shall equal at least 12,000 wafers per month by the Additional Wafer Partner Financing Date and such agreements shall be in full force and effect.

        7.8.  Toshiba Agreement. The Toshiba Agreement shall be in full force and effect and shall not have been breached by any party thereto.

        7.9.  Certificates. In addition to the documents the Company is obligated to deliver to Buyer under Section 2.5 and this Section 7, the Company shall furnish Buyer with such other documents as Buyer may reasonably request for the purpose of (i) evidencing the accuracy of any of the Company’s representations and warranties, (iii) evidencing the performance by the Company of, or the compliance by the Company with, any covenant or obligation required to be performed or complied with by the Company, (iv) evidencing the satisfaction of any condition referred to in this Section 7, or (v) otherwise facilitating the consummation or performance of any of the Contemplated Transactions.

        7.10.  No Proceedings. Since the date of this Agreement, there must not have been commenced or Threatened by a third party against Buyer or the Company, or against any Person affiliated with Buyer or the Company, any Proceeding (a) involving any challenge to, or seeking material damages or other relief in connection with, any of the Contemplated Transactions, or (b) that may have the effect of making illegal, materially preventing, delaying, or otherwise interfering with any of the Contemplated Transactions.

        7.11.  No Prohibition. Neither the consummation nor the performance of any of the Contemplated Transactions will, directly or indirectly (with or without notice or lapse of time), materially contravene, or conflict with, or result in a material violation of, or cause the Company, Buyer or any Person affiliated with the Company or Buyer to suffer any material adverse consequence under, (a) any applicable Legal Requirement or Order, or (b) any Legal Requirement or Order that has been published, introduced, or otherwise formally proposed by or before any Governmental Body.

        7.12.  Directors. The Board of Directors of the Company shall have been reformed in accordance with the provisions of Section 2 of the Shareholders Agreement.

        7.13.  No Material Adverse Change. There shall have been no material adverse change in the business, financial condition, results of operations, assets, operations or prospects of the Company.

        7.14.  Incentive Plan. The Company shall have adopted stock based incentive plans (the “Additional Incentive Plans”) reserving 1,500,000 Ordinary Shares or such other number as may be approved by the Board for the purpose of the work force and human resources employed in Fab 2, such plans being satisfactory to Buyer, and the Company shall have submitted to Buyer a plan satisfactory to Buyer setting forth the Company’s efforts to recruit the required work force and human resources for Fab 2.

        7.15.  Closing Disclosure. There shall be no fact known to the co-Chief Executive Officer of the Company identified in Schedule 7.15. that has specific application to the Company or any of its Subsidiaries (other than general economic or industry conditions) and that materially adversely affects the assets, business, financial condition, results of operations or prospects of the Company or any of its Subsidiaries that has not been set forth in this Agreement or the Schedules or the Business Plan (without giving effect to any risk factors included therein).

        7.16.  Shareholder Approval. Shareholders of the Company shall have approved the increase in registered share capital, the issuance of the Shares hereunder, the issuance of the Shares and Addtional Purchase Obligations under the Addtional Purchase Obligation Agreement and the reconstitution of the Board.

        7.17.  Updated Business Plan. Without derogating from sections 5.6 and 7.3, Buyer and the Company shall have agreed to updates to the Business Plan (which thereafter shall be deemed to be the Business Plan for all purposes of this Agreement) which shall, among other things (a) provide that water rights approvals satisfactory to the Steering Committee in the manner set forth in Section 7.3 shall have been obtained prior to Closing, (b) indicate that Seller provided the relevant Governmental Authority with an environmental study which had been prepared in 1995 and updated recently to reflect changes from the date of the original survey, which survey shall be acceptable to the relevant Governmental Authority and (c) include wafer costs data as part of the financial plan assumptions as part of the base case.

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8.  Conditions Precedent to the Company’s Obligation at Closing

        The Company’s obligation to take the actions required to be taken by the Company at the Closing is subject to the satisfaction, at or prior to the Closing, of each of the following conditions (any of which may be waived by the Company, in whole or in part, in its sole discretion):

        8.1.  Accuracy of Representations. All of Buyer’s representations and warranties in this Agreement (considered collectively), and each of these representations and warranties (considered individually), must have been accurate in all material respects as of the date of this Agreement and must be accurate in all material respects as of the Closing Date as if made on the Closing Date.

        8.2.  Buyer’s Performance

              8.2.1.  All of the covenants and obligations that Buyer is required to perform or to comply with pursuant to this Agreement at or prior to the Closing (considered collectively), and each of these covenants and obligations (considered individually), must have been performed and complied with in all material respects.

              8.2.2.  Each of the Executed Transaction Documents shall have been duly executed by the Buyer and shall have been in full force and effect and no party to such document (other than the Company) shall be in a breach thereof. Buyer must have executed and delivered the each of the documents required to be delivered by Buyer pursuant to Section 2.5.2.

        8.3.  Additional Documents

              8.3.1.  In addition to the documents required to be delivered in accordance with Section 2.5.2 by Buyer, Buyer shall have furnished such other documents as the Company may reasonably request for the purpose of (i)  evidencing the accuracy of any representation or warranty of Buyer, (ii) evidencing the performance by Buyer of, or the compliance by Buyer with, any covenant or obligation required to be performed or complied with by Buyer, (iii) evidencing the satisfaction of any condition referred to in this Section 8, or (iv) otherwise facilitating the consummation of any of the Contemplated Transactions.

        8.4.  No Injunction. There must not be in effect any Legal Requirement or any injunction or other Order that (i) prohibits the issuance and sale of the Shares the Company to Buyer, and (ii) has been adopted or issued, or has otherwise become effective, since the date of this Agreement.

        8.5.  Shareholder Approval. Shareholders of the Company shall have approved the increase in registered share capital, the issuance of the Shares hereunder, the issuance of the Shares and Addtional Purchase Obligations under the Addtional Purchase Obligation Agreement and the reconstitution of the Board.

9.  Termination

        9.1.  Termination Events. This Agreement may, by written notice given prior to or at the Closing, be terminated:

              9.1.1.  by either Buyer or the Company if a material breach of any provision of this Agreement has been committed by the other party and such breach has not been waived;

              9.1.2.  (i) by Buyer if any of the conditions in Section 7 has not been satisfied in all material respects by January 31, 2001 (unless extended by Buyer in its discretion), and Buyer has not waived such condition on or before the Closing Date; or (ii) by the Company, if any of the conditions in Section 8 has not been satisfied in all material respects by January 31, 2001; or

              9.1.3.  by mutual consent of Buyer and the Company.

        9.2.  Effect of Termination. Each party’s right of termination under Section 9.1 is in addition to any other rights it may have under this Agreement or otherwise, and the exercise of a right of termination will not be an election of remedies. If this Agreement is terminated pursuant to Section 9.1, all further obligations of the parties under this Agreement will terminate, except that the obligations in Sections 12.1 and 12.3 will survive; provided, however, that if this Agreement is terminated by a party because of the breach of the Agreement by the other party or because one or more of the conditions to the terminating party’s obligations under this Agreement is not satisfied

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as a result of the other party’s failure to comply with its obligations under this Agreement, the terminating party’s right to pursue all legal remedies will survive such termination unimpaired.

10.  Indemnification; Remedies

        10.1.  Survival; Right to Indemnification not Affected by Knowledge. All representations, warranties, covenants, and obligations in this Agreement and the Addtional Purchase Obligation Agreement, the schedules, the supplements to the schedules, the certificate delivered pursuant to Section 2.5.1.9, and any other certificate or document delivered pursuant to this Agreement or the Addtional Purchase Obligation Agreement will survive the Closing until the expiration of six full months in which Fab 2 is fully operated at a capacity of at least 8,000 wafers per month in compliance with the Foundry Agreement, provided, that in the event that any of the Addtional Purchase Obligations is not exercised, such survival shall only be until the date that is nine months from the last date on which Buyer could have been required to mandatorily exercise the Addtional Purchase Obligation under the terms and conditions of the Ad dtional Purchase Obligation Agreement (after giving effect to all applicable grace periods and extensions under the Addtional Purchase Obligation Agreement). The right to indemnification, payment of Damages or other remedies based on such representations, warranties, covenants, and obligations will not be affected by any investigation conducted with respect to, or any knowledge acquired (or capable of being acquired) at any time, whether before or after the execution and delivery of this Agreement or the Closing Date, with respect to the accuracy or inaccuracy of or compliance with, any such representation, warranty, covenant, or obligation.

        10.2.  Indemnification and Payment of Damages by the Company. The Company will indemnify and hold harmless Buyer and its Representatives, controlling persons, and affiliates (collectively, the “Buyer Indemnified Persons”) for, and will pay to the Buyer Indemnified Persons the amount of, any loss, liability, claim, damage, expense (including costs of investigation and defense and reasonable attorneys’ fees) or diminution of value, whether or not involving a third- party claim (collectively, “Damages”), arising, directly or indirectly, from or in connection with:

              10.2.1.  any breach of any representation or warranty made by the Company in this Agreement or in any other Transaction Document (without giving effect to any materiality qualification), the Schedules, the supplements to the Schedules, or any other certificate or document delivered by the Company pursuant to this Agreement, provided, however, that the determination of any breach of any representation or warranty made by the Company with respect to information contained in the Business Plan shall only be assessed when considering the Business Plan in its entirety and to any changes or modifications thereto which were made with Buyer’s approval, and that the Company shall not be liable under this clause 10.2.1 for an amount of Damages exceeding the aggregate proceeds actually provided by the Buyer to the Company pursuant to this Agreement and the Addtional Purchase Obligation Agreement , as the case may be, at the time the Company becomes required to make payment pursuant hereto; or

              10.2.2.  any breach by the Company of any covenant or obligation of the Company in this Agreement; or

              10.2.3.  any claim by any Person for brokerage or finder’s fees or commissions or similar payments based upon any agreement or understanding alleged to have been made by any such Person with the Company (or any Person acting on its behalf) in connection with any of the Contemplated Transactions.

        10.3.  The remedies provided in Section 10.2 will be the exclusive source of remedies that may be available to Buyer or the other Indemnified Persons in relation to any financial or pecuniary damages which may be available, however Buyer shall be free to pursue all other equitable remedies available under applicable law, including without limitation, any injunctive relief.

        10.4.  Notwithstanding anything to the contrary contained in Section 10.2, the Buyer shall not be entitled to seek indemnification from the Company under this Agreement with respect to any damages arising out of or resulting from Section 10.2, until the aggregate amount of such damages exceeds two hundred and fifty thousand US dollars ($250,000), and where such damages exceed two hundred and fifty thousand US dollars ($250,000), the Buyer shall be entitled to indemnification in full (including the amount of the two hundred and fifty thousand US dollars ($250,000) referred to above).

        10.5.  Indemnification and Payment of Damages by Buyer. Buyer will indemnify and hold harmless the Company, its Representatives, controlling persons and affiliates (the “Company Indemnified Persons”) and will pay

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to the Company Indemnified Persons the amount of any Damages arising, directly or indirectly, from or in connection with (i) any breach of any representation or warranty made by Buyer in this Agreement or in any certificate delivered by Buyer pursuant to this Agreement, (ii) any breach by Buyer of any covenant or obligation of Buyer in this Agreement, or (iii) any claim by any Person for brokerage or finder’s fees or commissions or similar payments based upon any agreement or understanding alleged to have been made by such Person with Buyer (or any Person acting on its behalf) in connection with any of the Contemplated Transactions.

        10.6.  Procedure for Indemnification - Third Party Claims

              10.6.1.  Promptly after receipt by an indemnified party under Section 10.2 or 10.3 of notice of the commencement of any Proceeding against it, such indemnified party will, if a claim is to be made against an indemnifying party under such Section, give notice to the indemnifying party of the commencement of such claim, but the failure to notify the indemnifying party will not relieve the indemnifying party of any liability that it may have to any indemnified party, except to the extent that the indemnifying party demonstrates that the defense of such action is prejudiced by the indemnifying party’s failure to give such notice.

              10.6.2.  If any Proceeding referred to in Section 10.6.1 is brought against an indemnified party and it gives notice to the indemnifying party of the commencement of such Proceeding, the indemnifying party will, unless the claim involves Taxes, be entitled to participate in such Proceeding and, to the extent that it wishes (unless (i) the indemnifying party is also a party to such Proceeding and the indemnified party determines in good faith that joint representation would be inappropriate, or (ii) the indemnifying party fails to provide reasonable assurance to the indemnified party of its financial capacity to defend such Proceeding and provide indemnification with respect to such Proceeding), to assume the defense of such Proceeding with counsel reasonably satisfactory to the indemnified party and, after notice from the indemnifying party to the indemnified party of its election to assum e the defense of such Proceeding, the indemnifying party will not, as long as it diligently conducts such defense, be liable to the indemnified party under this Section 10 for any fees of other counsel or any other expenses with respect to the defense of such Proceeding, in each case subsequently incurred by the indemnified party in connection with the defense of such Proceeding, other than reasonable costs of investigation. If the indemnifying party assumes the defense of a Proceeding, (i) it will be conclusively established for purposes of this Agreement that the claims made in that Proceeding are within the scope of and subject to indemnification; (ii) no compromise or settlement of such claims may be effected by the indemnifying party without the indemnified party’s consent unless (A) there is no finding or admission of any violation of Legal Requirements or any violation of the rights of any Person and no effect on any other claims that may be made against the indemnified party, and (B) the sole r elief provided is monetary damages that are paid in full by the indemnifying party; and (iii) the indemnified party will have no liability with respect to any compromise or settlement of such claims effected without its consent. If notice is given to an indemnifying party of the commencement of any Proceeding and the indemnifying party does not, within ten days after the indemnified party’s notice is given, give notice to the indemnified party of its election to assume the defense of such Proceeding, the indemnifying party will be bound by any determination made in such Proceeding or any compromise or settlement effected by the indemnified party.

              10.6.3.  Notwithstanding the foregoing, if an indemnified party determines in good faith that there is a reasonable probability that a Proceeding may adversely affect it or its affiliates other than as a result of monetary damages for which it would be entitled to indemnification under this Agreement, the indemnified party may, by notice to the indemnifying party, assume the exclusive right to defend, compromise, or settle such Proceeding, but the indemnifying party will not be bound by any determination of a Proceeding so defended or any compromise or settlement effected without its consent.

              10.6.4.  The Company hereby consents to the non-exclusive jurisdiction of any court in which a Proceeding is brought against any Buyer Indemnified Person for purposes of any claim that a Buyer Indemnified Person may have under this Agreement with respect to such Proceeding or the matters alleged therein, and agree that process may be served on the Company with respect to such a claim anywhere in the world.

        10.7.  Procedure for Indemnification - Other Claims. A claim for indemnification for any matter not involving a third-party claim may be asserted by notice to the party from whom indemnification is sought. Any claim for indemnification which may be brought under this Section 10 may be brought until 30 days after expiration of the relevant survival period.

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11.  Covenants of the Company Subsequent to the Closing Date

        11.1.  Additional Financing. The Company shall comply with all terms, conditions, covenants and obligations of the Company under the agreements entered into in connection with the Additional Financings.

        11.2.  Ancillary Agreements. The Company shall comply with all terms, conditions, covenants and obligation of the Company under the Ancillary Agreements. The Company shall not change or modify or agree to change or modify any of the terms and conditions of this Agreement, the Transaction Documents and the Toshiba Agreement without the prior written approval of Buyer (other than the Business Plan pursuant to Section 11.3).

        11.3.  Business Plan. The Company shall use the proceeds of this Agreement, the Addtional Purchase Obligations and the Additional Financings solely in order to finance the construction, deployment and operation of Fab 2 in accordance with the Business Plan and the timetable included therein. The Company shall not change or modify or agree to change or modify the Business Plan and shall not deviate materially from the Business Plan (whether or not it is changed) without the prior written approval of Buyer (which shall not be unreasonably withheld) if any such change, modification or agreement would or reasonably be expected to (a) materially change the construction schedule of Fab 2 as set forth in the Business Plan, (b) significantly increase the cost of Fab 2 beyond that set forth in the Business Plan or (c) materially change the production capacity schedule of Fab 2 as set forth in the Business Plan. In addit ion, the Company shall not change or modify or agree to change or modify the Business Plan and shall not deviate materially from the Business Plan (whether or not it is changed) if any such change, modification or agreement would or reasonably be expected to materially change the Additional Financing Plan as set forth in the Business Plan or result in a material failure to comply with the schedule for the financings described therein unless such change, modification or agreement has been approved by the Company’s Board, provided, however that such approval shall not be deemed granted if two or more members of the Board shall have voted against such change, modification or agreement.

        11.4.  Project Committee. As of the Closing and thereafter the Company shall create a committee of its Board (the “Project Committee”) to oversee and bear managerial responsibility for the Fab 2 Project. The Project Committee shall consist of four directors, including the Chief Executive Officer of the Company then serving on the Board, a representative of Buyer on the Board, so long as the Buyer is entitled to appoint a memer of the Board, a representative of TIC, so long as TIC is entitled to appoint a member to the Board, and one statutory external director, so long as the Company is required to appoint such an external director either to such committee or to the Board pursuant to Applicable Law.

        11.5.  Project Progress Reports; Liaison Officer. The Company shall, on a monthly basis starting immediately subsequent to the date hereof, and in any other date requested by Buyer, provide to Buyer with a written report describing, in reasonable detail, the progress and status of the Fab 2 and the Additional Financings. The Buyer may appoint a liasion officer with respect to the Fab 2 project that will be an employee or consultant of the Buyer and will be permitted to obtain from the Company and its officers, directors consultants and contractors, ongoing information with respect to the progress of the project, will have free access to all relevant information and documents and will be permitted to participated in intenal meetings and discussions of the Company with respect to the progress of the project. The Company will coordinate with the liasion officer any requests in accordance with the foregoing and s hall fully cooperate with such officer.

        11.6.  Information Rights. As long as Buyer, together with its Affiliates, holds at least 3% of the outstanding share capital of the Company, the Company shall deliver to Buyer copies of each report filed or furnished by the Company to the SEC, within no later than five days after such report is filed or furnished to the SEC.

        11.7.  Pre-emptive Rights.

              11.7.1.  Until the later of such time as (a) the Series B-1 Addtional Purchase Obligation shall have expired in accordance with its terms and (b) Buyer shall have exercised the Series B-1 Addtional Purchase Obligation and thereafter shall no longer own ten percent of the issued and outstanding share capital of the Company, if the Company proposes to issue any of its equity securities or securities convertible into such equity securities (the “Offered Securities”), other than Excluded Securities, then the Buyer shall have the right, but not the obligation, to purchase a portion of such Offered Securities, on the same terms and conditions and for the same consideration as the Offered Securities which are sold, equal to the percentage of the Company’s issued and

27

outstanding share capital as is owned by the Buyer on the date on which Buyer responds to the notice to be provided under Section 11.7.2 (the “Pro Rata Share”).

              11.7.2.  If the Company proposed to issue Offered Securities, it shall give the Buyer written notice of its intention (the “ Pre-emptive Notice”) and shall, in such notice, fully describe the Offered Securities and any other relevant securities and the terms and conditions and total consideration upon and for which the Company proposes to issue them. Upon receipt of such notice, the Buyer shall have 15 business days to decide and notify the Company of its decision to purchase Offered Securities in an amount not exceeding Buyer’s then current Pro Rata Share. If the Company fails to issue and sell the Offered Securities or any portion of them within 90 days from the date of the Pre-emptive Notice upon terms and conditions and for consideration that are no more favorable to the purhasers of the Offered Securities than specified in the Pre-emptive Notice, the Company shall not th ereafter issue or sell such Offered Securities without again complying with the provisions of this Section 11.7.2.

12.  General Provisions

              12.1.  Expenses. Except as otherwise expressly provided in this Agreement, each party to this Agreement will bear its respective expenses incurred in connection with the preparation, execution, and performance of this Agreement and the Contemplated Transactions, including all fees and expenses of agents, representatives, counsel, and accountants, provided that upon the Closing the Company shall reimburse Buyer for its reasonable legal expenses in connection with the negotiation and execution of this Agreement in an amount of up to $30,000 plus VAT. The Company shall pay all stamp tax duties in connection with the issuance of the Shares and any shares upon exercise of the Addtional Purchase Obligations and otherwise in connection with this Agreement.

              12.2.  Public Announcements. Any public announcement or similar publicity with respect to this Agreement or the Contemplated Transactions will be issued, if at all, by mutual agreement by the parties, except as required by applicable law or the regulations of the securities exchange upon which the securities of either party are traded or quoted. The Company and Buyer will consult with each other concerning the means by which the Company’s employees, customers, and suppliers and others having dealings with the Company will be informed of the Contemplated Transactions, and Buyer will have the right to be present for any such communication.

              12.3.  Confidentiality. From the date hereof, Buyer and the Company will maintain in confidence, and will cause the directors, officers, employees, agents, and advisors of Buyer and the Company to maintain in confidence, any written information stamped “confidential” when originally furnished by another party in connection with this Agreement or the Contemplated Transactions (including information furnished prior to the date hereof), unless (a) such information is already known to such party or to others not bound by a duty of confidentiality or such information becomes publicly available through no fault of such party, (b) the use of such information is necessary or appropriate in making any filing or obtaining any consent or approval required for the consummation of the Contemplated Transactions, or (c) the furnishing or use of such information is required by Legal Requ irements.

              If the Contemplated Transactions are not consummated, each party will return or destroy as much of such written information as the other party may reasonably request.

              12.4.  Notices. All notices, consents, waivers, and other communications under this Agreement must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by telecopier (with written confirmation of receipt), provided that a copy is mailed by registered mail, return receipt requested, or (c) when received by the addressee, if sent by a recognized overnight delivery service (receipt requested), in each case to the appropriate addresses and telecopier numbers set forth below (or to such other addresses and telecopier numbers as a party may designate by notice to the other parties):

Company:

Attention: Co-Chief Executive Officer
P.O. Box 619
Migdal Haemek 23105 Israel

Facsimile No.: 972-6-654-7788

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with a copy to: Yigal Arnon & Co.
3 Daniel Frisch Street
Tel Aviv, Israel

Attention: David H. Schapiro, Adv.

Facsimile No.: 972-3-608-7714

Buyer:

Attention: President and CEO
SanDisk Corporation
140 Caspian Court
Sunnyvale, California 94089

Facsimile No.: (408) 542-0600

with a copy to: SanDisk Corporation
140 Caspian Court
Sunnyvale, California 94089

Attention: Vice President and General Counsel

Facsimile No.: (408) 548-0385

        12.5.  Jurisdiction; Service of Process. Any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this Agreement may be brought against any of the parties solely in the courts of the State of California, and each of the parties consents to the jurisdiction of such courts (and of the appropriate appellate courts) in any such action or proceeding and waives any objection to venue laid therein. Process in any action or proceeding referred to in the preceding sentence may be served on any party anywhere in the world.

        12.6.  Further Assurances. The parties agree (a) to furnish upon request to each other such further information, (b) to execute and deliver to each other such other documents, and (c) to do such other acts and things, all as the other party may reasonably request for the purpose of carrying out the intent of this Agreement and the documents referred to in this Agreement.

        12.7.  Waiver. The rights and remedies of the parties to this Agreement are cumulative and not alternative. Neither the failure nor any delay by any party in exercising any right, power, or privilege under this Agreement or the documents referred to in this Agreement will operate as a waiver of such right, power, or privilege, and no single or partial exercise of any such right, power, or privilege will preclude any other or further exercise of such right, power, or privilege or the exercise of any other right, power, or privilege. To the maximum extent permitted by applicable law, (a) no claim or right arising out of this Agreement or the documents referred to in this Agreement can be discharged by one party, in whole or in part, by a waiver or renunciation of the claim or right unless in writing signed by the other party; (b) no waiver that may be given by a party will be applicable except in the sp ecific instance for which it is given; and (c) no notice to or demand on one party will be deemed to be a waiver of any obligation of such party or of the right of the party giving such notice or demand to take further action without notice or demand as provided in this Agreement or the documents referred to in this Agreement.

        12.8.  Entire Agreement and Modification. This Agreement supersedes all prior agreements between the parties with respect to its subject matter (including the term sheet between Buyer and the Company dated March 15, 2000 and all drafts hereof and thereof) and constitutes (along with the documents referred to in this Agreement) a complete and exclusive statement of the terms of the agreement between the parties with respect to its subject matter. This Agreement may not be amended except by a written agreement executed by the party to be charged with the amendment.

        12.9.  Disclosure Schedules

              12.9.1.  The disclosures in the Schedules, and those in any supplement thereto, must relate only to the representations and warranties in the Section of the Agreement to which they expressly relate and not to any other representation or warranty in this Agreement.

29

              12.9.2.  In the event of any inconsistency between the statements in the body of this Agreement and those in the Schedules (other than an exception expressly set forth as such in the Schedules with respect to a specifically identified representation or warranty), the statements in the body of this Agreement will control.

        12.10.  Assignments, Successors, and no Third-Party Rights. Neither party may assign any of its rights under this Agreement without the prior consent of the other parties, except that Buyer may assign any of its rights under this Agreement to any wholly owned Subsidiary of Buyer or to any Subsidiary which is wholly owned other than a nominal interest, so long as such ownership shall be maintained. Subject to the preceding sentence, this Agreement will apply to, be binding in all respects upon, and inure to the benefit of the successors and permitted assigns of the parties. Nothing expressed or referred to in this Agreement will be construed to give any Person other than the parties to this Agreement any legal or equitable right, remedy, or claim under or with respect to this Agreement or any provision of this Agreement. This Agreement and all of its provisions and conditions are for the sole and exclusive benef it of the parties to this Agreement and their successors and assigns.

        12.11.  Severability. If any provision of this Agreement is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Agreement will remain in full force and effect. Any provision of this Agreement held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable.

        12.12.  Section Headings, Construction. The headings of Sections in this Agreement are provided for convenience only and will not affect its construction or interpretation. All references to “Section” or “Sections” refer to the corresponding Section or Sections of this Agreement. All words used in this Agreement will be construed to be of such gender or number as the circumstances require. Unless otherwise expressly provided, the word “including” does not limit the preceding words or terms.

        12.13.  Time of Essence. With regard to all dates and time periods set forth or referred to in this Agreement, time is of the essence.

        12.14.  Governing Law. This Agreement will be governed by the laws of the State of California without regard to conflicts of law principles.

        12.15.  Counterparts. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement.

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IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first written above.

	SanDisk Corporation
By:	/s/ Eli Harari
	Chief Executive Officer

	Tower Semiconductor Ltd.
By:	/s/ Yoav Nissan Cohen
	Co-Chief Executive Officer

EX-10.38 3 ex10-38.htm EXHIBIT 10-38

EXHIBIT 10.38

ESCROW AGREEMENT

        ESCROW AGREEMENT dated as of August 14, 2000, between SanDisk Corporation, a Delaware corporation, (the “Purchaser”), Tower Semiconductor Ltd., an Israeli corporation (the “Company”) and Union Bank of California, N.A., as escrow agent (the “Escrow Agent”).

        WHEREAS, Purchaser and the Company have entered into a Share Purchase Agreement, dated July 4, 2000 (the “SPA”), pursuant to which the Purchaser shall, subject to the terms and conditions of the SPA, purchase from the Company 866,551 of the Company’s ordinary shares, par value NIS1.00 per share, as may be adjusted pursuant to the terms of the SPA (the “Shares”) in consideration for an aggregate purchase price of $20,000,000 (the “Purchase Price”); and

        WHEREAS, pursuant to Section 2 of the SPA, the Purchase Price (as defined in the SPA) is to be deposited in escrow pursuant to the terms and conditions of this Agreement; and

        WHEREAS, pursuant to Section 2 of the SPA, at the Closing (as defined in the SPA), subject to the fulfillment of all closing conditions under the SPA, the Purchase Price will be released from escrow to the Company in accordance with the terms hereof.

        NOW THEREFORE, in consideration of the mutual covenants and agreements contained herein, and upon the terms and subject to the conditions hereinafter set forth, the parties agree as follows:

        1.  Appointment of Escrow Agent.   The Company and the Purchaser hereby appoint Union Bank of California, N.A. as escrow agent with respect to the Purchase Price and the Escrow Agent accepts such appointment, all upon the terms and conditions set forth herein.

        2.  Deposit into Escrow Account.  Promptly following the execution and delivery of this Agreement, the Purchaser shall cause to be deposited with the Escrow Agent, and upon such deposit the Escrow Agent shall acknowledge receipt of, $20,000,000 (such funds together with any income earned thereon pursuant to Section 4 hereof after payment of expenses incurred or taxes incurred, the “Escrowed Funds”) via a wire transfer of immediately available funds to the account of the Escrow Agent set forth in Schedule 2 hereto (the “Escrow Account”). The Escrow Agent shall hold the Escrowed Funds and shall administer the same and the Escrow Account in accordance with the terms of this Agreement. The Escrow Agent shall report to the Company and the Purchaser upon receipt of the Purchase Price into the Escrow Account.

        3.  Disbursement of the Escrowed Funds.

        3.1  Upon receipt by the Escrow Agent of written notice from the Purchaser to the effect that the Closing set forth in Section 2 of the SPA is scheduled to occur on a specified date, the Escrow Agent shall, on the date specified in such notice release the Escrowed Funds to the Company by way of wire transfer of immediately available funds into the bank account designated by the Company in Schedule 3.1 hereto. The Purchaser shall provide the Company with a copy of the written notice referred to in the first sentence of this Section 3.1.

        3.2  In the event that the written notice set forth in Section 3.1 is not received by the Escrow Agent on or prior to the earlier of (a) January 31, 2001 and (b) such time as the Escrow Agent shall receive a notice from either the Purchaser, the Company or both to the effect that the sender(s) of such notice has terminated the SPA pursuant to Section 9 of the SPA together with a copy of the actual written notice of termination as required under such Section 9, this Agreement shall terminate. Upon termination, the Escrow Agent shall deliver the Escrowed Funds to the Purchaser by way of wire transfer of immediately available funds into the bank account designated by the Purchaser in Schedule 3.2 hereto.

        4.  Investments.  Purchaser and Company may deliver written and jointly signed instructions to the Escrow Agent with specific investment instructions for the Escrowed Funds. In the absence of such instructions, the Escrow Agent shall have full authority and shall, invest and reinvest the Escrowed Funds in United States Treasury obligations or other fixed income securities rated “ AA” or higher by a nationally recognized statistical rating organization or in one or more money market funds of major institutions meeting the following criteria (i) fund assets of at least $1 billion, (ii) comprised of high quality money market instruments having a dollar weighted average maturity of ninety days or less, (iii) provide for same day settlement and (iv) stable net asset value of US

$1.00 and rated AAA by S&P. The Escrow Agent shall not be liable or responsible for any loss suffered in connection with any investment of funds made by it pursuant hereto or in connection with the liquidation of any such investment prior to its maturity.

        5.  Further Provisions Relating to the Escrow

        5.1  The Company and the Purchaser shall be the sole parties entitled to bring suit concerning this Agreement (excluding an action for interpleader brought by the Escrow Agent), and specific performance of this Agreement shall be their sole and exclusive remedy against the Escrow Agent. Other than in connection with a claim of gross negligence or willful misconduct, the Escrow Agent shall not be liable for any monetary damages in connection with this Agreement. Other than in connection with a claim of gross negligence or willful misconduct and except in connection with a claim for specific performance of this Agreement, the Escrow Agent shall not be liable in law or equity for any mistake of fact or of law or any error of judgment, or for any act or any omission.

        5.2  Other than in connection with a claim against the Escrow Agent of gross negligence or willful misconduct and except in connection with a claim by the Company or the Purchaser for specific performance of this Agreement, the Company and the Purchaser, jointly and equally, shall indemnify and hold harmless the Escrow Agent and its directors, officers, agents and employees against and in respect of any and all claims, suits, actions, proceedings (formal and informal), investigations, judgments, deficiencies, damages, settlements, liabilities, and legal and other expenses (including legal fees and expenses of attorneys chosen by the Escrow Agent) as and when incurred arising out of or based upon any act, omission, alleged act, or alleged omission by the Escrow Agent, or its agents, or any other cause, in any case in connection with the acceptance of, or the performance or non-performance by the Escrow Agent, or its agents, of any of the Escrow Agent’s duties under this Agreement.

        5.3  The Escrow Agent makes no representation as to the validity or genuineness of any document held by or delivered to it. The Escrow Agent shall be fully protected by acting in reliance upon any notice given in proper form hereunder, advice, direction, other document, or signature believed by it to be genuine, by assuming that any person purporting to give the Escrow Agent any notice, advice, direction, or other document has been duly authorized so to do, or by acting or failing to act in good faith on the advice of any counsel retained by the Escrow Agent.

        5.4  The Escrow Agent shall have no duties or responsibilities except those expressly set forth herein and shall not be responsible for or chargeable with knowledge of the terms or provisions of any agreements between the parties, including, without limitation the SPA. The Escrow Agent shall not be bound by any notice of a claim, or demand with respect thereto, or any waiver, modification, amendment, termination, cancellation, or revision of this Agreement, unless it is in writing and signed by the Company and the Purchaser and received by the Escrow Agent, and, if the Escrow Agent’s duties as Escrow Agent hereunder are affected, unless the Escrow Agent shall have given its prior written consent thereto. The Escrow Agent shall not be bound by any assignment by either of the other parties hereto of its rights hereunder.

        5.5  The Escrow Agent is authorized to comply with and obey all laws, orders, judgments, decrees, and regulations of any governmental authority, court, tribunal, or arbitrator. If the Escrow Agent so complies, it shall not be liable even if such law, order, judgment, decree, or regulation is subsequently reversed, modified, annulled, set aside, vacated, or found to have been entered without jurisdiction.

        5.6  If the Escrow Agent shall be uncertain as to its duties or rights hereunder, or if it shall receive any notice, advice, direction or other document from any other party with respect to the Escrowed Funds which, in the Escrow Agent’s opinion, is in conflict with any of the provisions of this Agreement, or if it should be advised that a dispute has arisen with respect to the payment, ownership, or right of possession of the Escrowed Funds or any part thereof (or as to the delivery, non-delivery) or content of any notice, advice, direction, or other document), the Escrow Agent shall be entitled, without liability, to refrain from taking any action other than to use Escrow Agent’s best efforts to keep safely the Escrowed Funds until the Escrow Agent shall be directed otherwise in writing by the other parties hereto or by an order, decree, or judgment of the competent California Court or an arbitrator duly appointed by the Company and the Purchaser, but the Escrow Agent shall be under no duty to institute or to defend any proceeding although the Escrow Agent may, in the Escrow Agent’s discretion and at the expense of the Company and the Purchaser (to be shared equally among such parties), institute or defend such proceedings.

        5.7  The Escrow Agent may resign by giving 30 days’ prior written notice to the Company and the Purchaser, in which case the Escrow Agent shall appoint a successor Escrow Agent reasonably acceptable to the

Company and the Purchaser. If the Escrow Agent fails to do so within 30 days, it may apply to a court of competent jurisdiction for the appointment of a successor. The resigning Escrow Agent shall transfer and deliver the Escrowed Funds to the successor Escrow Agent, after the fees and expenses for all services rendered by the resigning Escrow Agent shall have been paid to it, and all of the provisions of this Escrow Agreement shall apply to the successor Escrow Agent as though it had been named herein.

        6.  Compensation of Escrow Agent

        The Escrow Agent shall be entitled to fees and expenses for all services rendered by it hereunder in accordance with Schedule 6 hereto, which fees and expenses shall be paid ½ each by the Company and the Purchaser. The Escrow Agent shall also be entitled to reimbursement on demand for all reasonable loss, liability, damage or expenses paid or incurred by it in the administration of its duties hereunder, including, but not limited to, all disbursements and all taxes or other governmental charges Escrow Agent may withdraw the fees shown in Schedule 6 from account income.

        7.  Representations of the Company and the Purchaser

        Each of the Company and the Purchaser is a corporation duly organized, validly existing and in good standing under the laws of its state or country of incorporation and has all necessary power and authority to execute and deliver this Agreement and to be bound by the provisions hereof. The execution and delivery of this Agreement and the performance by the Company and the Purchaser of their respective obligations hereunder have been duly authorized by all requisite corporate action on the part of the Company and the Purchaser. This Agreement has been validly executed and delivered by the Company and the Purchaser and constitutes the legal, valid and binding obligation of the Company and the Purchaser enforceable against each of them in accordance with its terms Company represents and warrants that any funds payable to it are not subject to any United States withholding.

        8.  Survival

        The covenants, agreements, representations, and warranties contained in or made pursuant to this Agreement shall survive the delivery by the Escrow Agent of the Escrowed Funds or any part thereof.

        9.  Miscellaneous

        9.1  At any time and from time to time, the Company and the Purchaser agree, at their expense, to take such actions and to execute and deliver such documents as may be reasonably necessary to effectuate the purposes of this Agreement.

        9.2  This Agreement does not create, and shall not be construed as creating, any rights enforceable by any person other than the parties hereto.

        9.3  Any demand, consent, notice or other communication authorized or required to be made under this Agreement shall be in writing and shall be given or made by registered mail (registered airmail if international post), personal delivery or facsimile (confirmed by registered mail or personal delivery), addressed to the respective Parties as set forth below:

To the Escrow Agent: Union Bank of California, N.A.
475 Sansome Street, 12th Floor
San Francisco, CA 94111
Attention: Douglas Schlafer,
Corporate Trust Department
Telephone: (415) 296-6747
Facsimile: (415) 296-6757

To Company at: Attention:  Co-Chief Executive Officer
Tower Semiconductor, Ltd.
P.O. Box 619
Migdal Haemek 23105 Israel
Facsimile No.:  972-6-654-7788

3

with a copy to: Yigal Arnon & Co.
3 Daniel Frisch Street
Tel Aviv, Israel
Attention:  David H. Schapiro, Adv.
Facsimile No.:  972-3-608-7714

To Purchaser at: SanDisk Corporation
140 Caspian Court
Sunnyvale, California 94089
Attention:  President and CEO
Facsimile No.:  (408) 542-0600

with a copy to: SanDisk Corporation
140 Caspian Court
Sunnyvale, California 94089
Attention:  Vice President and General Counsel
Facsimile No.:  (408) 548-0385

(or to such changed addresses as to which they may give notice).

        9.4  This Agreement shall be governed by, and construed in accordance with, the laws of the State of California regardless of the laws that might otherwise govern under applicable principles of conflicts of law thereof. Any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this Agreement may be brought against any of the parties solely in the courts of the State of California, and each of the parties consents to the jurisdiction of such courts (and of the appropriate appellate courts) in any such action or proceeding and waives any objection to venue laid therein. Process in any action or proceeding referred to in the preceding sentence may be served on any party anywhere in the world.

        9.5  Neither the Company nor the Purchaser may assign any of its rights hereunder. This Agreement shall inure to the benefit of and be binding upon the successors of the Company and the Purchaser.

        9.6  No consent or waiver, express or implied, by any party to or of any breach or default by a party in the performance of its obligations hereunder shall be deemed or construed to be a consent or waiver to or of any other breach or default in the performance by such party of the same or any other obligations of such party hereunder. Failure on the part of any party to complain of any act or failure to act of another party or to declare the other party in default, irrespective of how long such failure shall continue, shall not constitute a waiver of such party of its rights hereunder.

        9.7  If any provision of this Agreement or the application thereof to any person or circumstance shall be invalid or unenforceable to any extent, the parties shall use best efforts to adopt an enforceable substitute provision expressing the intent of the parties, and remainder of this Agreement and the application of such remaining provisions to other persons or circumstances shall not be affected thereby and shall be enforced to the greatest extent permitted by law.

        9.8  This Agreement, together with Schedules 2, 3.1, 3.2 and 6, contains the entire agreement between the parties hereto relative to their rights and obligations as related to the escrow. No variations, modifications, or changes herein or hereof shall be binding upon any party hereto unless set forth in a document duly executed by or on behalf of such party.

        9.9  This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement.

4

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written.

SanDisk Corporation

By: /s/ Frank A. Calderoni

Name: Frank A. Calderoni
Title: Sr. Vice President Finance and
          Administration

Tower Semiconductor Ltd.

By: /s/ Rafael Levin

Name: Rafael Levin
Title: Co-Chief Executive Officer

Union Bank of California, N.A

By: /s/ Vicki Elnick

Name: Vicki Elnick
Title: Vice President

EX-10.39 4 ex10-39.htm EXHIBIT 10-39

EXHIBIT 10.39

ADDITIONAL PURCHASE OBLIGATION AGREEMENT

        ADDITIONAL PURCHASE OBLIGATION AGREEMENT, dated as of July 4, 2000, between Tower Semiconductor Ltd., an Israeli corporation (“T”), and SanDisk Corporation, a Delaware corporation (“S”).

        WHEREAS, T and S are parties to that certain Share Purchase Agreement dated July 4, 2000, relating to the sale by T to S of 866,551 of T’s Ordinary Shares (the “ Share Purchase Agreement”) and parties to that certain Foundry Agreement dated July 4, 2000, relating to the production of certain silicon wafers by T for delivery to S; and

        WHEREAS, as a condition to the closing of the sale of certain of T’s shares under the Share Purchase Agreement and the effectiveness of the Foundry Agreement, T and S have each agreed to enter into this Agreement providing for the issuance and delivery of conditional additional purchase obligations for the purchase by S of Ordinary Shares of T, subject to the terms and conditions set forth herein.

        NOW, THEREFORE, in consideration of the foregoing and for the purpose of defining the terms and provisions of the Additional Purchase Obligations and the respective rights and obligations thereunder of T and S, T and S hereby agree as follows:

1.  Definitions

        1.1.  Certain Definitions. As used in this Agreement, terms not defined herein shall have the meaning ascribed to them in the Share Purchase Agreement and the following terms shall have the following respective meanings:

        “A Additional Purchase Obligation Certificates” shall have the meaning ascribed to it in Section 2.2.

        “A Additional Purchase Obligations” shall have the meaning ascribed to it in Section 2.1.

        “Additional Purchase Obligation Certificates” shall have the meaning ascribed to it in Section 2.2.

        “Additional Purchase Obligations” shall have the meaning ascribed to it in Section 2.1.

        “B Additional Purchase Obligation Certificates” shall have the meaning ascribed to it in Section 2.2.

        “B Additional Purchase Obligations” – shall have the meaning ascribed to it in Section 2.1.

        “Equity Securities” means (a) Ordinary Shares and securities convertible into, or exercisable or exchangeable for, Ordinary Shares or rights or options to acquire Ordinary Shares or such other securities, and (b) shares of any other class or series of capital shares and securities convertible into, or exercisable or exchangeable for, shares of such other class or series and rights or options to acquire shares of such other class or series or such other securities, in each case, excluding the Additional Purchase Obligations.

        “Exchange Act” means the Securities Exchange Act of 1934, as amended.

        “Exercise Price” means the purchase price per Ordinary Share to be paid upon the exercise of each Additional Purchase Obligation in accordance with the terms hereof, which price shall initially be $30 per share, as each may be adjusted from time to time pursuant to Section 4 hereof.

        “Expiration Date” means the fifth anniversary of the date of this Agreement subject to earlier termination of one or more of the Additional Purchase Obligations pursuant to Section 5.1.

        “Exercise Notice” – shall have the meaning ascribed to in Section 2.1.3.

        “Grace Period” – shall have the meaning ascribed to it in Section 5.1.

        “Mandatory Exercise Event” shall have the meaning ascribed to it in Section 5.1.

        “Missed Exercise” - shall have the meaning ascribed to it in Section 5.1.

        “Nasdaq” means the Nasdaq National Market.

        “B Additional Purchase Obligation Certificates” shall have the meaning ascribed to it in Section 2.2.

        “B Additional Purchase Obligations” – shall have the meaning ascribed to it in Section 2.1.

        “Ordinary Shares” means the ordinary shares, par value NIS1.00 per share of T and any other capital shares of T into which such ordinary shares may be converted or reclassified or that may be issued in respect of, in exchange for, or in substitution of, such ordinary shares by reason of any share splits, shares dividends, distributions, mergers, consolidations or other like events.

        “SEC” means the Securities and Exchange Commission.

        “Securities Act” means the Securities Act of 1933, as amended.

        “Share Purchase Agreement” – as defined in the recitals to this Agreement.

        “T” means T, an Israeli corporation, and its successors and assigns.

        “Underlying Ordinary Shares” means the Ordinary Shares issuable or issued upon the exercise of the Additional Purchase Obligations.

2.  Original Issue of Additional Purchase Obligations

        2.1.  The Additional Purchase Obligations.

        2.1.1.  A Additional Purchase Obligations. On the basis of the representations, warranties and agreements contained in this Agreement, but subject to the terms and conditions hereof, concurrently with the execution of this Agreement, T shall issue and deliver to S warrants mandatorily exercisable under Section 5.1 hereof for the purchase of up to an aggregate of 1,833,450 Ordinary Shares of T by S subject to adjustment as set forth herein (the “A Additional Purchase Obligations”).

        2.1.2.  B Additional Purchase Obligations. On the basis of the representations, warranties and agreements contained in this Agreement, but subject to the terms and conditions hereof, concurrently with the execution of this Agreement, T shall issue and deliver to S Additional Purchase Obligations for the purchase of up to an aggregate of 2,700,000 Ordinary Shares of T by S subject to adjustment as set forth herein. Pursuant to the election of S to exercise the B Additional Purchase Obligations as provided in Section 2.1.3 below, the B Additional Purchase Obligations shall become mandatorily exercisable under Section 5.1 hereof (the “B Additional Purchase Obligations” and together with the A Additional Purchase Obligations, the “Additional Purchase Obligations”).

        2.1.3.  B Additional Purchase Obligations Exercise Notice. In the event that S elects to exercise the B Additional Purchase Obligations, S is required to deliver to T, no later than October 1, 2001(the “Exercise Date”) , a written notice (the “Exercise Notice”) of its election to exercise the B Additional Purchase Obligations under Section 5.1 hereof. The Exercise Notice shall be accompanied by a payment for such number of B Additional Purchase Obligations as shall have been exercised in the A Additional Purchase Obligation series through the Exercise Date. For instance, if by the Exercise Date the A-1, A-2 and A-3 Additional Purchase Obligations shall have been exercised, on the Exercise Date S shall make a payment for the B-1, B-2 and B-3 Additional Purchase Obligations. For the avoidance of all doubt, the B Additional Purchase Obligations shall not become exercisable until the delivery o f the Election Notice and failure to deliver the Election Notice to T within the above date shall cause the B Additional Purchase Obligations to terminate and become void.

        2.2.  Form of Additional Purchase Obligation Certificates. The A Additional Purchase Obligations shall be designated in five series (Series A1 – A5), each evidenced by an Additional Purchase Obligation certificate in the form of Exhibits A1 – A5 attached hereto (the “A Additional Purchase Obligation Certificates”). The B Additional Purchase Obligations shall be designated in five series (Series B1 – B5), each evidenced by an Additional Purchase Obligation certificate in the form of Exhibits B1 – B5 attached hereto (the “B Additional Purchase Obligation

Certificates” and together with the A Additional Purchase Obligation Certificates, the “Additional Purchase Obligation Certificates”). Each A Additional Purchase Obligation series shall contain Additional Purchase Obligations to purchase up to an aggregate of 366,690 Ordinary Shares of T. Each B1- to B-5 Additional Purchase Obligation series shall contain Additional Purchase Obligations to purchase 540,000 Ordinary Shares of T. Each Additional Purchase Obligation Certificate shall be dated the date hereof and shall bear the legend set forth in Exhibit C, together with such other legends and endorsements thereon as may be required to comply with any law or with any rule or regulation pursuant thereto or with any rule or regulation of any securities exchange on which the Ordinary Shares may be listed, or to conform to customary usage.

3.  Exercise Price; Exercise of Additional Purchase Obligations Generally

        3.1.  Payment of Exercise Price. Each Additional Purchase Obligation Certificate shall entitle the holder thereof, subject to the provisions thereof and of this Agreement, to receive up to the number of Ordinary Shares stated therein, subject to adjustment as herein provided, upon payment of the Exercise Price for each of such shares. The Exercise Price shall be payable by wire transfer of immediately available funds to T in accordance with written wiring instructions provided by T, or by such other means as may be mutually agreed by the parties.

        3.2.  Exercise Periods of A and B Additional Purchase Obligations

        3.2.1.  Exercise Period of A Additional Purchase Obligations. Subject to the terms and conditions set forth herein, the A Additional Purchase Obligations shall be exercisable at any time on or after the Closing Date under the Share Purchase Agreement and on or prior to the Expiration Date.

        3.2.2.  Exercise Period of B Additional Purchase Obligations. Subject to the terms and conditions set forth herein, the B Additional Purchase Obligations shall be exercisable at any time after the delivery of the Exercise Notice, pursuant to Section 2.1.3, and on or prior to the Expiration Date.

        3.3.  Expiration of Additional Purchase Obligations. The Additional Purchase Obligations shall terminate and become void as of the close of business on the Expiration Date.

        3.4.  Exercise Generally. Subject to Section 5, in order to exercise an Additional Purchase Obligation, S must surrender the Additional Purchase Obligation Certificate evidencing such Additional Purchase Obligation to T, with one of the forms on the reverse of or attached to the Additional Purchase Obligation Certificate duly executed. Subject to the terms of Section 5, each Additional Purchase Obligation may be exercised in whole or in part, provided that no Additional Purchase Obligation may be exercised for the purchase of less than an aggregate of 100,000 Ordinary Shares. If fewer than all of the Additional Purchase Obligations represented by an Additional Purchase Obligation Certificate are surrendered, such Additional Purchase Obligation Certificate shall be surrendered and a new Additional Purchase Obligation Certificate substantially in the form of the Additional Purchase Obligation Certificate surrendered for partial exercise thereof providing for purchase by S of the number of Ordinary Shares that were not exercised shall be executed by T and issued to S.

        Upon surrender of an Additional Purchase Obligation Certificate and payment of the Exercise Price in conformity with the foregoing provisions, T shall promptly issue to S appropriate evidence of ownership of the Ordinary Shares or other securities or property to which S is entitled, including share certificates in the name of S and evidence of such Ordinary Shares having been registered in the share register of T in the name of S. Such Shares shall bear the same legend as set forth in Section 4.3.2 of the Share Purchase Agreement.

4.  Adjustments

        4.1.  Adjustment of Exercise Price and Number of Shares of Ordinary Shares

              The (a) number and kind of shares purchasable upon the exercise of Additional Purchase Obligations and (b) Exercise Price shall both be subject to adjustment from time to time as follows:

        4.1.1.  Stock Dividends, Share-Splits, Combinations, etc. In case T shall hereafter (a) pay a stock dividend or make a distribution (whether in Ordinary Shares or capital shares of any other class on its Ordinary Shares), (b) subdivide its outstanding Ordinary Shares, (c) combine its outstanding Ordinary Shares into a smaller number of shares, or (d) issue by reclassification of its Ordinary Shares any capital shares of T, the Exercise Price in effect immediately prior to such action (after giving effect to all other adjustements under this Section 4) shall be adjusted so that, in relation to any Additional Purchase

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             Obligation thereafter exercised, S shall be entitled to receive the number of Ordinary Shares or of other capital shares which S would have owned immediately following such action had such Additional Purchase Obligation been exercised immediately prior thereto. An adjustment made pursuant to this paragraph shall become effective immediately after the record date in the case of a dividend and shall become effective immediately after the effective date in the case of a subdivision, combination or reclassification.

        4.1.2.  Reclassification, Combination, Mergers, etc. In case of any reclassification or change of outstanding Ordinary Shares issuable upon exercise of the Additional Purchase Obligations (other than (i) as set forth in paragraph 4.1.1 above, and (ii) a change in par value, or from par value to no par value, or from no par value to par value or (iii) as a result of a subdivision or combination), or in case of any consolidation or merger of T with or into another corporation (other than a merger in which T is the continuing corporation and which does not result in any reclassification or change of the then outstanding Ordinary Shares or other capital shares issuable upon exercise of the Additional Purchase Obligations (other than a change in par value, or from par value to no par value, or from no par value to par value or as a result of a subdivision or combination), or in case of any sale or conveyance to ano ther corporation of the property of T as an entirety or substantially as an entirety, then, as a condition of such reclassification, change, consolidation, merger, sale or conveyance, T or such a successor or purchasing corporation, as the case may be, shall forthwith make lawful and adequate provision whereby S shall have the right thereafter to receive on exercise of such Additional Purchase Obligation the kind and amount of shares and other securities and property receivable upon such reclassification, change, consolidation, merger, sale or conveyance by a holder of the number of Ordinary Shares issuable upon exercise of such Additional Purchase Obligation immediately prior to such reclassification, change, consolidation, merger, sale or conveyance. Such provisions shall include provision for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 4. The above provisions of this paragraph 4.1.2 shall similarly apply to successive reclassificati on and changes of Ordinary Shares and to successive consolidations, mergers, sales or conveyances.

        4.1.3.  Deferral of Certain Adjustments. No adjustment to the Exercise Price (including the related adjustment to the number of Ordinary Shares purchasable upon the exercise of each Additional Purchase Obligation) shall be required hereunder unless such adjustment, together with other adjustments carried forward as provided below, would result in an increase or decrease of at least one percent of the Exercise Price, provided, however, that any adjustments which by reason of this paragraph 4.1.3 are not required to be made shall be carried forward and taken into account in any subsequent adjustment. No adjustment need be made for a change in the par value of the Ordinary Shares.

        4.1.4.  Other Adjustments. In the event that at any time, as a result of an adjustment made pursuant to this Section 4, S shall become entitled to receive any securities of T other than Ordinary Shares thereafter the number of such other securities so receivable upon exercise of the Additional Purchase Obligations and the Exercise Price applicable to such exercise shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Ordinary Shares contained in this Section 4.

        4.2.  Notice of Adjustment. Whenever the number of Ordinary Shares or other Equity Securities or property issuable upon the exercise of each Additional Purchase Obligation or the Exercise Price is adjusted, as herein provided, T shall promptly mail by first class mail, postage prepaid, to S notice of such adjustment or adjustments and shall deliver to S a certificate of T’s chief financial officer setting forth the number of Ordinary Shares or other Equity Securities or property issuable upon the exercise of each Additional Purchase Obligation or the Exercise Price after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth the computation by which such adjustment was made.

        4.3.  Statement on Additional Purchase Obligations. Irrespective of any adjustment in the number or kind of shares issuable upon the exercise of the Additional Purchase Obligations or the Exercise Price, Additional Purchase Obligations theretofore or thereafter issued may continue to express the same number and kind of shares as are stated in the Additional Purchase Obligations initially issuable pursuant to this Agreement.

        4.4.  Fractional Interest. T shall not be required to issue fractional Ordinary Shares upon the exercise of Additional Purchase Obligations. If more than one Additional Purchase Obligation shall be presented for exercise in full at the same time, the number of full Ordinary Shares which shall be issuable upon such exercise shall be

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computed on the basis of the aggregate number of Ordinary Shares acquirable on exercise of the Additional Purchase Obligations so presented. If any fraction of an Ordinary Share would, except for the provisions of this section, be issuable on the exercise of any Additional Purchase Obligation (or specified portion thereof), T shall pay an amount in cash calculated by it to equal to the then current market value per share multiplied by such fraction computed to nearest whole cent. S, by its acceptance of the Additional Purchase Obligation Certificates, expressly waive any and all rights to receive any fraction of an Ordinary Share or a share certificate representing a fraction of an Ordinary Share.

5.  Mandatory Exercise

        5.1.  Mandatory Exercise Events; Termination of Obligation. Subject to the terms and conditions contained herein, S shall be obligated to exercise each Additional Purchase Obligation within thirty days of the following events (each a “Mandatory Exercise Event”):

        5.1.1.  In respect of the Series A-1 Additional Purchase Obligation (and the B-1 Additional Purchase Obligation if an Exercise Notice was delivered prior to the date the Series A-1 Additional Purchase Obligation is mandatorily exercisable), upon receipt of written notice from T signed by the two Co-CEOs (or by the CEO, in the event that at the relevant time the Company shall employ only one CEO) and the Chairman of the Board of T certifying that the Board of Directors of T has authorized commencement of construction of Fab 2 at the site set forth in the Business Plan, which approval shall not occur prior to obtaining all regulatory approvals necessary for the construction start as described in the Business Plan, provided that such event must occur no later than one month after the Closing under the Share Purchase Agreement;

        5.1.2.  In respect of the Series A-2 Additional Purchase Obligation and the Series B-2 Additional Purchase Obligation (if an Exercise Notice was delivered prior to the date the Series A-2 Additional Purchase Obligation is mandatorily exercisable), upon receipt of written notice from T signed by the two Co-CEOs or the CEO, as the case may be, and the Chairman of the Board of T certifying the commencement of construction of the shell of the Fab 2 building in accordance with the Business Plan provided that such event must occur no later than three months after the Closing under the Share Purchase Agreement;

        5.1.3.   In respect of the Series A-3 Additional Purchase Obligation and the Series B-3 Additional Purchase Obligation (if an Exercise Notice was delivered prior to the date the Series A-3 Additional Purchase Obligation is mandatorily exercisable), upon receipt of written notice from T signed by the two Co-CEOs or the CEO, as the case may be, and the Chairman of the Board of T certifying the completion of the construction of the first phase of the cleanroom of Fab 2 in accordance with the Business Plan provided that such event must occur no later than 12 months after the Closing under the Share Purchase Agreement;

        5.1.4.  In respect of the Series A-4 Additional Purchase Obligation and the Series B-4 Additional Purchase Obligation (if an Exercise Notice was delivered prior to the date the Series A-4 Additional Purchase Obligation is mandatorily exercisable), upon receipt of written notice from T signed by the two Co-CEOs or the CEO, as the case may be, and the Chairman of the Board of T certifying the completion of successful pilot production in Fab 2 in accordance with the Business Plan provided that such event must occur no later than 18 months after the Closing under the Share Purchase Agreement; and

        5.1.5.  In respect of the Series A-5 Additional Purchase Obligation and the Series B-5 Additional Purchase Obligation (if an Exercise Notice was delivered prior to the date the Series A-5 Additional Purchase Obligation is mandatorily exercisable), upon receipt of written notice from T signed by the two Co-CEOs or the CEO, as the case may be, and the Chairman of the Board of T certifying that Fab 2 has successfully produced wafers at the rate of 5,000 per month for two full consecutive months in accordance with the Business Plan provided that such event must occur no later than 22 months after the Closing under the Share Purchase Agreement.

        Each of the Mandatory Exercise Events shall be deemed to have occurred if the Mandatory Exercise Event occurs within seven and one-half months from its original exercise date set forth above (such seven and one-half month period, a “Grace Period”). In the event that one of the Mandatory Exercise Events does not occur by the last date set forth in the relevant clause of clauses 5.1.1 – 5.1.5, including

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             during the corresponding Grace Period (a “Missed Exercise”), then, if the subsequent Mandatory Exercise Event does not occur by no later than the end of its corresponding Grace Period, S shall not be obligated to effect the Missed Exercise and any subsequent series of Additional Purchase Obligations and the Additional Purchase Obligation relating to the Missed Exercise, to the extent such Additional Purchase Obligations are unexercised, shall automatically expire. However, if such subsequent Mandatory Exercise Event does occur within the applicable Grace Period, then S shall be obligated to exercise the Additional Purchase Obligation related to that subsequent Mandatory Exercise Event and shall be required to either effect the Missed Exercise within thirty days of the occurrence of the relevant subsequent Mandatory Exercise Event or the Additional Purchase Obligation relating to the Missed E xercise shall expire.

        In addition, and without limiting any other remedies available to T, in the event that S fails to exercise an Additional Purchase Obligation in connection with a Mandatory Exercise Event which it is obligated to effect pursuant to this Section 5, any Additional Purchase Obligations unexercised at such time shall automatically expire

        5.2.  Percentage Ownership Delay. Notwithstanding the provisions of Section 5.1, S may delay the exercise of any Additional Purchase Obligation if any such exercise would result in S owning more than 19.9% of the outstanding share capital of T.

        5.3.  Other Conditions to Mandatory Exercise. In addition to the conditions to Mandatory Exercise contained in Section 5.1, S’s obligation to effect a Mandatory Exercise shall be subject to satisfaction of the following conditions (any of which may be waived by S, in whole or in part, in S’s discretion) in relation to each Mandatory Exercise:

        5.3.1.  Accuracy of Representations. All of T’s representations and warranties in Section 6.1(i) of this Agreement must have been accurate in all material respects (except that such representations and warranties specifically qualified by materiality shall be read for purposes of this Section so as not to require an additional degree of materiality) as of the date of this Agreement, and must be accurate in all material respects as of the date of the relevant Mandatory Exercise, after giving effect, with respect to the representations made in Section 3.1 and 3.3 of the Share Purchase Agreement, to the issuance of Ordinary Shares contemplated by the Business Plan and Additional Financing Plan and without giving effect to any supplement to the Schedules other than supplements disclosing events and facts not existing at the time of the Closing and arising in the Ordinary Course of Business.

        5.3.2.  Additional Financings. T shall have raised all the funds under the Additional Financings required thereunder to have been raised or obtained either prior to or simultaneously with the date of the relevant Mandatory Exercise as described in the Additional Financing Plan (each, a “Target Date”), including those funds required to have been raised by the relevant Target Date under (i) the debt or equity financing described in Section 10 of the Business Plan and (ii) under the grant from the Investment Center, in each case on terms and conditions which do not significantly deviate from the terms and conditions agreed upon in accordance with Section 5.6 of the Share Purchase Agreement, provided, however, that this condition shall be deemed to have been not satisfied only if the failure to raise such funds causes a material change in the timetable or cost of the Fab 2 project in relati on to the Business Plan as determined by S. Notwithstanding the foregoing, the conditions set forth in this Section 5.2.2 shall be deemed to have been met if the funds which were not raised as of the relevant Target Date are raised within 90 days of such Target Date on terms and conditions substantially similar to the terms and conditions upon which such funds were supposed to have been raised in accordance with Section 5.6 of the of the Share Purchase Agreement.

        5.3.3.  Transaction Documents; Ancillary Agreements. Each of the Transaction Documents and the Toshiba Agreement shall be in full force and effect and shall not have been materially breached by any party thereto.

        5.3.4.  Certificates. In addition to the documents T is obligated to deliver to S under this Section 5, T shall furnish S with such other documents as T may reasonably request for the purpose of (i) evidencing the performance by T of, or the compliance by T with, any covenant or obligation required to be performed or complied with by T in relation to the relevant Mandatory Exercise and (ii)  evidencing the satisfaction of any condition referred to in this Section 5.

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        5.3.5.  No Proceedings. Since the date of this Agreement, there must not have been commenced by a third party against S or T, or against any Person affiliated with S or T, any Proceeding (a) involving any challenge to, or seeking damages or other relief in connection with, any of the Contemplated Transactions, or (b) that may have the effect of preventing, delaying, making illegal, or otherwise interfering with any of the Contemplated Transactions.

        5.3.6.  Bankruptcy-Related Events. None of the following events shall have occurred for any reason whatsoever (and whether such occurrence shall be voluntary or involuntary, or come about or be effected by operation of law, or pursuant to or in compliance with any judgement, decree or order of any court or any order, rule or regulation of any administrative or governmental body):

        5.3.6.1.  T shall be unable to pay its debts generally as they become due; file a petition to take advantage of any insolvency statute; make an assignment for the benefit of its creditors; commence a proceeding for the appointment of a receiver, trustee, liquidator or conservator of itself or of the whole or any substantial part of its property; file a petition or answer seeking reorganization or arrangement or similar relief under applicable bankruptcy laws; or

        5.3.6.2.  A court of competent jurisdiction shall have entered an order, judgement or decree appointing a custodian, receiver, trustee, liquidator or conservator of T or of the whole or any substantial part of its properties, or approve a petition filed against T seeking reorganization or arrangement or similar relief under applicable bankruptcy, or if, under the provisions of any law for the relief or aid of debtors, a court of competent jurisdiction shall assume custody or control of T or of the whole or any substantial part of its properties, or if there was commenced against T any proceeding or petition seeking reorganization or arrangement or similar relief under applicable bankruptcy laws, or if T shall have taken any action to indicate its consent to or approval of any such proceeding or petition, and any one of which proceedings shall not have been vacated or abandoned within 30 days.

        5.3.6.3.  A default shall have occurred in any agreement or instrument under or pursuant to which any material indebtedness of T shall have been issued, created, assumed, guaranteed or secured, and such default shall continure for more than the period of grace, if any, therein specified, or if such default shall permit the holder of such indebtedness to accelerate the maturity thereof, provided, however, that the condition contained in this Section 5.3.6.3 shall not be deemed to have been satisfied in the event that a default in any agreement or instrument under which any indebtedness of T has been issued could give rise to a cross default provision in in any agreement or instrument under or pursuant to which any material indebtedness of T shall have been issued, created, assumed, guaranteed or secured, or if the cumulative effect of any or all such defaults could be material to the Company.

6.  Representations and Warranties

        6.1.  Representations and Warranties of T. (i) T hereby makes in favor of S, as of the date hereof and as of the date of each exercise of each Additional Purchase Obligation, each of the representations and warranties made by the Company in Sections 3.1, 3.2, 3.3, 3.14.1(i), the first two sentences of 3.14.2 and clause (ii) of the first paragraph of 3.15 of the Share Purchase Agreement, provided that references to “this Agreement” shall refer both to this Agreement and the Share Purchase Agreement; references, directly or indirectly, to the Escrow Agreement shall be ignored; references to “Shares” and the “Closing” shall be deemed to be references to the Ordinary Shares to be issued pursuant to the exercise of the Additional Purchase Obligation; and references to the “Closing Date” shall refer to the date that Ordinary Shares are actually issued and delivered to S purs uant to the relevant exercise of an Additional Purchase Obligation. Notwithstanding the foregoing, the representation contained in the first two sentences of Section 3.14.2 shall be read to relate to Fab 2. In the event that it is uncertain if a situation, event or fact that would otherwise be included in the scope of such representation relates to Fab 2, the matter shall be conclusively decided by the Project Committee.

        6.2.  Representations and Warranties of S. S hereby makes in favor of T, as of the date hereof and as of the date of each exercise of an Additional Purchase Obligation, the representations and warranties made by S under Sections 4.1 – 4.5 of the Share Purchase Agreement, provided that references to “this Agreement” shall refer both to this Agreement and the Share Purchase Agreement, references to Shares shall refer to the Additional Purchase

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Obligations and the Ordinary Shares issuable upon the exercise thereof and references, directly or indirectly, to the Escrow Agreement shall be ignored.

7.  Covenants

        7.1.  Reservation of Shares. T will reserve for issuance such number of Ordinary Shares as shall be sufficient for issuance and delivery thereof upon exercise of all outstanding Additional Purchase Obligations and will take any and all corporate action necessary to validly and legally issue fully paid and nonassessable Ordinary Shares.

        7.2.  Consents; Required Approvals. T and S will each, as promptly as practicable after the date of this Agreement, take all action required of each of them, respectively, to obtain as promptly as practicable all necessary Consents and agreements of, and to give all notices and make all other filings with, any third parties, including Governmental Bodies, necessary to authorize, approve or permit the consummation of the transactions contemplated hereby, the Contemplated Transactions and the transactions contemplated by the Ancillary Agreements. Between the date of this Agreement and the date of the last issuance of Ordinary Shares pursuant to an exercise of a Additional Purchase Obligation, T will cooperate with S with respect to all filings that S elects to make or is required by Legal Requirements to make in connection with the performance of this Agreement and the Additional Purchase Obligations and S will l ikewise cooperate with T.

        7.3.  Operation of T’s Business. Between the date of this Agreement and the date of the last issuance of Ordinary Shares pursuant to a Mandatory Exercise, T will not (i) take or agree or commit to take any action that would make any representation or warranty of T hereunder inaccurate in any respect at, or as of any time prior to, the date of the last issuance of Ordinary Shares pursuant to a Mandatory Exercise or (ii) omit or agree or commit to omit to take any action necessary to prevent any such representation or warranty from being inaccurate in any respect at any such time.

8.  Miscellaneous

        8.1.  Payment of Taxes. T will pay all taxes and other governmental charges (other than on the net income of S) that may be imposed or deliverable upon exercise of Additional Purchase Obligations and issuance of Ordinary Shares with respect thereto. T will not be required, however, to pay any tax or other charges which may be payable in respect of any transfer involved in the issue of any certificate for Ordinary Shares or other securities underlying the Additional Purchase Obligations or payment of cash or other property to any person other than the holder of an Additional Purchase Obligation Certificate surrendered upon the exercise thereof.

        8.2.  Mutilated, Destroyed, Lost and Stolen Additional Purchase Obligation Certificates. If (a) any mutilated Additional Purchase Obligation Certificate is surrendered to T or (b) T receives evidence to its satisfaction of the destruction, loss or theft of any Additional Purchase Obligation Certificate, then, T shall execute and deliver, in exchange for any such mutilated Additional Purchase Obligation Certificate or in lieu of any such destroyed, lost or stolen Additional Purchase Obligation Certificate, a new Additional Purchase Obligation Certificate of like tenor and for a like aggregate number of Additional Purchase Obligations.

              Upon the issuance of any new Additional Purchase Obligation Certificate under this Section 8.2, T may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and other expenses in connection therewith and an appropriate indemnity with respect to losses related thereto.

              Every new Additional Purchase Obligation Certificate executed and delivered pursuant to this Section 8.2 in lieu of any destroyed, lost or stolen Additional Purchase Obligation Certificate shall constitute an original contractual obligation of T, whether or not the destroyed, lost or stolen Additional Purchase Obligation Certificate shall be at any time enforceable by anyone, and shall be entitled to the benefits of this Agreement equally and proportionately with any and all other Additional Purchase Obligation Certificates duly executed and delivered hereunder.

              The provisions of this Section 8.2 are exclusive and shall prelude (to the extent lawful) all other rights or remedies with respect to the replacement of mutilated, destroyed, lost or stolen Additional Purchase Obligation Certificates.

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        8.3.  Miscellaneous Rights. The rights of S upon the occurrence of the events set forth in this Agreement are cumulative. If more than one such event shall occur and the periods following the occurrence of such events and prior to the closing of the transactions that are the subject of such events overlap, S may exercise such rights arising therefrom as S may elect without any condition imposed upon such exercise not contained in this Agreement.

        8.4.  Notices. Any notice, demand or delivery authorized by this Agreement shall be sufficiently given or made when mailed if sent by first-class mail, postage prepaid, addressed to the parties as follows:

T:

Attention: Co-Chief Executive Officer
P.O. Box 619
Migdal Haemek 23105 Israel
Facsimile No.: 972-6-654-7788

with a copy to: Yigal Arnon & Co.
3 Daniel Frisch Street
Tel Aviv, Israel

Attention: David H. Schapiro, Adv.
Facsimile No.: 972-3-608-7714

S:

Attention: President and CEO
SanDisk Corporation
140 Caspian Court
Sunnyvale, California 94089
Facsimile No.: (408) 542-0600

with a copy to: SanDisk Corporation
140 Caspian Court
Sunnyvale, California 94089

Attention: Vice President and General Counsel
Facsimile No.: (408) 548-0385

              or such other address as shall have been furnished to the party giving or making such notice, demand or delivery.

        8.5.  Assignments, Successors, and no Third-Party Rights. Neither party may assign any of its rights under this Agreement without the prior consent of the other parties, except that S may assign any of its rights under this Agreement to any wholly owned Subsidiary of S or to any Subsidiary which is wholly owned other than a nominal interest, so long as such ownership shall be maintained. Subject to the preceding sentence, this Agreement will apply to, be binding in all respects upon, and inure to the benefit of the successors and permitted assigns of the parties. Nothing expressed or referred to in this Agreement will be construed to give any Person other than the parties to this Agreement any legal or equitable right, remedy, or claim under or with respect to this Agreement or any provision of this Agreement. This Agreement and all of its provisions and conditions are for the sole and exclusive benefit of the parties to this Agreement and their successors and assigns.

        8.6.  Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together constitute one and the same instrument.

        8.7.  Entire Agreement and Modification. This Agreement supersedes all prior agreements between the parties with respect to its subject matter (including the term sheet between S and T dated March 15, 2000 and all drafts hereof and thereof) and constitutes (along with the documents referred to in this Agreement) a complete and exclusive statement of the terms of the agreement between the parties with respect to its subject matter. This Agreement may not be amended except by a written agreement executed by the party to be charged with the amendment.

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        8.8.  Termination. This Agreement (other than T’s obligations with respect to Additional Purchase Obligations previously exercised) and the indemnification provisions relating hereto appearing in Sections 10 of the Share Purchase Agreement, shall terminate and be of no further force and effect on the Expiration Date.

        8.9.  Applicable Law. This Agreement and each Additional Purchase Obligation issued hereunder and all rights arising hereunder shall be governed by the law of the State of California, without giving effect to the conflict of laws provisions thereof.

        8.10.  Headings. The descriptive headings of the several Sections of this Agreement are inserted for convenience and shall not control or affect the meaning or construction of any of the provisions hereof.

        IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, as of the day and year first above written.

	TOWER SEMICONDUCTOR LTD.
By:	/s/  Yoav Nissan Cohen
	Name:  Yoav Nissan Cohen Title:  Co-Chief Executive Officer

	SANDISK CORPORATION
By:	/s/  Eli Harari
	Name:  Eli Harari Title:  Chief Executive Officer

EX-10.37

EXHIBIT 10.37

SHARE PURCHASE AGREEMENT

             This Share Purchase Agreement (“Agreement”) is made as of July 4, 2000, by SanDisk Corporation, a Delaware corporation (“Buyer”), and Tower Semiconductor Ltd., an Israeli corporation (the “Company”).

RECITALS

             The Company desires to sell, and Buyer desires to purchase, an interest in the Company through the acquisition of 866,551 ordinary shares, par value NIS1.00 each (the “Shares”) of the Company and through the issuance and delivery of Addtional Purchase Obligations for the purchase by Buyer of additional Ordinary Shares of the Company, on the terms and subject to the conditions set forth in this Agreement and in the Addtional Purchase Obligation Agreement in the form of Exhibit B hereto.

             NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and for other good and valuable consideration the receipt and adequacy of which are hereby acknowledged, the parties agree as follows:

1.  Definitions

        For purposes of this Agreement, the following terms have the meanings specified or referred to in this Section 1:

        “Additional Financings” – as defined in Section 3.5.

        “Additional Financing Plan” – a detailed written plan, approved by the Board and detailing, among other things, the significant financial terms and timetable under which the Company will obtain the financings listed in Section 7.6 hereto, all as set forth in Section 10 to the Business Plan.

        “Ancillary Agreements” – as defined in Section 3.2.4.

        “Applicable Contract”- any Contract (a) under which the Company or any Subsidiary has or may acquire any rights, (b) under which the Company or any Subsidiary has or may become subject to any obligation or liability, or (c) by which the Company or any Subsidiary or any of the assets owned or used by them is or may become bound.

        “Assets” – as defined in Section 3.6.

        “Balance Sheet”- as defined in Section 3.4.2.

        “Business Plan” means the Business Plan, dated July 4, 2000, of the Company with respect to the proposed construction, deployment and operation by the Company of Fab 2.

        “Buyer”- as defined in the first paragraph of this Agreement.

        “Closing”- as defined in Section 2.3.

        “Closing Date”- the date and time as of which the Closing actually takes place.

        “Company”- as defined in the first paragraph of this Agreement.

        “Consent”- any approval, consent, ratification, waiver, or other authorization (including any Governmental Authorization).

        “Contemplated Transactions”- all of the transactions contemplated by this Agreement, the Transaction Documents and the Ancillary Agreements.

        “Contract”- any agreement, contract, obligation, promise, or undertaking whether oral or written that is legally binding.

        “Damages”- as defined in Section 10.2.

        “Encumbrance”- any charge, claim, community property interest, condition, equitable interest, lien, option, pledge, security interest, right of first refusal, or restriction of any kind, including any restriction on use, voting, transfer, receipt of income, or exercise of any other attribute of ownership.

        “Escrow Agreement”- as defined in Section 2.4.

        “Escrow Agent”- as defined in the Escrow Agreement.

        “Exchange Act” means the U.S. Securities Exchange Act of 1934, as amended, and any rules or regulations issued pursuant to that Act or any successor law.

        “Excluded Securities” means Ordinary Shares or options to purchase Ordinary Shares issued to bona fide employees, directors or consultants of the Company or any Subsidiary thereof.

        “Fab 2” – The Company’s new Fab project to be constructed in Migdal Haemek in Israel, all as further set forth in the Business Plan.

        “Facilities”- any real property, leaseholds, or other interests currently owned or operated by the Company and any buildings, plants, structures, or equipment currently owned or operated by the Company.

        “GAAP”- generally accepted Israel accounting principles, applied on a basis consistent with the basis on which the Balance Sheet and the other financial statements referred to in Section 3.4 were prepared.

        “Governmental Authorization”- any approval, consent, license, permit, waiver, or other authorization issued, granted, given, or otherwise made available by or under the authority of any Governmental Body or pursuant to any Legal Requirement.

        “Governmental Body”- any U.S. or Israeli federal, state, local, municipal or other government, governmental or quasi-governmental authority of any nature (including any governmental agency, branch, department, official or entity and any court or other tribunal), or body exercising or entitled to exercise any administrative, executive, judicial, legislative, police, regulatory or taxing authority or power of any nature.

        “Intellectual Property Assets” - as defined in Section 3.20.

        “Interim Balance Sheet”- as defined in Section 3.4.2.

        “Investment Center” – the Investment Center of the Ministry of Trade and Commerce of the Israeli Government.

        “Knowledge” or “knowledge”- a person will be deemed to have “Knowledge” or “knowledge” of a particular fact or other matter if any individual who is serving as a Named Director or Officer has, or at any time had, knowledge of such fact or other matter.

        “Legal Requirement”- any U.S. or Israeli federal, state, local, municipal or administrative or other order, constitution, law, ordinance, principle of common law, regulation, statute, or treaty.

        “Named Officers and Directors”- as defined in Section 3.3.2.

        “OCS” – as defined in Section 3.21.

        “Order”- any award, decision, injunction, judgment, order, ruling, subpoena, or verdict entered, issued, made, or rendered by any court, administrative agency, or other Governmental Body or by any arbitrator.

        “Ordinary Course of Business”- an action taken by a Person will be deemed to have been taken in the “Ordinary Course of Business” only if:

Such action is consistent with the past practices of such Person and is taken in the ordinary course of the normal day-to-day operations of such Person; and

        Such action is similar in nature and magnitude to actions customarily taken in the ordinary course of the normal day-to-day operations of other Persons that are in the same line of business as such Person.

        “Ordinary Shares” – the ordinary shares of the Company, par value NIS1.00 per share.

        “Organizational Documents”- (a) the memorandum of association, articles of association, certificate of incorporation and/or the bylaws of a corporation; (b)  the partnership agreement and any statement of partnership of a general partnership; (c) the limited partnership agreement and the certificate of limited partnership of a limited partnership; (d) any charter or similar document adopted or filed in connection with the creation, formation, or organization of a Person; and (e) any amendment to any of the foregoing.

        “Person”- any individual, corporation (including any non-profit corporation), general or limited partnership, limited liability company, joint venture, estate, trust, association, organization, labor union, or other entity or Governmental Body.

        “Proceeding”- any action, arbitration, audit, hearing, investigation, litigation, or suit (whether civil, criminal, administrative, investigative, or informal) commenced, brought, conducted, or heard by or before, or otherwise involving, any Governmental Body or arbitrator.

        “Representative”- with respect to a particular Person, any director, officer, employee, agent, consultant, advisor, or other representative of such Person, including legal counsel, accountants, and financial advisors.

        “Schedule” means a schedule comprising part of the disclosure schedule delivered by the Company to Buyer concurrently with the execution and delivery of this Agreement.

        “Securities Act”- the U.S. Securities Act of 1933 as amended, and regulations and rules issued pursuant to that Act or any successor law.

        “Shares”- as defined in the Recitals of this Agreement.

        “Steering Committee” – a committee to be formed immediately upon the signing of this Agreement and dissolved upon the Closing and comprised of three members including one representative of each of the Buyer, TIC and the Company, none of whom needs to be a member of the Board. The Steering Committee shall oversee the development, assessment and implementation, and, if applicable, any modification of the Business Plan as specified in Sections 5.6.5 of this Agreement. The Steering Committee shall not be deemed to be a committee of the Board and its members shall not have a fiduciary duty to the Company. The Steering Committee shall consider, in making decisions pursuant to Sections 5.6.5 and 7.3 hereunder, (a) the construction schedule of Fab 2 as set forth in the Business Plan and any changes thereto, (b) the Additional Financing Plan as set forth in the Business Plan and any failure to comply with the schedule for such f inancings or changes to the Additional Financing Plan, (c) any significant increase in the cost of Fab 2 beyond that set forth in the Business Plan and (d) the production capacity schedule of Fab 2 as set forth in the Business Plan and any changes thereto.

        “Subsidiary”- any corporation or other Person of which securities or other interests having the power to elect a majority of that corporation’s or other Person’ s board of directors or similar governing body, or otherwise having the power to direct the business and policies of that corporation or other Person (other than securities or other interests having such power only upon the happening of a contingency that has not occurred) are held by the Company or one or more of its Subsidiaries.

        “Tax Return”- any return (including any information return), report, statement, schedule, notice, form, or other document or information filed with or submitted to, or required to be filed with or submitted to, any Governmental Body in connection with the determination, assessment, collection, or payment of any Tax or in connection with the administration, implementation, or enforcement of or compliance with any Legal Requirement relating to any Tax.

        “TIC”- The Israel Corporation Ltd.

        “Threatened”- a claim, Proceeding, dispute, action, or other matter will be deemed to have been “Threatened” if either (a) any demand or statement has been made in writing or any notice has been given in writing or any other event has occurred or any other circumstance exists, that actually leads any Named Officer and Director to believe that such a claim, will be filed or otherwise pursued in the future or (b) any demand or statement has been made orally or any notice has been given orally to the effect that such a claim, Proceeding, dispute, action or other matter will be asserted, commenced, taken or otherwise pursued in the future.

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        “Transaction Documents” – collectively, the Foundry Agreement, the Addtional Purchase Obligation Agreement, the Escrow Agreement (all as defined in Section 2.4), the Shareholders Agreement and the Registration Rights Agreement (as defined in Section 2.5.1.5.).

         “Wafer Partner” – a wafer manufacturer that either invests in the equity of the Company and enters into an agreement with the Company providing for a wafer order right or that enters into a wafer manufacturing agreement with the Company on a “take or pay” basis or on a “pre-payment” basis, in each case in accordance with the provisions of Sections 7.6(ii) and 7.7 hereof.

        “Additional Purchase Obligations” – Conditional obligations to purchase Ordinary Shares of the Company issued under the Additional Purchase Obligation Agreement.

        Additional Defined Terms

6K Reports	Section 3.4.1	Material Adverse Effect	Section 3.1.1
Additional Incentive Plans	Section 1.14	Offered Securities	Section 11.8.1
Additional Purchase Obligation Agreement	Section 2.4	Patents	Section 3.20.1
Additional Purchase Obligation Shares	Section 2.4	Project Committee	Section 11.4
Additional Wafer Partner Financing Date	Section 7.6	Pro Rata Share	Section 11.8.1
Annual Report	Section 3.4.1	Purchase Price	Section 2.2
Articles	Section2.5.1.2	Registration Right Agreement	Section 2.5.1.5
Board	Section 2.4	Rights in Mask Works	Section 3.10.1
Copyrights	Section 3.20.1	SEC	Section 3.4.1
Debt Financing Term Sheet	Section 5.6.4	Shareholders Agreement	Section 2.5.1.5
Environmental Study	Section 3.5.1	SEC Documents	Section 3.4.1
Executed Transaction Documents	Section 3.2.1	Steering Committee	Section 5.10
Grants	Section 3.2.1	Taxes
Indemnified Persons	Section 10.2	Toshiba Agreement	Section 3.2.3
Foundry Agreement	Section 2.4	Wafer Commitments	Section 7.7
Marks	Section3.20.1	Wafer Partner Differential	Section 7.6

2.  Sale and Transfer of Shares; Purchase Price; Closings

        2.1.  Delivery. Subject to the terms and conditions of this Agreement, at the Closing, the Company shall issue to the Buyer the Shares, validly authorized, duly issued, fully paid and nonassesable entitled to all rights and privileges assigned to such Shares in this Agreement and in the Articles and free of any Encumbrances (other than arising solely by or through actions of Buyer), in consideration for the release of the Purchase Price (as defined below) from the Escrow Agent to the Company.

        2.2.  Purchase Price. The per share purchase price will be $23.08 (all references herein to “$” are to United States dollars) representing an aggregate purchase price (the “Purchase Price”) for the Shares of $20,000,000. Within 14 days of the execution of this Agreement, the Purchase Price will be deposited in escrow pursuant to the terms and conditions of the Escrow Agreement with an escrow agent to be appointed by the parties. At the Closing, subject to the fulfillment or waiver of all closing conditions hereto, the Purchase Price will be released from escrow to the Company all in accordance with the terms and conditions of this Agreement and the Escrow Agreement and all interest accrued with respect to the Purchase Price during the escrow period will be released to the Company.

        2.3.  Closing. The closing provided for in this Agreement (the “ Closing”) will take place at the offices of Meitar, Liquornik, Geva & Co. at 16 Abba Hillel Silver Road, Ramat Gan, 52506, Israel at 10:00 a.m. (local time) on the date that is seven days following satisfaction of all the conditions specified in Sections 7 and 8, unless the parties otherwise agree, provided that the Closing may not, in any event, take place after January 31, 2001, unless the parties otherwise agree. In the event that the Closing fails to take place by January 31, 2001, or such later

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date as the parties may agree, or otherwise terminates pursuant to section 9.1, then all interest accrued with respect to the Purchase Price and the Purchase Price shall be retained by Buyer.

        2.4.  Other Agreements; Company’s Resolutions. Concurrently with the execution of this Agreement, (a) the parties hereto are executing and entering into the Foundry Agreement in the form of Exhibit A hereto (the “Foundry Agreement”) and the Addtional Purchase Obligation Agreement in the form of Exhibit B hereto (the “Addtional Purchase Obligation Agreement”), each of which shall provide that they shall only be effective upon the Closing, (b) the Company is delivering to the Buyer certified resolutions of the Company’s board of directors (the “Board”) authorizing and approving the execution, delivery and performance of the Transaction Documents and the consummation of the Contemplated Transactions, including without limitation, the issuance of the Shares to the Buyer and all shares issuable upon exercise of the Addtional Purchase Obligations under the Addtional Purchase Obligatio n Agreement (the “Addtional Purchase Obligation Shares”) (subject, in relation to the issuance of the Shares and the Addtional Purchase Obligation Shares, to Company shareholder approval pursuant to a general meeting of the Company) and (c) the Company is delivering to the Buyer a certificate dated the date hereof signed by the co-Chief Executive Officer of the Company identified in Schedule 7.15 to the effect set forth in Section 7.15. The parties shall enter into the Escrow Agreement in the form of Exhibit C hereto (the “Escrow Agreement”) within 14 days of the date hereof. Buyer and TIC will execute and enter into the Shareholders Agreement in the form of Exhibit D hereto (the “Shareholders Agreement”) within 14 days of the date hereof.

        2.5.  Closing Obligations. At the Closing:

              2.5.1.  The Company will deliver to Buyer:

                     2.5.1.1.  Certified copies of resolutions of the Company’s shareholders relating to, among other things, an increase in the Company’s registered share capital and the issuance of the Shares and the Addtional Purchase Obligation Shares, and the Board authorizing and approving the Ancillary Agreements and the transactions contemplated therein;

                     2.5.1.2.  Certified copies of the Company’s Articles of Association (the “ Articles”) as amended through the Closing Date;

                     2.5.1.3.  A certificate duly executed by two executive officers of the Company in the form set forth in Schedule 2.5.1.3, dated as of the date of the Closing;

                     2.5.1.4.  The opinion of Yigal Arnon & Co., counsel to the Company, in the form reasonably satisfactory to Buyer and its counsel to be attached hereto as Schedule 2.5.1.4, dated as of the date of the Closing;

                     2.5.1.5.  Executed copies of the Registration Rights Agreement substantially in the form of Exhibit E hereto (the “Registration Rights Agreement”), which shall provide an equal number of Demand Rights (as defined in such agreement) to Buyer and TIC.

                     2.5.1.6.  Validly executed certificates representing the Shares, issued in the name of the Buyer and a certificate of the secretary of the Company confirming that the Shares were registered in the share register of the Company in the name of Buyer;

                     2.5.1.7.  Copies of documents evidencing all Consents and approvals required under Section 7.3 hereof;

                     2.5.1.8.  Copies of all the Ancillary Agreements duly executed and delivered and in accordance with Section 7 hereof;

                     2.5.1.9.  The written consent of the OCS and the Investment Center to the execution of this Agreement and the issuance of the Shares to the Buyer.

                     2.5.1.10.  The certificate required to be delivered under Section 7.15 hereof.

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              2.5.2.  Buyer will deliver to the Company:

                     2.5.2.1.  A copy of a letter from Buyer to the Escrow Agent irrevocably authorizing the release of the Purchase Price to the account of the Company pursuant to the terms of the Escrow Agreement;

                     2.5.2.2.  A certificate duly executed by two executive officers of Buyer in the form set forth in Schedule 2.5.2.2, dated as of the date of the Closing.

                     2.5.2.3.  Executed copies of the Shareholders Agreement and the Registration Rights Agreement .

3.  Representations and Warranties of the Company

        The Company hereby represents and warrants to Buyer as of the date hereof and as of the Closing and as otherwise provided in the Addtional Purchase Obligation Agreement as follows:

        3.1.  Organization and Good Standing

              3.1.1.  The Company and each Subsidiary is a corporation duly organized, validly existing, and in good standing under the laws of its jurisdiction of incorporation, with full corporate power and authority to conduct its business as it is now being conducted and as currently approved by the Board to be conducted in the future and to own or use its properties and assets. The Company has all requisite corporate power to perform all its obligations under Applicable Contracts including, but not limited to, the Ancillary Agreements, subject, with respect to the issuance of the Shares and the Addtional Purchase Obligation Shares, to receipt of the shareholder resolutions referred to in Section 2.5.1.1. The Company and each Subsidiary is duly qualified to do business as a foreign corporation and is in good standing under the laws of each state or other jurisdiction in which either the ownership or use of the properties owned or used by it, or the nature of the activities conducted by it or proposed to be conducted by it, requires such qualification, unless such non-qualifications would not have a material adverse affect on the business, financial conditions, assets, operations and prospects of the Company and its Subsidiaries taken as a whole (a “Material Adverse Effect”). Schedule 3.1 contains a complete and accurate list for the Company and each Subsidiary of its name, its jurisdiction of incorporation, other jurisdictions in which it is authorized to do business, and its capitalization, including (i) in connection with each Subsidiary, the identity of each shareholder and the number of shares held by such shareholder, and (ii) in connection with the Company, the identity of each shareholder who to the knowledge of the Company holds more than 5% of the issued and outstanding share capital of the Company and the number of shares of the Company held by each such shareholders. Also enclose d in Schedule 3.1 is a copy of the list of shareholders maintained by the Company’s transfer agent as of a date within 5 days prior to the date hereof.

              3.1.2.  The Company has delivered to Buyer copies of (i) the Organizational Documents of the Company and each Subsidiary, as currently in effect, and (ii) minutes of all meetings of the directors and shareholders of the Company and each Subsidiary held since January 1, 1995 and all resolutions passed by the directors or shareholders since January 1, 1995.

        3.2.  Authority; No Conflict; Consents and Approvals

              3.2.1.  Each of this Agreement, the Addtional Purchase Obligation Agreement, the Addtional Purchase Obligations, the Escrow Agreement and the Foundry Agreement (the “Executed Transaction Documents”) has been duly authorized, executed and delivered by the Company (subject, with respect to the increase in the Company’s registered share capital and issuance of the Shares and the Addtional Purchase Obligation Shares, to receipt of shareholder approval by Closing) and, assuming the due execution and delivery hereof and thereof by Buyer, constitutes the legal, valid, and binding obligation of the Company, enforceable against the Company in accordance with its terms. Upon the execution and delivery by the Company of the Transaction Documents and the other Ancillary Agreements (where applicable), and assuming the due execution and delivery thereof by the other parties thereto, the Transaction Documents and the other Ancillary Agreements (where applicable) will constitute the legal, valid, and binding obligations of the Company, enforceable against the Company in accordance with their respective terms. The Company has the absolute and unrestricted right, power, authority, and capacity to execute and deliver this Agreement and the Transaction Documents and the other Ancillary Agreements (where applicable) and to perform its obligations under this Agreement, the Transaction Documents and the other Ancillary Agreements (where applicable) (subject, with respect to the issuance of the Shares and the Addtional Purchase Obligation Shares, to receipt of Company shareholder approval by Closing) and

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has taken all corporate action necessary to consummate the transactions contemplated hereby and thereby and to perform its obligations hereunder and thereunder.

              3.2.2.  Except as set forth in Schedule 3.2, neither the execution and delivery of this Agreement, any of the Transaction Documents or any of the other Ancillary Documents nor the consummation or performance of any of the foregoing is or will, directly or indirectly (with or without notice or lapse of time):

                     3.2.2.1.  contravene, conflict with, or result in a violation of (A) any provision of the Organizational Documents of the Company or any Subsidiary, or (B) any resolution adopted by the board of directors or the shareholders of the Company or any Subsidiary; or

                     3.2.2.2.  contravene, conflict with, or result in a violation of, or give any Governmental Body or other Person the right to challenge or to exercise any remedy or obtain any relief under, any Legal Requirement or any Order to which the Company or any Subsidiary, or any of the assets owned or used by the Company or any Subsidiary, may be subject, the breach of or default under which could have a Material Adverse Effect or could materially adversely affect the consummation of the Contemplated Transactions; or

                     3.2.2.3.  contravene, conflict with, or result in a violation of any of the terms or requirements of, or give any Governmental Body the right to revoke, withdraw, suspend, cancel, terminate or modify any Governmental Authorization that is held by the Company or any Subsidiary or that otherwise relates to the business of, or any of the assets owned or used by, the Company or any Subsidiary, the effect of which would have a Material Adverse Effect or materially adversely affect the consummation of the Contemplated Transactions; or

                     3.2.2.4.  contravene, conflict with, or result in a violation or breach of any provision of, or give any Person the right to declare a default or exercise any remedy under, or to accelerate the maturity or performance of, or to cancel, terminate, or modify, any Applicable Contract, the effect of which could have a Material Adverse Effect or materially adversely affect the consummation of the Contemplated Transactions; or

                     3.2.2.5.  result in the imposition or creation of any Encumbrance upon or with respect to any of the Asset owned or used by the Company or any Subsidiary, the effect of which could have a Material Adverse Effect or materially adversely affect the consummation of the Contemplated Transactions.

              3.2.3.  Except as set forth in Schedule 3.2.3, no notice to, filing with or Consent from any Person or Governmental Body is or will be required to be made or obtained in connection with the execution and delivery of (i) this Agreement, (ii) the Transaction Documents, (iii) the Technology License Agreement, effective April 7, 2000 between the Company and Toshiba Corporation (the “Toshiba Agreement”) and (iv) the Additional Incentive Plans (as defined in Section 7.14) or the consummation or performance of any of the transactions contemplated hereby or thereby.

              3.2.4.  To the best knowledge of the Company and based on the Company’s investigation as of the date hereof, except as set forth in Section 5.2 to the Business Plan and Schedule 3.2.3, no notice to, filing with or Consent from any Person or Governmental Body is or will be required to be made or obtained in connection with (a) the construction, deployment and operation of Fab 2 in accordance with the Business Plan, (b) the implementation of the Additional Financing Plan (as defined), provided that the representation made in this clause (b) is given to the actual Knowledge of the Company on the date hereof in respect of equity financings to be provided by Wafer Partners, and (c) the execution, delivery and performance of the agreements entered into or to be entered into by the Company in connection therewith (such agreements, together with the agreements referred to in clauses (i)- (iv) of Section 3.2.3, the “Ancillary Agreements”), other than, in respect of each of the foregoing clauses, notices, filings or Consents, the failure of which to be made or obtained would not, individually or in the aggregate have a material adverse affect on the construction and operation of Fab 2.

        3.3.  Capitalization; Issuance of Shares; Officers and Directors.

              3.3.1.  The authorized share capital of the Company, immediately prior to the Closing, including the proposed increase in share capital referred to in Section 2.4, will consist of 70,000,000 Ordinary Shares, of which 12,207,007 shares are issued and outstanding and 1,784,804 are reserved for issuance of outstanding options to employees, officers and directors and 1,615,500 are reserved for future grants of options to employees, officers and directors. All of the outstanding Ordinary Shares have been duly authorized and validly issued and are fully paid and nonassessable. Schedule 3.3 sets forth the list of the Company’s shareholders of record as maintained by the

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transfer agent and a list of all the options outstanding, the vesting schedules of such options and the exercise prices thereof. Except as set forth in Schedule 3.3, there are no Contracts relating to the issuance, or to the Knowledge of the Company, sale, transfer, or Encumbrance (other than arising solely by or through actions of Buyer) of any equity securities or securities convertible or exchangeable into equity securities of the Company. When the Shares shall have been issued and delivered to Buyer as part of the Closing, such Shares will: (i) have been duly authorized for issuance by the Company’s Board, (ii) upon delivery of the consideration therefor in accordance with the terms of this Agreement and the Escrow Agreement, be duly and validly issued, fully paid and nonassessable and (iii) be free and clear of any Encumbrances, and not the subject of any preemptive or other participation rights.

              3.3.2.  The Company’s and its Subsidiaries current officers and directors are those persons whose names are set forth in Schedule 3.3.2 (the “Named Officers and Directors”).

              3.3.3.  Neither the Company nor any Subsidiary has any agreement, obligation or commitment with respect to the election of any Person to the Company’s Board and/or any Subsidiary’s board of directors and to the actual knowledge of the Company, there is no voting agreement or other arrangement among the Company’s shareholders or the Subsidiaries’ shareholders, and there are no agreements or arrangements between any Person which affects or relates to the voting or giving written consents with respect to the Company’s or any Subsidiaries’ securities including with respect to the nomination of a director and/or officer of the Company and/or the Subsidiary.

              3.3.4.  There are no agreements, commitments and understandings, whether written or oral, with respect to any compensation to be provided by the Company and/or the Subsidiary to any of the Named Officers and Directors, and, to the best knowledge of the Company, to be provided by any third party to any of the Named Officers and Directors, except as set forth in Schedule 3.3.4.

              3.3.5.  Except as set forth in Schedule 3.3.5 (a) and in the Registration Rights Agreement to be entered into hereunder, the Company is not under any obligation to register for trading on any securities exchange any of its currently outstanding securities or any of its securities which may hereafter be issued. Since its incorporation there has been no declaration or payment by the Company of dividends, or any distribution by the Company of any assets of any kind to any of its shareholders in redemption of or as the purchase price for any of the Company’s securities except as set forth in Schedule 3.3.5 (b).

        3.4.  SEC Documents; Financial Statements

              3.4.1.  The Company has furnished to Buyer copies of the Company’s Annual Report on Form 20-F for the year ended December 31, 1999 (the “Annual Report”) as filed with the U.S. Securities and Exchange Commission (“SEC”) on March 20, 2000. The Company represents and warrants to Buyer that: (i) the Annual Report has been duly filed with the SEC, and when filed was in compliance in all material respects with the requirements of the Exchange Act and the rules and regulations of the SEC applicable to such Annual Report; and (ii) the Annual Report was complete and correct in all material respects as of its date and, as of its date, did not contain any untrue statement of material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements made therein, in light of the circumstances under which they were made, not mislea ding. The Company has provided the Buyer with a copy of each document submitted to the SEC on Form 6-K since January 1, 1999 (the “6K Reports” and together with the Annual Report, the “SEC Documents”). The Company represents and warrants to Buyer that: (i) the 6K Reports have been duly submitted to the SEC, and when submitted were in compliance in all material respects with the requirements of the Exchange Act and the rules and regulations of the SEC applicable to such 6K Reports; and (ii) the 6K Reports were complete and correct in all material respects as of their respective dates and, as of such dates, did not contain any untrue statement of material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. The Company represents that it has filed all the reports that the Company was required to file with the SEC since January 1, 1998, according to the requirements of the Exchange Act.

              3.4.2.  The Company has delivered to Buyer: (a) audited consolidated balance sheets of the Company as at December 31 in each of the years 1998 through 1999 (the December 31, 1999 balance sheet being hereinafter referred to as the “Balance Sheet”) and the related audited consolidated statements of income, changes in shareholders’ equity, and cash flow for each of the fiscal years then ended, together with the report thereon of Brightman Almagor, independent certified public accountants, and (b) an unaudited consolidated balance sheet of the Company as at March 31, 2000 (the “Interim Balance Sheet”) and the related unaudited consolidated statements

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of income, changes in shareholders’ equity, and cash flow for the three months then ended, including in each case the notes thereto. Such financial statements and notes fairly present the financial condition and the results of operations, changes in shareholders’ equity, and cash flow of the Company as at the respective dates of and for the periods referred to in such financial statements, all in accordance with GAAP, subject, in the case of interim financial statements, to normal recurring year-end adjustments (the effect of which will not, individually or in the aggregate, be materially adverse); the financial statements referred to in this Section 3.4.2 reflect the consistent application of such accounting principles throughout the periods involved.

        3.5.  Business Plan; Additional Financing Plan

              True and correct copies of the Business Plan and of the Environmental Study submitted to the District Zoning Authority (the “ Environmental Study”) are attached hereto as Schedule 3.5. The Company has conducted reasonable research and surveys in preparing the Business Plan and the Environmental Study and consulted with reputable experts in the field as is reasonably appropriate in these circumstances. The Company believes that the opinions, assumptions and timetables contained in the Business Plan (including both the alternate case assumptions and the base assumptions, as defined therein, and without giving effect to any risk factors included therein) and in the Environmental Study are reasonable. The financial, business and other projections set out in the Business Plan (including both the alternate case assumptions and the base assumptions, as defined therein, and without giving effect t o any risk factors included therein) have been reasonably prepared with due diligence, care and consideration. To the Company’s knowledge, each of the Business Plan and the Environmental Study is complete and correct in all material respects and does not contain any untrue statement of material fact. To the best of the Company’s knowledge, after conducting reasonable research and surveys as is reasonably appropriate in these circumstances and after consulting with reputable experts in the field, the financings contemplated in Section 7.6 hereto (the “Additional Financings”) together with the Purchase Price and the proceeds to be paid to the Company upon exercise of the Addtional Purchase Obligations, will be sufficient to complete the construction, deployment and operation of Fab 2 in accordance with the Business Plan according to the base scenario under which management of the Company currently contemplates implementing the Business Plan. There are no other facts or matters of which the Company is aware which could render any such opinions, assumptions, timetables or projections materially misleading; provided, however, that no assurance can be or is given that any of the forecast projections will be attained or that the assumptions contained therein will not change.

        3.6.  Title to Properties; Encumbrances. Except as set forth in Schedule 3.6, the Company and its Subsidiaries have good and marketable title, free and clear of all Encumbrances (other than Encumbrances for current Taxes not yet due and minor Encumbrances, if any, which in the aggregate do not materially detract from the value of the Assets (as hereinafter defined) or materially impair the conduct of business of the Company as currently conducted and as currently approved by the Board to be conducted in the future), to all of the assets, real property, interests in real property, rights, franchises, patents, trademarks, copyrights, mask works, trademarks, trade names, licenses and properties tangible or intangible, real or personal, wherever located which are used in the conduct of the business conducted and as currently approved by the Board to be conducted in the future by the Company (the “Assets”), other than property that is leased or licensed. Except as set forth in Schedule 3.6, the Company has valid and enforceable leases or licenses, as the case may be, with respect to the Assets consisting of property that is leased or licensed, under which there exists no default, event of default or event which, with notice or lapse of time or both, would constitute a default, except for such defaults which could not have a Material Adverse Effect. Except as set forth on Schedule 3.6, with respect to real property owned or leased by the Company or any Subsidiary, there are not any rights of way, building use restrictions exceptions, variances, reservations, or limitations of any nature which materially impair or could reasonably be expected to materially impair the business of the Company as conducted and as currently approved by the Board to be conducted in the future, other than such which would not have a Material Adverse Effect. All buildings, plants, and structures owned or leased by the Company or any Subsidia ry do not encroach upon the property of, or otherwise conflict with the property rights of, any other Person in a material manner.

        3.7.  Condition and Sufficiency of Assets. The buildings, plants, structures, and equipment of the Company and its Subsidiaries are structurally sound, are in good operating condition and repair, and are adequate for the uses to which they are being put, and none of such buildings, plants, structures, or equipment is in need of maintenance or repairs except for ordinary, routine maintenance and repairs that are not material in nature or cost. Except as set forth in Schedule 3.7, the building, plants, structures and equipment of the Company and its Subsidiaries are sufficient for the continued conduct of the Company’s businesses after the Closing in substantially the same manner as conducted prior to the Closing.

9

        3.8.  Customers and Suppliers. Since January 1, 2000, there has not been any adverse change in the business relationship of the Company with any material customer or material supplier of the Company.

        3.9.  Inventory. Inventories of raw materials, work in progress and finished goods of the Company and its Subsidiaries are in good condition and of a quality useable and saleable in the Ordinary Course of Business or have had appropriate financial reserves established.

        3.10.  No Undisclosed Liabilities. Except as set forth in Schedule 3.10, neither the Company nor any Subsidiary has any liabilities or obligations of any nature (whether absolute, accrued, contingent or otherwise) except for liabilities or obligations reflected or reserved against in the Balance Sheet or the Interim Balance Sheet and current liabilities incurred in the Ordinary Course of Business since the respective dates thereof.

        3.11.  Taxes

              3.11.1.  The Company and each Subsidiary has filed or caused to be filed (on a timely basis since January 1, 1994) all Tax Returns that are or were required to be filed by or with respect to it, pursuant to applicable Legal Requirements. The Company and each Subsidiary has paid, or made provision for the payment of, all Taxes that have or may have become due pursuant to those Tax Returns or otherwise, or pursuant to any assessment received by the Company, except such Taxes, if any, as are listed in Schedule 3.11 and are being contested in good faith and as to which adequate reserves (determined in accordance with GAAP) have been provided in the Balance Sheet and the Interim Balance Sheet.

              3.11.2.  Except as set forth in Schedule 3.11.2, the relevant state tax authorities have audited all such Tax Returns or such Tax Returns are closed by the applicable statute of limitations for all taxable years through December 31, 1999. All deficiencies proposed as a result of such audits have been paid, reserved against, settled, or, as described in Schedule 3.11, are being contested in good faith by appropriate proceedings. Except as described in Schedule 3.11, neither the Company nor any Subsidiary has given or been requested to give waivers or extensions (or is or would be subject to a waiver or extension given by any other Person) of any statute of limitations relating to the payment of Taxes of the Company or for which the Company may be liable.

              3.11.3.  All Taxes that the Company and any Subsidiary is or was required by Legal s to withhold or collect have been duly withheld or collected and, to the extent required, have been paid to the proper Governmental Body or other Person.

              3.11.4.  All Tax Returns filed by (or that include on a consolidated basis) the Company and any Subsidiary are true, correct, and complete in all material respects. There is no tax sharing agreement that will require any payment by the Company after the date of this Agreement.

        3.12.  No Material Adverse Change. Except as set forth in Schedule 3.12, since the date of the Balance Sheet, there has not been any material adverse change in the business, operations, properties, assets or condition of the Company (financial or other), including in the prospects of the construction, deployment and operation of Fab 2 in accordance with the Business Plan, and no event or development has occurred or circumstance exists that may result in such a material adverse change.

        3.13.  Employee Benefits; Labor

              3.13.1.  Except as set forth in Schedule 3.13.1, neither the Company nor any Subsidiary is a member of any employers union or a party to any collective bargaining contract, collective labor agreement or other contract or arrangement with a labor union, trade union or other organization or body involving any of its employees, or is otherwise required (under any legal requirement, including under any profit sharing, bonus, deferred compensation, savings, insurance, pension, retirement, or other employee benefit plan for or with any employees of the Company or any of its Subsidiaries, except for the respective personal employment agreements) to provide benefits or working conditions beyond the minimum benefits and working conditions required by law. Neither the Company nor any Subsidiary has recognized or received a demand for recognition from any collective bargaining representative with res pect to any of its employees. Except as set forth in Schedule 3.13.1, neither the Company nor any Subsidiary are subject to, and no employee of the Company or any Subsidiary benefits from, any extension order (tzavei harchava) or any arrangement or custom with respect to employment or termination thereof. All of the Company’s and the Subsidiaries’ employees are “at will” employees and neither the Company nor any Subsidiary has any obligation to employ any employee for a specified period.

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              3.13.2.  Except as set forth in Schedule 3.13.2, there are no claims or complaints that are pending or that have been threatened against the Company or any Subsidiary by any person who is or has been an employee or director of the Company or any Subsidiary, that may, individually or in the aggregate, have a Material Adverse Effect.

              3.13.3.  Since January 1, 1995, (i) there has been no labor strike, slowdown or stoppage pending or threatened against or affecting the Company or any Subsidiary and (ii) there has been no material dispute between the Company or any Subsidiary and any group of its employees which was not resolved.

              3.13.4.  Except as set forth in Schedule 3.13.4, the Company’s and its Subsidiaries’ obligations to provide severance pay to its employees are fully funded or have been properly provided for in the Financial Statements in accordance with GAAP including, by contribution to appropriate insurance funds. All other liabilities of the Company or any Subsidiary (absolute or contingent) relating to their employees were properly accrued in the Financial Statements in accordance with GAAP.

              3.13.5.  All amounts that the Company or any Subsidiary is legally or contractually required either (i) to deduct from its employees’ salaries or to transfer to such employees’ pension or provident, life insurance, manager insurance, incapacity insurance, continuing education fund or other similar fund or (ii) to withhold from their employees’ salaries and pay to any Governmental Entity as required by Israeli Legal Requirements relating to any tax or any other compulsory payment have, in each case, been duly deducted, transferred, withheld and paid.

              3.13.6.  The Company and each Subsidiary is in compliance in all material respects with all applicable Legal Requirements and contracts relating to employment, employment practices, wages, bonuses and other compensation matters and terms and conditions of employment.

              3.13.7.  Schedule 3.13.7 sets forth true and complete details of payment by the Company or any of its Subsidiaries since January 1, 2000 of any bonuses, salaries or other compensation to any shareholder or Named Director or Officer (except in the Ordinary Course of Business) or entry into any employment, severance, or similar Contract with any Named Director or Officer.

        3.14.  Compliance with Legal Requirements; Governmental Authorizations

              3.14.1.  Except as set forth in Schedule 3.14 (i) the Company and its Subsidiaries are, and at all times since January 1, 1997 have been, in full compliance with each Legal Requirement that is or was applicable to them or to the conduct or operation of their business or the ownership or use of any of their assets, except for such non-compliance which would not have a Material Adverse Effect and (ii) neither the Company nor any of its Subsidiaries have received, at any time since January 1, 1997, any notice or other communication (whether oral or written) from any Governmental Body or any other Person regarding any actual, alleged, possible, or potential violation of, or failure to comply with, any Legal Requirement except for such notices and communications which could not have a Material Adverse Effect.

              3.14.2.  The Company and each Subsidiary has all Governmental Authorizations necessary to permit the Company and its Subsidiaries to lawfully conduct and operate their business as currently conducted and as approved by the Board to be conducted in the future, except for such authorizations, the failure to possess which would not have a Material Adverse Effect. The Company and its Subsidiaries are and have been in full compliance with all of the terms and requirements of each Governmental Authorization that is held by the Company and its Subsidiaries or that otherwise relates to the business of the Company and its Subsidiaries as presently conducted and as approved by the Board to be conducted in the future, or to any of the assets owned or used by the Company and its Subsidiaries, except for such non-compliance which would not have a Material Adverse Effect. Each Governmental Authorization referred to in the foregoing sentence is valid and in full force and effect. No event has occurred or circumstance exists that may constitute or result directly or indirectly in a violation of or a failure to comply with any term or requirement of any such Governmental Authorization or result directly or indirectly in the revocation, withdrawal, suspension, non-renewal, cancellation, or termination of, or any modification to, any such Governmental Authorization and no notice has been received by the Company or any Subsidiary with respect to the foregoing, other than those events, circumstances or notices which would not have a Material Adverse Effect. To the best knowledge of the Company, the Company and its Subsidiaries can obtain all such renewals and Governmental Authorizations on a timely basis as needed for their respective operations and business, other than those the failure of which to be obtained could not have a Material Adverse Effect.

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        3.15.  Legal Proceedings; Orders. Except as set forth in Schedule 3.15, there is no pending Proceeding (i) that has been commenced by or against the Company or that otherwise relates to or may affect the business of, or any of the assets owned or used by, the Company or any Subsidiary in a material manner; or (ii) that challenges, or that may have the effect of preventing, delaying, making illegal, or otherwise interfering with, any of the Contemplated Transactions.

              3.15.1.  In addition, (A) no such Proceeding has been Threatened, and (B) no event has occurred or circumstance exists that may give rise to or serve as a basis for the commencement of any such Proceeding.

              3.15.2.  Except as set forth in Schedule 3.15, (i) there is no Order to which the Company or any of its Subsidiaries, or any of the assets owned or used by the Company or any of its Subsidiaries, is subject; and (ii) the Company or any of its Subsidiaries are not subject to any Order that relates to its business as presently conducted or as approved by the Board to be conducted, or any of the assets owned or used by, the Company or any of its Subsidiaries.

              3.15.3.  Except as set forth in Schedule 3.15, the Company and all its Subsidiaries are, and at all times have been, in full compliance with all of the terms and requirements of each Order to which it, or any of the assets owned or used by it, is or has been subject, other than any non-compliance which would not have a Material Adverse Effect

        3.16.  Absence of Certain Changes and Events. Except as set forth in Schedule 3.16, since the date of the Balance Sheet, the Company and all its Subsidiaries have conducted their businesses only in the Ordinary Course of Business and there has not been any:

              3.16.1.  entry into, termination of, or receipt of notice of termination of (i) any license, distributorship, dealer, sales representative, joint venture, credit, or similar agreement, or (ii) any Contract or transaction involving a total remaining commitment by or to the Company or any of its Subsidiaries of at least $2,000,000; or

              3.16.2.  sale (other than sales of inventory in the Ordinary Course of Business), lease, or other disposition of any asset or property of the Company or any of its Subsidiaries for at least $2,000,000 or mortgage, pledge, or imposition of any lien or other encumbrance on any material asset or property of the Company or any of its Subsidiaries, including the sale, lease, or other disposition of any of the Intellectual Property Assets except in the Ordinary Course of Business; or

              3.16.3.  cancellation or waiver of any claims or rights with a value to the Company or any of its Subsidiaries in excess of $2,000,000; or

              3.16.4.  material change in the accounting methods used by the Company or any of its Subsidiaries; or

              3.16.5.  agreement, whether oral or written, by the Company or any of its Subsidiaries to do any of the foregoing.

        3.17.  Contracts; No Defaults

              3.17.1.  Except as set forth in Schedule 3.17.1 and except for agreements, instruments, arrangements and contracts which are exhibits to the SEC Documents, as of the date of this Agreement, there is no Applicable Contract that:

                            3.17.1.1.  involves performance of services or delivery of goods or materials by or to the Company or any of its Subsidiaries of an amount or value in excess of $1,000,000; or

                     3.17.1.2.  was not entered into in the Ordinary Course of Business and that involves expenditures or receipts of the Company or any of its Subsidiaries in excess of $2,000,000; or

                     3.17.1.3.  affects the ownership of, leasing of, title to, use of, or any leasehold or other interest in, any real or personal property (except personal property leases and installment and conditional sales agreements having a value per item or aggregate payments of less than $500,000 and with terms of less than one year); or

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                     3.17.1.4.  relates to patents, trademarks, copyrights, or other intellectual property, except for standard agreements with current or former employees, consultants, or contractors regarding the appropriation or the non-disclosure of any of the Intellectual Property Assets; or

                     3.17.1.5.  constitutes a collective bargaining agreement or other commitment to or with any labor union or other employee representative of a group of employees; or

                     3.17.1.6.  involves a sharing of profits, losses, costs, or liabilities by the Company or any of its Subsidiaries with any other Person; or

                     3.17.1.7.  contains covenants that in any way purport to restrict the business activity of the any of its Subsidiaries or limit the freedom of the Company or any of its Subsidiaries to engage in any line of business or to compete with any Person; or

                     3.17.1.8.  provides for payments to or by any Person based on sales, purchases, or profits, other than direct payments for goods; or

                     3.17.1.9.  constitutes a currently effective and outstanding power of attorney; or

                     3.17.1.10.was entered into other than in the Ordinary Course of Business and that contains or provides for an express undertaking by the Company or any of its Subsidiaries to be responsible for consequential damages; or

                     3.17.1.11.is for capital expenditures of the Company or any of its Subsidiaries in excess of $1,000,000; or

                     3.17.1.12.  represents a written warranty, guaranty, and or other similar undertaking with respect to contractual performance extended by the Company or any of its Subsidiaries other than in the Ordinary Course of Business.

              3.17.2.  Each Contract identified in Schedule 3.17.1 is in full force and effect in all respects and is valid and enforceable in accordance with its terms. No event has occurred or circumstance exists that (with or without notice or lapse of time) may materially contravene, conflict with, or result in a material violation or breach of, or give the Company or any other Person the right to declare a default or exercise any remedy under, or to accelerate the maturity or performance of, or to cancel, terminate, or modify, any Contract listed on Schedule 3.17.1,

              3.17.3.  Except as set forth in Schedule 3.17.3, there are no renegotiations of any material amounts paid or payable to the Company or any of its Subsidiaries under current or completed Contracts listed on Schedule 3.17.1 with any Person and no such Person has made written demand for such renegotiations.

        3.18.  Insurance. The properties, assets, employees, business and operations of the Company and its Subsidiaries are insured by policies which are in full force and effect against such risks, casualties and contingencies and of such types and amounts as are reasonable and customary for the size and scope of the Company’s and its Subsidiaries business as now conducted and as approved to be conducted by the Board in the future. All premiums due and payable for insurance policies held by the Company have been duly paid; and, except as listed in Schedule 3.18, such policies or extensions, renewals or replacements thereof (on comparable terms to the extent available) in such amounts will be outstanding and in full force and effect without interruption until the Closing Date. The Company or any of its Subsidiaries have not received any notice from any insurer, agent or broker with respect to any pending or threatened t erminations or increases in premiums other than increases contemplated by existing policies, and the consummation of the transactions contemplated by this Agreement and the Transaction Documents will not result in the termination of any such policy, or cause a material increase in any premiums thereunder, pursuant to the express terms of such policy.

        3.19.  Environmental Matters. Except for (i) matters disclosed in the SEC Documents or (ii) matters disclosed in Schedule 3.19:

              3.19.1.  The Company and its Subsidiaries are in material compliance with all applicable Environmental Laws and Environmental Permits. Neither the Company or any of its Subsidiaries has received any written communication from a Governmental Body or Person that alleges that the Company is not in compliance with or has liability under any applicable Environmental Law, nor does the Company or any of its Subsidiaries have a basis to expect any such actual or Threatened communication. On the date of this Agreement, there are no

13

circumstances or conditions that may prevent or interfere with compliance in the future with Environmental Laws and Environmental Permits in effect as of the date of this Agreement. The Company and its Subsidiaries have all Environmental Permits required under applicable Environmental Laws to operate the business of the Company as presently conducted and as approved by the Board to be conducted in the future, except as would not have a Material Adverse Effect.

              3.19.2.  There is no Environmental Claim pending or, to the best of the Company’s knowledge, Threatened against the Company or its Subsidiaries or against any Person whose liability for such an Environmental Claim the Company or its Subsidiaries have or may have retained or assumed whether contractually or by operation of law.

              3.19.3.  To the best of the Company’s knowledge, there are no Materials of Environmental Concern present in or at the facilities of the Company or any of its Subsidiaries or at any geologically or hydrological adjoining property, including any Materials of Environmental Concern contained in barrels, above or underground storage tanks, landfills, land deposits, dumps, equipment (whether moveable or fixed) or other containers, either temporary or permanent, and deposited or located in land, water, sumps, or any other part of the facilities of the Company or any of its Subsidiaries or such adjoining property, or incorporated into any structure therein or thereon.

              3.19.4.  The Company has delivered to Buyer true and complete copies and results of any reports, studies, analyses, tests, or monitoring possessed or initiated by the Company pertaining to Materials of Environmental Concern in, on, or under the facilities of the Company or any of its Subsidiaries, or concerning compliance by the Company, or any other Person for whose conduct it is or may be held responsible, with Environmental Laws.

              3.19.5.  As used herein, the following terms shall have the meaning set forth below:

              “Environmental Claim” means any claim, action, cause of action, administrative proceeding, investigation or notice by any Person alleging potential liability (including, without limitation, potential liability for investigative costs, cleanup costs, governmental response costs, natural resources damages, property damages, personal injuries, or penalties) arising out of, based on or resulting from (a) the presence, or release into the environment, of any Materials of Environmental Concern at any location, whether or not owned by the Company or its Subsidiaries or (b) circumstances or conditions forming the basis of any violation, or alleged violation, of any Environmental Law.

              “Environmental Laws” means all U.S. and Israeli laws, regulations, ordinances, codes, rules, orders, decrees, directives and standards relating to pollution or protection of human health or the environment (including, without limitation, ambient air, surface water, ground water, land surface, subsurface strata), including, without limitation, laws, regulations, ordinances, codes, rules, orders, decrees, directives and standards relating to the manufacture, processing, distribution, use, treatment, storage, transport, planning and building or handling of Materials of Environmental Concern.

              “Environmental Permits” means permits, licenses, authorizations and registrations required pursuant to the Environmental Laws.

              “Materials of Environmental Concern” means any hazardous chemicals, pollutants, contaminants, hazardous wastes, toxic substances, hazardous substances, as defined under applicable Environmental Laws or any other substance defined or regulated pursuant to Environmental Laws, including, without limitation, fluoride, asbestos, PCBs, petroleum or petroleum derived substances.

              “Release” means any spilling, leaking, pumping, pouring, emitting, discharging, injecting, escaping, leaching, dumping or disposing into the environment, including, without limitation, the abandonment or discarding of barrels, containers and other closed receptacles containing Materials of Environmental Concern.

        3.20.  Intellectual Property

              3.20.1.  Intellectual Property Assets- The term “Intellectual Property Assets” means all such rights set forth in Sections 3.20.1.1 – 3.20.1.4, and all know-how, trade secrets, confidential information, customer lists, software, technical information, data, process technology, plans, drawings, and blue prints (collectively, “Trade Secrets”); owned, used or licensed by the Company or its Subsidiaries as licensee or licensor which are, in each

14

case, used in or are necessary for the conduct of the Company’s and its Subsidiaries’ respective businesses as now conducted and as approved by the Board to be conducted, including, without limitation, the operation of Fab-2 in accordance with the Business Plan. Schedule 3.20.1 sets forth a list of the Intellectual Property Rights, other than Trade Secrets and unregistered Copyrights:

                     3.20.1.1.  trading names, registered and unregistered trademarks, service marks, and applications (collectively, “Marks”);

                     3.20.1.2.  all patents, patent applications, and inventions and discoveries that may be patentable (collectively, “Patents”); and

                     3.20.1.3.  all copyrights in both published works and unpublished works (collectively, “Copyrights”).

              3.20.2.  Agreements- Schedule 3.20.2 contains a complete and accurate list and summary description, including any royalties paid or received by the Company or its Subsidiaries, of all Contracts relating to the Intellectual Property Assets to which the Company or its Subsidiaries is a party or by which the Company or its Subsidiaries are bound, except for any license implied by the sale of a product and perpetual, paid-up licenses for commonly available software programs with a value of less than $5,000,000 under which the Company or any of its Subsidiaries is the licensee. There are no outstanding or Threatened disputes or disagreements with respect to any such agreement.

              3.20.3.  Know-How Necessary for the Business

                     3.20.3.1.  To the Company’s best Knowledge, the Intellectual Property Assets are all those necessary for the operation of the Company’s and its Subsidiaries’ business as it is currently conducted and as is approved by the Board to be conducted, including, without limitation, in connection with the operation of Fab-2 in acordance with the Business Plan, except as would not have a Material Adverse Effect. Except as set forth in Schedule 3.20.3, the Company is the owner of all right, title, and interest in and to each of the Intellectual Property Assets, to the Company’s best Knowledge, free and clear of all, Encumbrances, equities, and other adverse claims, and has the right to use without payment to a third party all of the Intellectual Property Assets, except as would not have a Material Adverse Effect.

                     3.20.3.2.  Except as set forth in Schedule 3.20.3.2, all former and current employees of the Company and all other Persons having access to any Intellectual Property Asset have executed written Contracts with the Company and its Subsidiaries respectively, that assign to the Company and its Subsidiaries, respectively, all rights to Intellectual Property Asset including any inventions, improvements, discoveries, or information relating to the business of the Company. To the Company’s Knowledge, no employee of the Company and its Subsidiaries has entered into any Contract which requires the employee to transfer, assign or disclose information concerning his work for the Company and its Subsidiaries to anyone other than the Company and its Subsidiaries.

              3.20.4.  Patents; Trademarks; Copyrights; Mask Works

                     3.20.4.1.  Schedule 3.20.1 contains a complete and accurate list and summary description of all Patents, Trademarks and registered Copyrights. The Company owns all right, title, and interest in and to each of the Patents, Trademarks and Copyrights, free and clear of all liens, security interests, charges, encumbrances, entities, and other adverse claims.

                     3.20.4.2.  Except as set forth in Schedule 3.20.4.2, all of the (i) issued Patents, (ii) Marks that have been registered with any trademark office and (iii) registered Copyrights are (with respect to issued Patents relating to wafer fabrication technology, to the best Knowledge of the Company) currently in compliance with formal legal requirements, are valid and enforceable, and are not subject to any maintenance fees or taxes.

                     3.20.4.3.  No Patent has been or is now involved in any interference, reissue, reexamination, or opposition proceeding. To the best of the Company’s knowledge, there is no potentially interfering patent or patent application or trademark or trademark application of any third party. No Mark has been or is now involved in any opposition, invalidation, or cancellation and no such action is Threatened with the respect to any of the Marks.

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                     3.20.4.4.  No Patent, Mark or Copyright is (with respect to issued Patents relating to wafer fabrication technology, to the best knowledge of the Company) infringed or, to the best of the Company’s knowledge, has been challenged or threatened in any way. To the best knowledge of the Company, none of the products manufactured and sold, nor any process or know-how used, by the Company infringes or is alleged to infringe any patent or other proprietary right of any other Person; to the best knowledge of the Company, none of the Marks used by the Company or any of its Subsidiaries infringes or is alleged to infringe any trade name, trademark, or service mark of any third party; and to the best knowledge of the Company, none of the subject matter of any of the Copyrights infringes or is alleged to infringe any copyright of any third party or is a derivative work based on the work of a third party.

              3.20.5.  Trade Secrets

                     3.20.5.1.  With respect to each Trade Secret, the documentation relating to such Trade Secret is current, accurate, and sufficient in detail and content to identify and explain it and to allow its full and proper use without reliance on the knowledge or memory of any individual.

                     3.20.5.2.  The Company and its Subsidiaries have taken all reasonable precautions to protect the secrecy, confidentiality, and value of its Trade Secrets to the extent that the maintenance of any such Trade Secret as a legally protectible trade secret under applicable law is material to the Company.

                     3.20.5.3.  The Company and its Subsidiaries have good title and an absolute (but not necessarily exclusive) right to use the Trade Secrets to the extent that the maintenance of any such Trade Secret as a legally protectible trade secret under applicable law is material to the Company. The Trade Secrets, the maintenance of any of which as a legally protectible trade secret under applicable law are material to the Company, are not part of the public knowledge or literature, and, to the Company’s Knowledge, have not been used, divulged, or appropriated either for the benefit of any Person or to the detriment of the Company or its Subsidiaries. No Trade Secret, the maintenance of which as a legally protectible trade secret under applicable law is material to the Company, is subject to any adverse claim or has been challenged or threatened in any w ay.

              3.21.  Grants, Incentives and Subsidies. Schedule 3.21 provides a correct and complete list of the aggregate amount of pending and outstanding grants from each Governmental Body of the State of Israel, or from any other Governmental Body, to the Company or any Subsidiary, net of royalties paid, and any tax incentive or subsidy granted to the Company or any Subsidiary, including the material terms and benefit periods thereof (collectively, “Grants”) including, without limitation, (i) Approved Enterprise Status from the Israeli Investment Center; and (ii) Grants from the Office of the Chief Scientist of the Israel Ministry of Industry and Trade (“OCS”). The Company has made available to Buyer, prior to the date hereof, correct and complete copies of all letters of approval, and supplements thereto, granted to the Company or any Subsidiary relating to Approve d Enterprise Status from the Investment Center and Grants under from the OCS. Except for undertakings set forth in such letters of approval and undertakings under applicable laws and regulations, there are no material undertakings of the Company or any Subsidiary given in connection with the Grants. The Company and each of Subsidiary are in compliance, in all material respects, with the terms and conditions of such Grants and, except as disclosed in Schedule 3.21, have duly fulfilled, in all material respects, all the undertakings relating thereto. The Company’s application to the Israeli Investment Center with respect to Fab-2 was submitted on May 17, 2000 and was previously provided to Buyer (the “Investment Center Application”). To the extent that there are changes to the assumptions contained in the Investment Center Application as submitted, they are reflected in the Business Plan. The Investment Center Application complies as to form with all Legal Requirements.

              3.22.  Disclosure

                     3.22.1.  No representation or warranty of the Company in this Agreement and no statement in the Schedules omits to state a material fact necessary to make the statements herein or therein, in light of the circumstances in which they were made, not misleading.

                     3.22.2.  No notice given pursuant to Section 5.5 will contain any untrue statement or omit to state a material fact necessary to make the statements therein or in this Agreement, in light of the circumstances in which they were made, not misleading.

              3.23.  Relationships with Related Persons. Except as described on Schedule 3.23 or in the SEC Documents, and except for any employment and consulting contracts listed on Schedule 3.23, there are no loans,

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guarantees, contracts, transactions, understandings or other arrangements of any nature outstanding between or among the Company or any of its Subsidiaries, on the one hand, and any shareholder, or any current or former director, officer or controlling person of the Company or any of their respective Affiliates, on the other hand. Except as set forth on Schedule 3.23 or in the SEC Documents, since the date of the Annual Report, no event has occurred that would be required to be reported by Company pursuant to Item 13 of Form 20-F promulgated by the SEC under the Exchange Act .

              3.24.  Brokers or Finders. The Company and its agents have incurred no obligation or liability, contingent or otherwise, for brokerage or finders’ fees or agents’ commissions or other similar payment in connection with the Contemplated Transactions.

4.  Representations and Warranties of Buyer

        Buyer represents and warrants to the Company as of the date hereof and as of the Closing and except as otherwise provided in the Addtional Purchase Obligation Agreement as follows:

        4.1.  Organization and Good Standing. Buyer is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware with full corporate power and authority to conduct its business as it is now being conducted and as currently proposed to be conducted, to own or use the properties and assets that it purports to own or use, and to perform all its obligations under the Transaction Documents.

        4.2.  Authority; No Conflict

              4.2.1.  This Agreement constitutes the legal, valid, and binding obligation of Buyer, enforceable against Buyer in accordance with its terms. Upon the execution and delivery by Buyer of the Transaction Documents, and assuming the due execution and delivery thereof by the other parties thereto, the Transaction Documents will constitute the legal, valid, and binding obligations of Buyer, enforceable against Buyer in accordance with their respective terms. Buyer has the absolute and unrestricted right, power, and authority to execute and deliver this Agreement and the Transaction Documents and to perform its obligations under this Agreement and the Transaction Documents.

              4.2.2.  Except as set forth in Schedule 4.2, neither the execution and delivery of this Agreement by Buyer nor the consummation or performance of any of the Contemplated Transactions by Buyer will give any Person the right to prevent, delay, or otherwise interfere with any of the Contemplated Transactions pursuant to:

                     4.2.2.1.  any provision of Buyer’s Organizational Documents;

                     4.2.2.2.  any resolution adopted by the board of directors or the stockholders of Buyer;

                     4.2.2.3.  any Legal Requirement or Order to which Buyer may be subject; or

                     4.2.2.4.  any Contract to which Buyer is a party or by which Buyer may be bound.

                     Except as set forth in Schedule 4.2, Buyer is not and will not be required to obtain any Consent from any Person in connection with the execution and delivery of this Agreement or the consummation or performance of any of the Contemplated Transactions.

        4.3.  Investment Intent; No Registration

              4.3.1.  Buyer is acquiring the Shares for its own account and not with a view to their distribution within the meaning of Section 2(11) of the Securities Act. Buyer has requisite knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of an investment in the Company and is an accredited investor as defined under Regulation D as promulgated by the United States Securities and Exchange Commission; and

              4.3.2.  Buyer understands that none of the Shares have been registered under the Securities Act, the Israeli Securities Law or the laws of any jurisdiction, and agrees that the Shares may not be sold, offered for sale, transferred, pledged, hypothecated or otherwise disposed of except in compliance with the Securities Act, Israeli Securities Law or any applicable securities laws of any jurisdiction and the terms of this Agreement. Buyer also acknowledges that the Shares, upon issuance, will bear the following legend:

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              THESE SECURITIES HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR ANY STATE OR OTHER JURISDICTION’S SECURITIES LAWS. THESE SECURITIES MAY NOT BE SOLD, OFFERED FOR SALE OR PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER THE ACT OR AN OPINION OF COUNSEL (SATISFACTORY IN FORM AND SUBSTANCE TO THE COMPANY) THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OF THE ACT.

        4.4.  Certain Proceedings. There is no pending Proceeding that has been commenced against Buyer and that challenges, or may have the effect of preventing, delaying, making illegal, or otherwise interfering with, any of the Contemplated Transactions. To Buyer’s knowledge, no such Proceeding has been Threatened.

        4.5.  Due Diligence. Subject to compliance by the Company with Section 3.22 and provision to the Buyer of all materials and information requested in its due diligence review of the Company and assuming that all information and material provided to the Buyer in its due diligence review was true and accurate and did not include any material misstatement or omit to include any information requested by Buyer, (a) the Buyer has had an opportunity to ask questions and receive answers concerning the legal, financial and technical condition of the Company and has had full access to such information concerning the Company as the Buyer has requested and (b) the Buyer hereby represents and warrants that the legal, technical and financial due diligence of Buyer has been completed and that the results of the Buyer’s business, technical, legal and financial review of the books, records, agreements and other legal documents and business organization of the Company are satisfactory to the Buyer. Notwithstanding the foregoing representations and warranties of the Buyer, nothing in this Section 4.5 shall derogate from the representations and warranties of the Company in Section 3 above.

        4.6.  Brokers or Finders. Buyer and its officers and agents have incurred no obligation or liability, contingent or otherwise, for brokerage or finders’ fees or agents’ commissions or other similar payment in connection with the Contemplated Transactions.

5.  Covenants of the Company Prior to Closing

        5.1.  Access and Investigation. Between the date of this Agreement and the Closing Date, the Company will, and will cause its Representatives to, (i) afford Buyer and its Representatives (collectively, “Buyer’s Advisors”) full and free access to the Company’s personnel, properties, contracts, books and records, and other documents and data, (ii) furnish Buyer and Buyer’s Advisors with copies of all such contracts, books and records, and other existing documents and data as Buyer may reasonably request, and (iii) furnish Buyer and Buyer’s Advisors with such additional financial, operating, technical and other data and information as Buyer may reasonably request. All information so provided to Buyer and its representatives will be subject to the Non-Disclosure Agreement dated April 4, 2000 between the parties (except for Section 6 thereof which shall expire upon signing of this Agree ment).

        5.2.  Operation of the Company’s Business. Between the date of this Agreement and the Closing Date, the Company will:

              5.2.1.  conduct its business only in the Ordinary Course of Business; and

              5.2.2.  use its best efforts to preserve intact the current business organization of the Company and its Subsidiaries, keep available the services of the current Named Officers, employees, and agents of the Company and its Subsidiaries, and maintain the relations and good will with suppliers, customers, landlords, creditors, employees, agents, and others having business relationships with the Company and its Subsidiaries; and

              5.2.3.  otherwise report periodically to Buyer concerning the status of the business, operations, finances and prospects of the Company and its Subsidiaries; and

              5.2.4.  not (i) take or agree or commit to take any action other than in the Ordinary Course of Business that would make any representation or warranty of the Company hereunder inaccurate in any respect at, or as of any time prior to, the Closing Date, provided that no such action taken in the Ordinary Course of Business that Buyer has not consented to in writing shall be taken into account in consideration of whether the conditions set forth in Section 7 below have been complied with or (ii) omit or agree or commit to omit to take any action within its control necessary to prevent any such representation or warranty from being inaccurate in any material respect at any such time.

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        5.3.  Negative Covenant. Except as otherwise expressly permitted by this Agreement or as is consistent with the Ordinary Course of Business, between the date of this Agreement and the Closing Date, the Company will not, without the prior written consent of Buyer, take any affirmative action, or fail to take any reasonable action within their or its control, as a result of which any of the changes or events listed in Section 3.16 is likely to occur.

        5.4.  Consents; Required Approvals; Construction. The Company will, as promptly as practicable after the date of this Agreement, take all action required to obtain as promptly as practicable all necessary Consents and agreements of, and to give all notices and make all other filings with, any third parties, including Governmental Bodies, necessary to authorize, approve or permit the consummation of the transactions contemplated hereby, the Contemplated Transactions and the transactions contemplated by the Ancillary Agreements, including, without limitation, all Consents, approvals and waivers referred to in Section 5.2 to the Business Plan and all Consents, approvals and waivers referred to in Section 7.3 hereof and the updated Business Plan referred to in Section 7.17 (which the parties shall endeavor to complete within 60 days from the date hereof). The Company will periodically update Buyer as to the matters discussed in the preceding sentence. Between the date of this Agreement and the Closing Date, the Company will (i) cooperate with Buyer with respect to all filings that Buyer elects to make or is required by Legal Requirements to make in connection with the Contemplated Transactions, and (ii) cooperate with Buyer in obtaining all consents identified in Schedule 4.2. In addition, the Company will, as promptly as practicable after the date of this Agreement, take all action required to select contractors and other experts and enter into agreements with such parties and take other necessary actions in order to facilitate the implementation of the construction of Fab 2 in accordance with the time table set forth in the Business Plan.

        5.5.  Notification. Between the date of this Agreement and the Closing Date, the Company will promptly notify Buyer in writing if the Company becomes aware of any fact or condition that causes or constitutes a material breach of any of the Company’s representations and warranties as of the date of this Agreement (except that such representations and warranties specifically qualified by materiality shall be read for purposes of this Section 5.5 so as not to require an additional degree of materiality), or if the Company becomes aware of the occurrence after the date of this Agreement of any fact or condition that could (except as expressly contemplated by this Agreement) cause or constitute a breach of any such representation or warranty had such representation or warranty been made as of the time of occurrence or discovery of such fact or condition (except for such representations and warranties that are e xpressly correct as of the date of this Agreement). Should any such fact or condition require any change in the Schedules if the Schedules were dated the date of the occurrence or discovery of any such fact or condition, the Company will promptly deliver to Buyer a supplement to the Schedules specifying such change. During the same period, the Company will promptly notify Buyer of the occurrence of any breach of any covenant of the Company in this Section 5 or of the occurrence of any event that may make the satisfaction of the conditions in Section 7 below impossible or unlikely.

        5.6.  Financings.

              5.6.1.  Between the date of this Agreement and the Closing Date, the Company will use its best efforts to achieve each of the conditions set forth in Section 7.4 and 7.6 in relation to the Additional Financings.

              5.6.2.  The Company shall provide to the Investment Center such other information and data, in addition to the information and data contained in the Investment Center Application, as reasonably necessary in order to secure the approval of the grant referred to in Section 7.4.

              5.6.3.  The proceeds from each of the equity financing sources referred to in clauses (ii) and (iii) of Section 7.6 with respect to Wafer Partners shall be obtained only from parties acceptable to Buyer upon Buyer’s prior approval. In addition, in the event that the underlying agreements with respect thereto contain any terms or conditions (including, without limitation, (a) pricing terms and (b) other economic terms taken as a whole) more favorable (the “Terms of the Other Agreements”) than those provided hereunder and in the Transaction Agreements, the terms and conditions of this Agreement and the Transaction Agreements, as the case may be, shall be automatically amended, without further action by the parties hereto and thereto, to provide such terms and conditions that are at least equally favorable to the Buyer as the Terms of the Other Agreements. The Company shall not enter into any agreement with respect to the equity financings referred to in clauses (ii) and (iii) of Section 7.6 if any of such agreements contain provisions that would impede the ability of the Company to effect the terms of the preceding sentence.

              5.6.4.  The proceeds from each of the debt financing sources referred to in clause (i) of Section 7.6 and the underlying agreements with respect thereto shall be obtained only on terms and conditions that are

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materially consistent with the terms and conditions to be set forth in a term sheet or similar agreement or document relating to such financing (a “Debt Financing Term Sheet”). The Company shall consult with Buyer in advance of execution of any Debt Financing Term Sheet and shall enter into such Debt Financing Term Sheet only upon the consent of Buyer which shall not be unreasonably withheld. The terms and conditions of such debt financing shall not be in conflict with the terms of the Contemplated Transactions and shall be consistent with the terms and conditions contained in the Additional Financing Plan and the Business Plan. The Company shall provide to the Buyer the transaction documents of each debt financing (the “Debt Fnancing Documents”) in the form presented to the Board for its approval, at least 10 business days prior to the execution thereof, in order to enable Buyer to review such documents and confirm that the terms thereof are consistent with the Debt Financing Term Sheet previously approved by Buyer. The Buyer shall deliver to the Company its written approval or other response to the Debt Financing Documents within 5 business days from its receipt of the Debt Financing Documents; Buyer’s failure to provide its written response to the Company within such period of time shall be deemed Buyer’s approval of the Debt Financing Documents.

              5.6.5.  Between the date of this Agreement and the Closing Date, the Company shall not change or modify or agree to change or modify any of the terms and conditions listed in the Additional Financing Plan, the Business Plan or the Investment Center Application without the prior written unanimous approval of all members of the Steering Committee if any such change, modification or agreement would or would reasonably be expected to (a) change the construction schedule of Fab 2 as set forth in the Business Plan, (b) change the Additional Financing Plan as set forth in the Business Plan or result in a failure to comply with the schedule for the financings described therein, (c) significantly increase the cost of Fab 2 beyond that set forth in the Business Plan or (d) change the production capacity schedule of Fab 2 as set forth in the Business Plan. Any change, modification or agreement to ch ange or modify the Business Plan, the Additional Financing Plan or the Investment Center Application which does not require written unanimous approval of all members of the Steering Committee pursuant to the preceding sentence shall require written approval of a majority of the members of the Steering Committee.

        5.7.  Shareholders Agreement. The Company will use its best efforts to ensure that any entity purchasing equity securities or securities exchangeable or convertible into equity securities comprising five percent (5%) or more of the outstanding Ordinary Shares of the Company pursuant to the Additional Financing Plan (other than investors purchasing any such securities in connection with a public offering conducted by the Company as part of the Additional Financing) shall execute the Shareholders Agreement as a counterparty or a similar agreement whose provisions, among other things, provide for such entity to take such actions as may be necessary to vote for the election of Buyer’s, TIC’s, and any other entity’s representative(s) to the Board, in accordance with the terms of the Shareholders Agreement.

        5.8.  No Negotiation. Until the later of (i) such time, if any, as this Agreement is terminated pursuant to Section 9, and (ii) the Closing Date, the Company will not, and will cause its Representatives not to, directly or indirectly solicit, initiate, or encourage any inquiries or proposals from, discuss or negotiate with, provide any non-public information to, or consider the merits of any unsolicited inquiries or proposals from, any Person (other than Buyer) relating to any transaction involving the sale of all or a substantial portion of the business or assets, or any of the capital stock of the Company (other than (i) in the Ordinary Course of Business; (ii) in connection with issuances of stock options or shares upon the exercise thereof under the Company’s employee stock incentive plans and (iii) in connection with issuances of equity securities in accordance with Section 7.6 (ii) and (iii) below p ursuant to the Additional Financing Plan and in accordance therewith), or any merger, consolidation, business combination, or similar transaction involving the Company or any of its Subsidiaries pursuant to which the shareholders of the Company immediately prior to such merger, consolidation, business combination, or similar transaction do not continue to hold a majority of the outstanding equity of the continuing or resulting entity.

        5.9.  Board of Directors. As long as Buyer has a representative on the Board, each committee of the Board shall include at least one representative of Buyer and, so long as TIC has a representative on the Board, one representative of TIC. The Company will ensure that the time period between each annual shareholders meeting shall not exceed 15 months. The Board shall meet at least once in every three months and notice of each Board meeting shall be provided in writing in English to all Board members at least 10 days in advance. All communications to the Directors will be provided in English. The quorum for each meeting of the Board shall include at least one representative of Buyer, so long as Buyer has at least two representatives on the Board. Notwithstanding the preceding sentence, in the event that quorum is not present at a meeting of the Board solely because a representative of Buyer was not present and s uch meeting is adjourned, the failure of a representative of Buyer to be present at the adjourned meeting shall not constitute lack of quorum. The Company acknowledges that

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the representatives of Buyer on the Board may at any time participate or fail to participate in any Board action concerning this Agreement if in their view such action is appropriate under applicable law.

        5.10.  Steering Committee. The Steering Committee shall be established within fifteen days after the date hereof. The Steering Committee will receive from the Company’s management reports on the progress on the Fab 2 project, the Business Plan and the approvals necessary for commencement of construction and for the operation of Fab 2. The Steering Committee shall meet at least once in every four weeks.

        5.11.  Company Shareholders Meeting. As soon as practicable after the date hereof, the Company shall take all necessary action to call an extraordinary general meeting of the Company’s shareholders and shall solicit proxies in order to obtain the approval of the Company’s shareholders to the issuance of the Shares and the Addtional Purchase Obligation Shares to Buyer in accordance with all aplicable laws, regulations and rules of any stock exchange and to an amendment to the Articles which shall provide that the Chairman of the Board shall be appointed by the Shareholders and to obtain any other shareholder approval which is necessary in order to execute, and consummate the transactions contemplated by, this Agreement and the Transaction Documents.

6.  Covenants of Buyer Prior to Closing Date

        6.1.  Approvals of Governmental Bodies. As promptly as practicable after the date of this Agreement, Buyer will make all filings required by Legal Requirements to be made by it to consummate the Contemplated Transactions. Between the date of this Agreement and the Closing Date, Buyer will cooperate with the Company with respect to all filings that the Company is required by Legal Requirements to make in connection with the Contemplated Transactions, and will cooperate with the Company in obtaining all consents identified in Section 5.2 to the Business Plan.

7.  Conditions Precedent to Buyer’s Obligation at Closing

        Buyer’s obligation to take the actions required to be taken by Buyer at the Closing is subject to the satisfaction, at or prior to the Closing, of each of the following conditions (any of which may be waived by Buyer, in whole or in part, in its sole discretion):

        7.1.  Accuracy of Representations. All of the Company’s representations and warranties in this Agreement and the Transaction Agreements (considered collectively, without giving effect to any supplement to the Schedules), and each of these representations and warranties (considered individually) must have been accurate in all material respects as of the date of this Agreement and must be accurate in all material respects as of the Closing Date as if made on the Closing Date (except to the extent such representations and warranties are only given as of the date hereof), without giving effect to any supplement to the Schedules, provided that any inaccuracies in such representations and warranties will be disregarded if the circumstances giving rise to all such inaccuracies (considered collectively) do not constitute, and are not reasonably expected to result in, a Material Adverse Effect (it being understoo d that any materiality qualifications contained in such representations and warranties shall be disregarded for this purpose).

        7.2.  Company’s Performance

              7.2.1.  All of the covenants and obligations that the Company is required to perform or to comply with pursuant to this Agreement at or prior to the Closing (considered collectively), and each of these covenants and obligations (considered individually), must have been duly performed and complied with in all material respects.

              7.2.2.  Each of the Transaction Documents and the Ancillary Agreements shall have been duly executed by the Company and shall have been in full force and effect and no party to such document (other than Buyer) shall be in a breach thereof. The Shareholders Agreement shall have been executed by Buyer and The Israel Corporation.

              7.2.3.  Each document required to be delivered by the Company pursuant to Section 2.5.1 must have been delivered.

        7.3.  Consents; Approvals; Other Requirements. (i) Each of the Consents, approvals or other requirements identified in Section 5.2 of the Business Plan, shall have been duly obtained or satisfied (in accordance with the schedule set forth therein), (ii) the Company shall have entered into construction agreements with respect to

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the supervising, management and implementation of the construction of Fab 2 in accordance with the Business Plan in accordance with the schedule contained therein, and (iii) the Business Plan, the financial data and project cost included therein, the list of necessary approvals and Consents included in Section 5.2 of the Business Plan, the timetable for construction of Fab 2 and the Financial Plan, all as set forth in the Business Plan attached to this Agreement as amended from time to time with the unanimous or majority consent, as the case may be, of the Steering Committee in accordance with Section 5.6.5 hereof, shall continue to be true and correct in all material respects. The condition included in this Section 7.3 shall be deemed to be satisfied only if the Steering Committee shall have unanimously decided, first, that all of the conditions included in clauses (i) - (iii) have been satisfied and second, to the extent that any of (i) – (iii) are not satisfied, that constr uction of Fab 2 by the Company in accordance with the Business Plan should properly commence. The Steering Committee shall consider, in its decision of whether the conditions set forth in this Section 7.3 have been met, the factors listed in Section 1 hereto under the definition of “Steering Committee.”

        7.4.  Investment Center Approval. The Company shall have obtained a final Certificate of Approval from the Investment Center which shall be comprised of the following factors (i) granting an “Approved Enterprise” status to Fab 2 within the Grant Course under the Law for the Encouragement of Capital Investments - 1959; (ii) providing for governmental grants of at least $250,000,000, which shall constitute at least 20% of the entire qualified project cost for the construction, deployment and operation of Fab 2 in accordance with the Business Plan as it exists on the date of this Agreement, provided that in the event that such project cost changes after the date of this Agreement in accordance with Section 5.6.5, the aggregate of such grants provided for in the Certificate of Approval shall equal at least 20% of the changed total project cost; (iii) the maximum required percentage of capital investments in Fab 2 which is required to be financed by equity will be 30%; and (iii) providing that the performance term under the Certificate of Approval shall be at least 5 years from the Closing.

        7.5.  OCS Approval. The Company has obtained the approval of the OCS with respect to the consummation of the Contemplated Transactions.

        7.6.  Additional Financings. The Company shall have (i) entered into binding definitive agreements in accordance with Section 5.6.4 providing for loans in an aggregate amount of at least $550,000,000 from reputable financial institutions solely for the purposes of the construction of Fab 2, as described in Section 10.4 of the Financing Plan, (ii) entered into binding definitive agreements providing for at least $225,000,000 in wafer partner pre-payments or equity financing from Wafer Partners (other than Buyer) obtained in accordance with the terms of Section 5.6.3 and provided to the Company by Wafer Partners pursuant to which all closing conditions have been satisfied and at least 15% of the equity of each equity investor has been transferred to or placed in escrow for the benefit of the Company subject only to the closing of this Agreement and the balance of such financing shall be forwarded automatically u pon the occurrence of specified milestones relating to the construction and operation of Fab-2, which milestones are generally similar to the milestones described in the Addtional Purchase Obligation Agreement, (iii) in the event that the Company only satisfies the condition in the preceding clause (ii) in relation to at least $150,000,000 of the $225,000,000 referred to above (such difference being the “Wafer Partner Differential”), entered into binding definitive agreements providing for at least the Wafer Partner Differential through non-Wafer Partner equity investors; provided, however, that the Company shall be required no later than October 1, 2001 (the “Additional Wafer Partner Financing Date”) to enter into binding definitive agreements with respect to the Wafer Partner Differential from additional Wafer Partners as a condition to the exercise of Addtional Purchase Obligations not exercised prior to such time pursuant to the Addtional Purchase Obligation Agreement on the Additiona l Wafer Partner Financing Date, pursuant to which agreement(s) all closing conditions have been satisfied and at least 15% of the equity of each equity investor has been transferred to or placed in escrow for the benefit of the Company and the balance of such financing shall be forwarded automatically upon the occurrence of specified milestones relating to the construction and operation of Fab-2, which milestones are generally similar to the milestones described in the Addtional Purchase Obligation Agreement and (iv) provided to Buyer a commitment in writing to provide $100,000,000 from the Company’s own cash resources, including, but not limited to, proceeds from the exercise of employee stock options, existing cash reserves, proceeds from sales of private equity securities, royalties and sales; in the event that the Company shall close on the basis of section (iii) above, at such time as the Wafer Partner Differential shall have been raised by the Additional Wafer Partner Financing Date , the Company & #146;s commitment to provide $100,000,000 under this clause (iv) shall be reduced by the Wafer Partner Differential.

        7.7.  Wafer Partners. The Company shall have entered into binding agreements, either on a “take or pay” basis or a “pre-payment” basis or, if the other party to any such agreement is making an equity investment pursuant to Section 7.6(ii), providing a wafer order right, for a term of at least 3 years (“Wafer Commitments”)

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providing for the sale of a minimum capacity in Fab 2 of at least 12,000 wafers per month if the Closing shall occur under Section 7.6 (ii) above or at least 8,000 wafers per month if the Closing shall occur under Section 7.6 (iii) above, in which case the Company shall have entered into Wafer Commitments providing that the aggregate Wafer Commitments shall equal at least 12,000 wafers per month by the Additional Wafer Partner Financing Date and such agreements shall be in full force and effect.

        7.8.  Toshiba Agreement. The Toshiba Agreement shall be in full force and effect and shall not have been breached by any party thereto.

        7.9.  Certificates. In addition to the documents the Company is obligated to deliver to Buyer under Section 2.5 and this Section 7, the Company shall furnish Buyer with such other documents as Buyer may reasonably request for the purpose of (i) evidencing the accuracy of any of the Company’s representations and warranties, (iii) evidencing the performance by the Company of, or the compliance by the Company with, any covenant or obligation required to be performed or complied with by the Company, (iv) evidencing the satisfaction of any condition referred to in this Section 7, or (v) otherwise facilitating the consummation or performance of any of the Contemplated Transactions.

        7.10.  No Proceedings. Since the date of this Agreement, there must not have been commenced or Threatened by a third party against Buyer or the Company, or against any Person affiliated with Buyer or the Company, any Proceeding (a) involving any challenge to, or seeking material damages or other relief in connection with, any of the Contemplated Transactions, or (b) that may have the effect of making illegal, materially preventing, delaying, or otherwise interfering with any of the Contemplated Transactions.

        7.11.  No Prohibition. Neither the consummation nor the performance of any of the Contemplated Transactions will, directly or indirectly (with or without notice or lapse of time), materially contravene, or conflict with, or result in a material violation of, or cause the Company, Buyer or any Person affiliated with the Company or Buyer to suffer any material adverse consequence under, (a) any applicable Legal Requirement or Order, or (b) any Legal Requirement or Order that has been published, introduced, or otherwise formally proposed by or before any Governmental Body.

        7.12.  Directors. The Board of Directors of the Company shall have been reformed in accordance with the provisions of Section 2 of the Shareholders Agreement.

        7.13.  No Material Adverse Change. There shall have been no material adverse change in the business, financial condition, results of operations, assets, operations or prospects of the Company.

        7.14.  Incentive Plan. The Company shall have adopted stock based incentive plans (the “Additional Incentive Plans”) reserving 1,500,000 Ordinary Shares or such other number as may be approved by the Board for the purpose of the work force and human resources employed in Fab 2, such plans being satisfactory to Buyer, and the Company shall have submitted to Buyer a plan satisfactory to Buyer setting forth the Company’s efforts to recruit the required work force and human resources for Fab 2.

        7.15.  Closing Disclosure. There shall be no fact known to the co-Chief Executive Officer of the Company identified in Schedule 7.15. that has specific application to the Company or any of its Subsidiaries (other than general economic or industry conditions) and that materially adversely affects the assets, business, financial condition, results of operations or prospects of the Company or any of its Subsidiaries that has not been set forth in this Agreement or the Schedules or the Business Plan (without giving effect to any risk factors included therein).

        7.16.  Shareholder Approval. Shareholders of the Company shall have approved the increase in registered share capital, the issuance of the Shares hereunder, the issuance of the Shares and Addtional Purchase Obligations under the Addtional Purchase Obligation Agreement and the reconstitution of the Board.

        7.17.  Updated Business Plan. Without derogating from sections 5.6 and 7.3, Buyer and the Company shall have agreed to updates to the Business Plan (which thereafter shall be deemed to be the Business Plan for all purposes of this Agreement) which shall, among other things (a) provide that water rights approvals satisfactory to the Steering Committee in the manner set forth in Section 7.3 shall have been obtained prior to Closing, (b) indicate that Seller provided the relevant Governmental Authority with an environmental study which had been prepared in 1995 and updated recently to reflect changes from the date of the original survey, which survey shall be acceptable to the relevant Governmental Authority and (c) include wafer costs data as part of the financial plan assumptions as part of the base case.

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8.  Conditions Precedent to the Company’s Obligation at Closing

        The Company’s obligation to take the actions required to be taken by the Company at the Closing is subject to the satisfaction, at or prior to the Closing, of each of the following conditions (any of which may be waived by the Company, in whole or in part, in its sole discretion):

        8.1.  Accuracy of Representations. All of Buyer’s representations and warranties in this Agreement (considered collectively), and each of these representations and warranties (considered individually), must have been accurate in all material respects as of the date of this Agreement and must be accurate in all material respects as of the Closing Date as if made on the Closing Date.

        8.2.  Buyer’s Performance

              8.2.1.  All of the covenants and obligations that Buyer is required to perform or to comply with pursuant to this Agreement at or prior to the Closing (considered collectively), and each of these covenants and obligations (considered individually), must have been performed and complied with in all material respects.

              8.2.2.  Each of the Executed Transaction Documents shall have been duly executed by the Buyer and shall have been in full force and effect and no party to such document (other than the Company) shall be in a breach thereof. Buyer must have executed and delivered the each of the documents required to be delivered by Buyer pursuant to Section 2.5.2.

        8.3.  Additional Documents

              8.3.1.  In addition to the documents required to be delivered in accordance with Section 2.5.2 by Buyer, Buyer shall have furnished such other documents as the Company may reasonably request for the purpose of (i)  evidencing the accuracy of any representation or warranty of Buyer, (ii) evidencing the performance by Buyer of, or the compliance by Buyer with, any covenant or obligation required to be performed or complied with by Buyer, (iii) evidencing the satisfaction of any condition referred to in this Section 8, or (iv) otherwise facilitating the consummation of any of the Contemplated Transactions.

        8.4.  No Injunction. There must not be in effect any Legal Requirement or any injunction or other Order that (i) prohibits the issuance and sale of the Shares the Company to Buyer, and (ii) has been adopted or issued, or has otherwise become effective, since the date of this Agreement.

        8.5.  Shareholder Approval. Shareholders of the Company shall have approved the increase in registered share capital, the issuance of the Shares hereunder, the issuance of the Shares and Addtional Purchase Obligations under the Addtional Purchase Obligation Agreement and the reconstitution of the Board.

9.  Termination

        9.1.  Termination Events. This Agreement may, by written notice given prior to or at the Closing, be terminated:

              9.1.1.  by either Buyer or the Company if a material breach of any provision of this Agreement has been committed by the other party and such breach has not been waived;

              9.1.2.  (i) by Buyer if any of the conditions in Section 7 has not been satisfied in all material respects by January 31, 2001 (unless extended by Buyer in its discretion), and Buyer has not waived such condition on or before the Closing Date; or (ii) by the Company, if any of the conditions in Section 8 has not been satisfied in all material respects by January 31, 2001; or

              9.1.3.  by mutual consent of Buyer and the Company.

        9.2.  Effect of Termination. Each party’s right of termination under Section 9.1 is in addition to any other rights it may have under this Agreement or otherwise, and the exercise of a right of termination will not be an election of remedies. If this Agreement is terminated pursuant to Section 9.1, all further obligations of the parties under this Agreement will terminate, except that the obligations in Sections 12.1 and 12.3 will survive; provided, however, that if this Agreement is terminated by a party because of the breach of the Agreement by the other party or because one or more of the conditions to the terminating party’s obligations under this Agreement is not satisfied

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as a result of the other party’s failure to comply with its obligations under this Agreement, the terminating party’s right to pursue all legal remedies will survive such termination unimpaired.

10.  Indemnification; Remedies

        10.1.  Survival; Right to Indemnification not Affected by Knowledge. All representations, warranties, covenants, and obligations in this Agreement and the Addtional Purchase Obligation Agreement, the schedules, the supplements to the schedules, the certificate delivered pursuant to Section 2.5.1.9, and any other certificate or document delivered pursuant to this Agreement or the Addtional Purchase Obligation Agreement will survive the Closing until the expiration of six full months in which Fab 2 is fully operated at a capacity of at least 8,000 wafers per month in compliance with the Foundry Agreement, provided, that in the event that any of the Addtional Purchase Obligations is not exercised, such survival shall only be until the date that is nine months from the last date on which Buyer could have been required to mandatorily exercise the Addtional Purchase Obligation under the terms and conditions of the Ad dtional Purchase Obligation Agreement (after giving effect to all applicable grace periods and extensions under the Addtional Purchase Obligation Agreement). The right to indemnification, payment of Damages or other remedies based on such representations, warranties, covenants, and obligations will not be affected by any investigation conducted with respect to, or any knowledge acquired (or capable of being acquired) at any time, whether before or after the execution and delivery of this Agreement or the Closing Date, with respect to the accuracy or inaccuracy of or compliance with, any such representation, warranty, covenant, or obligation.

        10.2.  Indemnification and Payment of Damages by the Company. The Company will indemnify and hold harmless Buyer and its Representatives, controlling persons, and affiliates (collectively, the “Buyer Indemnified Persons”) for, and will pay to the Buyer Indemnified Persons the amount of, any loss, liability, claim, damage, expense (including costs of investigation and defense and reasonable attorneys’ fees) or diminution of value, whether or not involving a third- party claim (collectively, “Damages”), arising, directly or indirectly, from or in connection with:

              10.2.1.  any breach of any representation or warranty made by the Company in this Agreement or in any other Transaction Document (without giving effect to any materiality qualification), the Schedules, the supplements to the Schedules, or any other certificate or document delivered by the Company pursuant to this Agreement, provided, however, that the determination of any breach of any representation or warranty made by the Company with respect to information contained in the Business Plan shall only be assessed when considering the Business Plan in its entirety and to any changes or modifications thereto which were made with Buyer’s approval, and that the Company shall not be liable under this clause 10.2.1 for an amount of Damages exceeding the aggregate proceeds actually provided by the Buyer to the Company pursuant to this Agreement and the Addtional Purchase Obligation Agreement , as the case may be, at the time the Company becomes required to make payment pursuant hereto; or

              10.2.2.  any breach by the Company of any covenant or obligation of the Company in this Agreement; or

              10.2.3.  any claim by any Person for brokerage or finder’s fees or commissions or similar payments based upon any agreement or understanding alleged to have been made by any such Person with the Company (or any Person acting on its behalf) in connection with any of the Contemplated Transactions.

        10.3.  The remedies provided in Section 10.2 will be the exclusive source of remedies that may be available to Buyer or the other Indemnified Persons in relation to any financial or pecuniary damages which may be available, however Buyer shall be free to pursue all other equitable remedies available under applicable law, including without limitation, any injunctive relief.

        10.4.  Notwithstanding anything to the contrary contained in Section 10.2, the Buyer shall not be entitled to seek indemnification from the Company under this Agreement with respect to any damages arising out of or resulting from Section 10.2, until the aggregate amount of such damages exceeds two hundred and fifty thousand US dollars ($250,000), and where such damages exceed two hundred and fifty thousand US dollars ($250,000), the Buyer shall be entitled to indemnification in full (including the amount of the two hundred and fifty thousand US dollars ($250,000) referred to above).

        10.5.  Indemnification and Payment of Damages by Buyer. Buyer will indemnify and hold harmless the Company, its Representatives, controlling persons and affiliates (the “Company Indemnified Persons”) and will pay

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to the Company Indemnified Persons the amount of any Damages arising, directly or indirectly, from or in connection with (i) any breach of any representation or warranty made by Buyer in this Agreement or in any certificate delivered by Buyer pursuant to this Agreement, (ii) any breach by Buyer of any covenant or obligation of Buyer in this Agreement, or (iii) any claim by any Person for brokerage or finder’s fees or commissions or similar payments based upon any agreement or understanding alleged to have been made by such Person with Buyer (or any Person acting on its behalf) in connection with any of the Contemplated Transactions.

        10.6.  Procedure for Indemnification - Third Party Claims

              10.6.1.  Promptly after receipt by an indemnified party under Section 10.2 or 10.3 of notice of the commencement of any Proceeding against it, such indemnified party will, if a claim is to be made against an indemnifying party under such Section, give notice to the indemnifying party of the commencement of such claim, but the failure to notify the indemnifying party will not relieve the indemnifying party of any liability that it may have to any indemnified party, except to the extent that the indemnifying party demonstrates that the defense of such action is prejudiced by the indemnifying party’s failure to give such notice.

              10.6.2.  If any Proceeding referred to in Section 10.6.1 is brought against an indemnified party and it gives notice to the indemnifying party of the commencement of such Proceeding, the indemnifying party will, unless the claim involves Taxes, be entitled to participate in such Proceeding and, to the extent that it wishes (unless (i) the indemnifying party is also a party to such Proceeding and the indemnified party determines in good faith that joint representation would be inappropriate, or (ii) the indemnifying party fails to provide reasonable assurance to the indemnified party of its financial capacity to defend such Proceeding and provide indemnification with respect to such Proceeding), to assume the defense of such Proceeding with counsel reasonably satisfactory to the indemnified party and, after notice from the indemnifying party to the indemnified party of its election to assum e the defense of such Proceeding, the indemnifying party will not, as long as it diligently conducts such defense, be liable to the indemnified party under this Section 10 for any fees of other counsel or any other expenses with respect to the defense of such Proceeding, in each case subsequently incurred by the indemnified party in connection with the defense of such Proceeding, other than reasonable costs of investigation. If the indemnifying party assumes the defense of a Proceeding, (i) it will be conclusively established for purposes of this Agreement that the claims made in that Proceeding are within the scope of and subject to indemnification; (ii) no compromise or settlement of such claims may be effected by the indemnifying party without the indemnified party’s consent unless (A) there is no finding or admission of any violation of Legal Requirements or any violation of the rights of any Person and no effect on any other claims that may be made against the indemnified party, and (B) the sole r elief provided is monetary damages that are paid in full by the indemnifying party; and (iii) the indemnified party will have no liability with respect to any compromise or settlement of such claims effected without its consent. If notice is given to an indemnifying party of the commencement of any Proceeding and the indemnifying party does not, within ten days after the indemnified party’s notice is given, give notice to the indemnified party of its election to assume the defense of such Proceeding, the indemnifying party will be bound by any determination made in such Proceeding or any compromise or settlement effected by the indemnified party.

              10.6.3.  Notwithstanding the foregoing, if an indemnified party determines in good faith that there is a reasonable probability that a Proceeding may adversely affect it or its affiliates other than as a result of monetary damages for which it would be entitled to indemnification under this Agreement, the indemnified party may, by notice to the indemnifying party, assume the exclusive right to defend, compromise, or settle such Proceeding, but the indemnifying party will not be bound by any determination of a Proceeding so defended or any compromise or settlement effected without its consent.

              10.6.4.  The Company hereby consents to the non-exclusive jurisdiction of any court in which a Proceeding is brought against any Buyer Indemnified Person for purposes of any claim that a Buyer Indemnified Person may have under this Agreement with respect to such Proceeding or the matters alleged therein, and agree that process may be served on the Company with respect to such a claim anywhere in the world.

        10.7.  Procedure for Indemnification - Other Claims. A claim for indemnification for any matter not involving a third-party claim may be asserted by notice to the party from whom indemnification is sought. Any claim for indemnification which may be brought under this Section 10 may be brought until 30 days after expiration of the relevant survival period.

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11.  Covenants of the Company Subsequent to the Closing Date

        11.1.  Additional Financing. The Company shall comply with all terms, conditions, covenants and obligations of the Company under the agreements entered into in connection with the Additional Financings.

        11.2.  Ancillary Agreements. The Company shall comply with all terms, conditions, covenants and obligation of the Company under the Ancillary Agreements. The Company shall not change or modify or agree to change or modify any of the terms and conditions of this Agreement, the Transaction Documents and the Toshiba Agreement without the prior written approval of Buyer (other than the Business Plan pursuant to Section 11.3).

        11.3.  Business Plan. The Company shall use the proceeds of this Agreement, the Addtional Purchase Obligations and the Additional Financings solely in order to finance the construction, deployment and operation of Fab 2 in accordance with the Business Plan and the timetable included therein. The Company shall not change or modify or agree to change or modify the Business Plan and shall not deviate materially from the Business Plan (whether or not it is changed) without the prior written approval of Buyer (which shall not be unreasonably withheld) if any such change, modification or agreement would or reasonably be expected to (a) materially change the construction schedule of Fab 2 as set forth in the Business Plan, (b) significantly increase the cost of Fab 2 beyond that set forth in the Business Plan or (c) materially change the production capacity schedule of Fab 2 as set forth in the Business Plan. In addit ion, the Company shall not change or modify or agree to change or modify the Business Plan and shall not deviate materially from the Business Plan (whether or not it is changed) if any such change, modification or agreement would or reasonably be expected to materially change the Additional Financing Plan as set forth in the Business Plan or result in a material failure to comply with the schedule for the financings described therein unless such change, modification or agreement has been approved by the Company’s Board, provided, however that such approval shall not be deemed granted if two or more members of the Board shall have voted against such change, modification or agreement.

        11.4.  Project Committee. As of the Closing and thereafter the Company shall create a committee of its Board (the “Project Committee”) to oversee and bear managerial responsibility for the Fab 2 Project. The Project Committee shall consist of four directors, including the Chief Executive Officer of the Company then serving on the Board, a representative of Buyer on the Board, so long as the Buyer is entitled to appoint a memer of the Board, a representative of TIC, so long as TIC is entitled to appoint a member to the Board, and one statutory external director, so long as the Company is required to appoint such an external director either to such committee or to the Board pursuant to Applicable Law.

        11.5.  Project Progress Reports; Liaison Officer. The Company shall, on a monthly basis starting immediately subsequent to the date hereof, and in any other date requested by Buyer, provide to Buyer with a written report describing, in reasonable detail, the progress and status of the Fab 2 and the Additional Financings. The Buyer may appoint a liasion officer with respect to the Fab 2 project that will be an employee or consultant of the Buyer and will be permitted to obtain from the Company and its officers, directors consultants and contractors, ongoing information with respect to the progress of the project, will have free access to all relevant information and documents and will be permitted to participated in intenal meetings and discussions of the Company with respect to the progress of the project. The Company will coordinate with the liasion officer any requests in accordance with the foregoing and s hall fully cooperate with such officer.

        11.6.  Information Rights. As long as Buyer, together with its Affiliates, holds at least 3% of the outstanding share capital of the Company, the Company shall deliver to Buyer copies of each report filed or furnished by the Company to the SEC, within no later than five days after such report is filed or furnished to the SEC.

        11.7.  Pre-emptive Rights.

              11.7.1.  Until the later of such time as (a) the Series B-1 Addtional Purchase Obligation shall have expired in accordance with its terms and (b) Buyer shall have exercised the Series B-1 Addtional Purchase Obligation and thereafter shall no longer own ten percent of the issued and outstanding share capital of the Company, if the Company proposes to issue any of its equity securities or securities convertible into such equity securities (the “Offered Securities”), other than Excluded Securities, then the Buyer shall have the right, but not the obligation, to purchase a portion of such Offered Securities, on the same terms and conditions and for the same consideration as the Offered Securities which are sold, equal to the percentage of the Company’s issued and

27

outstanding share capital as is owned by the Buyer on the date on which Buyer responds to the notice to be provided under Section 11.7.2 (the “Pro Rata Share”).

              11.7.2.  If the Company proposed to issue Offered Securities, it shall give the Buyer written notice of its intention (the “ Pre-emptive Notice”) and shall, in such notice, fully describe the Offered Securities and any other relevant securities and the terms and conditions and total consideration upon and for which the Company proposes to issue them. Upon receipt of such notice, the Buyer shall have 15 business days to decide and notify the Company of its decision to purchase Offered Securities in an amount not exceeding Buyer’s then current Pro Rata Share. If the Company fails to issue and sell the Offered Securities or any portion of them within 90 days from the date of the Pre-emptive Notice upon terms and conditions and for consideration that are no more favorable to the purhasers of the Offered Securities than specified in the Pre-emptive Notice, the Company shall not th ereafter issue or sell such Offered Securities without again complying with the provisions of this Section 11.7.2.

12.  General Provisions

              12.1.  Expenses. Except as otherwise expressly provided in this Agreement, each party to this Agreement will bear its respective expenses incurred in connection with the preparation, execution, and performance of this Agreement and the Contemplated Transactions, including all fees and expenses of agents, representatives, counsel, and accountants, provided that upon the Closing the Company shall reimburse Buyer for its reasonable legal expenses in connection with the negotiation and execution of this Agreement in an amount of up to $30,000 plus VAT. The Company shall pay all stamp tax duties in connection with the issuance of the Shares and any shares upon exercise of the Addtional Purchase Obligations and otherwise in connection with this Agreement.

              12.2.  Public Announcements. Any public announcement or similar publicity with respect to this Agreement or the Contemplated Transactions will be issued, if at all, by mutual agreement by the parties, except as required by applicable law or the regulations of the securities exchange upon which the securities of either party are traded or quoted. The Company and Buyer will consult with each other concerning the means by which the Company’s employees, customers, and suppliers and others having dealings with the Company will be informed of the Contemplated Transactions, and Buyer will have the right to be present for any such communication.

              12.3.  Confidentiality. From the date hereof, Buyer and the Company will maintain in confidence, and will cause the directors, officers, employees, agents, and advisors of Buyer and the Company to maintain in confidence, any written information stamped “confidential” when originally furnished by another party in connection with this Agreement or the Contemplated Transactions (including information furnished prior to the date hereof), unless (a) such information is already known to such party or to others not bound by a duty of confidentiality or such information becomes publicly available through no fault of such party, (b) the use of such information is necessary or appropriate in making any filing or obtaining any consent or approval required for the consummation of the Contemplated Transactions, or (c) the furnishing or use of such information is required by Legal Requ irements.

              If the Contemplated Transactions are not consummated, each party will return or destroy as much of such written information as the other party may reasonably request.

              12.4.  Notices. All notices, consents, waivers, and other communications under this Agreement must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by telecopier (with written confirmation of receipt), provided that a copy is mailed by registered mail, return receipt requested, or (c) when received by the addressee, if sent by a recognized overnight delivery service (receipt requested), in each case to the appropriate addresses and telecopier numbers set forth below (or to such other addresses and telecopier numbers as a party may designate by notice to the other parties):

Company:

Attention: Co-Chief Executive Officer
P.O. Box 619
Migdal Haemek 23105 Israel

Facsimile No.: 972-6-654-7788

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with a copy to: Yigal Arnon & Co.
3 Daniel Frisch Street
Tel Aviv, Israel

Attention: David H. Schapiro, Adv.

Facsimile No.: 972-3-608-7714

Buyer:

Attention: President and CEO
SanDisk Corporation
140 Caspian Court
Sunnyvale, California 94089

Facsimile No.: (408) 542-0600

with a copy to: SanDisk Corporation
140 Caspian Court
Sunnyvale, California 94089

Attention: Vice President and General Counsel

Facsimile No.: (408) 548-0385

        12.5.  Jurisdiction; Service of Process. Any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this Agreement may be brought against any of the parties solely in the courts of the State of California, and each of the parties consents to the jurisdiction of such courts (and of the appropriate appellate courts) in any such action or proceeding and waives any objection to venue laid therein. Process in any action or proceeding referred to in the preceding sentence may be served on any party anywhere in the world.

        12.6.  Further Assurances. The parties agree (a) to furnish upon request to each other such further information, (b) to execute and deliver to each other such other documents, and (c) to do such other acts and things, all as the other party may reasonably request for the purpose of carrying out the intent of this Agreement and the documents referred to in this Agreement.

        12.7.  Waiver. The rights and remedies of the parties to this Agreement are cumulative and not alternative. Neither the failure nor any delay by any party in exercising any right, power, or privilege under this Agreement or the documents referred to in this Agreement will operate as a waiver of such right, power, or privilege, and no single or partial exercise of any such right, power, or privilege will preclude any other or further exercise of such right, power, or privilege or the exercise of any other right, power, or privilege. To the maximum extent permitted by applicable law, (a) no claim or right arising out of this Agreement or the documents referred to in this Agreement can be discharged by one party, in whole or in part, by a waiver or renunciation of the claim or right unless in writing signed by the other party; (b) no waiver that may be given by a party will be applicable except in the sp ecific instance for which it is given; and (c) no notice to or demand on one party will be deemed to be a waiver of any obligation of such party or of the right of the party giving such notice or demand to take further action without notice or demand as provided in this Agreement or the documents referred to in this Agreement.

        12.8.  Entire Agreement and Modification. This Agreement supersedes all prior agreements between the parties with respect to its subject matter (including the term sheet between Buyer and the Company dated March 15, 2000 and all drafts hereof and thereof) and constitutes (along with the documents referred to in this Agreement) a complete and exclusive statement of the terms of the agreement between the parties with respect to its subject matter. This Agreement may not be amended except by a written agreement executed by the party to be charged with the amendment.

        12.9.  Disclosure Schedules

              12.9.1.  The disclosures in the Schedules, and those in any supplement thereto, must relate only to the representations and warranties in the Section of the Agreement to which they expressly relate and not to any other representation or warranty in this Agreement.

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              12.9.2.  In the event of any inconsistency between the statements in the body of this Agreement and those in the Schedules (other than an exception expressly set forth as such in the Schedules with respect to a specifically identified representation or warranty), the statements in the body of this Agreement will control.

        12.10.  Assignments, Successors, and no Third-Party Rights. Neither party may assign any of its rights under this Agreement without the prior consent of the other parties, except that Buyer may assign any of its rights under this Agreement to any wholly owned Subsidiary of Buyer or to any Subsidiary which is wholly owned other than a nominal interest, so long as such ownership shall be maintained. Subject to the preceding sentence, this Agreement will apply to, be binding in all respects upon, and inure to the benefit of the successors and permitted assigns of the parties. Nothing expressed or referred to in this Agreement will be construed to give any Person other than the parties to this Agreement any legal or equitable right, remedy, or claim under or with respect to this Agreement or any provision of this Agreement. This Agreement and all of its provisions and conditions are for the sole and exclusive benef it of the parties to this Agreement and their successors and assigns.

        12.11.  Severability. If any provision of this Agreement is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Agreement will remain in full force and effect. Any provision of this Agreement held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable.

        12.12.  Section Headings, Construction. The headings of Sections in this Agreement are provided for convenience only and will not affect its construction or interpretation. All references to “Section” or “Sections” refer to the corresponding Section or Sections of this Agreement. All words used in this Agreement will be construed to be of such gender or number as the circumstances require. Unless otherwise expressly provided, the word “including” does not limit the preceding words or terms.

        12.13.  Time of Essence. With regard to all dates and time periods set forth or referred to in this Agreement, time is of the essence.

        12.14.  Governing Law. This Agreement will be governed by the laws of the State of California without regard to conflicts of law principles.

        12.15.  Counterparts. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement.

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IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first written above.

	SanDisk Corporation
By:	/s/ Eli Harari
	Chief Executive Officer

	Tower Semiconductor Ltd.
By:	/s/ Yoav Nissan Cohen
	Co-Chief Executive Officer

EX-10.38

EXHIBIT 10.38

ESCROW AGREEMENT

        ESCROW AGREEMENT dated as of August 14, 2000, between SanDisk Corporation, a Delaware corporation, (the “Purchaser”), Tower Semiconductor Ltd., an Israeli corporation (the “Company”) and Union Bank of California, N.A., as escrow agent (the “Escrow Agent”).

        WHEREAS, Purchaser and the Company have entered into a Share Purchase Agreement, dated July 4, 2000 (the “SPA”), pursuant to which the Purchaser shall, subject to the terms and conditions of the SPA, purchase from the Company 866,551 of the Company’s ordinary shares, par value NIS1.00 per share, as may be adjusted pursuant to the terms of the SPA (the “Shares”) in consideration for an aggregate purchase price of $20,000,000 (the “Purchase Price”); and

        WHEREAS, pursuant to Section 2 of the SPA, the Purchase Price (as defined in the SPA) is to be deposited in escrow pursuant to the terms and conditions of this Agreement; and

        WHEREAS, pursuant to Section 2 of the SPA, at the Closing (as defined in the SPA), subject to the fulfillment of all closing conditions under the SPA, the Purchase Price will be released from escrow to the Company in accordance with the terms hereof.

        NOW THEREFORE, in consideration of the mutual covenants and agreements contained herein, and upon the terms and subject to the conditions hereinafter set forth, the parties agree as follows:

        1.  Appointment of Escrow Agent.   The Company and the Purchaser hereby appoint Union Bank of California, N.A. as escrow agent with respect to the Purchase Price and the Escrow Agent accepts such appointment, all upon the terms and conditions set forth herein.

        2.  Deposit into Escrow Account.  Promptly following the execution and delivery of this Agreement, the Purchaser shall cause to be deposited with the Escrow Agent, and upon such deposit the Escrow Agent shall acknowledge receipt of, $20,000,000 (such funds together with any income earned thereon pursuant to Section 4 hereof after payment of expenses incurred or taxes incurred, the “Escrowed Funds”) via a wire transfer of immediately available funds to the account of the Escrow Agent set forth in Schedule 2 hereto (the “Escrow Account”). The Escrow Agent shall hold the Escrowed Funds and shall administer the same and the Escrow Account in accordance with the terms of this Agreement. The Escrow Agent shall report to the Company and the Purchaser upon receipt of the Purchase Price into the Escrow Account.

        3.  Disbursement of the Escrowed Funds.

        3.1  Upon receipt by the Escrow Agent of written notice from the Purchaser to the effect that the Closing set forth in Section 2 of the SPA is scheduled to occur on a specified date, the Escrow Agent shall, on the date specified in such notice release the Escrowed Funds to the Company by way of wire transfer of immediately available funds into the bank account designated by the Company in Schedule 3.1 hereto. The Purchaser shall provide the Company with a copy of the written notice referred to in the first sentence of this Section 3.1.

        3.2  In the event that the written notice set forth in Section 3.1 is not received by the Escrow Agent on or prior to the earlier of (a) January 31, 2001 and (b) such time as the Escrow Agent shall receive a notice from either the Purchaser, the Company or both to the effect that the sender(s) of such notice has terminated the SPA pursuant to Section 9 of the SPA together with a copy of the actual written notice of termination as required under such Section 9, this Agreement shall terminate. Upon termination, the Escrow Agent shall deliver the Escrowed Funds to the Purchaser by way of wire transfer of immediately available funds into the bank account designated by the Purchaser in Schedule 3.2 hereto.

        4.  Investments.  Purchaser and Company may deliver written and jointly signed instructions to the Escrow Agent with specific investment instructions for the Escrowed Funds. In the absence of such instructions, the Escrow Agent shall have full authority and shall, invest and reinvest the Escrowed Funds in United States Treasury obligations or other fixed income securities rated “ AA” or higher by a nationally recognized statistical rating organization or in one or more money market funds of major institutions meeting the following criteria (i) fund assets of at least $1 billion, (ii) comprised of high quality money market instruments having a dollar weighted average maturity of ninety days or less, (iii) provide for same day settlement and (iv) stable net asset value of US

$1.00 and rated AAA by S&P. The Escrow Agent shall not be liable or responsible for any loss suffered in connection with any investment of funds made by it pursuant hereto or in connection with the liquidation of any such investment prior to its maturity.

        5.  Further Provisions Relating to the Escrow

        5.1  The Company and the Purchaser shall be the sole parties entitled to bring suit concerning this Agreement (excluding an action for interpleader brought by the Escrow Agent), and specific performance of this Agreement shall be their sole and exclusive remedy against the Escrow Agent. Other than in connection with a claim of gross negligence or willful misconduct, the Escrow Agent shall not be liable for any monetary damages in connection with this Agreement. Other than in connection with a claim of gross negligence or willful misconduct and except in connection with a claim for specific performance of this Agreement, the Escrow Agent shall not be liable in law or equity for any mistake of fact or of law or any error of judgment, or for any act or any omission.

        5.2  Other than in connection with a claim against the Escrow Agent of gross negligence or willful misconduct and except in connection with a claim by the Company or the Purchaser for specific performance of this Agreement, the Company and the Purchaser, jointly and equally, shall indemnify and hold harmless the Escrow Agent and its directors, officers, agents and employees against and in respect of any and all claims, suits, actions, proceedings (formal and informal), investigations, judgments, deficiencies, damages, settlements, liabilities, and legal and other expenses (including legal fees and expenses of attorneys chosen by the Escrow Agent) as and when incurred arising out of or based upon any act, omission, alleged act, or alleged omission by the Escrow Agent, or its agents, or any other cause, in any case in connection with the acceptance of, or the performance or non-performance by the Escrow Agent, or its agents, of any of the Escrow Agent’s duties under this Agreement.

        5.3  The Escrow Agent makes no representation as to the validity or genuineness of any document held by or delivered to it. The Escrow Agent shall be fully protected by acting in reliance upon any notice given in proper form hereunder, advice, direction, other document, or signature believed by it to be genuine, by assuming that any person purporting to give the Escrow Agent any notice, advice, direction, or other document has been duly authorized so to do, or by acting or failing to act in good faith on the advice of any counsel retained by the Escrow Agent.

        5.4  The Escrow Agent shall have no duties or responsibilities except those expressly set forth herein and shall not be responsible for or chargeable with knowledge of the terms or provisions of any agreements between the parties, including, without limitation the SPA. The Escrow Agent shall not be bound by any notice of a claim, or demand with respect thereto, or any waiver, modification, amendment, termination, cancellation, or revision of this Agreement, unless it is in writing and signed by the Company and the Purchaser and received by the Escrow Agent, and, if the Escrow Agent’s duties as Escrow Agent hereunder are affected, unless the Escrow Agent shall have given its prior written consent thereto. The Escrow Agent shall not be bound by any assignment by either of the other parties hereto of its rights hereunder.

        5.5  The Escrow Agent is authorized to comply with and obey all laws, orders, judgments, decrees, and regulations of any governmental authority, court, tribunal, or arbitrator. If the Escrow Agent so complies, it shall not be liable even if such law, order, judgment, decree, or regulation is subsequently reversed, modified, annulled, set aside, vacated, or found to have been entered without jurisdiction.

        5.6  If the Escrow Agent shall be uncertain as to its duties or rights hereunder, or if it shall receive any notice, advice, direction or other document from any other party with respect to the Escrowed Funds which, in the Escrow Agent’s opinion, is in conflict with any of the provisions of this Agreement, or if it should be advised that a dispute has arisen with respect to the payment, ownership, or right of possession of the Escrowed Funds or any part thereof (or as to the delivery, non-delivery) or content of any notice, advice, direction, or other document), the Escrow Agent shall be entitled, without liability, to refrain from taking any action other than to use Escrow Agent’s best efforts to keep safely the Escrowed Funds until the Escrow Agent shall be directed otherwise in writing by the other parties hereto or by an order, decree, or judgment of the competent California Court or an arbitrator duly appointed by the Company and the Purchaser, but the Escrow Agent shall be under no duty to institute or to defend any proceeding although the Escrow Agent may, in the Escrow Agent’s discretion and at the expense of the Company and the Purchaser (to be shared equally among such parties), institute or defend such proceedings.

        5.7  The Escrow Agent may resign by giving 30 days’ prior written notice to the Company and the Purchaser, in which case the Escrow Agent shall appoint a successor Escrow Agent reasonably acceptable to the

Company and the Purchaser. If the Escrow Agent fails to do so within 30 days, it may apply to a court of competent jurisdiction for the appointment of a successor. The resigning Escrow Agent shall transfer and deliver the Escrowed Funds to the successor Escrow Agent, after the fees and expenses for all services rendered by the resigning Escrow Agent shall have been paid to it, and all of the provisions of this Escrow Agreement shall apply to the successor Escrow Agent as though it had been named herein.

        6.  Compensation of Escrow Agent

        The Escrow Agent shall be entitled to fees and expenses for all services rendered by it hereunder in accordance with Schedule 6 hereto, which fees and expenses shall be paid ½ each by the Company and the Purchaser. The Escrow Agent shall also be entitled to reimbursement on demand for all reasonable loss, liability, damage or expenses paid or incurred by it in the administration of its duties hereunder, including, but not limited to, all disbursements and all taxes or other governmental charges Escrow Agent may withdraw the fees shown in Schedule 6 from account income.

        7.  Representations of the Company and the Purchaser

        Each of the Company and the Purchaser is a corporation duly organized, validly existing and in good standing under the laws of its state or country of incorporation and has all necessary power and authority to execute and deliver this Agreement and to be bound by the provisions hereof. The execution and delivery of this Agreement and the performance by the Company and the Purchaser of their respective obligations hereunder have been duly authorized by all requisite corporate action on the part of the Company and the Purchaser. This Agreement has been validly executed and delivered by the Company and the Purchaser and constitutes the legal, valid and binding obligation of the Company and the Purchaser enforceable against each of them in accordance with its terms Company represents and warrants that any funds payable to it are not subject to any United States withholding.

        8.  Survival

        The covenants, agreements, representations, and warranties contained in or made pursuant to this Agreement shall survive the delivery by the Escrow Agent of the Escrowed Funds or any part thereof.

        9.  Miscellaneous

        9.1  At any time and from time to time, the Company and the Purchaser agree, at their expense, to take such actions and to execute and deliver such documents as may be reasonably necessary to effectuate the purposes of this Agreement.

        9.2  This Agreement does not create, and shall not be construed as creating, any rights enforceable by any person other than the parties hereto.

        9.3  Any demand, consent, notice or other communication authorized or required to be made under this Agreement shall be in writing and shall be given or made by registered mail (registered airmail if international post), personal delivery or facsimile (confirmed by registered mail or personal delivery), addressed to the respective Parties as set forth below:

To the Escrow Agent: Union Bank of California, N.A.
475 Sansome Street, 12th Floor
San Francisco, CA 94111
Attention: Douglas Schlafer,
Corporate Trust Department
Telephone: (415) 296-6747
Facsimile: (415) 296-6757

To Company at: Attention:  Co-Chief Executive Officer
Tower Semiconductor, Ltd.
P.O. Box 619
Migdal Haemek 23105 Israel
Facsimile No.:  972-6-654-7788

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with a copy to: Yigal Arnon & Co.
3 Daniel Frisch Street
Tel Aviv, Israel
Attention:  David H. Schapiro, Adv.
Facsimile No.:  972-3-608-7714

To Purchaser at: SanDisk Corporation
140 Caspian Court
Sunnyvale, California 94089
Attention:  President and CEO
Facsimile No.:  (408) 542-0600

with a copy to: SanDisk Corporation
140 Caspian Court
Sunnyvale, California 94089
Attention:  Vice President and General Counsel
Facsimile No.:  (408) 548-0385

(or to such changed addresses as to which they may give notice).

        9.4  This Agreement shall be governed by, and construed in accordance with, the laws of the State of California regardless of the laws that might otherwise govern under applicable principles of conflicts of law thereof. Any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this Agreement may be brought against any of the parties solely in the courts of the State of California, and each of the parties consents to the jurisdiction of such courts (and of the appropriate appellate courts) in any such action or proceeding and waives any objection to venue laid therein. Process in any action or proceeding referred to in the preceding sentence may be served on any party anywhere in the world.

        9.5  Neither the Company nor the Purchaser may assign any of its rights hereunder. This Agreement shall inure to the benefit of and be binding upon the successors of the Company and the Purchaser.

        9.6  No consent or waiver, express or implied, by any party to or of any breach or default by a party in the performance of its obligations hereunder shall be deemed or construed to be a consent or waiver to or of any other breach or default in the performance by such party of the same or any other obligations of such party hereunder. Failure on the part of any party to complain of any act or failure to act of another party or to declare the other party in default, irrespective of how long such failure shall continue, shall not constitute a waiver of such party of its rights hereunder.

        9.7  If any provision of this Agreement or the application thereof to any person or circumstance shall be invalid or unenforceable to any extent, the parties shall use best efforts to adopt an enforceable substitute provision expressing the intent of the parties, and remainder of this Agreement and the application of such remaining provisions to other persons or circumstances shall not be affected thereby and shall be enforced to the greatest extent permitted by law.

        9.8  This Agreement, together with Schedules 2, 3.1, 3.2 and 6, contains the entire agreement between the parties hereto relative to their rights and obligations as related to the escrow. No variations, modifications, or changes herein or hereof shall be binding upon any party hereto unless set forth in a document duly executed by or on behalf of such party.

        9.9  This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement.

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written.

SanDisk Corporation

By: /s/ Frank A. Calderoni

Name: Frank A. Calderoni
Title: Sr. Vice President Finance and
          Administration

Tower Semiconductor Ltd.

By: /s/ Rafael Levin

Name: Rafael Levin
Title: Co-Chief Executive Officer

Union Bank of California, N.A

By: /s/ Vicki Elnick

Name: Vicki Elnick
Title: Vice President

EX-10.39

EXHIBIT 10.39

ADDITIONAL PURCHASE OBLIGATION AGREEMENT

        ADDITIONAL PURCHASE OBLIGATION AGREEMENT, dated as of July 4, 2000, between Tower Semiconductor Ltd., an Israeli corporation (“T”), and SanDisk Corporation, a Delaware corporation (“S”).

        WHEREAS, T and S are parties to that certain Share Purchase Agreement dated July 4, 2000, relating to the sale by T to S of 866,551 of T’s Ordinary Shares (the “ Share Purchase Agreement”) and parties to that certain Foundry Agreement dated July 4, 2000, relating to the production of certain silicon wafers by T for delivery to S; and

        WHEREAS, as a condition to the closing of the sale of certain of T’s shares under the Share Purchase Agreement and the effectiveness of the Foundry Agreement, T and S have each agreed to enter into this Agreement providing for the issuance and delivery of conditional additional purchase obligations for the purchase by S of Ordinary Shares of T, subject to the terms and conditions set forth herein.

        NOW, THEREFORE, in consideration of the foregoing and for the purpose of defining the terms and provisions of the Additional Purchase Obligations and the respective rights and obligations thereunder of T and S, T and S hereby agree as follows:

1.  Definitions

        1.1.  Certain Definitions. As used in this Agreement, terms not defined herein shall have the meaning ascribed to them in the Share Purchase Agreement and the following terms shall have the following respective meanings:

        “A Additional Purchase Obligation Certificates” shall have the meaning ascribed to it in Section 2.2.

        “A Additional Purchase Obligations” shall have the meaning ascribed to it in Section 2.1.

        “Additional Purchase Obligation Certificates” shall have the meaning ascribed to it in Section 2.2.

        “Additional Purchase Obligations” shall have the meaning ascribed to it in Section 2.1.

        “B Additional Purchase Obligation Certificates” shall have the meaning ascribed to it in Section 2.2.

        “B Additional Purchase Obligations” – shall have the meaning ascribed to it in Section 2.1.

        “Equity Securities” means (a) Ordinary Shares and securities convertible into, or exercisable or exchangeable for, Ordinary Shares or rights or options to acquire Ordinary Shares or such other securities, and (b) shares of any other class or series of capital shares and securities convertible into, or exercisable or exchangeable for, shares of such other class or series and rights or options to acquire shares of such other class or series or such other securities, in each case, excluding the Additional Purchase Obligations.

        “Exchange Act” means the Securities Exchange Act of 1934, as amended.

        “Exercise Price” means the purchase price per Ordinary Share to be paid upon the exercise of each Additional Purchase Obligation in accordance with the terms hereof, which price shall initially be $30 per share, as each may be adjusted from time to time pursuant to Section 4 hereof.

        “Expiration Date” means the fifth anniversary of the date of this Agreement subject to earlier termination of one or more of the Additional Purchase Obligations pursuant to Section 5.1.

        “Exercise Notice” – shall have the meaning ascribed to in Section 2.1.3.

        “Grace Period” – shall have the meaning ascribed to it in Section 5.1.

        “Mandatory Exercise Event” shall have the meaning ascribed to it in Section 5.1.

EX-10.40

EXHIBIT 10.40

SHAREHOLDERS AGREEMENT

        This Shareholders Agreement (the “Agreement”) made as of July 4, 2000 by and between by SanDisk Corporation, a Delaware corporation (“S”), and The Israel Corporation, an Israeli corporation (“I”).

RECITALS

        WHEREAS I is a shareholder of T, an Israeli corporation (the “Company”);

        WHEREAS S has entered into a Share Purchase Agreement with the Company dated July 4, 2000 (the “Share Purchase Agreement”) pursuant to which S shall purchase, subject to the terms and conditions thereof, 866,551 Shares; and

        WHEREAS The parties hereto desire to set forth their agreements with respect to their shareholdings in the Company.

        NOW, THEREFORE, in consideration of the mutual promises and agreements herein contained, the parties hereto hereby agree as follows:

        1.  Definitions

        The following terms will have the meaning ascribed to them in this paragraph when used in this Agreement:

              (a)  “Shares” - Ordinary Shares, par value NIS 1.00 per share, of the Company (adjusted for any reorganization, recapitalization, share split, share dividend and securities at any time issued by the Company in exchange for such shares or in connection with any distribution, merger, sale of assets, consolidation or other action by the Company). In each case in which this Agreement specifies a number of Shares such number will be subject to the adjustment described herein.

              (b)  “Permitted Transferee” - any entity at least the majority of the voting rights in which is held by the transferring shareholder, provided that (i) such entity is or becomes a party to this Agreement and agrees in writing to be bound by all the provisions of this Agreement, and (ii) such transferring shareholder shall not be relieved of its obligations hereunder.

              (c)  “Equity Securities” means any securities having voting rights in the election of the Board of Directors of the Company not contingent upon default, or any securities evidencing an ownership interest in the Company, or any securities convertible into or exercisable for any shares of the foregoing, or any agreement or commitment to issue any of the foregoing. For the purpose of this definition and the definitions ascribed to “Offered Shares, “Excess Offered Shares” and “Co-Sale Shares”, the restrictions on the transfer of equity securities of the Company, as set forth in Sections 3, 4 and 5 of this Agreement, shall not apply to an amount of the Company’s share capital in excess of 5.4 million shares, subject to proportionate adjustment upon stock splits, stock dividends, reclassification, recapitalization or any similar change affecting the Compan y’s share capital, provided that in the event that S fails to exercise Additional Purchase Obligation B-1 and the Optional Additional Purchase Obligations accordingly terminate, Sections 4 and 5 shall terminate and the restrictions contained in Section 3 shall apply only to 2.7 million shares. In addition, in the event that for any reason S does not exercise any series of Additional Purchase Obligations by its prescribed exercise date the amount of shares included in this definition (i.e. not in excess of 5.4 million or 2.7 million shares, as the case may be) (“Equity Securities”) shall be decreased by an equivalent amount of shares represented by such non-exercised warrants.

              (d)  “Share Purchase Agreement” shall have the meaning ascribed to it in the recitals to this Agreement.

              (e)  “Shareholders” means S, I, their Permitted Transferees and other parties who have joined this Agreement in accordance with Sections 6 or 9.10 to this Agreement, and which hold Shares at the date in question.

              (f)   “Major Holder” means any Shareholder holding at least 5% of the Company’s outstanding Equity Securities and which is a party to this Agreement. For the purpose of this definition the holdings of a Shareholder and all its Permitted Transferees shall be calculated together.

              (g)  “Closing” as defined in the Share Purchase Agreement.

        2.  Board of Directors

              2.1.  Each Shareholder hereby agrees to attend and vote (or cause to be voted) at general meetings of shareholders of the Company all of its Shares (i) to vote for the election of the following persons to the Board of Directors of the Company and for any other resolution which is necessary in order to facilitate such election and (ii) to vote against the election of any other person to the Board of Directors of the Company or against any resolution the effect of which is to prevent or impede such election, other than in accordance with this Agreement:

                     2.1.1.  From the Closing and thereafter:  

                            (a)  1 nominee designated by S, provided that in the event that, from the date on which S exercises the Series A-3 Additional Purchase Obligations and thereafter, S and its Permitted Transferees hold together in the aggregate less than 5% of the outstanding Shares, then S shall not be entitled to designate any nominee, provided further that if subsequently S and its Permitted Transferees become together the holders of 5% of the outstanding Shares then S shall again be entitled to designate a nominee.

                            (b)  2 nominees designated by I, provided that, (i) in the event that I and its Permitted Transferees hold together in the aggregate less than 10% of the outstanding shares, then I shall be entitled to designate only one nominee, provided further that if subsequently I and its Permitted Transferees become together the holders of 10% of the outstanding shares then I shall again be entitled to designate two nominees and (ii) in the event that I and its Permitted Transferees hold together in the aggregate less than 5% of the outstanding shares, then I shall not be entitled to designate any nominee, provided further that if subsequently I and its Permitted Transferees become together the holders of less than 5% of the outstanding shares then S shall again be entitled to designate a nominee.

                            (c)  2 External Directors (as defined in the Israeli Companies Law - 1999 (the “Companies Law”)) recommended by the Board of Directors of T, assuming the Company is obliged under the Companies Law to nominate External Directors.

                            (d)  1 other person who shall be a member of the Company’s management, including either of the Company’s co-CEOs, provided that it is understood that the two co-CEOs may alternate service on the Company’s Board of Directors at intervals to be determined by the Board (excluding the management director). In the event that the two co-CEOs do rotate service on the Board, the parties agree to cause the CEO not serving to have observer status.

                            (e)  1 or 2 other person(s) who shall be designated by T’s Wafer Partners (as defined in the Share Purchase Agreement).

                            (f)  Such other directors as agreed upon between I and S.

                            (g)  A representative of I (who will be one of the nominees under clause (b) above) as Chairman of the Board.

                     2.1.2.  Each Shareholder further agrees that in the event that any party that is entitled to nominate a director under this Agreement decides to terminate or replace such director, then the Shareholders shall vote (or cause to be voted) all of his or its Shares to cause the termination of office or the replacement of such director, in accordance with the decision of the Shareholder who nominated such director pursuant to the provisions of this Section 2.1, and cause, if required, a general meeting of shareholders of the Company to be held for such purpose.

              2.2.  (a)  S undertakes upon itself, for as long as it is entitled to nominate a director to the Board of Directors, as specified above, not to nominate to the Board of Directors of the Company a director who is an employee or consultant of the Company.

                     (b)  I undertakes upon itself for as long as it is entitled to nominate a director to the Board of Directors, as specified above, not to nominate to the Board of Directors of the Company a director who is an employee or consultant of the Company.

              2.3.  In the event that the number of nominees to the Board of Directors which a party is entitled to nominate is decreased or terminated as per Section 2.1 above, the respective Shareholder who nominated such director agrees to lawfully cause such director to immediately resign from the Board of Directors and in the absence of such resignation within 24 hours of such decrease or termination, all the Shareholders agree to take such action as is necessary to cause a general meeting of shareholders of the Company to be assembled, and to vote all their Shares in order to remove such director from the Board of Directors. In each such case the number of members of the Board of Directors shall decrease accordingly.

        3.  Restrictions on Transfer of Equity Securities.

              3.1.  From the date of this Agreement and until the end of three years from the Closing (the “Restricted Period”) neither I and any of its Permitted Transferees nor S and any of its Permitted Transferees shall sell, assign, transfer, pledge, hypothecate, or otherwise encumber or dispose of in any way (hereinafter referred to as “Transfer”), all or any part of or any interest in the Equity Securities now or hereafter owned or held by such parties.

              3.2.  Notwithstanding Section 3.1 hereof, during the Restricted Period (i) I and its Permitted Transferees may transfer up to an aggregate of 1,200,000 Shares and (ii) S and its Permitted Transferees, to the extent S holds in excess of 2.7 million shares, may transfer up to 1,200,000 shares in excess of its holding of 2.7 million shares, subject to the following restrictions: (a) any Transfer made other than in accordance with clause (b) shall be effected only after compliance with Section 4 hereof; and (b) any Transfer made by sale of Shares in the public markets pursuant to and in accordance with Rule 144 under the Securities Act (a “Public Sale”) shall be effected only after the Shareholder offering to effect the Public Sale shall have given the other Major Holders, at least two business days prior to the proposed Public Sale, written notice setting forth its intention to Tr ansfer, the number of Shares proposed to be Transferred and the manner of disposition; the other Major Holders may, by written notice to the Shareholder proposing to make the Public Sale served on such Shareholder at least 12 hours prior to the Public Sale, exercise a right of first refusal to purchase all or any part of the Shares proposed to be Transferred in the Public Sale at a price per share equal to the average closing price of the Shares in the seven trading days preceding the date of the notice. Any Shares with respect to which the other Major Holders have not exercised such right of first refusal, may be Transferred in accordance with such notice of Public Sale within a period of 45 days after the date of the notice of Public Sale at such price per share as determined by the Shareholder effecting such Public Sale.

              3.3.  From the end of the Restricted Period any Transfer by I and any of its Permitted Transferees and by S and any of its Permitted Transferees may only be made pursuant to the provisions of Sections 4 and 5 below.

        4.  Rights of First Refusal.

              4.1.  Transfer Notice. Subject to the provisions of Section 3, if at any time, any Shareholder proposes to Transfer Equity Securities to one or more third parties pursuant to an understanding with such third parties (a “Disposition”), then such Shareholder (a “Selling Shareholder”) shall give the Company and each of the Major Holders, a written notice of its intention to effect the Disposition (the “Transfer Notice”), which Transfer Notice shall include (i) a description of the Equity Securities to be transferred (“Offered Shares”), (ii) the identity of the prospective transferee(s) and (iii) the consideration and the material terms and conditions upon which the proposed Disposition is to be made. The Transfer Notice shall certify that the Selling Shareholder has received a firm offer from the prospective transferee(s) and in go od faith believes a binding agreement for the Transfer is obtainable on the terms set forth in the Transfer Notice. The Transfer Notice shall also include a copy of any written proposal, term sheet or letter of intent or other agreement relating to the proposed Disposition. Notwithstanding the foregoing, in the event that any Shareholder proposes to pledge Shares to a banking institution, such pledge shall be permitted only if such Shareholder effects the pledge subject to the provisions of Sections 4 and 5 hereof, furnishes to the other parties hereto a written representation of the Shareholder confirming that, and evidence which is reasonably satisfactory to indicate that, such pledge is subject to Sections 4 and 5 and ensures that no voting rights with respect to the Shares are granted to the banking institution.

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              4.2.  Major Holders’ Option. Each Major Holder shall have an option for a period of thirty (30) days from its receipt of the Transfer Notice to elect to purchase its respective pro rata share of the Offered Shares, and in the event that any other Major Holder does not exercise its right hereunder, its pro rata share of such Offered Shares not purchased by the other Major Holders (the “Excess Offered Shares”), at the same price and subject to the same terms and conditions as described in the Transfer Notice. Each Major Holder may exercise such purchase option and, thereby, purchase all or any portion of its pro rata share of the Offered Shares, and in the event that any Major Holder does not exercise its right hereunder, its pro rata share of the Excess Offered Shares, by notifying the Selling Shareholder and the Company in writing, before expiration of the thirty (30) day period as to the number of Offered Shares and Excess Offered Shares, if any, which it wishes to purchase (the “Purchase Notice”). Failure to respond to the Transfer Notice: (a) within the applicable period will be considered a waiver of the right to exercise the right set forth in this Section 4.2; and (b) within forty-five days after receipt of the Transfer Notice will be considered a waiver of the right of co-sale set forth in Section 5.1, provided that the Transfer Notice clearly references such right of co-sale. Each Major Holder’s pro rata share of the Offered Shares, or of the Excess Offered Shares, as the case may be, shall be a fraction of the Offered Shares, or of the Excess Offered Shares, as the case may be, of which the number of Shares owned by such Major Holder on the date of the Transfer Notice shall be the numerator and the total number of Shares held by all such Major Holders (excluding the Selling Shareholder) on the date of the Transfer Notice shall be the denominator.

              4.3.  If Major Holder(s) give the Selling Shareholder(s) Purchase Notice(s) pursuant to Section 4.2 above with respect to all and not part of the Offered Shares, then the Selling Shareholder shall not effect the Disposition to the third party transferee rather to the Major Holder(s) exercising their right of first refusal and then payment for the Offered Shares shall be by check or wire transfer to a bank account to be designated by the Selling Shareholder, against delivery of the Offered Shares to be purchased at a place agreed upon between the parties and at the time of the scheduled closing therefor, which shall be no later than forty five (45) days after the Selling Shareholders’ receipt of the Purchase Notice, unless the Transfer Notice contemplated a later closing with the prospective third party transferee(s) in which case the closing of the purchase by the Major Holding may b e held until such later date.

              4.4.  Each Major Holder shall be entitled to apportion Offered Shares to be purchased among its Permitted Transferees, provided that such Purchaser notifies the Selling Shareholder of such allocation.

              4.5.  The rights of first refusal set forth in this Section 4 shall extend until the two-year anniversary of the Closing and be automatically renewed for two additional years unless the parties hereto agree, prior to the second anniversary of the Closing, to terminate such rights.

        5.  Right of Co-Sale.

              5.1.  To the extent the Major Holders do not exercise their right of first refusal in respect of all of the Offered Shares pursuant to Section 4 above, then S and I, each, (a “Co-Sale Holder” for purposes of this Section 5) shall be entitled to notify the Selling Shareholder in writing in the Purchase Notice referred to in Section 4.2 and subject to the terms thereof and shall have the right to participate in the Disposition on the same terms and conditions as specified in the Transfer Notice. Such selling Co-Sale Holder’s notice to the Selling Shareholder shall indicate the number of shares of Equity Securities the Co-Sale Holder wishes to sell under its right to participate.

              5.2.  Each Co-Sale Holder may sell all or any part of that number of Offered Shares equal to the product obtained by multiplying (i) the aggregate number of Offered Shares by (ii) a fraction, the numerator of which is the number of Shares owned by the Co-Sale Holder on the date of the Transfer Notice and the denominator of which is the total number of Shares owned by all of the Co-Sale Holders and the Selling Shareholder on the date of the Transfer Notice (the “Co-Sale Shares”).

              5.3.  Each Co-Sale Holder shall effect its participation in the sale by promptly delivering to the Selling Shareholder for Transfer to the prospective purchaser one or more transfer deeds, properly executed for Transfer, which represent the number of Offered Shares which such Co-Sale Holder elects to sell. The transfer deeds that the Co-Sale Holder delivers to the Selling Shareholder as provided above shall be transferred to the prospective purchaser in consummation of the sale of the Offered Shares pursuant to the terms and conditions specified in the Transfer Notice, and the Selling Shareholder shall concurrently therewith remit to such Co-Sale Holder that portion of the net sale proceeds to which such Selling Holder is entitled by reason of its participation in such sale. To the extent that any prospective purchaser or purchasers prohibits such assignment or otherwise refuses to purchas e

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shares or other securities from a Co-Sale Holder exercising its rights of co-sale hereunder, the Selling Shareholder shall not sell to such prospective purchaser or purchasers any Offered Shares unless and until, simultaneously with such sale, the Selling Shareholder shall purchase such shares or other securities from such Selling Holder for the same consideration and on the same terms and conditions as the proposed transfer described in the Transfer Notice.

              5.4.  Non-Exercise of Rights. To the extent that the Major Holders have not exercised in full their rights to purchase all the Offered Shares within the time periods specified in Section 4.2, the Selling Shareholder shall have a period of ninety (90) days from the expiration of the 45 day period set forth in Section 4.2 (the “Ninety Day Period”) to sell the Offered Shares and the Co-Sale Shares, if any, upon terms and conditions (including the purchase price) no more favorable than those specified in the Transfer Notice to the third-party transferee(s) identified in the Transfer Notice. The third-party transferee(s) shall, as a condition to such transfer, become a party to Section 2 of this Agreement and become subject to all the provisions included therein unless waived by Major Holders, holding in the aggregate 75% of the aggregate number of shares of the Company he failure to obtain third party approvals, the sale or disposition of the Offered Shares and the Co-Sale Shares, if any, cannot be consummated within the Ninety Day Period, the Ninety Day Period shall be extended by a further period of up to ninety (90) days (the “Second Ninety Day Period”). Notwithstanding the aforesaid in the previous sentence, in the event that the Selling Shareholder does not consummate the sale or disposition of the Offered Shares and the Co-Sale Shares, if any, within the Ninety Day Period or the Second Ninety Day Period, as the case may be, the Major Holders’ first refusal rights and the Co-Sale Holders’ co-sale rights shall continue to be applicable to any subsequent disposition of the Offered Shares by such Sellin g Shareholder until such right lapses in accordance with the terms of this Agreement.

              5.5.  Sale of Shares Under Rule 144. Notwithstanding the provisions of Sections 4 and 5, in the event of a Public Sale effected after the expiration of the Restricted Period, the Selling Shareholder shall be permitted to effect the Public Sale subject to and in accordance with Rule 144 (including, without limitation, the volume limitations included therein), and such Public Sale shall not be subject to the rights of first refusal and co-sale set forth in Sections 4 and 5.

              5.6.  Limitations to Rights of Refusal and Co-Sale. Notwithstanding the provisions of Sections 3, 4 and 5 of this Agreement, any Shareholder may sell or otherwise assign, with or without consideration, Equity Securities to any Permitted Transferee, provided, however, that any Permitted Transferee shall, prior to receiving any such Equity Securities and as a condition to the effectiveness of any such sale or assignation, become a party to this Agreement and undertake to return such Equity Securities to its transferor in the event that the Permitted Transferee ceases to be a Permitted Transferee in relation to its transferor.

        6.  [Omitted]

        7.  Purchase of Additional Shares.

              I and S shall coordinate the purchase of additional Shares in excess of the Shares owned by such Shareholder as of the date of execution of this Agreement.

        8.  Term and Termination

              This Agreement shall be in effect from the date hereof and until the earlier of (i) twelve (12) years from the Closing; or (ii) the termination of the Share Purchase Agreement. In the event S shall not exercise Additional Purchase Obligation B-1, Sections 4, 5 and 7 shall terminate. In addition, if Additional Purchase Obligation B-1 shall have been exercised, this Agreement shall thereafter not have any further force and effect to any Shareholder from the date that, and as long as, such Shareholder holds less than 10% of the Company’s outstanding share capital.

        9.  General Provisions

              9.1.  Expenses. Each party to this Agreement will bear its respective expenses incurred in connection with the preparation, execution, and performance of this Agreement, including all fees and expenses of agents, representatives, counsel, and accountants.

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              9.2.  Public Announcements. Any public announcement or similar publicity with respect to this Agreement will be issued, if at all, by mutual agreement by S and I and any other parties hereto, subject to limitations contained in the Share Purchase Agreement.

              9.3.  Confidentiality. The parties to this agreement will maintain in confidence, and will cause the directors, officers, employees, agents, and advisors to maintain in confidence, this Agreement and any written information furnished by another party in connection with this Agreement, unless (a) such information is already known to such party or to others not bound by a duty of confidentiality or such information becomes publicly available through no fault of such party, (b) the use of such information is necessary or appropriate in making any filing or obtaining any consent or approval required for the consummation of this Agreement, or (c) the furnishing or use of such information is required by any U.S., Israeli or other federal, state, local or administrative order, law, ordinance, or regulation or by the applicable rules of any stock exchange.

              9.4.  Notices. All notices, consents, waivers, and other communications under this Agreement must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by telecopier (with written confirmation of receipt), provided that a copy is mailed by registered mail, return receipt requested, or (c) when received by the addressee, if sent by a recognized overnight delivery service (receipt requested), in each case to the appropriate addresses and telecopier numbers set forth below (or to such other addresses and telecopier numbers as a party may designate by notice to the other parties):

S: Attention: President and CEO
Facsimile No.: (408) 542-0600

with a copy to: SanDisk Corporation
Attention: Vice President and General Counsel
Facsimile No.: (408) 548-0385

I: Attention: Udi Hillman
Facsimile No.: 972-3-695-3631

              9.5.  Jurisdiction; Service of Process. Any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this Agreement may be brought against any of the parties solely in the courts of the State of California, and each of the parties consents to the jurisdiction of such courts (and of the appropriate appellate courts) in any such action or proceeding and waives any objection to venue laid therein. Process in any action or proceeding referred to in the preceding sentence may be served on any party anywhere in the world.

              9.6.  Further Assurances. The parties agree (a) to furnish upon request to each other such further information, (b) to execute and deliver to each other such other documents, and (c) to do such other acts and things, all as the other party may reasonably request for the purpose of carrying out the intent of this Agreement and the documents referred to in this Agreement.

              9.7.  Waiver. The rights and remedies of the parties to this Agreement are cumulative and not alternative. Neither the failure nor any delay by any party in exercising any right, power, or privilege under this Agreement or the documents referred to in this Agreement will operate as a waiver of such right, power, or privilege, and no single or partial exercise of any such right, power, or privilege will preclude any other or further exercise of such right, power, or privilege or the exercise of any other right, power, or privilege. To the maximum extent permitted by applicable law, (a) no claim or right arising out of this Agreement or the documents referred to in this Agreement can be discharged by one party, in whole or in part, by a waiver or renunciation of the claim or right unless in writing signed by the other party; (b) no waiver that may be given by a party will be applicable except in the specific instance for which it is given; and (c) no notice to or demand on one party will be deemed to be a waiver of any obligation of such party or of the right of the party giving such notice or demand to take further action without notice or demand as provided in this Agreement or the documents referred to in this Agreement.

              9.8.  Entire Agreement. This Agreement supersedes all prior agreements between the parties with respect to its subject matter and constitutes (along with the documents referred to in this Agreement) a complete and exclusive statement of the terms of the agreement between the parties with respect to its subject matter.

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              9.9.  Modification. This Agreement may not be amended except by a written agreement executed only by S (or its Permitted Transferees in case S do not hold Share of the Company) and I (or its Permitted Transferees in case I do not hold Share of the Company). In the event that any person is added to this Agreement as a party as contemplated by Section 5.7 of the SPA, then the parties hereto will cooperate to amend this Agreement to provide similar voting support by the parties hereto for any director seat agreed by the Company to be allocated to such additional party.

              9.10.  Assignments, Successors, and no Third-Party Rights. Neither party may assign any of its rights under this Agreement, except for such assignments made to Permitted Transferees along with the transfer of Shares to such Permitted Transferees, without the prior consent of the other parties. Subject to the preceding sentence, this Agreement will apply to, be binding in all respects upon, and inure to the benefit of the successors and permitted assigns of the parties.

                     Nothing expressed or referred to in this Agreement will be construed to give any person or entity other than the parties to this Agreement any legal or equitable right, remedy, or claim under or with respect to this Agreement or any provision of this Agreement. Subject to the above, this Agreement and all of its provisions and conditions are for the sole and exclusive benefit of the parties to this Agreement and their successors and assigns.

              9.11.  Severability. If any provision of this Agreement is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Agreement will remain in full force and effect. Any provision of this Agreement held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable.

              9.12.  Section Headings, Construction. The headings of Sections in this Agreement are provided for convenience only and will not affect its construction or interpretation. All references to “Section” or “Sections” refer to the corresponding Section or Sections of this Agreement. All words used in this Agreement will be construed to be of such gender or number as the circumstances require. Unless otherwise expressly provided, the word “including” does not limit the preceding words or terms.

              9.13.  Time of Essence. With regard to all dates and time periods set forth or referred to in this Agreement, time is of the essence.

              9.14.  Governing Law. Subject to such provisions of the Israeli Companies Law which are applicable to this Agreement and which may not be stipulated, this Agreement will be governed by the laws of the State of California without regard to conflicts of law principles.

              9.15.  Counterparts. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement.

        IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first written above.

	S:
By:	/s/ Eli Harari
	President

	I:
By:	/s/ Yossi Rosen & Udi Hillman

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EX-10.41

EXHIBIT 10.41

DEFINITIVE AGREEMENT
TO FORM VENDING BUSINESS

Between

Photo-Me International, Plc.

and

SanDisk Corporation

August 7, 2000

CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

TABLE OF CONTENTS

Page

RECITALS	1
ARTICLE I—STRUCTURE OF VENDING BUSINESS	2

1.01	DPI	2
1.02	Product and Flash Memory Cards	3
1.03	Maintenance	5
1.04	Marketing and Promotion	5
1.05	Intellectual Property	5
1.06	Management	6
1.07	Facilities	7
1.08	Overhead Compensation	7
1.09	Independent Auditors	7

ARTICLE II—RESERVED	7
ARTICLE III—CLOSING	7

3.01	Place and Time	7
3.02	Delivery of Documents	7

ARTICLE IV—REPRESENTATIONS AND WARRANTIES OF SANDISK 8

4.01	Organization	8
4.02	Authorization/Enforceability	8
4.03	Financial Statements	8
4.04	Undisclosed Liabilities	8
4.05	Absence of Changes	9
4.06	Tax Matters	9
4.07	Compliance with Laws	9
4.08	Litigation and Claims	10
4.09	Intangible Assets	10
4.10	No Conflict	10
4.11	Disclosure	11
4.12	Investment Intent	11

ARTICLE V—REPRESENTATIONS AND WARRANTIES OF PMI 11

5.01	Organization	11
5.02	Authorization/Enforceability	11
5.03	Financial Statements	12
5.04	Undisclosed Liabilities	12
5.05	Absence of Changes	12
5.06	Tax Matters	12
5.07	Compliance with Laws	12
5.08	Litigation and Claims	13
5.09	Intangible Assets	13
5.10	No Conflict	13
5.11	Disclosure	14
5.12	Investment Intent	14

ARTICLE VI—COVENANTS 14

6.01	Initial Public Offering	14
6.02	Public Announcements	15
6.03	Exclusivity	15
6.04	SanDisk Investment Opportunities	17

ARTICLE VII—CONDITIONS TO OBLIGATIONS OF SANDISK 17

7.01 Obligations of SanDisk 17

ARTICLE VIII—CONDITIONS TO OBLIGATIONS OF PMI 18

8.01 Obligations of PMI 18

ARTICLE IX—TERM AND TERMINATION 19

9.01	Term	19
9.02	Termination of Agreement Prior to Closing	19
9.03	Termination of This Agreement Post Closing	20
9.04	Termination of Obligations	21

ARTICLE X—SURVIVAL OF REPRESENTATIONS AND WARRANTIES, ETC. AND INDEMNIFICATION 21

10.01	Survival of Representations and Warranties, Etc	21
10.02	General Indemnification	21
10.03	Indemnification for Patent and Trademark Infringement	22
10.04	Notice of Loss or Asserted Liability	22
10.05	Opportunity to Contest	22
10.06	Limitation of Liability	23

ARTICLE XI—MISCELLANEOUS 23

11.01	Headings	23
11.02	Severability	23
11.03	Entire Agreement; Amendment; Waiver	23
11.04	Assignment	24
11.05	No Third-Party Beneficiaries	24
11.06	Counterparts	24
11.07	Knowledge	24
11.08	Notices	24
11.09	Expenses	25
11.10	Dispute Resolution	25
11.11	Governing Law	26

INDEX OF EXHIBITS

Exhibit Number	Description
Exhibit A	Product Specification
Exhibit B	Bylaws of DPI
Exhibit C	Stockholders’ Agreement
Exhibit D	Business Plan
Exhibit E	Exclusive Product Purchase Agreement
Exhibit F	Maintenance Agreement
Exhibit G	RESERVED
Exhibit H	Non-Solicitation Agreement
Exhibit I	Trademark Cross-License Agreement

ii
i

DEFINITIVE AGREEMENT

        This Agreement (“Agreement”), dated and effective August 7, 2000 (the “Effective Date”), is between SanDisk Corporation, a Delaware corporation (“ SanDisk”), and Photo-Me International, Plc. (“PMI”) a corporation organized under the laws of England and Wales.

RECITALS

        A.  PMI has developed a technology for a product, described on Exhibit A to this Agreement, which is a self-service digital photo printing kiosk capable of reading flash memory cards, floppy diskettes and CD ROM discs which can be connected to an Internet photo portal and which is capable of printing digital photographic images on silver-halide paper obtained from flash data cards, Internet photo portals and other sources, which may dispense flash memory cards for use with digital photography equipment and may be placed in public locations (the “PMI Technology”).

        B.  PMI has developed unique proprietary technology and know-how, including software, which is incorporated into the design, manufacturing, marketing, operation and support of the PMI Technology, and has developed methods and procedures and know-how for the operation of the PMI Technology in many and varied public locations which enable a profitable business to be conducted in the sale and delivery of photos to consumers.

        C.  SanDisk develops and markets flash memory storage systems (“FMS Technology”) that it sells to the consumer electronics market for use in, among other things, digital photography equipment.

        D.  SanDisk owns certain confidential or proprietary information including specifications, designs, drawings, mask works, software, processes, data, know-how, plans, services, samples, prototypes, applications and other information regarding technical specifications for its FMS Technology.

        E.  PMI and SanDisk desire to jointly operate and control a vending business in the Exclusive Territory (as defined in Section 6.03) (the “Vending Business”) that operates self-service digital photo printing kiosks under the SanDisk and PMI brand and name, utilizing the PMI Technology and which may dispense SanDisk brand flash memory cards, such kiosks to be designed and manufactured in accordance with the specifications set forth on Exhibit A hereto or as amended in writing by agreement of the parties (the “Product”).

        NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties agree as follows:

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AGREEMENT
ARTICLE I
STRUCTURE OF VENDING BUSINESS

        1.01  DPI.

              (a)  Formation. Prior to Closing (as defined below), the parties will cause a corporation to be organized under the laws of the State of Delaware and named DigitalPortal Inc. (“DPI”). Each of PMI and SanDisk will hold 50% of the initially outstanding shares of common stock of DPI.

              (b)  Capitalization. Each of PMI and SanDisk will contribute to DPI a total of $4,000,000 to be dispersed as set forth in Article III. The capitalization of DPI shall consist of 87,000,000 shares of common stock, par value $0.0001 per share. Each of PMI and SanDisk will be issued 40,000,000 shares of common stock. *.

              (c)  Governance.

        (1)  DPI will be governed by a Board of Directors consisting of four directors (the “Board”). The Board shall have responsibility for the general supervision, direction and control of the business of DPI and shall have all the powers and duties typically vested in a board of directors of a corporation, as set forth in the Bylaws of DPI, attached hereto as Exhibit B. The Bylaws shall provide that the Board shall meet at least once each quarter, that at least one meeting per year shall be held in Grenoble, France and that at least one meeting per year shall be held in Sunnyvale, California. DPI shall provide at its expense audited financial statements for each year ended April 30 and unaudited financial statements for each six month period ended October 31 to PMI.

        (2)  The Bylaws of DPI shall provide that except as required by applicable law, all actions or decisions of the Board shall require the vote of a majority of Directors and shall provide that DPI may not take certain actions, as set forth in this Agreement, without the express written approval of a director appointed by each of SanDisk and PMI (the “Approval Agents”).

        (3)  Effective as of Closing, the parties shall enter into a Stockholders Agreement, attached hereto as Exhibit C, which shall provide among other things: (A) for annual election of two directors designated by SanDisk and two directors designated by PMI; (B) for annual election of a Chairman, who shall be designated by SanDisk in even years and designated by PMI in odd years; and (C) that DPI shall declare an annual dividend to the stockholders of DPI on a pro rata basis consisting of all net profits less allocations to research, development, reserves and other items approved by the Board and the Approval Agents.

              (d)  Business of DPI. DPI will operate a Vending Business for the Product in the Exclusive Territory (as defined in Section 6.03 hereof). DPI shall not engage in any other type of business without the consent of the Board.

              (e)  Development of a Business Plan. DPI shall operate the Vending Business in accordance with the business plan attached hereto as Exhibit D (“Business Plan”) or as amended by the Board from time to time in accordance with the Bylaws. The Business Plan shall be a base plan setting forth, among other things, the capital expenditures, projected revenues, supply costs, profit margins, kiosk deployment and overhead for DPI fiscal years 2001 through 2002. DPI shall revise the Business Plan at least annually for each subsequent fiscal year not later than November 15 of the prior fiscal year. In the event DPI fails to revise the Business Plan for any fiscal year, the last Business Plan approved by the Board of DPI, or the Business Plan set forth in Exhibit D, as the case may be, shall be the operative Business Plan until the Board of DPI approves a re vised Business Plan.

              (f)  Failure to Agree on a Business Plan. If the Board shall fail to agree on a Business Plan for the subsequent fiscal year by December 15 of the prior fiscal year, the parties shall follow the dispute resolution, buy-sell and liquidation provisions contained in Section 9 of the Stockholders Agreement.

              (g)  Additional Investors. The parties shall enter into good faith negotiations to consider inviting a strategic investor to participate as an approximately ten percent (10%) shareholder of DPI, where such strategic investor will have such rights and obligations as the parties may mutually agree in written amendments to this Agreement and the Transaction Documents.

              (h)  DPI Management Team. Within thirty (30) days of the effective date of this agreement, the parties shall contract with a reputable international recruiter to initiate the search for a senior level Chief Executive Officer candidate with experience and knowledge in retail sales in general and/or the photographic print processing business specifically.

*INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24b-2. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

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              (i)  Other Entities. From time to time, the Board may elect to create subsidiaries or operating divisions for purposes of organizing aspects of the Vending Business.

        1.02  Product and Flash Memory Cards.

              (a)  Product Purchases. DPI or a third party in a leasing transaction with DPI (“Lessor”) will purchase units of Product exclusively from PMI, and PMI will supply such Product through one of its subsidiaries including, without limitation, KIS, S.A., located in Grenoble, France. At its option, DPI may contract with a third party to purchase Product from PMI and lease Product to DPI pursuant to sale-leaseback transactions or may pursue other vehicles for financing or purchase of the Product. For purposes of this Agreement, references to purchase by DPI shall be deemed to include purchase by any such third party. All Product purchased by DPI or Lessor from PMI shall be designed and manufactured in compliance with the specifications attached hereto as Exhibit A or as amended in writing by agreement of the parties. The Product will be customized according to DPI&# 146;s reasonable requirements, which will not include any customer-specific customization. For the period beginning on the date hereof and ending upon the closing of any initial public offering of DPI common stock, PMI and SanDisk shall each provide several, but not joint, guaranties of the financing of the purchase or lease of units of Product equal to their respective percentage equity ownership of DPI, if such guaranties are required by third parties from which DPI will obtain such financing, provided however, that SanDisk and PMI will use best efforts to structure such guaranties in a manner which allows SanDisk and PMI to be released from such obligations upon closing of an IPO. Subsequent to the closing of the contemplated initial public offering of DPI common stock, PMI and SanDisk may, if agreed to by PMI and SanDisk, each provide several, but not joint, guaranties of the financing of the purchase or lease of units of Product equal to their respective percentage equity ownership of DPI, if such guara nties are required by third parties from which DPI will obtain such financing.

              (b)  Number/Location of Units. DPI shall place orders specifying delivery of a minimum of 2,000 units of Product for the end of 2001; provided however, that notwithstanding the initial Business Plan, DPI shall not be obligated to purchase more than 2000 units of Product for any one (1) year period through the end of 2002. DPI shall place orders specifying delivery of a minimum of 2,000 units of the Product per year for the duration of this Agreement starting in the fourth quarter of calendar year 2000 with a non-binding target of placing orders for delivery of between * and * units by December 31, 2001. DPI’s obligations to order units of Product shall be terminated in the event that Section 9 of the Stockholders’ Agreement (Exhibit C) is invoked by PMI, SanDisk or DPI. The invocation of Section 9 of the Stockholders’ Agreement shall not r elieve DPI or PMI of obligations incurred prior thereto, including the obligation of PMI to deliver previously ordered units of Product or of DPI to pay for units of Product previously ordered. Units of the Product initially will be sited in high-traffic locations, preferably where there currently is no digital photo printing capability. DPI will determine the site placement for any and all Product.

              (c)  Terms. DPI will purchase exclusively from PMI each unit of Product at the price ex works (as such term is defined in Incoterms ICC Edition 2000), Grenoble, France, not to exceed US $20,000 per unit * for the initial * units. Such prices do not include site-specific or customer-specific customization. Notwithstanding the foregoing, if PMI shall sell any units of product substantially similar to the Product to other parties at *. The unit price is based upon an exchange rate of * (the “Base Rate”). SanDisk and PMI agree to review at the end of each calendar quarter, the exchange rates between the Euro and the US dollar, as set forth in the New York Foreign Exchange mid-range rates (Currency per US Dollars) table published in the Wall Street Journal, Western Edition) (such rates, the “Exchange Rates”) for each of the preceding 90 days (such period, the “Ex change Rate Period”). In the event that the average of the Exchange Rates during the Exchange Rate Period (such average, the “Average Exchange Rate”) differs from the Base Rate by more or less than * percent (but not more or less than * percent), then the unit price as reflected on invoices issued during the following calendar quarter shall be adjusted accordingly. DPI shall purchase the Products exclusively from PMI according to terms to be set forth in the “Exclusive Product Purchase Agreement” attached hereto as Exhibit E.

              (d)  Development of Enhanced Feature Kiosks. PMI shall use commercially reasonable efforts to develop and make available for purchase to DPI multiple terminal kiosks, and kiosks featuring a mechanism for storing photographic prints for subsequent retrieval, within the first two (2) years of the term of this Agreement.

              (e)  Flash Memory Cards. The parties agree to discuss in good faith whether, and upon what terms, DPI may obtain from SanDisk the flash memory cards which incorporate FMS Technology and which may be dispensed in the Product. SanDisk shall be the exclusive source for any such cards.

        1.03  Maintenance. Unless and until DPI obtains more competitive pricing, terms, response time, or quality of service for such services or determines to form its own maintenance organization (which it may do so at its own discretion), PMI, through its US subsidiary, Photo-Me USA, LLC, will provide for the support, maintenance and operation of the Product, including cleaning, data input, data collection and all other services required to ensure the on-going maintenance and operation of the Product according to terms set forth in the “Maintenance Agreement” attached hereto as Exhibit F.

*INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24b-2. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

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        1.04  Marketing and Promotion. Marketing and Promotion of the Product will be undertaken by DPI, in consultation with PMI and SanDisk. SanDisk shall employ a reasonable number of its sales force for the purpose of locating and securing sites for the Project. SanDisk shall be compensated monthly by DPI for this service as follows: *. Each party agrees to co-operate reasonably in such marketing and promotion and the parties will enter into a trademark cross-license agreement granting DPI, PMUSA and each other the non-exclusive right to use identified trademarks on a paid-up, royalty free basis according to the terms set forth in the “Trademark Cross-License Agreement” attached hereto as Exhibit I. The display of any advertising, trademarks or logos on the Product, other than the trade colors of DPI, require approval from both Approval Agents.

        1.05  Intellectual Property.

              (a)  DPI will develop the brand and trademarks under which the Product will be promoted in the Exclusive Territory (as defined in Section 6.03 hereof). DPI will own the trademarks that it develops.

              (b)  “Intellectual Property Rights” shall mean all current and future worldwide patents and other patent rights, utility models, copyrights, mask work rights, trade secrets, trademarks and all other intellectual property rights and the related documentation or other tangible expression thereof.

              (c)  SanDisk shall retain all right, title and interest in and to all of the information, content, data, designs, materials and all copyrights, patent rights, trademark rights and other Intellectual Property Rights thereto provided by it pursuant to this Agreement, including but not limited to all such rights in the FMS Technology or in any and all modifications or derivative works of the FMS Technology, including but not limited to any upgrades or enhancements thereof.

              (d)  PMI shall retain all right, title and interest in and to all of the information, content, data, designs, materials and all copyrights, patent rights, trademark rights and other Intellectual Property Rights thereto provided by it pursuant to this Agreement, including but not limited to all such rights in the PMI Technology, in any and all modifications or derivative works of the PMI Technology, including but not limited to any upgrades or enhancements thereof, the Product and any and all modifications or derivative works of the Product, including but not limited to any upgrades or enhancements thereof.

              (e)  Except as expressly provided herein, no other right or license is granted under this Agreement. All rights not expressly granted hereunder by a party are expressly reserved to such party and its licensors and information and content providers.

              (f)  The provisions of this Section 1.05 shall survive termination of this Agreement.

        1.06  Management.

              (a)  Chief Executive Officer. The Bylaws of DPI shall provide for appointment of a Chief Executive Officer (“CEO”), who will have the responsibility for the management of the ordinary course day-to-day operations of DPI and the Vending Business and will report to the Board. The CEO will be designated jointly by the Approval Agents for appointment by the Board.

              (b)  Other Officers. The Board of DPI shall also appoint such other officers as are required by applicable law or, as permitted by the Bylaws, as it determines from time to time are in the best interests of DPI.

              (c)  Core Employees. The CEO shall appoint a core team of employees. Initially, and until changes are approved by the Board, such team, in addition to the CEO, shall consist of one Product Manager, two network engineers, two web specialist people, two marketing people and one assistant. Compensation of core employees is forecasted to be as shown on the cash flow analysis in Exhibit D.

              (d)  Other Employees. Prior to the closing of the IPO (as defined below), DPI shall utilize SanDisk’s human resources, finance and administration personnel, for which SanDisk will be compensated by DPI as provided in Section 1.08 below.

              (e)  Employee Incentive Compensation. The Board shall adopt an incentive stock option plan, pursuant to which, as approved by the Board, options to purchase Common Stock, may be granted to officers, directors, employees and consultants. *.

              (f)  Non-Solicitation Agreement. PMI and SanDisk shall each execute a non-solicitation agreement, attached hereto as Exhibit H.

        1.07  Facilities. During the first twelve months of operations, the headquarters of DPI will be located at the SanDisk Sunnyvale, California premises, for which SanDisk will be compensated by DPI as provided in Section 1.08 below.

*INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24b-2. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

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        1.08  *.

       1.09 Independent Auditors. The initial independent auditors for DPI and the Vending Business will be Ernst & Young (the “Auditors”).

ARTICLE II

        This Article is intentionally blank.

ARTICLE III

CLOSING

        3.01  Place and Time. The closing (“Closing”) shall take place at 9:00 a.m., Central Time, at the offices of Wolin, Ridley & Miller LLP, 3100 Bank One Center, 1717 Main Street, Dallas, Texas 75201, on August 7, 2000 or at such other time and date as is mutually agreed to by the parties.

        3.02  Delivery of Documents.

              (a)  Each party shall deliver to DPI in payment for its shares of DPI common stock in accordance with the following schedule: (a) $1,000,000 by each party on or before August 17, 2000; (b) $1,000,000 by each party on or before November 1, 2000; (c) $1,000,000 by each party on or before February 1, 2001; and (d) $1,000,000 by each party on or before May 1, 2001. Payment for such shares shall be made by wire transfer to the bank account established by DPI in immediately available funds.

              (b)  At each payment date specified in clause (a) above, each party shall take delivery of certificates representing the respective number of shares (“Shares”) in DPI purchased by such party at the price of $0.10 per Share.

              (c)  At Closing, each party shall execute and deliver to the other this Agreement, any agreement which is an exhibit to this Agreement (collectively, “Transaction Documents”) to which such party is a party, and such other instruments as are contemplated by this Agreement.

              (d)  At Closing, the parties shall cause to be executed the organizational documents of DPI, all Transaction Documents to which DPI is a party, and such other instruments as are contemplated by this Agreement.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF SANDISK

        SanDisk represents and warrants to PMI as follows:

        4.01  Organization. SanDisk is a corporation duly organized, validly existing and in good standing under the laws of Delaware, has all corporate requisite power and authority to carry on and conduct its business as it is now being conducted and to own or lease its properties and assets, and is duly qualified and in good standing in every jurisdiction in which the conduct of its businesses or the ownership of its properties and assets requires it to be so qualified.

        4.02  Authorization/Enforceability. SanDisk has the right, power and capacity to execute, deliver and perform this Agreement and all documents ancillary hereto and to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement and all documents ancillary hereto by SanDisk and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of SanDisk. This Agreement and the Transaction Documents have been duly and validly executed and delivered by SanDisk and constitute the legal, valid and binding obligation of SanDisk, enforceable in accordance with their terms.

        4.03  Financial Statements. SanDisk has provided PMI with true and correct copies of (i) SanDisk’s financial statements for the year ended December 31, 1999, audited by Ernst & Young and (ii) SanDisk’s unaudited financial statements for the six months ended June 30, 2000 (collectively, the “Financial Statements”). The Financial Statements have been prepared from the books and records of SanDisk, are correct in all material respects and present fairly SanDisk’s financial position and results of operations as of their respective date and for the respective period, in accordance with United States generally accepted accounting principles.

*INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24b-2. CONFIDENTIAL TREATMENT HAS BEEN REQUESED WITH RESPECT TO THE OMITTED PORTIONS.

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        4.04  Undisclosed Liabilities. Except as disclosed in the Financial Statements or on Schedule 4.04 hereto, to its knowledge, SanDisk has no obligations or liabilities (whether absolute, accrued, contingent or otherwise) of any nature whatsoever, other than obligations incurred in the ordinary course of business and not material to its business.

        4.05  Absence of Changes. Except as disclosed on Schedule 4.05, since December 31, 1999 none of the following has occurred:

              (a)  Any change in the financial condition, assets, liabilities, business, prospects, or operations, other than changes in the ordinary course of business or changes affecting the economy or industry as a whole, which in the aggregate would have a material adverse effect on SanDisk;

              (b)  Any material damage, destruction, or loss, whether or not covered by insurance, of SanDisk;

              (c)  Any event or condition that, to the knowledge of SanDisk, could materially and adversely affect SanDisk or its business prospects; or

              (d)  Any receipt of notice (formal or informal) that any supplier or customer has taken or contemplates taking any steps that could disrupt SanDisk’s business relationship with the supplier or customer.

        4.06  Tax Matters. SanDisk has timely filed all annual federal, state, and local tax returns as required by applicable law. Except as disclosed on Schedule 4.06(a), none of SanDisk’s tax returns have been audited by any taxing authority during the past five (5) years, and SanDisk has not received any notice of deficiency or other adjustment from any taxing authority that is unresolved as of Closing. Except as described on Schedule 4.06(a), no audit or examination, claim or proposed assessment by any taxing authority is pending or, to the knowledge of SanDisk, threatened against SanDisk or any portion of its business.

        4.07  Compliance with Laws.

              (a)  To the knowledge of SanDisk: (i) SanDisk has complied and is in compliance with all laws, regulations, and orders applicable to SanDisk, and has obtained all permits, licenses, orders, and approvals of federal, state, and local governmental and regulatory bodies that are required for it to own, maintain, and operate its business; (ii) no threat of cancellation, modification, or non-renewal of any such permits, licenses, orders, or approvals is pending, nor to the knowledge of SanDisk, does any basis exist for cancellation, modification, or non-renewal; (iii) except as otherwise set forth on Schedule 4.07(a), SanDisk is not currently in violation or default of any such permit, license, order, or approval and the present uses of SanDisk do not violate any law, regulation, or order; and (iv) except as disclosed in Schedule 4.07(a) , SanDisk does not have or need governmental permits or licenses to transact its business as currently conducted and, except as listed on Schedule 4.07(a), none of the permits or licenses that SanDisk holds will be adversely affected in any way by reason of this Agreement or the consummation of the transactions contemplated hereby, including assignment of the permits and licenses to Purchaser. No governmental authority has issued or threatened any notice or warning with respect to any failure or alleged failure of SanDisk to comply with any law, regulation or order.

              (b)  Except as set forth in Schedule 4.07(b), no consent or approval of, prior filing with, notice to, or other action by, any governmental body or agency is required for SanDisk to execute and deliver this Agreement, any document ancillary hereto, or other instrument to be executed and delivered pursuant to this Agreement or to consummate the transactions provided for hereby.

        4.08  Litigation and Claims. Except as disclosed in Schedule 4.08, no judgments, orders, writs, decrees, injunctions, or quasi judicial or administrative decisions are outstanding to which SanDisk or its properties are subject which would materially affect SanDisk’s ability to perform any of its obligations under this Agreement and the Transaction Documents. Except as disclosed on Schedule 4.08, no litigation, claim, action, suit, investigation, or proceeding is pending or has been filed at any time since January 1, 1999, or to the knowledge of SanDisk, threatened against or relating to SanDisk or SanDisk’s Assets which would materially affect SanDisk’s ability to perform any of its obligations under this Agreement and the Transaction Documents.

        4.09  Intangible Assets. Schedule 4.09 lists all trademarks, service marks, trade names, and service names owned by, registered in the name of, or used in connection with SanDisk’s flash memory card business since 1996 (or for which application has been made), and which are to be licensed to DPI in the Trademark Cross License Agreement. There are no pending or, to the knowledge of SanDisk, threatened infringement claims against SanDisk by any person with respect to any of the items listed on Schedule 4.09, nor has any such item been declared invalid or been limited by any court or agreement. The intangible assets will afford DPI after Closing the rights to use all trademarks, trade names and service marks owned by SanDisk as specified in the Trademark Cross License Agreement. To the knowledge of SanDisk the use of these intangible assets will not and, the conduc t of SanDisk as currently conducted does not, infringe on the intellectual property rights of any other person.

        4.10  No Conflict. Except as set forth on Schedule 4.10, neither the execution and delivery of this Agreement nor any document ancillary hereto nor the consummation of the transactions contemplated herein will (a) result in the breach, violation or contravention of, or constitute a default under, or conflict with, or give rise to a right of termination of, or accelerate any obligation under any of the provisions of (i) SanDisk’s charter, bylaws or other organizational documents; (ii) any agreement,

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lease, note, bond, debenture or other evidence of indebtedness or any mortgage, deed of trust, indenture or other instrument to which SanDisk is a party or by which it is bound or to which any of its assets is subject, (iii) any judgment, decree, order or award of any court, regulatory agency or other governmental body or arbitrator to which SanDisk or any of its assets is subject or by which SanDisk is bound or (iv) any statute, rule or regulation or other law applicable to SanDisk, (b) result in the creation of any pledge, lien, encumbrance or security interest upon any of its assets, or (c) require the authorization, approval, consent or order of, or filing with, or other action by any court, regulatory agency or other governmental body.

        4.11  Disclosure. No representations, warranties, assurances, or statements of SanDisk in this Agreement and no statement in any document (including the Financial Statements and the Schedules), certificate, or other writing furnished or to be furnished by SanDisk (or caused to be furnished by SanDisk) to PMI or any of its representatives pursuant to this Agreement, contains or will contain any untrue statement of material fact or omits or will omit to state any material fact necessary, in light of the circumstances under which it was made, to make the statements made not misleading.

        4.12  Investment Intent.

              (a)  The Shares will be acquired by SanDisk for its own account for investment and not with a view to, or for resale in connection with any distribution of such securities, within the meaning of the Securities Act of 1933, as amended (the “Act”). SanDisk hereby acknowledges that in connection with the purchase and sale contemplated herein, the Shares will not be registered under the Act.

              (b)  SanDisk is aware that there are substantial restrictions on the transferability of the Shares. SanDisk agrees that the Shares shall not be sold, pledged, hypothecated or otherwise transferred, except in compliance with the registration provisions of the Act and applicable state securities laws, unless in the opinion of counsel reasonably satisfactory to DPI, any such transaction is exempt from registration.

ARTICLE V

REPRESENTATIONS AND WARRANTIES OF PMI

        PMI represents and warrants to SanDisk as follows:

        5.01  Organization. PMI is a corporation duly organized, validly existing and in good standing under the laws of England and Wales and has all corporate requisite power and authority to carry on and conduct its business as it is now being conducted and to own or lease its properties and assets, and is duly qualified and in good standing in every jurisdiction in which the conduct of its businesses or the ownership of its properties and assets requires it to be so qualified.

        5.02  Authorization/Enforceability. PMI has the right, power and capacity to execute, deliver and perform this Agreement and all documents ancillary hereto and to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement and all documents ancillary hereto by PMI and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of PMI. This Agreement and all Transaction Documents have been duly and validly executed and delivered by PMI and constitute the legal, valid and binding obligation of PMI, enforceable in accordance with their terms.

        5.03  Financial Statements. PMI’s financial statements for the year ended April 30, 1999, audited by Menzies, as set forth in public filings (collectively, the “Financial Statements”), are true and correct. The Financial Statements have been prepared from the books and records of PMI, are correct in all material respects and present fairly PMI’s financial position and results of operations as of their respective date and for the respective period, in accordance with United Kingdom generally accepted accounting principles.

        5.04  Undisclosed Liabilities. Except as disclosed in the Financial Statements or on Schedule 5.04 hereto, to its knowledge, PMI has no obligations or liabilities (whether absolute, accrued, contingent or otherwise) of any nature whatsoever, other than obligations incurred in the ordinary course of business and not material to its business.

        5.05  Absence of Changes. Except as disclosed on Schedule 5.05, since April 30, 1999 none of the following has occurred:

              (a)  Any change in the financial condition, assets, liabilities, business, prospects, or operations, other than changes in the ordinary course of business or changes affecting the economy or industry as a whole, which in the aggregate would have a material adverse effect on PMI;

              (b)  Any material damage, destruction, or loss, whether or not covered by insurance, of PMI;

              (c)  Any event or condition that, to the knowledge of PMI, could materially and adversely affect PMI or its business prospects; or

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              (d)  Any receipt of notice (formal or informal) that any supplier or customer has taken or contemplates taking any steps that could disrupt PMI’s business relationship with the supplier or customer.

        5.06  Tax Matters. PMI has timely filed all annual tax returns as required by applicable law. Except as disclosed on Schedule 5.06 , none of PMI’s tax returns have been audited by any taxing authority during the past five (5) years, and PMI has not received any notice of deficiency or other adjustment from any taxing authority that is unresolved as of Closing. Except as described on Schedule 5.06(a), no audit or examination, claim or proposed assessment by any taxing authority is pending or, to the knowledge of PMI, threatened against PMI or any portion of its business.

        5.07  Compliance with Laws.

              (a)  To the knowledge of PMI: (i) PMI has complied and is in compliance with all laws, regulations, and orders applicable to PMI, and has obtained all permits, licenses, orders, and approvals of governmental and regulatory bodies that are required for it to own, maintain, and operate its business; (ii) no threat of cancellation, modification, or non-renewal of any such permits, licenses, orders, or approvals is pending, nor to the knowledge of PMI, does any basis exist for cancellation, modification, or non-renewal; (iii) except as otherwise set forth on Schedule 5.07(a), PMI is not currently in violation or default of any such permit, license, order, or approval and the present uses of PMI do not violate any law, regulation, or order; and (iv) except as disclosed in Schedule 5.07(a), PMI does not have or need governmental permits o r licenses to transact its business as currently conducted and, except as listed on Schedule 5.07(a), none of the permits or licenses that PMI holds will be adversely affected in any way by reason of this Agreement or the consummation of the transactions contemplated hereby, including assignment of the permits and licenses to Purchaser. No governmental authority has issued or threatened any notice or warning with respect to any failure or alleged failure of PMI to comply with any law, regulation or order.

              (b)  Except as set forth in Schedule 5.07(b), no consent or approval of, prior filing with, notice to, or other action by, any governmental body or agency is required for PMI to execute and deliver this Agreement, any document ancillary hereto, or other instrument to be executed and delivered pursuant to this Agreement or to consummate the transactions provided for hereby.

        5.08  Litigation and Claims. No judgments, orders, writs, decrees, injunctions, or quasi-judicial or administrative decisions are outstanding to which PMI or its properties are subject which would materially affect PMI’s ability to perform any of its obligations under this Agreement and the Transaction Documents. Except as disclosed on Schedule 5.08, no litigation, claim, action, suit, investigation, or proceeding is pending or has been filed at any time since May 1, 1999, or to the knowledge of PMI, threatened against or relating to PMI or PMI’s Assets which would materially affect PMI’s ability to perform any of its obligations under this Agreement and the Transaction Documents.

        5.09  Intangible Assets. Schedule 5.09 lists all inventions, licenses, trademarks, service marks, trade names, service names, copyrights, know-how, patents, and related registrations and applications owned by, registered in the name of, or used in connection with the PMI Technology, which are to be licensed to DPI in the Trademark Cross License Agreement or will be incorporated into the Product. There are no pending or, to the knowledge of PMI, threatened infringement claims against PMI by any person with respect to any of the items listed on Schedule 5.09, nor has any such item been declared invalid or been limited by any court or agreement. The intangible assets will afford DPI at all times after Closing the rights to use all technology, proprietary information, know-how or patented ideas, designs, inventions, trademarks, copyrights, trade names and service marks o wned by PMI or others necessary for the conduct of PMI as currently being conducted. To the knowledge of PMI the use of these intangible assets will not and, the conduct of PMI as currently conducted does not, infringe on the intellectual property rights of any other person.

        5.10  No Conflict. Except as set forth on Schedule 5.10, neither the execution and delivery of this Agreement nor any document ancillary hereto nor the consummation of the transactions contemplated herein will (a) result in the breach, violation or contravention of, or constitute a default under, or conflict with, or give rise to a right of termination of, or accelerate any obligation under any of the provisions of (i) PMI’s charter, bylaws or other organizational documents; (ii) any agreement, lease, note, bond, debenture or other evidence of indebtedness or any mortgage, deed of trust, indenture or other instrument to which PMI is a party or by which it is bound or to which any of its assets is subject, (iii) any judgment, decree, order or award of any court, regulatory agency or other governmental body or arbitrator to which PMI or any of its assets is subject or by which PMI is bound or (iv) any statute, rule or regulation or other law applicable to PMI, (b) result in the creation of any pledge, lien, encumbrance or security interest upon any of its assets, or (c) require the authorization, approval, consent or order of, or filing with, or other action by any court, regulatory agency or other governmental body.

        5.11  Disclosure. No representations, warranties, assurances, or statements of PMI in this Agreement and no statement in any document (including the Financial Statements and the Schedules), certificate, or other writing furnished or to be furnished by PMI (or caused to be furnished by PMI) to SanDisk or any of its representatives pursuant to this Agreement, contains or will contain any untrue statement of material fact or omits or will omit to state any material fact necessary, in light of the circumstances under which it was made, to make the statements made not misleading.

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        5.12  Investment Intent.

              (a)  The Shares will be acquired by PMI for its own account for investment and not with a view to, or for resale in connection with any distribution of such securities, within the meaning of the Act. PMI hereby acknowledges that in connection with the purchase and sale contemplated herein, the Shares will not be registered under the Act.

              (b)  PMI is aware that there are substantial restrictions on the transferability of the Shares. PMI agrees that the Shares shall not be sold, pledged, hypothecated or otherwise transferred, except in compliance with the registration provisions of the Act and applicable state securities laws, unless in the opinion of counsel satisfactory to DPI, any such transaction is exempt from registration.

ARTICLE VI

COVENANTS

        6.01  Initial Public Offering. The Parties shall request that the Board of DPI consider, at the earliest appropriate time, the registration of the shares of common stock of DPI with the SEC and the listing or quoting of shares on one or more appropriate stock exchanges or the over-the-counter market in connection with an underwritten initial offering to the public of shares of DPI’s common stock (the “IPO”), to the extent feasible and practicable given (a) market conditions, (b) DPI’s actual and anticipated financial performance, (c) applicable legal requirements, and (d) the interests of DPI. Such an IPO shall only be undertaken with the consent of both Approval Agents.

        6.02  Public Announcements. Except as required by law or the rules of any stock exchange on which a Party’s capital stock is listed, no Party shall make any public announcement regarding the transactions contemplated herein without the prior written consent of the other Party, which shall not be reasonably withheld, and shall give the other Party advance notice of the proposed public announcement.

        6.03  Exclusivity.

              (a)  DPI shall have unrestricted exclusive rights to operate and control the Vending Business in the United States and Canada and shall have the right of first refusal to conduct the Vending Business in Japan, Korea, Hong Kong, Taiwan, China and the countries within the Pacific Rim. As used herein, the phrase “Exclusive Territory” shall mean the United States, Canada and any other country for which DPI shall have exercised its right of first refusal.

              DPI will not operate outside the Exclusive Territory now or in the future, unless the parties otherwise agree in writing.

              (b)  PMI and its subsidiaries shall be prohibited in the Exclusive Territory from selling, operating or manufacturing the Product or any other device incorporating technology equivalent to that of the Product (including, but not limited to, automated or partially automated ordering and printing of digital photographic prints, where such ordering takes place through the use of publicly displayed self-service kiosks from electronic storage devices or where such ordering takes place through the use of multiple vending terminals connected to a remote printing facility from electronic storage devices), unless they own less than 10% of the then outstanding DPI common stock. PMI shall remain fully entitled, at all times without limitation, to freely make, use, sell, lease and operate the Product in any country or territory other than the Exclusive Territory; provided that in the event that PMI de sires to, or desires to enter into a relationship with another entity to, sell, manufacture, license, or operate the Product, or any other device or service similar to the Product, in Japan, Korea, Hong Kong, Taiwan, China and the countries within the Pacific Rim (“Opportunity”), PMI shall first offer the Opportunity to DPI on the following terms:

        (i)  Notice of Opportunity. PMI shall deliver a written notice (the “Notice of Opportunity”) to DPI (with copy to SanDisk) describing the proposed Opportunity. The Notice of Opportunity will include a statement of PMI’s intention to distribute and/or operate the Product in the country at issue.

        (ii)  DPI’s Acceptance. DPI may elect to undertake the Opportunity by delivering to PMI written notice of such election within 30 days after delivery of the Notice of Opportunity (the “Election Period”), in which case the additional country will be considered to be within the Exclusive Territory.

        (iii)  DPI’s Rejection. If DPI has not elected in writing to undertake the Opportunity by the end of the Election Period, PMI will be free to undertake the Opportunity itself, and the additional country shall not be considered to be within the Exclusive Territory.

        (iv)  Acceptance. If SanDisk notifies DPI within the Election Period that it desires DPI to accept such Opportunity, the Board of Directors of DPI shall consider and, if appropriate after exercising its business judgment, approve the election to undertake the Opportunity and notify PMI of DPI’s election in the manner set forth in clause (ii) above.

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              (c)  Notwithstanding the foregoing, at any time following twelve (12) months after the Closing Date, upon the request of SanDisk, the Board of Directors of DPI shall, if appropriate after exercising its business judgment, notify PMI (“Expansion Notice”) of its intent to expand the Vending Business into one or more of the countries specified in Section 6.03 (b).

              (d)  DPI’s exclusive right to conduct the Vending Business in a territory specified in paragraph 6.03 (i.e., in Japan, Korea, Hong Kong, Taiwan, China and the countries within the Pacific Rim) shall terminate without notice, and the provisions of subsection (iii) hereof shall apply, if: (1) DPI fails to deploy one or more Products for test marketing purposes in the territory within six months of the Election Period; or (2) DPI fails to submit purchase orders to PMI for the installation of at least 25 units of Product within six months of the Expansion Notice.

              (e)  SanDisk and its subsidiaries shall be prohibited in the Exclusive Territory from selling, operating or manufacturing the Product or any other device incorporating technology equivalent to that of the Product unless they own less than 10% of the then outstanding DPI common stock. In the event SanDisk desires to make, use, sell, lease, distribute or operate a non-infringing device similar to the Product or service in any nation in the European Union by itself or with a third party, SanDisk shall first offer the opportunity (“European Opportunity”) to PMI on the following terms:

        (i)  Notice of SanDisk Opportunity. SanDisk shall deliver a written notice (the “SanDisk Notice of Opportunity”) to PMI describing the proposed European Opportunity. The SanDisk Notice of Opportunity will include a statement of SanDisk’s intention to distribute and/or operate a device similar to the Product or service in the European Union country at issue.

        (ii)  PMI’s Acceptance. PMI may elect to undertake the European Opportunity by delivering to SanDisk written notice of such election identifying the country in the European Union at issue within 30 days after delivery of the SanDisk Notice of Opportunity (the “SanDisk Election Period”).

        (iii)  PMI’s Rejection. If PMI has not elected in writing to undertake the European Opportunity by the end of the SanDisk Election Period, SanDisk will be free to undertake the European Opportunity in the specified country in the European Union. SanDisk’s right to enter the specified nation in the European Union shall terminate without notice, and the provisions of subsection (iv) hereof shall apply, if SanDisk fails to install at least 25 noninfringing devices similar to the Product within one (1) year of the SanDisk Election Period.

        (iv)  Termination of Opportunity. If SanDisk fails to satisfy the contingency in subsection (iii) above, it shall not thereafter distribute and/or operate a device similar to the Product or service in the European Union country at issue without offering the European Opportunity again to PMI in accordance with this Section.

        (v)  No License to Technology. Nothing in this Section, or in this Agreement, shall be deemed to constitute a license of the PMI Technology to SanDisk.

              (f)  The provisions of this Section 6.03 shall terminate with the termination of the Definitive Agreement, except that such provisions shall survive termination of the Definitive Agreement upon the closing of an initial public offering but only for so long as either party remains at least a ten percent (10%) shareholder of DPI.

        6.04  SanDisk Investment Opportunities.

        (a)  *.

        (b)  Other Opportunities. Except as otherwise provided in subsection (a) above, PMI shall invite SanDisk to invest in, purchase or otherwise acquire an amount of shares equal to the number of shares of any investment opportunity offered to PMI in any internet-related investment which pertains to the Vending Business, upon terms (including price) substantially similar to PMI’s purchase price for its equity investment, including cash and non-cash contributions as adjusted for any taxes payable by PMI on such purchase and sale. This provision does not apply to PMI’s interest in *.

ARTICLE VII

CONDITIONS TO OBLIGATIONS OF SANDISK

        7.01  Obligations of SanDisk. The obligations of SanDisk are subject to the satisfaction or waiver at Closing of each of the following conditions:

              (a)  Representations and Warranties True at Closing. PMI’s representations and warranties contained in this Agreement shall be true in all material respects on and as of Closing and as of the date hereof with the same force and effect as though made on and as of such date; PMI shall have complied in all material respects with its covenants and agreements in this Agreement on or before Closing; and PMI shall have delivered to SanDisk a certificate dated as of Closing signed by an authorized officer to all such effects.

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*INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24b-2. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

              (b)  Litigation. No suit, investigation, action or other proceeding shall be overtly threatened or pending against PMI before any court or governmental agency which (i) could result in an order materially restricting SanDisk, PMI or DPI from performing their respective obligations under this Agreement or the Transaction Documents; or (ii) could result in an order prohibiting the consummation of the transactions contemplated herein.

              (c)  No Material Adverse Changes. PMI shall not have suffered any material adverse change in its businesses, prospects, financial condition, working capital, assets, liabilities (absolute, accrued, contingent, or otherwise) or operations which would materially affect its ability to perform its obligations under this Agreement and the Transaction Documents.

              (d)  Documents and Schedules Satisfactory. All schedules, assignments, certificates, and other documents delivered by PMI to SanDisk at Closing will be in form and substance satisfactory to SanDisk and its counsel.

              (e)  Required Governmental Approvals. All governmental authorizations, consents, and approvals necessary to consummate the transactions contemplated herein shall have been obtained by PMI and shall be in full force and effect.

              (f)  Other Necessary Consents. PMI shall have obtained all other consents and approvals necessary to consummate the transactions contemplated herein.

              (g)  Transaction Documents. The Transaction Documents shall have been executed, effective as of Closing.

ARTICLE VIII

CONDITIONS TO OBLIGATIONS OF PMI

        8.01  Obligations of PMI. The obligations of PMI are subject to the satisfaction or waiver at Closing of each of the following conditions:

              (a)  Representations and Warranties True at Closing. SanDisk’s representations and warranties contained in this Agreement shall be true in all material respects on and as of Closing and as of the date hereof with the same force and effect as though made on and as of such date; SanDisk shall have complied in all material respects with its covenants and agreements in this Agreement on or before Closing; and SanDisk shall have delivered to PMI a certificate dated as of Closing signed by an authorized officer to all such effects.

              (b)  Litigation. No suit, investigation, action or other proceeding shall be overtly threatened or pending against SanDisk before any court or governmental agency which (i) could result in an order materially restricting SanDisk, PMI or DPI from performing their respective obligations under this Agreement or the Transaction Documents; or (ii) could result in an order prohibiting the consummation of the transactions contemplated herein.

              (c)  No Material Adverse Changes. SanDisk shall not have suffered any material adverse change in its businesses, prospects, financial condition, working capital, assets, liabilities (absolute, accrued, contingent, or otherwise) or operations which would materially affect its ability to perform its obligations under this Agreement and the Transaction Documents.

              (d)  Documents and Schedules Satisfactory. All schedules, assignments, certificates, and other documents delivered by SanDisk to PMI at Closing will be in form and substance satisfactory to PMI and its counsel.

              (e)  Required Governmental Approvals. All governmental authorizations, consents, and approvals necessary to consummate the transactions contemplated herein shall have been obtained by SanDisk and shall be in full force and effect.

              (f)  Other Necessary Consents. SanDisk shall have obtained all other consents and approvals necessary to consummate the transactions contemplated herein.

              (g)  Transaction Documents. The Transaction Documents shall have been executed, effective as of Closing

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ARTICLE IX

TERM AND TERMINATION

        9.01  Term. This Agreement shall commence on the Closing Date and shall expire on December 31, 2010, unless terminated earlier as provided herein.

        9.02  Termination of Agreement Prior to Closing. This Agreement may be terminated at any time prior to Closing:

              (a)  By the mutual written consent of the parties;

              (b)  By SanDisk in writing, without liability, if PMI (i) fails to perform in any material respect any covenant required at Closing, or (ii) materially breaches any representation or warranty in this Agreement;

              (c)  By PMI in writing, without liability, if SanDisk (i) fails to perform in any material respect any covenant required at Closing, or (ii) materially breaches any representation or warranty in this Agreement; or

              (d)  By any party in writing, without liability, if any court or governmental or regulatory agency order, writ, injunction, or decree prohibits or restrains any party from consummating the transactions contemplated herein.

        9.03  Termination of this Agreement Post Closing.

              (a)  Any time upon closing of any IPO.

              (b)  On six months’ notice by any party hereto, if such notice is given in writing from January 1, 2003 through January 30, 2003, the dissolution of DPI shall proceed in accordance with Section 9 of the Stockholders’ Agreement without regard to the mediation provisions.

              (c)  At any time during the twelve month period following the second anniversary of the end of the first fiscal year subsequent to the Closing Date, this Agreement may be terminated by either party if DPI fails to meet at least seventy percent (70%) of the revenue and profit targets for the two year period provided in Exhibit D attached hereto. Thereafter, at any time during the 12 month period following the completion of any subsequent fiscal year, this agreement may be terminated by either party if DPI fails to meet at least (70%) of the revenue and profit targets for the applicable Business Plan. Any such termination shall be effected by providing the parties to this Agreement one hundred eighty (180) days’ prior written notice.

              (d)  For the term of the Agreement, this Agreement may be terminated by SanDisk, upon 90 days written notice (“Shortfall Notice Period”), of the failure or refusal of PMI to deliver ex works Grenoble, France at least * of the minimum annual quantities (i.e., 2,000 units) of Product (“Delivery Shortfall”), if ordered by DPI in accordance with Section 1.02(b) herein and Article 3 of the Exclusive Product Purchase Agreement, within three (3) months of the end of the applicable calendar year, unless within such Shortfall Notice Period, PMI shall have cured such Delivery Shortfall. For the years 2001 and thereafter during the term of the Agreement, this Agreement may be terminated by SanDisk, upon 90 days written notice (“ Shortfall Notice Period”), of the failure or refusal of PMI to deliver each quarter ex works Grenoble, France the applicable percenta ge (“Applicable Percentage”) of the minimum quarterly quantities * of Product (“Delivery Shortfall”), if ordered by DPI in accordance with Section 1.02(b) herein and Article 3 of the Exclusive Product Purchase Agreement, within two (2) months of the end of the applicable calendar quarter, unless within such Shortfall Notice Period, PMI shall have cured such Delivery Shortfall. The Applicable Percentage for each of the four quarters of 2001 shall be *, *, * and *, respectively. The Applicable Percentage for each quarter of 2002 and 2003 shall be *.

              (e)  This Agreement may be terminated by PMI, upon 90 days written notice, if DPI fails to order the minimum annual quantities or the minimum quarterly quantities specified in clause (d) above, unless DPI shall have cured such shortfall within such notice period.

              (f)  This Agreement may be terminated by either party on termination of the Exclusive Product Purchase Agreement by PMI.

              (g)  Following the second anniversary of the Closing Date, this Agreement may be terminated by either party upon the occurrence of a Business Plan deadlock, as specified in Section 1.01(f), and pursuant to the provisions of Section 9 of the Stockholders Agreement.

        9.04  Termination of Obligations.

        (a)  In the case of termination pursuant to Section 9.02, within fifteen (15) days after this Agreement is terminated, each party will, upon written request from any other party, return all documents and copies previously delivered to it or made in connection with this Agreement.

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*INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24b-2. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

        (b)  Termination of this Agreement pursuant to Section 9.02 (a) or (d) will terminate all of the parties’ obligations, except for the obligations under Section 10.02 and Section 10.03 hereof.

        (c)  Termination pursuant to Section 9.02 (b) or Section 9.02 (c) hereof will not relieve a defaulting or breaching party from any liability to any other party therefore.

        (d)  In the event of termination pursuant to Section 9.03(g), the parties shall be bound to the additional rights and obligations imposed by Section 9 of the Stockholders Agreement.

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ARTICLE X

SURVIVAL OF REPRESENTATIONS AND
WARRANTIES, ETC. AND INDEMNIFICATION

        10.01  Survival of Representations and Warranties, Etc. All representations and warranties made by SanDisk or PMI in this Agreement shall survive the execution and delivery hereof and Closing hereunder, and will continue to survive for a period of six (6) months after the Closing. All covenants and other agreements hereof which are to be performed after the Closing shall survive the execution and delivery hereof and Closing hereunder, and will continue to survive until the dissolution of DPI.

        10.02  General Indemnification. Each of PMI and SanDisk agrees to indemnify, defend and hold the other and their respective majority owned affiliate companies and permitted assigns harmless from and against all losses, costs, deficiencies, damages, fines, penalties and liabilities incurred, and all expenses (including, but not limited to reasonable attorneys= fees) arising out of or otherwise related to any claim based upon, arising out of or otherwise related to any material inaccuracy in any representation or warranty or any breach of any covenant or agreement made pursuant to this Agreement or any of the Transaction Documents (collectively, and together with the Losses under Section 10.03, “Losses,” and individually, a “Loss”), net of any insurance recovery or tax benefits actually received relating to such Loss.

        10.03  Indemnification for Patent and Trademark Infringement.

              (a)  SanDisk agrees to indemnify, defend and hold harmless DPI and PMI (including their respective majority owned affiliate companies) and permitted assigns against any and all claims, actions, suits or proceedings claiming patent infringement, theft of trade secrets, trademark infringement or trademark related causes of action under the Lanham Act related to SanDisk trademarks and/or FMS Technology used in connection with the Product (collectively, and together with the Losses in Section (b) below and under Section 10.02, “Losses,” and individually, a “Loss”) net of any insurance recovery or tax benefits actually received relating to such Loss.

              (b)  PMI agrees to indemnify, defend and hold harmless DPI and SanDisk (including their respective majority owned affiliate companies and permitted assigns) against any and all claims, actions, suits or proceedings claiming patent infringement, copyright infringement, trademark infringement or trademark related causes of action under the Lanham Act, or theft of trade secrets related to PMI trademarks and/or PMI Technology used in connection with the Product (collectively, and together with the Losses in Section (a) above and under Section 10.02, “Losses,” and individually, a “Loss”) net of any insurance recovery or tax benefits actually received relating to such Loss.

              (c)  The provisions of this Section 10.03 shall survive termination of this Agreement.

        10.04  Notice of Loss or Asserted Liability. Promptly after (a) becoming aware of circumstances that have resulted in a Loss for which any party hereto (the “Indemnitee”) intends to seek indemnification under Sections 10.02 and 10.03 hereof or (b) receipt by the Indemnitee of written notice of any demand, claim or circumstances which, with or without the lapse of time, the giving of notice or both, would give rise to a claim or the commencement (or threatened commencement) of any action, proceeding or investigation (an “Asserted Liability”) that may result in a Loss, the Indemnitee will give notice thereof to any other party (or parties) obligated to provide indemnification pursuant to Sections 10.02 and 10.03 hereof (the “Indemnifying Party”).

        10.05  Opportunity to Contest. Subject to the provisions of Section 10.05 hereof, the Indemnifying Party may elect to compromise or contest, at its own expense and by its own counsel, any Asserted Liability. If the Indemnifying Party elects to compromise or contest such Asserted Liability, it will within thirty (30) days after receiving notice of the claim from Indemnitee (or sooner, if the nature of the Asserted Liability so requires) notify the Indemnitee in writing of its intent to do so, and the Indemnitee will cooperate, at the expense of the Indemnifying Party, in the compromise or contest of such Asserted Liability. If the Indemnifying Party elects not to compromise or contest the Asserted Liability, fails to so notify the Indemnitee of its election as herein provided or contests its obligation to indemnify under this Agreement, the Indemnitee (upon further notice to the Indemnifying P arty) will hereafter have the right to pay, compromise or contest such Asserted Liability on behalf of and for the account and risk of the Indemnifying Party, subject to the right of the Indemnifying Party to assume the compromise or contest of such Asserted Liability at any time before final settlement or determination thereof. In any event, the Indemnitee and the Indemnifying Party may participate, at their own expense, in the contest of such Asserted Liability. If the Indemnifying Party chooses to contest any Asserted Liability, the Indemnitee will make available to the Indemnifying Party any books, records or other documents within its control that are necessary or appropriate for, will make its officers and employees available, on a basis reasonably consistent with their other duties, in connection with, and will otherwise cooperate with, such defense.

        10.06  Limitation of Liability.

              EXCEPT AS OTHERWISE PROVIDED IN THIS AGREEMENT, NEITHER PARTY SHALL BE RESPONSIBLE OR LIABLE TO THE OTHER FOR LOST PROFITS, OR LOST BUSINESS OPPORTUNITIES OR FOR INDIRECT, SPECIAL, PUNITIVE OR CONSEQUENTIAL DAMAGES ARISING OUT OF OR IN CONNECTION WITH PERFORMANCE OF WORK PROVIDED FOR UNDER THIS AGREEMENT OR FOR TERMINATION OF THIS

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AGREEMENT AS PROVIDED FOR HEREIN. THIS PROVISION SHALL SURVIVE ANY EXPIRATION OR TERMINATION OF THIS AGREEMENT.

ARTICLE XI

MISCELLANEOUS

        11.01  Headings. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement.

        11.02  Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any Law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in a mutually acceptable manner in order that the transactions contemplated hereby be consummated as originally contemplated to the greatest extent possible.

        11.03  Entire Agreement; Amendment; Waiver. This Agreement, together with all ancillary documents and all other exhibits and schedules hereto (including the Schedules and the other agreements referred to herein), constitutes the entire agreement among the parties pertaining to the subject matter hereof and supersedes all prior agreements, understandings, letters of intent, negotiations and discussions, whether oral or written, of the parties. This Agreement may not be amended except in an instrument in writing signed by or on behalf of each of the parties hereto. No amendment, supplement, modification or waiver of this Agreement shall be binding unless executed in writing by or on behalf of the party to be bound thereby. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision hereof (whether or not similar), nor shall such waiver constitute a continuing waiver unless otherwise expressly provided.

        11.04  Assignment. Neither this Agreement nor any of the rights or obligations hereunder may be assigned by either party without the prior written consent of the other party, except (i) in accordance with the Stockholders Agreement, or (ii) in the event of the sale of all or substantially all of the business or assets of either party, such party may assign all of its rights and obligations under this Agreement and the Transaction Documents to the acquirer of such business or assets, provided that such acquirer agrees to assume in writing the obligations of such party set forth in this Agreement and the Transaction Documents. Subject to the foregoing, this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns.

        11.05  No Third-Party Beneficiaries. Except as provided in Article X, this Agreement is for the sole benefit of the parties hereto and their permitted assigns and nothing herein, express or implied, is intended to or shall confer upon any other Person or entity any legal or equitable right, benefit or remedy of any nature whatsoever under or by reason of this Agreement.

        11.06  Counterparts. This Agreement and any exhibits hereto may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Agreement or any exhibits hereto by telecopier shall be effective as delivery of a manually executed counterpart of this Agreement or such exhibit This Agreement may be executed in one or more counterparts, each of which will for all purposes be deemed to be an original and all of which will constitute the same instrument. A fax copy of a signature page shall be treated as if it were an original.

        11.07  Knowledge. As used in this Agreement, “knowledge” and “to the knowledge of” means actual knowledge of a party or any executive officer of the party.

        11.08  Notices. Any notice, request, instruction, or other document to be given must be in writing and delivered personally or sent by certified mail or by United States Express Mail, postage or fees prepaid, or by FedEx, as follows:

If to SanDisk to: SanDisk Corporation
140 Caspian Court
Sunnyvale, CA 94089
Attn: Vice President, General Counsel
Facsimile: 408-548-0385

with copies to: Brobeck, Phleger & Harrison LLP
Two Embarcadero Place
2200 Geng Road
Palo Alto, CA 94303

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Attn: Timothy R. Curry, Esq.
Facsimile: 650-496-2715

If to PMI to: Photo-Me International, Plc. c/o KIS
2110, avenue du Général de Gaulle
38130 Echirolles
France
Attn: Directeur Juridique
Facsimile: 011-33-476-339647

with a copy to: Wolin, Ridley & Miller LLP
1717 Main Street, Suite 3100
Dallas, Texas 75201
Attn: Stephen A. Kennedy, Esq.
Facsimile: (214) 939-4949

Any notice delivered personally in the manner provided here will be deemed given to the party to whom it is directed upon the party’s (or its agent’s) actual receipt. Any notice addressed and mailed in the manner provided here will be deemed given to the party to whom it is addressed at the close of business, local time of the recipient, on the fourth (4th) business day after the day it is placed in the mail or, if earlier, the time of actual receipt.

        11.09  Expenses. PMI and SanDisk agree that they will each bear and pay all costs and expenses incurred by them respecting the transactions contemplated herein and all investigations and proceedings in connection therewith, including, without limitation, fees and expenses of their respective counsel, accountants and advisors. Notwithstanding, SanDisk and PMI agree to split the legal fees and expenses (excluding travel) of Wolin, Ridley& Miller LLP incurred in preparing initial drafts of the transaction documents through and including July 12, 2000.

        11.10  Dispute Resolution. All disputes arising in connection with this Agreement shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules. The arbitration shall take place in New York, New York and shall be conducted in the English language. The parties hereby agree to the enforceability of any judgements worldwide and to the authority of the arbitrator to award injunctive relief.

        11.11  Governing Law. This Agreement will be construed in accordance with and governed by the laws of the State of California without regard to its conflicts of law provisions.

        11.12  The provisions of this Article XI shall survive termination of this Agreement.

[SIGNATURE PAGE FOLLOWS]

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        IN WITNESS WHEREOF, PMI and SanDisk have caused this Agreement to be executed by their duly authorized officers as of the date first set forth above.

	PHOTO-ME INTERNATIONAL, PLC
By:	/s/ Serge Crasnianski
	Name: Serge Crasnianski Title: Chief Executive Officer

	SANDISK CORPORATION
By:	/s/ Eli Harari
	Name: Eli Harari Title: President

EX-10.42

EXHIBIT 10.42

NON-SOLICITATION AGREEMENT

        THIS NON-SOLICITATION AGREEMENT (this “Agreement”) is made and entered into effective as of August 7, 2000 (the “Effective Date”), by and between SanDisk Corporation, a Delaware corporation (“SanDisk”), DigitalPortal Inc., a Delaware corporation (“DPI”), and Photo-Me International, Plc. (“PMI”), a corporation organized under the laws of England and Wales.

        WHEREAS, as of even date herewith, the parties have entered into a Definitive Agreement for joint operation and control of a Vending Business (the “Definitive Agreement”); and

        WHEREAS, the parties desire to enter into this Agreement to set forth their agreement concerning solicitation of employees.

        NOW, THEREFORE, in consideration of the premises and the covenants herein and in the Definitive Agreement, and other good and valuable consideration, the receipt and sufficiency of which are acknowledged, the parties hereby agree as follows:

        1.  Definitions. Capitalized terms not otherwise defined herein shall have the meaning ascribed to such terms in the Definitive Agreement.

        2.  PMI’s Covenant not to Solicit. PMI covenants that it will not, unless and until such employee has been terminated or subject to a notice of termination, solicit for employment purposes any employee of SanDisk or DPI or endeavor or attempt in any way to interfere with or induce a breach of any employment or contractual relationship that SanDisk or DPI may have with any employee, agent, independent contractor or representative.

        3.  SanDisk’s Covenant Not to Solicit. SanDisk covenants that it will not, unless and until such employee has been terminated or subject to a notice of termination, solicit for employment purposes any employee of PMI, Photo-Me USA, LLC or DPI or endeavor or attempt in any way to interfere with or induce a breach of any employment or contractual relationship that PMI, Photo-Me USA, LLC or DPI may have with any employee, agent, independent contractor or representative.

        4.  DPI’s Covenant Not to Solicit. DPI covenants that it will not, unless and until such employee has been terminated or subject to a notice of termination, solicit for employment purposes any employee of PMI, Photo-Me USA, LLC or SanDisk or endeavor or attempt in any way to interfere with or induce a breach of any employment or contractual relationship that PMI, Photo-Me USA, LLC or DPI may have with any employee, agent, independent contractor or representative.

        5.  Enforcement. Each party acknowledges that execution of this Agreement is a condition to the Definitive Agreement and acknowledges the adequacy of consideration for each covenant contained herein. Each party understands and acknowledges that any violation of this Agreement may cause the other party and/or DPI irreparable harm, the amount of which may be difficult to ascertain, and therefore agrees that the other party and/or DPI shall have the right to apply for specific performance and/or an order restraining and enjoining any breach and for such other relief as the other party and/or DPI shall deem appropriate. Such right is to be in addition to the remedies otherwise available at law or in equity. Each party expressly waives the defense that a remedy in damages will be adequate and any requirement for the posting of a bond by the other party and/or DPI in an action for specific performance or injunction.

CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

        6.  Limitation of Liability.

        EXCEPT AS OTHERWISE PROVIDED IN THIS AGREEMENT, NEITHER PARTY SHALL BE RESPONSIBLE OR LIABLE TO THE OTHER FOR LOST PROFITS, OR LOST BUSINESS OPPORTUNITIES OR FOR INDIRECT, SPECIAL, PUNITIVE OR CONSEQUENTIAL DAMAGES ARISING OUT OF OR IN CONNECTION WITH PERFORMANCE OF WORK PROVIDED FOR UNDER THIS AGREEMENT OR FOR TERMINATION OF THIS AGREEMENT AS PROVIDED FOR HEREIN. This section shall survive termination of this Agreement.

        7.  Dispute Resolution. All disputes arising in connection with this Agreement shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules. The arbitration shall take place in New York, New York and shall be conducted in the English language. The parties hereby agree to the enforceability of any judgements worldwide and to the authority of the arbitrator to award injunctive relief. This section shall survive termination of this Agreement.

        8.  Governing Law. This Agreement shall in all respects be construed according to the laws of the State of California, without regard to the conflict of laws principles thereof. This section shall survive termination of this Agreement.

        9.  Counterparts. This Agreement may be executed in any number of counterparts, each of which may be executed by less than all of the parties to this Agreement, each of which shall be enforceable against the parties actually executing such counterparts, and all of which together shall constitute one instrument.

        10.  Notices. Any notice, request, instruction, or other document to be given must be in writing and delivered personally or sent by certified mail or by United States Express Mail, postage or fees prepaid, or by FedEx, as follows:

If to SanDisk to: SanDisk Corporation
140 Caspian Court
Sunnyvale, CA 94089
Attn: Vice President, General Counsel
Facsimile: 408-548-0385

with copies to: Brobeck, Phleger & Harrison LLP
Two Embarcadero Place
Palo Alto, CA 94303
Attn: Timothy R. Curry, Esq
Facsimile: 650-496-2715

If to PMI to: Photo-Me International, Plc. c/o KIS
2110, avenue du Général de Gaulle
38130 Echirolles
France
Attn: Directeur Juridique
Facsimile: 011-33-476- 339647

with a copy to: Wolin, Ridley & Miller LLP
1717 Main Street, Suite 3100
Dallas, Texas 75201
Attn: Stephen A. Kennedy, Esq.
Facsimile: (214) 939-4949

If to DPI: DigitalPortal Inc. c/o SanDisk Corporation
140 Caspian Court
Sunnyvale, CA 94089
Attn: President of DigitalPortal Inc.
Attn: President and CEO SanDisk Corporation
Facsimile 408-542-0600

Any notice delivered personally in the manner provided here will be deemed given to the party to whom it is directed upon the party’s (or its agent’s) actual receipt. Any notice addressed and mailed in the manner provided here will be deemed given to the party to whom it is addressed at the close of business, local time of the recipient, on the fourth (4th) business day after the day it is placed in the mail or, if earlier, the time of actual receipt. This section shall survive termination of this Agreement.

        11.  Termination. This Agreement shall terminate with the termination of the Definitive Agreement, except where the Definitive Agreement is terminated due to the closing of an initial public offering and where either party remains at least a * shareholder of DPI.

        12.  Miscellaneous. This Agreement contains the entire agreement between the parties regarding its subject matter and supersedes all prior or contemporaneous proposals, agreements, representations and understandings, whether written or oral, between the parties regarding such subject matter. This Agreement may not be amended or modified except in writing signed by each of the parties hereto. This Agreement shall be binding on and shall inure to the benefit of the parties hereto and their respective successors and assigns. In the event that any of the provisions of this Agreement shall be held by a court or other tribunal of competent jurisdiction to be illegal, invalid or unenforceable, such provisions shall be limited or eliminated to the minimum extent necessary so that this Agreement shall otherwise remain in full force and effect. This Agreement shall be construed as to its fair meaning and not strictly for or against either party. The headings hereof are descriptive only and not to be construed in interpreting the provisions hereof. This Agreement may be executed in any number of counterparts, each of which may be executed by less than all of the parties, each of which shall be enforceable against the party actually executing such counterpart, and all of which together shall constitute one instrument. The parties shall be entitled to rely upon and enforce a facsimile of any authorized signatures as if it were the original. This section shall survive termination of this Agreement.

*  INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24b-2. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

        IN WITNESS WHEREOF, PMI and SanDisk have caused this Agreement to be executed by their duly authorized officers as of the date first set forth above.

	PHOTO-ME INTERNATIONAL, PLC
By:	/s/ Serge Crasnianski
	Name: Serge Crasnianski Title: Chief Executive Officer

	SANDISK CORPORATION
By:	/s/ Eli Harari
	Name: Eli Harari Title: President

	DIGITALPORTAL INC.
By:	/s/ Nelson Chan
	Name: Nelson Chan Title: President and Chief Executive Officer

EX-10.43

EXHIBIT 10.43

EXCLUSIVE PRODUCT PURCHASE AGREEMENT

             THIS PRODUCT PURCHASE AGREEMENT (“Agreement”) is made and entered into effective as of August 7, 2000 by and between Photo-Me International Plc., a company governed by the laws of England and Wales (“PMI”), and DigitalPortal Inc. (“DPI”) a Delaware corporation.

             WHEREAS, PMI and SanDisk Corporation (a Delaware corporation) have signed the Definitive Agreement to Form Vending Business pursuant to which DPI shall operate units of Product (defined below);

             WHEREAS, PMI will develop and manufacture Products under the DPI, PMI and SanDisk brands and names;

             WHEREAS, DPI or a third party in a leasing transaction with DPI (“Lessor”) desires to purchase from PMI the Products;

             NOW, THEREFORE, in consideration of the premises and the covenants herein and in the Definitive Agreement, and other good and valuable consideration, the receipt and sufficiency of which are acknowledged, the parties hereby agree as follows:

1.      Definitions.

        1.1  “Product” shall mean those self service photo printing kiosks designed and manufactured by PMI or one of its subsidiaries, which constitute self-service digital photo printing kiosks which can be connected to an Internet photo portal capable of reading and printing on silver-halide paper digitized images from flash memory cards, floppy diskettes, CD-ROM discs and an Internet photo portal, including those kiosks containing multiple terminals connected to a single print processor.

        1.2  “Technical Specifications” shall mean the technical description of the Product and the functionality which they provide as described in Exhibit A attached hereto and incorporated by reference herein.

        1.3  “Territory” means the United States of America and Canada and such other regions as the Board of Directors of DPI may approve pursuant to Section 6.03 of the Definitive Agreement.

2.      Agreement of Sale And Purchase.

        2.1  PMI agrees to sell or lease to DPI or Lessor, and DPI agrees to purchase or lease from PMI, a minimum of 2,000 units of the Product per year, for the duration of this Agreement starting in the fourth quarter of calendar year 2000, *. PMI will be the exclusive and sole source to DPI of self-service digital photo printing kiosks capable of printing digital photographic images on silver halide paper obtained from flash memory cards, internet photo portals and/or other sources. DPI shall also purchase spare parts for the Product from PMI, as provided in Article 9 of this Agreement.

        2.2  The terms and conditions of this Agreement shall control over any terms contained in any purchase order, invoice or confirmation or other business form provided by either party.

3.      Purchase Order Provisions.

        3.1  Purchase and delivery of Products shall be made pursuant to individual purchase orders issued in writing by DPI. Each purchase order will be deemed accepted and binding upon PMI unless, within ten (10) business days after receipt of such purchase order, PMI gives DPI written notice that such purchase order (a) does not comply with the terms and conditions for ordering Products as set forth herein, or (b) cannot be accepted due to reasons of Force Majeure as set forth in Article 18. Any such notice from PMI shall provide a reasonably detailed explanation of the basis for such rejection.

CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

   *   INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24b-2. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS

        3.2  The individual purchase orders shall set forth the following: Purchase Order number and date; the quantities of each Product ordered, identified by DPI Catalog Number; price per unit in U.S. Dollars (U.S. $); requested delivery dates and instructions; destination.

        3.3  Purchase Orders shall be sent by telecopy and express delivery to:

*

Immediate copy must be sent to:

*

*

4.      Prices For Products.

        4.1  DPI will purchase exclusively from PMI each unit of Product ex works (as such term is defined in according to the Incoterms ICC Edition 2000), Grenoble, France, not to exceed US $20,000 per unit * for the initial * units. Notwithstanding the foregoing, if PMI shall sell any units of Product substantially similar to the Product to other parties at *. The unit price is based upon an exchange rate of * (the “Base Rate”). SanDisk and PMI agree to review at the end of each calendar quarter, the exchange rates between the Euro and the US dollar, as set forth in the New York Foreign Exchange mid-range rates (Currency per US Dollars) table published in the Wall Street Journal, Western Edition) (such rates, the “Exchange Rates”) for each of the preceding 90 days (such period, the “Exchange Rate Period”). In the event that the average of the Exchange Rates during the Exchange Rate Period (such average, the “Average Exchange Rate”) differs from the Base Rate by more or less than * percent (but not more or less than * percent), then the unit price as reflected on invoices issued during the following calendar quarter shall be adjusted accordingly.

        4.2  Those prices shall be fixed for the period covering the purchase of the first 2,500 Products. After said period and until the end of this Agreement, PMI reserves the right to change such prices once a year to account for material and labor cost increases net of manufacturing cost decreases, but not to exceed the published value in the latest monthly report issued pursuant to *.

        4.3  Purchase Orders issued by DPI and accepted by PMI prior to the effective date of any price changes will be honored at the previously existing prices.

   *   INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24b-2. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS

5.      Terms of Delivery.

             PMI shall deliver units of Product to DPI ex works Grenoble, France as such term is defined by Incoterms ICC Edition 2000, within * months after the receipt of order for such units unless a longer period is specified in the order. DPI shall be free to reschedule the delivery of any Product which is scheduled for delivery beyond * months from the date of such request to reschedule. Any such rescheduled delivery may be rescheduled for up to an additional * months from the originally scheduled date of delivery.

6.      Terms of Payment.

        6.1  Products purchased by DPI shall be paid in U.S. dollars.

        6.2  PMI shall issue invoices for the Products and deliver such invoices to DPI on the date of delivery of the Products. DPI shall pay the price of the Products as invoiced by PMI within forty-five (45) days from the delivery.

7.      Inspection – Warranty And Remedies.

        7.1  PMI warrants to DPI that the Products shipped by PMI under this Agreement shall conform to the Technical Specifications and shall be free from defects in materials and parts for * months from the date of delivery ex works Grenoble, France (herein “Warranty Period”).

        7.2  DPI shall have the right to inspect the Products (i) at PMI’s factory prior to shipment, (ii) at the offices of Photo-Me USA, LLC in Grand Prairie, Texas within ten (10) days of the date of arrival or (iii) at such other place as the parties shall mutually agree, for the relevant Products (the “Receipt Date”).

        7.3  A representative of PMI will be present for the inspection by DPI.

        7.4  If the Products do not conform to Technical Specifications or are shown to be defective in materials and workmanship (herein collectively “Nonconforming Warranted Product”) before the end of the Warranty Period, DPI shall promptly provide PMI with documentation substantiating such nonconformance.

        7.5  In the event that DPI determines that the Products do not meet the Technical Specification attached hereto as Exhibit 1, or are defective upon such incoming inspection, DPI shall provide PMI with documentation substantiating such nonconformance (the “Nonconformance Notice”) within fifteen (15) days of the Receipt Date. If Nonconformance notice is not provided within fifteen (15) days of the Receipt Date for such Products, such Products shall be deemed accepted.

        7.6  During the Warranty Period, PMI shall provide the following remedy for any nonconforming Product:

        (a)  PMI at its own cost shall sort and inspect the entire shipment lot of Products which contained nonconforming Products at the destination specified by DPI. If such inspection by PMI identifies any conforming Products, DPI will accept such conforming Products.

        (b)  PMI shall provide one or more qualified technicians to repair nonconforming Products at the destination specified by DPI. Such repair shall be completed by PMI or Photo-Me USA, LLC within ten (10) days of the written Nonconformance Notice from DPI, and PMI shall pay all costs (including without limitation, for materials, parts and direct labor, including PMI’s overhead, and overnight parts deliveries, if necessary to meet the ten (10) day deadline) incurred in repairing Products.

        7.7  The foregoing warranty shall not be applicable to any Products which are modified or altered, other than by PMI, after delivery thereof to DPI or to any Products which are misused or mishandled after delivery thereof to DPI.

             EXCEPT FOR THE EXPRESS WARRANTIES SET FORTH ABOVE IN THIS ARTICLE PMI IS MAKING NO OTHER WARRANTIES, EXPRESS OR IMPLIED, REGARDING THE PRODUCTS, INCLUDING BUT NOT LIMITED TO IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.

   *   INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24b-2. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS

8.      Change in Products; Enhancements and Modifications.

        8.1  Changes to Technical Specifications shall be made with both parties’ written agreement.

        8.2  PMI shall provide DPI with copies of any software upgrades or enhancements to the Product which are developed by PMI.

3

9.      Spare Parts Upon Termination of the Maintenance Agreement.

        9.1  In the event that the Maintenance Agreement is terminated, PMI will supply Spare Parts to DPI at the lowest price that such spare parts are sold by PMI to other parties. Such obligation by PMI shall survive for as long as either PMI or SanDisk remains at least a * shareholder of DPI.

        9.2  Upon termination of the Maintenance Agreement, DPI or its designee shall exclusively order Spare Parts from PMI provided that DPI may purchase non-custom parts meeting PMI specifications from other suppliers.

        9.3  PMI shall warrant the installation of Spare Parts by PMI, and shall warrant that the Spare Parts shall be free from any defect or error, from a period of * months from the date of such delivery ex works Grenoble, France, or if applicable, installation by PMI of such Spare Parts.

        9.4  The provisions of this Article 9 shall survive termination of this Agreement.

10.      Regulatory Approvals.

             DPI shall, at its cost and responsibility, obtain any necessary approvals and authorizations of regulatory agencies and other governmental organizations to export from France and deploy the Products in the Territory. PMI shall give DPI the cooperation it reasonably requires in connection with any such obligations.

11.      Confidentiality.

        11.1  The term “Confidential Information” as used herein shall mean any and all information relating to the Products disclosed by PMI to DPI in a written or other tangible form and clearly marked “Confidential” or a comparable legend, or any such other information which the parties would reasonably expect to be treated as confidential.

        11.2  For a period from the date of the disclosure of such Confidential Information until three (3) years after the termination of this Agreement, DPI shall keep Confidential Information in strict confidence, and shall neither disclose it to any person, firm or corporation, nor use the same for any purpose other than those described herein. Notwithstanding the foregoing, DPI may disclose Confidential Information to its employees who have a need to know it; provided, however, that DPI shall bear all responsibility and liability to have such employees comply with terms and conditions hereof.

        11.3  Notwithstanding the provision of Article 11.2 above to the contrary, DPI shall have no confidentiality obligation and no use restriction hereunder with respect to any information which:

        (a)  is or becomes publicly known through no fault of DPI at or subsequent to the time of disclosure thereof; or

        (b)  is approved for release or disclosure to any third party by the prior written authorization of PMI.

12.      Term.

             This Agreement shall commence on the Closing Date and shall expire on December 31, 2010, unless terminated earlier as provided herein. This Agreement shall be automatically renewed thereafter on a year-to-year basis, unless either party hereto gives the other party a written notice not to renew this Agreement at least 180 days before expiration of the initial term or any extension hereof.

   *   INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24b-2. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS

13.      Termination.

        13.1  Either party may terminate this Agreement for either of the following reasons by giving a written notice thereof:

4

        (a)  In the case of bankruptcy or insolvency of the other party; or

        (b)  Upon voluntary or involuntary liquidation, or inability or retirement from the business of the other party.

        13.2  This Agreement may be terminated immediately by the non-breaching party upon written notice in the event of any material breach by the other party of the terms and conditions hereof, provided that the defaulting party is given written notice of such breach and sixty (60) days from receipt of the notice to cure such breach.

        13.3  Notwithstanding the above, this Agreement will automatically terminate in the event that the Definitive Agreement is terminated for reasons other than the closing of an initial public offering. If this Agreement is terminated pursuant to this Section, PMI shall agree to sell to DPI units of Product at the last invoice price by PMI to DPI with a multiple of * of this Agreement, with delivery to be ex works Grenoble, France and all remaining terms to be negotiated in good faith. Notwithstanding the foregoing, PMI shall provide DPI with sixty (60) days written notice of the new pricing terms, during which time PMI shall accept new orders at the last invoice price by PMI to DPI.

        13.4  Termination under Article 13.1 or Article 13.2 above shall not relieve either party of obligations incurred prior thereto, including the obligation of PMI to deliver previously ordered Products or of DPI to pay for Products previously ordered.

        13.5  DPI’s obligations to order units of Product in Section 2.1 of this Agreement shall be terminated in the event that Section 9 of the Stockholders’ Agreement is invoked by PMI, SanDisk or DPI. The invocation of Section 9 of the Stockholders’ Agreement shall not relieve either party of obligations incurred prior thereto, including the obligation of PMI to deliver previously ordered Products or of DPI to pay for Products previously ordered.

14.      Limitation of Liability.

             EXCEPT AS OTHERWISE PROVIDED IN THIS AGREEMENT, NEITHER PARTY SHALL BE RESPONSIBLE OR LIABLE TO THE OTHER FOR LOST PROFITS, OR LOST BUSINESS OPPORTUNITIES OR FOR INDIRECT, SPECIAL, PUNITIVE OR CONSEQUENTIAL DAMAGES ARISING OUT OF OR IN CONNECTION WITH PERFORMANCE OF WORK PROVIDED FOR UNDER THIS AGREEMENT OR FOR TERMINATION OF THIS AGREEMENT AS PROVIDED FOR HEREIN.

15.      Assignability.

             Neither this Agreement nor any of the rights or obligations hereunder may be assigned by either party without the prior written consent of the other party, except that in the event of the sale of all or substantially all of the business or assets of either party, such party may assign all of its rights and obligations under this Agreement to the acquirer of such business or assets, provided that such acquirer agrees to assume in writing the obligations of such party set forth in this Agreement and the Transaction Documents. Subject to the foregoing, this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns.

16.      Force Majeure.

             Neither party shall be liable to the other in any manner for failure or delay to fulfill all or part of this Agreement, directly or indirectly, owing to act of God, governmental orders, restrictions, war, threat of war, warlike conditions, , sanctions, mobilization of government personnel, blockade, embargo, revolution, riot, accident or any other cause for circumstances beyond their reasonable control.

             Either party which is prevented from complying with its obligation under this Agreement, due to Force Majeure, shall notify the other party, without delay, and shall supply such other party, if requested, with any supporting documents. In the same manner, the party which has invoked the Force Majeure shall inform the other party without delay of the termination of such Force Majeure.

   *   INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24b-2. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS

5

             If necessary the obligations of both parties shall be postponed for the duration of the event, and the current contractual period shall be extended for the duration of the event.

             However, should such event persist for a period of three (3) months, it will be open to either party to terminate the affected purchase order forthwith without being entitled to any indemnity whatsoever.

17.      Severability.

             Any term, condition or provision of this Agreement determined to be illegal, invalid or void under applicable state or federal law, shall be deemed severable, and the remaining provisions, terms and conditions shall not be impaired thereby, such that the remaining Agreement shall be interpreted and given effect as far as possible to accomplish its stated purpose.

18.      Waiver of Default.

             Any failure of either party at any time, or from time to time, to require or enforce the strict keeping and performance by either party of any of the terms and conditions of this Agreement shall not constitute a waiver by either party of a breach of any such terms or conditions in the future and shall not affect or impair such terms or conditions in any way, or the right of either party at any time to avail itself of such remedies as it may have for any such breach of any term or condition. No waiver of any right or remedy hereunder shall be effective unless expressly stated in writing by the waiving part.

19.      Notice.

             Any notice made in connection with this Agreement or performance hereunder shall be addressed,

If to PMI:

Photo-Me International, Plc. c/o KIS
2110, avenue du Général de Gaulle
38130 Echirolles
France
Attn: Directeurr Juridique
Fax Number : 334-76-339647.

With a copy to:

Stephen A. Kennedy, Esq.
Wolin, Ridley & Miller LLP
3100 Bank One Center
1717 Main Street
Dallas, Texas 75201

If to DPI:

DigitalPortal Inc. c/o SanDisk Corporation
140 Caspian Court
Sunnyvale, CA 94089
Attn: President of DigitalPortal Inc.
Attn: President and CEO SanDisk Corporation
Facsimile: 408-542-0600

In all cases, with a copy to:

SanDisk Corporation
140 Caspian Court
Sunnyvale, CA 94089
Attn: Vice President and General Counsel
Fax: 408-548-0385

6

or to such other addresses as the parties may notify each other from time to time, by registered mail or facsimile, followed immediately by a confirmation letter by registered mail.

20.      Entire Agreement/Amendment.

             This Agreement, including all constitutes the entire agreement and understanding between PMI and DPI relative to the subject matter hereof and supersedes any previous agreements or understandings whether oral or written. This Agreement may not be amended, except in writing, signed by authorized representatives of both parties.

21.      Dispute Resolution.

             All disputes arising in connection with this Agreement shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules. The arbitration shall take place in New York, New York and shall be conducted in the English language. The parties hereby agree to the enforceability of any judgements worldwide and to the authority of the arbitrator to award injunctive relief.

22.      Governing Law.

             This Agreement shall in all respects be construed according to the laws of the State of California, without regard to the conflict of laws principles thereof.

23.      Counterparts.

             This Agreement may be executed in two counterparts, each of which shall be an original and together which shall constitute one and the same instrument.

24.      Survival.

             The following provisions shall survive the termination of this Agreement: Sections 1, 7.1, 7.6, 7.7, 9, 11, and 14 through and including 24.

             IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first above written.

	PHOTO-ME INTERNATIONAL, PLC
By:	/S/ Serge Crasnianski
	Name: Serge Crasnianski Title: Chief Executive Officer

	DIGITALPORTAL INC.
By:	/s/ Nelson Chan
	Name: Nelson Chan Title: President & Chief Executive Officer

EX-10.44

EXHIBIT 10.44

STOCKHOLDERS’ AGREEMENT

        THIS STOCKHOLDERS’ AGREEMENT (the “Agreement”) dated as of August 7, 2000 by and among SanDisk Corporation, a Delaware corporation (“SanDisk”), Photo-Me International, Plc. (“PMI”), a corporation organized under the laws of England and Wales (each referred to herein as a “Stockholder” and together as the “Stockholders”), and DigitalPortal Inc., a Delaware corporation (the “Company”).

RECITALS

        WHEREAS, SanDisk holds 50% of the outstanding Common Stock of the Company; and

        WHEREAS, PMI holds 50% of the outstanding Common Stock of the Company;

        WHEREAS, the parties to this Agreement desire to make certain provisions for the management and regulation of the Company’s affairs and to establish the rights and obligations of each of the Stockholders;

        NOW, THEREFORE, in consideration of the mutual covenants contained herein and the mutual benefits to be derived herefrom, the parties agree that:

        1.  Certain Definitions. In addition to defined terms appearing throughout this Agreement, the following capitalized terms shall have the following meanings, unless otherwise indicated:

              “Affiliate” of a party means a corporation, partnership or other entity which is (a) a direct or indirect wholly-owned subsidiary entity of such party, (b) such party’s ultimate parent entity or (c) a direct or indirect wholly-owned subsidiary entity of such party’s ultimate parent entity.

              “Definitive Agreement” means that certain Definitive Agreement to Form Vending Business, dated as of even date herewith, to which the Stockholders are parties and to which this Agreement is an Exhibit.

              “Dividend Payment” means dividends (in cash, property or obligations) on, or other payments or distributions on account of, or the setting apart of money for a sinking or other analogous fund for, or the purchase, redemption, retirement or other acquisition of, any Stock of any class of capital stock of the Company, or of any warrants, options or other rights to acquire the same.

              “Fair Market Value” means, *.

              “Interested Party” means each Person who, as a result of an Involuntary Transfer, has an interest in Stock previously owned by a Stockholder, including (as applicable) the affected Stockholder’s estate, personal representative, spouse or successor.

              “Involuntary Transfer” means any transfer of Shares owned by a Stockholder or a Permitted Transferee pursuant to Section 2(b)(iv) below that results from (a) an involuntary transfer resulting from a bankruptcy or similar proceeding affecting such Stockholder; or (b) a foreclosure or similar exercise of remedies in respect of a pledge of Shares.

              “Person” means any individual, corporation, partnership, trust or other entity.

              “Voluntary Transfer” means any sale, pledge or other transfer of Shares by a Stockholder, except (a) a bona fide pledge to secure a loan to such Stockholder, but only if the pledgee agrees in writing to accept such pledge subject to the terms of this Agreement; or (b) an Involuntary Transfer.

CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

        *INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24b-2. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

              “Board of Directors” or “Board” means the board of directors of the Company.

              “Common Stock” or “Stock” means the Common Stock, par value $0.001 per share, of the Company.

              “Exchange Act” means the Securities Exchange Act of 1934, as amended.

              “Initial Public Offering” means the closing of the initial public offering of Common Stock pursuant to a registration statement declared effective under the Securities Act, except that an Initial Public Offering shall not include an offering made in connection with an employee benefit plan.

              “Person” means any individual, corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof.

              “Restricted Period” means the period commencing on the date hereof and ending upon the closing of the Initial Public Offering.

              “Securities Act” means the Securities Act of 1933, as amended.

              “Transfer” of shares of Common Stock of any Person shall mean the sale, assignment or transfer, directly or indirectly, of such shares (including by a pledge, assignment, encumbrance or security interest that gives the pledgee, assignee or secured party, upon the occurrence or non-occurrence of an event, the right to acquire such shares or to require that such shares be sold, but not, in any event, including any “negative pledge” or similar type covenant); however, a “Transfer” by a Person shall not include a transfer to any Person by reason of a merger of such Person into such other Person or a consolidation of such Person with such other Person (“Excluded Transaction”).

        2.  Recitals Correct. Each of the parties to this Agreement acknowledges and declares that the foregoing Recitals, insofar as they relate to it, are true and correct both in substance and in fact, and constitute representations and warranties which shall survive the execution of this Agreement and the completion of the actions which it contemplates.

        3.  Board of Directors.

              (a)  The Board of Directors shall have the rules of operation, powers, duties and responsibilities set forth in the Certificate of Incorporation and the Bylaws of the Company and shall provide overall policy direction and supervision of the affairs of the Company. Directors of the Company may, but need not, be officers or employees of the Company or its stockholders or their respective Affiliates.

              (b)  During the Restricted Period, the Stockholders agree that they shall vote all of the shares of Stock now or hereafter owned by them, whether beneficially or otherwise and shall take or cause to be taken all such action as may be required from and after the date hereof:

        (i)  to establish and maintain the size of the Board of Directors at an even number of directors;

        (ii)  to maintain the quorum and voting requirements of the Board of Directors in accordance with the Bylaws;

        (iii)  to cause the Board of Directors to meet at least quarterly, with at least one meeting per year in Grenoble, France and one meeting per year in Sunnyvale, CA, USA.

        (iv)  to cause the Bylaws, unless otherwise required by law, to be consistent with the Definitive Agreement.

        4.  Election of Directors. During the Restricted Period, the Stockholders agree that they shall vote all of the shares of Stock now or hereafter owned by them, whether beneficially or otherwise in the following manner:

              (a)  Except as otherwise provided in this Agreement, at any annual or special meeting called, or any other action taken, for the purpose of electing directors to the Company’s Board of Directors, the Stockholders agree to vote all of their Stock so as always to elect as directors the following designated nominees: 50% of the total authorized number of directors to be representatives designated by PMI (or its assignee as provided

in Section 6 hereof) and 50% of the total authorized number of directors to be representatives designated by SanDisk (or its assignee as provided in Section 6 hereof).

              (b)  Either party may remove one or all of its designated directors at any time and designate one or more new directors to fill the vacancy or vacancies caused by such removal in accordance with Section 4 (c) below.

              (c)  In the event of any vacancy on the Board of Directors for any reason, the Stockholders will vote their Stock to fill such vacancy with a nominee designated by the Stockholder or the assignee of the Stockholder who designated the person who held the directorship so vacated.

        5.  Election of Chairman. During the Restricted Period, the Stockholders agree that they shall vote all of the shares of Stock now or hereafter owned by them, whether beneficially or otherwise in the following manner:

              (a)  At any annual or special meeting called, or any other action taken, for the purpose of electing a chairman of the Company’s Board of Directors, the Stockholders agree to vote all of their Stock so as always to elect as chairman a nominee designated by SanDisk in even years and a nominee designated by PMI in odd years.

              (b)  In the event of a vacancy of the chairmanship, the Stockholders will vote their Stock to fill such vacancy with a nominee designated in the same manner as the person who held the chairmanship so vacated.

        6.  Assignment of Designation Rights. With respect to Transfers (other than to the Stockholders), unless the other Stockholder consents to a transfer of such rights to a third party transferee, the rights to designate directors and the chairman pursuant to Sections 4 and 5 hereof shall remain with a Stockholder so long as such Stockholder retains at least * of the outstanding Stock of the Company. Notwithstanding Section 4(a) to the contrary, in the event that a Stockholder acquires more than * of the outstanding Stock of the Company, the right to designate directors pursuant to Section 4(a) shall be adjusted so that the percentage of directors designated by each Stockholder is proportionate to such Stockholder’s percentage ownership of outstanding Stock shall be rounded up for the purpose of determining the number of directors it is entitled to designate; provided, that for so long as a Stockhold er owns at least * of the outstanding Stock of the Company, such Stockholder shall be entitled to designate one director. Any shares transferred by any Stockholder to any third party shall not be deemed to be owned by such Stockholder for purposes of calculating the number of directors to be designated by such Stockholder. In the event that the number of nominees which a Stockholder is entitled to designate is reduced pursuant to this Section, the Stockholder shall cause the appropriate number of directors to resign.

        7.  Restrictions on Transfer of Common Stock. During the Restricted Period or three years from the date of this Agreement, whichever occurs first, the Stockholders shall not Transfer or dispose of any of their respective shares of Stock or any portion thereof, except as part of an Excluded Transaction or if the other Stockholder consents in writing thereto. Thereafter, the Stockholders may Transfer or dispose of any of their respective shares of Stock, provided that (a) any such Transfer or disposition is in full compliance with Section 8 below or is part of an Excluded Transaction; (b) the other Stockholder consents in writing thereto; or (c) the Transfer is to an Affiliate and  the assignee agrees in writing, in form and substance reasonably satisfactory to the Company, to be bound by this Agreement and all obligations of the transferring Stockholder pursuant to the Definitive Agreement. Th e Company shall not be required to recognize any such assignment, until the certificate representing such Stock and the accompanying stock transfer power has been delivered to the Company for recordation. Any purported assignment, sale, exchange, pledge, or other disposition or hypothecation of Stock of the Company which does not comply with the provisions of this Section shall be null and void ab initio and ineffective against the Company and the other Stockholder.

        *INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24b-2. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

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        8.  Rights of First Refusal and Purchase.

              (a)  Rights of First Refusal on Voluntary Transfers. Subsequent to three years from the date of this Agreement, if no Initial Public Offering has closed, with respect to any transaction, other than an Excluded Transaction, and subsequent to the closing of the Initial Public Offering, with respect to any private transaction, other than a sale made pursuant to Rule 144 or Rule 144k or an Excluded Transaction, any Stockholder (the “Selling Stockholder”) intending to sell all or a portion of his Stock and thereby effect a Voluntary Transfer to any person other than in a transfer authorized by Section 7, shall make such sale or Transfer on the following terms:

                     (i)  Notice of Sale. The Selling Stockholder will deliver a written notice (the “Notice of Sale”) to the Company and the other Stockholder (the “Other Stockholder”) describing the proposed Voluntary Transfer. The Notice of Sale will include (i) a statement of the Selling Stockholder’s bona fide intention to sell or transfer Stocks; (ii) the name and address of the proposed transferee (the “Buyer”); (iii) the type and number of shares to be sold or transferred (the “Offered Stock”); (iv) the per share purchase price, which must be in cash; (v) the other material terms and conditions of the proposed sale and (vi) expected date of closing.

                     (ii)  Other Stockholder’s Option. The Notice of Sale will constitute an irrevocable offer by the Selling Stockholder to sell to the Other Stockholder the Offered Stock on the same per share terms and conditions stated in the Notice of Sale. The Other Stockholder may accept such offer, in whole only by delivering to the Selling Stockholder written notice of its irrevocable election to accept such offer within 30 days after delivery of the Notice of Sale. If the Other Stockholder has not elected to purchase all of the Offered Stock, by the end of such 30-day period, the Selling Stockholder will be free to sell or transfer the Offered Stock to the Buyer at a price or on terms no more favorable to the Buyer than described in the Notice of Sale, within 30 days after the expiration of such 30 day period. If the sale to the Buyer is not so c onsummated, the terms of this Section will again be applicable to any sale or transfer of Stock by such Selling Stockholder.

                     (iii)  Closing. If the Other Stockholder elects to purchase Offered Stock, the closing of the purchase and sale will occur on the 30th day following expiration of the Other Stockholder’s option (or such earlier date as may be agreed among the purchasing and selling parties). At such closing, the purchasers will deliver (by wire transfer or as otherwise specified in the Notice of Sale) the consideration payable to the order of the Selling Stockholder, against delivery by the Selling Stockholder of certificates evidencing the Offered Stock being so purchased, free and clear of all liens, claims and encumbrances (other than this Agreement) and endorsed in good form for transfer.

              (b)  Rights of Purchase on Involuntary Transfers. Upon any Involuntary Transfer of Stock affecting a Stockholder (the “ Former Stockholder”), each Interested Party will comply with the following provisions:

                     (i)  Notice of Involuntary Transfer. The Interested Party will deliver a written notice (the “Notice of Involuntary Transfer”) to the Company and the Other Stockholder no later than 30 days after such Involuntary Transfer. The Notice will include (i) a description of the circumstances resulting in the Involuntary Transfer; (ii) the name and address of the Interested Party; and (iii) the number of shares of Common Stock subject to such Involuntary Transfer.

                     (ii)  Other Stockholders’ Option. The Notice of Involuntary Transfer will constitute an irrevocable offer by the Interested Party to sell the Common Stock at Fair Market Value to the Other Stockholder. The Other Stockholder may elect to accept such offer by delivering to the Interested Party written notice of their irrevocable election to accept such offer within 30 days after delivery of the Notice of Involuntary Transfer.

                     (iii)  Closing. If the Other Stockholder elects to purchase Stock pursuant to this Section 3, the closing of the purchase and sale will occur on the 40th day following delivery of the Notice of Involuntary Transfer (or such earlier date as may be agreed among the purchasing and selling parties). At such closing, the purchaser will deliver by wire transfer the consideration payable to the order of the Interested Party, against delivery by the Interested Party of certificates evidencing the Stock being so purchased, free and clear of all liens, claims and encumbrances (other than this Voting Agreement) and endorsed in good form for transfer.

              (c)  Merger or Consolidation. The merger or consolidation by a Stockholder with another corporation shall be considered a Transfer or assignment of Stock, unless the Stockholder is the survivor of such merger or consolidation.

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        9.  Procedures Upon Deadlock to Adopt Business Plan. Effective upon the completion of the second year anniversary of the filing of the Articles of the Corporation, and only for the period during which PMI and SanDisk are the only two Stockholders of the Corporation, and further provided the Corporation has not closed an IPO, the parties agree with respect to any deadlock of the Board of Directors to adopt a revised Business Plan as follows:

              (a)  If the Board of Directors deadlock on the adoption of a annual Business Plan, or fail to act to adopt a Business Plan, * of the year preceding the year for which the Business Plan is to be adopted and do not unanimously agree to continue discussions for one or more * day periods in order to adopt a new Business Plan, the Approval Agents shall promptly contact one another by telephone to conduct one or more conversations to endeavor to resolve the matter so to enable the Board of Directors to adopt an annual Business Plan.

              (b)  If agreement is reached by the Approval Agents, the mutually agreeable resolution shall be implemented by the Corporation. Should no solution be agreed upon within thirty (30) days after the matter has first been discussed by the Approval Agents, and the Approval Agents do not agree in writing to extend their discussions in order to resolve the dispute for one or more additional 30 day periods, or arrive at such other written agreement to resolve the matter, then within ten days following the end of such period, either party may submit the matter to non-binding mediation in accordance with Section (i), below

              (c)  If agreement is reached as a result of such mediation process, then the mutually agreeable resolution shall be implemented by the Corporation. Should no solution be agreed upon as a result of such mediation process, then, within ten (10) days following the conclusion of such mediation process, either Stockholder may elect by written notice to the other Stockholder to declare a deadlock (“Deadlock”) and request a valuation of the Corporation pursuant to the procedures set forth in Section (f).

              (d)  Within ten (10) days after the results of the valuation referred to in Section (f) are made available, either Stockholder (the “Selling Stockholder”) may submit to the other Stockholder (the “Buying Stockholder”) a written irrevocable notice (the “Deadlock Selling Notice”) stating that the Selling Stockholder offers to sell to the Buying Stockholder, the Selling Stockholder’s Shares for a cash purchase price equal to the Fair Market Value of the Corporation, as determined in such valuation, multiplied by the Selling Stockholder’s fraction of ownership of the Corporation’s issued. shares of Common Stock owned by the Selling Stockholder.

              (e)  The Buying Stockholder may accept such offer by written response within 45 days of receipt of the Deadlock Selling Notice indicating that it elects to purchase the Shares of the Selling Stockholder. If the Buying Stockholder declines to exercise its right to purchase the Shares of the Selling Stockholder pursuant to this Section (f) or fails to respond (or if both Stockholders submit Deadlock Selling Notices), the Stockholders shall immediately take all steps necessary to sell the assets of, or cause the liquidation and dissolution of, the Corporation.

              (f)  If either Stockholder declares a Deadlock and requests a valuation of the Corporation pursuant to Section (c), such Stockholder may initiate a determination of the Corporation’s Fair Market Value in accordance with this Section (f). Such valuation shall be made by a single appraiser appointed jointly by both Stockholders or, in lieu thereof, by two appraisers, one of which will be appointed by each Stockholder. Such appraiser or appraisers shall be knowledgeable in the area of the Vending Business. If the Stockholders have not mutually selected the appraiser within twenty (20) days of receipt of the notice pursuant to this Section (f), each Stockholder shall select an appraiser and such two persons shall act as the appraisers; provided, however, that if, within twenty (20) days of receipt of such notice, either Stockholder has selected an appraiser while the other h as not, then the person so selected shall act as the sole appraiser. If two appraisers are selected, they will be instructed to reach a joint determination if feasible. Once the appraiser or appraisers have been selected, each Stockholder will submit to the appraiser or appraisers in writing, within thirty (30) days of such selection, such Stockholder’s estimate of the Fair Market Value of the Corporation, together with such supporting information justifying such value as the submitting Stockholder determines appropriate. After receipt of such information, the appraiser or appraisers shall furnish such information on a confidential basis to the non-providing Stockholder which will have

        *INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24b-2. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

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ten days to respond in writing to such information. The Fair Market Value of the Corporation shall be the amount determined by the appraiser (if there is only one appraiser) or the average of the amounts determined by the appraisers (if there are two appraisers); provided, that if the higher of such amounts exceeds the lower of such amounts by more than * of the lower of such amounts, then the two appraisers shall, as promptly as practicable, select a third person to act as appraiser to determine the fair market value within the range of the two amounts previously determined. Such determination of Fair Market Value by the appraiser or appraisers initially appointed shall be made and advised to both Stockholders not later than forty-five (45) days from the selection of the appraiser or appraisers and shall be final and binding unless a third appraiser is required to be appointed. Such determination by the third appraiser shall be made and advised to both Stockholders not earl ier than ten (10) days nor later than twenty (20) days from the selection of such appraiser and shall be final and binding. In making such determination the appraiser or appraisers may request additional information from the Stockholders and may hold sessions with the Stockholders, provided that no communications may be on an ex parte basis. The fees and expenses of any appraiser shall be paid by the Stockholder selecting such appraiser, except that the fees and expenses of a single, jointly selected appraiser or the third appraiser (if necessary) shall be paid by the Selling Stockholder. All other costs and expenses of the valuation procedure will be borne by the Stockholder incurring such cost or expense.

              *

              (g)  The closing of any purchase Shares by a Buying Stockholder shall take place not later than thirty (30) days after its acceptance to purchase the shares offered pursuant to the Deadlock Selling Notice, except that such period shall be extended as necessary in order to comply with any governmental order or ruling. The Buying Stockholder shall pay for the Selling Stockholder’s Shares being acquired by wire transfer of immediately available funds to an account specified by the Selling Shareholder. The Selling Stockholder shall execute all documents necessary to effect the conveyance of such interest in the Corporation, free and clear of all liens, to the Buying Stockholder. In addition, the Stockholders shall enter into an indemnity and release agreement in a form reasonably satisfactory to each Stockholder indemnifying and holding harmless the Selling Stockholder and its Affiliates for liabilities or claims made after the date of the purchase and sale under any guarantees or other agreements supporting the obligations of the Corporation which may have been extended by the Selling Stockholder or any of its Affiliates.

              (h)  Upon the liquidation of the Corporation, the Stockholders shall proceed as promptly as practicable to (i) wind-up the affairs of the Corporation and satisfy the Corporation’s liabilities and (ii) dispose of the Corporation’s assets as promptly as practicable consistent with obtaining the full Fair Market Value of the Corporation, preferably, to the extent it is commercially practicable to do so, by selling the Corporation as a going concern; provided, however, neither Stockholder shall be under any obligation to extend the terms of any Transaction Document or to offer to enter into any other agreement with a prospective purchaser of the Corporation for the purchase or sale of goods or services or the use of facilities or any other business arrangement. Upon the completion of the liquidation of the Corporation, a Certificate of Dissolution shall be filed in the Office of the Secretary of State of Delaware.

(i)  Either SanDisk or PMI may request non-binding mediation in accordance with Section (b) before a single mediator with expertise in intellectual property licensing transactions selected by mutual agreement of the parties or appointed by JAMS in San Francisco, California. The mediation session will be held in San Francisco, California within thirty (30) days following the request and shall be attended by the Approval Agents or such other representatives of SanDisk and PMI who have full settlement authority. The parties will follow the recommendation of the mediator regarding the agenda most likely to resolve the dispute. The parties will participate in the mediation in good faith, and will share equally in its costs. All offers, promises, conduct and statements, whether oral or written, made in the course of the mediation by any of the parties, their agents, employees, experts and attorneys, and by the mediator and any JAMS employees, are confidential, privileged and in admissible for any purpose, including impeachment, in any litigation or other proceeding involving the parties, provided that evidence that is otherwise admissible or discoverable shall not be rendered inadmissible or non-discoverable as a result of its use in the mediation. The provisions of this clause may be enforced by any court of competent jurisdiction, and the party seeking enforcement shall be entitled to an award of all costs, fees and expenses, including attorneys fees, to be paid by the party against whom enforcement is ordered.

        *INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24b-2. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS

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        10.  Guarantee. Each Stockholder agrees that, in the event that shares are transferred to an Affiliate of such Stockholder, such Stockholder shall unconditionally and irrevocably guarantee the obligations of the Affiliate hereunder.

        11.  Covenants of the Company. The Company covenants and agrees with each of the Stockholders as follows:

              (a)  Dividend Payments. The Company shall declare an annual dividend to the Stockholders on a pro rata basis consisting of all net profits less allocations to research, development, reserves and other items approved by the Board and the Approval Agents (as defined in the Definitive Agreement dated as of even date herewith, to which this Agreement is an Exhibit). The Company will not, nor will the Company permit any of its Subsidiaries to, declare or make any Dividend Payment at any time unless such Dividend Payment is made on a pro rata basis to each Stockholder of the Company. Nothing herein shall be deemed to prohibit the payment of dividends by any subsidiary of the Company to the Company or to any other subsidiary of the Company.

              (b)  Restricted Loans and Advances. The Company will not, nor will the Company permit any of its subsidiaries to, make any loan or advance to any of the Stockholders of the Company or to any of their respective Affiliates, unless such loans or advances are made on a pro rata basis to each of the Stockholders of the Company and approved by the Board of Directors.

              (c)  Business Activities. The Company will not engage in any business other than as provided in the Business Plan approved by the Board of Directors.

              (d)  Consolidation, Merger or Disposition of Assets as an Entirety; Sale of Material Assets. The Company will not consolidate or merge with, or sell, lease, assign, transfer or otherwise dispose of its assets as an entirety or substantially as an entirety or any material portion thereof, whether in a single transaction or a series of transactions, to any person unless (i) in the case of a merger or consolidation, each Stockholder receives on a pro rata basis the same form and amount of consideration, and (ii) in the case of a sale, lease, assignment, transfer or other disposition of the Company’s assets as an entirety or substantially as an entirety or any material portion thereof, the Company distributes the proceeds therefrom to the Stockholders on a pro rata basis.

        12.  Initial Public Offering. In the event that the Board approves an Initial Public Offering, the Stockholders will enter into such underwriting agreements and documents, including without limitation, indemnification or contribution agreements and lock-up agreements, as the managing underwriter shall deem reasonably necessary or appropriate to facilitate the completion of the Initial Public Offering.

        13.  Duration of Agreement. This Agreement shall terminate upon the earlier of (i) the consummation of a sale of all the capital stock of the Company, the merger of the company with or into another entity or the sale of all or substantially all of the assets of the Company (an “Approved Sale”), (ii) the closing of an Initial Public Offering or (iii) ten (10) years from the date hereof. The rights and obligations of each Stockholder under this Agreement shall terminate as to such Stockholder upon the Transfer of all Stock owned by such Stockholder in compliance with the terms and conditions of this Agreement (but nothing shall relieve such Stockholder from a claim for damages for a breach prior to such Transfer). Notwithstanding the termination of this Agreement upon an Initial Public Offering, either Stockholder may nonetheless continue to enforce Section 8 of this Agreement with respect to transfers of Securities. The Company shall imprint such legends on any certificates evidencing Stock outstanding prior to the date hereof or issued hereafter. The legends set forth below shall be removed from the certificates evidencing any Stock which ceases to be Stock subject to this Agreement or which may be transferred pursuant to Rule 144(k) under the Securities Act, as appropriate.

        14.  General Provisions.

              (a)  Notices; Addresses. Any notice, communication, payment or demand required or permitted to be given or made hereunder shall be in writing and will be deemed to have been given or made for all purposes if (i) delivered personally (effective upon delivery), (ii) sent by an international overnight delivery service (effective one day after delivery to such delivery service), or (iii) sent by telecopy (effective upon confirmation of transmission), in each addressed as indicated in the stock transfer records of the Company.

              (b)  Legend on Certificates. All certificates representing the Stock of Common Stock shall bear the following legend:

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        THESE SECURITIES ARE NOT REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR ANY STATE SECURITIES LAW AND MAY NOT BE SOLD OR TRANSFERRED UNLESS (A) A REGISTRATION STATEMENT COVERING THESE SECURITIES IS EFFECTIVE UNDER THE ACT OR (B) THE TRANSACTION IS EXEMPT FROM REGISTRATION UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAW AND, IF THE CORPORATION REQUESTS, AN OPINION SATISFACTORY TO THE CORPORATION TO SUCH EFFECT HAS BEEN RENDERED BY COUNSEL SATISFACTORY TO THE CORPORATION.

        THE SHARES OF CAPITAL STOCK REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A STOCKHOLDERS’ AGREEMENT DATED AS OF AUGUST 7, 2000, AND ARE TRANSFERABLE ONLY IN ACCORDANCE WITH THE PROVISIONS OF SUCH AGREEMENT. NO SALE, PLEDGE, HYPOTHECATION OR OTHER DISPOSITION OF ANY SHARES OF COMMON STOCK OF THE CORPORATION REPRESENTED BY THIS CERTIFICATE IN CONTRAVENTION OF THE TERMS OF SUCH AGREEMENT SHALL BE VALID OR EFFECTIVE.

              (c)  Deposit of Agreement With Stock Transfer Records. The Company shall cause a copy of this Agreement to be deposited with the stock transfer records of the Company and to be retained there during the term of this Agreement.

              (d)  Severability of Provisions. If any article, section or any portion of any section of this Agreement is determined to be unenforceable or invalid by the decision of any court of competent jurisdiction, which determination is not appealed or appealable, for any reason whatsoever, the unenforceable provision shall be construed as narrowly as possible so as to minimize the adverse impact upon the terms of this Agreement, such unenforceability or invalidity shall not affect the enforceability or validity of the remaining portions of this Agreement, and such unenforceable or invalid article, section or portion thereof shall be severed from the remainder of this Agreement.

              (e)  Dispute Resolution. All disputes arising in connection with this Agreement shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules. The arbitration shall take place in New York, New York and shall be conducted in the English language. The parties hereby agree to the enforceability of any judgements worldwide and to the authority of the arbitrator to award injunctive relief.

              (f)  Governing Law. This Agreement shall in all respects be construed according to the laws of the State of California, without regard to the conflict of laws principles thereof.

              (g)  Equitable Relief. Each party to this Agreement acknowledges and agrees that the remedy at law for any breach of any of the terms of this Agreement would be inadequate, and agrees and consents that temporary and permanent injunctive and other equitable relief may be granted in any proceeding which may be brought to enforce any provision hereof, including specific performance with such other equitable relief, without the necessity of proof of actual damage or inadequacy of legal remedy.

              (h)  Amendment. No provision of this Agreement may be amended, supplemented, waived, discharged or terminated except by a written instrument signed by all of the parties hereto.

              (i)  Waivers. No waiver of any breach of default hereunder shall be considered valid unless in writing and signed by the party giving such waiver, and no such waiver shall be deemed a waiver of any subsequent breach or default of the same or similar nature.

              (j)  EXCEPT AS OTHERWISE PROVIDED IN THIS AGREEMENT, NEITHER PARTY SHALL BE RESPONSIBLE OR LIABLE TO THE OTHER FOR LOST PROFITS, OR LOST BUSINESS OPPORTUNITIES OR FOR INDIRECT, SPECIAL, PUNITIVE OR CONSEQUENTIAL DAMAGES ARISING OUT OF OR IN CONNECTION WITH PERFORMANCE OF WORK PROVIDED FOR UNDER THIS AGREEMENT OR FOR TERMINATION OF THIS AGREEMENT AS PROVIDED FOR HEREIN.

              (k)  Additional Assurances. Each party to this Agreement shall sign such further and other papers, cause such meetings to be held, resolutions passed and bylaws enacted, exercise their vote and influence and

8

do and perform and cause to be done and performed such further and other acts as may be necessary or desirable to implement the provisions of this Agreement.

              (l)  Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument.

              (m)  Binding Effect. Subject to subsection (l) below, each and all of the covenants, terms, provisions and agreements contained herein shall inure to the benefit of and be binding upon the parties hereto, their respective receivers, trustees, administrators, legal or personal representatives, and, to the extent permitted by this Agreement, their respective successors and assigns.

              (n)  Effectiveness. This Agreement shall be effective as to each Stockholder who is a signatory upon the acquisition by such Stockholder beneficially and of record of any issued and outstanding Stock of Common Stock of the Company and shall apply to all Stock of Common Stock owned beneficially and of record by such Stockholder, whether now owned or subsequently acquired.

[SIGNATURE PAGE FOLLOWS]

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        IN WITNESS WHEREOF, PMI and SanDisk have caused this Agreement to be executed by their duly authorized officers as of the date first set forth above.

	PHOTO-ME INTERNATIONAL, PLC
By:	/S/ Serge Crasnianski
	Name: Serge Crasnianski Title: Chief Executive Officer

	SANDISK CORPORATION
By:	/S/ Eli Harari
	Name: Eli Harari Title: President

	DIGITALPORTAL INC.
By:	/S/ Nelson Chan
	Name: Nelson Chan Title: President and Chief Executive Officer

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EX-10.45

EXHIBIT 10.45

BYLAWS OF
DIGITALPORTAL INC.
A DELAWARE CORPORATION

CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

TABLE OF CONTENTS

	Page
PREAMBLE	1
ARTICLE I OFFICES	1
Section 1.1 Registered Office and Agent	1
Section 1.2 Other Offices	1
ARTICLE II STOCKHOLDERS	1
Section 2.1 Place of Meetings	1
Section 2.2 Annual Meeting	1
Section 2.3 Special Meetings	1
Section 2.4 Notice of Meetings	1
Section 2.5 Voting List	2
Section 2.6 Quorum	2
Section 2.7 Adjournments	2
Section 2.8 Voting and Proxies	2
Section 2.9 Action at Meeting	2
Section 2.10 Nomination of Directors	2
Section 2.11 Notice of Business at Annual Meetings	3
Section 2.12 Inspectors	3
Section 2.13 Action without Meeting	4
Section 2.14 Organization	4
ARTICLE III DIRECTORS	4
Section 3.1 General Powers	4
Section 3.2 Number; Election and Qualification	5
Section 3.3 Terms of Office	5
Section 3.4 Vacancies	5
Section 3.5 Resignation	5
Section 3.6 Annual Meetings	5
Section 3.7 Regular Meetings	5
Section 3.8 Special Meetings	5
Section 3.9 Notice of Special Meetings	5
Section 3.10 Meetings by Telephone Conference Calls	5
Section 3.11 Quorum	5
Section 3.12 Required Consent	5
Section 3.13 Special Consent Required	5
Section 3.14 Action by Consent	6
Section 3.17 Compensation of Directors	6
ARTICLE IV OFFICERS	6
Section 4.1 Enumeration	6
Section 4.2 Election	6
Section 4.3 Qualification	6
Section 4.4 Tenure	6
Section 4.5 Resignation and Removal	6
Section 4.6 Vacancies	7
Section 4.7 Chairman of the Board and Vice Chairman of the Board	7
Section 4.8 President and Chief Executive Officer	7
Section 4.9 Vice Presidents	7
Section 4.10 Secretary and Assistant Secretaries	7
Section 4.11 Treasurer and Assistant Treasurer	8
Section 4.12 Salaries	8

Section 5.4 Lost, Stolen or Destroyed Certificates	8
Section 5.5 Record Date	8
Section 5.6 Dividends	9
ARTICLE VI GENERAL PROVISIONS	9
Section 6.1 Fiscal Year	9
Section 6.2 Corporate Seal	9
Section 6.3 Waiver of Notice	9
Section 6.4 Voting for Securities	9
Section 6.5 Evidence of Authority	9
Section 6.6 Certificate of Incorporation	9
Section 6.7 Transactions with Interested Parties	9
Section 6.8 Dissolution	10
Section 6.9 Severability	10
Section 6.10 Pronouns	10

i

BYLAWS
OF
DIGITALPORTAL INC.

PREAMBLE

        These Bylaws are subject to, and governed by, the General Corporation Law of the State of Delaware and the Certificate of Incorporation of DigitalPortal Inc., a Delaware corporation (the “Corporation”). In the event of a direct conflict between the provisions of these Bylaws and the mandatory provisions of the Delaware General Corporation Law or the provisions of the Certificate of Incorporation of the Corporation, such provisions of the Delaware General Corporation Law or the Certificate of Incorporation of the Corporation, as the case may be, will be controlling.

ARTICLE I
OFFICES

        Section 1.1  Registered Office and Agent. The registered office and registered agent of the Corporation shall be as designated from time to time by the appropriate filing by the Corporation in the office of the Secretary of State of the State of Delaware. The initial registered office of the Corporation shall be established at 1209 Orange Street, City of Wilmington, County of New Castle, Delaware 19801. The initial registered agent of the Corporation at such registered office shall be The Corporation Trust Company.

        Section 1.2  Other Offices. The Corporation may also have offices at such other places, both within and without the State of Delaware, as the Board of Directors from time to time determines or as the business of the Corporation from time to time requires.

ARTICLE II
STOCKHOLDERS

        Section 2.1  Place of Meetings. All meetings of stockholders shall be held at such place within or without the State of Delaware as may be designated from time to time by the Board of Directors, the Chairman of the Board or the President or, if not so designated, at the registered office of the Corporation.

        Section 2.2  Annual Meeting. The annual meeting of stockholders for the election of directors and Chairman of the Board and for the transaction of such other business as may properly be brought before the meeting shall be held on a date to be fixed by the Board of Directors, the Chairman of the Board or the President (which date shall not be a legal holiday in the place where the meeting is to be held) at the time and place to be fixed by the Board of Directors, the Chairman of the Board or the President and stated in the notice of the meeting. If no annual meeting is held in accordance with the foregoing provisions, the Board of Directors shall cause the meeting to be held as soon thereafter as convenient. If no annual meeting is held in accordance with the foregoing provisions, a special meeting may be held in lieu of the annual meeting, and any action taken at the annual meeting, and in such case all references in these Bylaws to the annual meeting of the stockholders shall be deemed to refer to such special meeting.

              Section 2.3  Special Meetings. Special meetings of stockholders may be called at any time only by the Chairman of the Board of Directors, the President or fifty percent (50%) of the Board of Directors. Business transacted at any special meeting of stockholders shall be limited to matters relating to the purpose or purposes stated in the notice of meeting.

              Section 2.4  Notice of Meetings. Except as otherwise provided by law, written notice of each meeting of stockholders, whether annual or special, shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting. The notices of all meetings shall state the place, date and hour of the meeting. The notice of a special meeting shall state, in addition, the purpose or purposes for which the meeting is called. If mailed, notice is given when deposited in the United States mail, postage prepaid, directed to the stockholder at the stockholder’s address as it appears on the records of the Corporation.

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              Section 2.5  Voting List. The officer who has charge of the stock ledger of the Corporation shall prepare, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, at a place within the city where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time of the meeting, and may be inspected by any stockholder who is present.

              Section 2.6  Quorum. Except as otherwise provided by law, the Certificate of Incorporation or these Bylaws, the holders of a majority of the shares of the capital stock of the Corporation issued and outstanding and entitled to vote at the meeting, present in person or represented by proxy, shall constitute a quorum for the transaction of business.

              Section 2.7  Adjournments. Any meeting of stockholders may be adjourned to any other time and to any other place at which a meeting of stockholders may be held under these Bylaws by the stockholders present or represented at the meeting and entitled to vote, although less than a quorum, or, if no stockholder is present, by any officer entitled to preside at or to act as Secretary of such meeting. It shall not be necessary to notify any stockholder of any adjournment of less than thirty (30) days if the time and place of the adjourned meeting are announced at the meeting at which adjournment is taken, unless after the adjournment a new record date is fixed for the adjourned meeting. At the adjourned meeting, the Corporation may transact any business which might have been transacted at the original meeting.

              Section 2.8  Voting and Proxies. Each stockholder shall have one vote for each share of stock entitled to vote held of record by such stockholder and a proportionate vote for each fractional share so held, unless otherwise provided by law, the Certificate of Incorporation or these Bylaws. Each stockholder of record entitled to vote at a meeting of stockholders, or to express consent or dissent to corporate action in writing without a meeting, may vote or express such consent or dissent in person or may authorize another person or persons to vote or act for him by proxy executed in writing (or in such other manner permitted by the General Corporation Law of the State of Delaware) by the stockholder or his authorized agent and delivered or transmitted to the Secretary of the Corporation. No such proxy shall be voted or acted upon after three (3) years from the date of its execution, u nless the proxy expressly provides for a longer period.

              Section 2.9  Action at Meeting. When a quorum is present at any meeting, the holders of a majority of the stock present or represented and voting on a matter (or if there are two or more classes of stock entitled to vote as separate classes, then in the case of each such class, the holders of a majority of the stock of that class present or represented and voting on a matter) shall decide any matter to be voted upon by the stockholders at such meeting, except when a different vote is required by express provision of law, the Certificate of Incorporation or these Bylaws. Any election by stockholders shall be determined by a plurality of the votes cast by the stockholders entitled to vote at the election.

              Section 2.10  Nomination of Directors. Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors. Nomination for election to the Board of Directors of the Corporation at a meeting of stockholders may be made by the Board of Directors or by any stockholder of the Corporation entitled to vote for the election of directors at such meeting who complies with the notice procedures set forth in this Section 2.10. Such nominations, other than those made by or on behalf of the Board of Directors, shall be made by timely notice in writing to the Secretary of the Corporation. To be timely, a stockholder’s notice must be delivered to, or mailed and received by, the Secretary at the principal executive offices of the Corporation not less than thirty (30) days nor more than ninety (90) days prior to the first anniversary of the pr eceding year’s annual meeting; provided, however, that (i) in the event that the date of the annual meeting is advanced by more than twenty (20) days, or delayed by more than seventy (70) days, from such anniversary date, notice by the stockholder to be timely must be so delivered or received not earlier than the ninetieth day prior to such annual meeting and not later than the close of business on the later of the thirtieth day prior to such annual meeting or the fifteenth day following the day on which notice of the date of such annual meeting was mailed or public disclosure of the date of such annual meeting was made, whichever first occurs, and (ii) with respect to the annual meeting of stockholders of the Corporation to be held in the year 2001, to be timely, a stockholder’s notice must be so received not earlier than the ninetieth day prior to such annual meeting and not later than the close of business on the later of (A) the thirtieth day prior to such annual meeting and (B)  the fifteenth day following the day on which notice of the date of such

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annual meeting was mailed or public disclosure of the date of such annual meeting was made, whichever first occurs. As to the stockholder giving the notice (i) the name and address, as they appear on the Corporation’s books, of such stockholder and (ii) the class and number of shares of the Corporation which are beneficially owned by such stockholder. The Corporation may require any proposed nominee to furnish such information as may reasonably be required by the Corporation to determine the eligibility of such proposed nominee to serve as a director of the Corporation.

              The chairman of the meeting may, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded.

              Section 2.11  Notice of Business at Annual Meetings. At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise brought before the meeting by or at the direction of the Board of Directors, or (c) otherwise properly brought before an annual meeting by a stockholder. For business to be properly brought before an annual meeting by a stockholder, if such business relates to the election of directors of the Corporation, the procedures in Section 2.10 must be complied with. If such business relates to any other matter, the stockholder must have given timely notice thereof in writing to the Secretary . To be timely, a stockholder’s notice must be delivered to, or mailed and received by, the Secretary at the principal executive offices of the Corporation not less than seventy (70) days nor more than ninety (90) days prior to the first anniversary of the preceding year’s annual meeting; provided, however, that (i) in the event that the date of the annual meeting is advanced by more than twenty (20) days, or delayed by more than seventy (70) days, from such anniversary date, notice by the stockholder to be timely must be so delivered or received not earlier than the ninetieth day prior to such annual meeting and not later than the close of business on the later of the seventieth day prior to such annual meeting or the tenth day following the day on which notice of the date of such annual meeting was mailed or public disclosure of the date of such annual meeting was made, whichever first occurs, and (ii) with respect to the annual meeting of stockholders of the Corporation to be held in t he year 2001, to be timely, a stockholder’s notice must be so received not earlier than the ninetieth day prior to such annual meeting and not later than the close of business on the later of (A) the sixtieth day prior to such annual meeting and (B) the tenth day following the day on which notice of the date of such annual meeting was mailed or public disclosure of the date of such annual meeting was made, whichever first occurs. A stockholder’s notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b)  the name and address, as they appear on the Corporation’s books, of the stockholder proposing such business, (c) the class and number of shares of the Corporation which are beneficially owned by the stockholder, and (d) any material interest of the s tockholder in such business. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this Section 2.11 and except that any stockholder proposal which complies with rule 14a-8 of the proxy rules (or any successor provision) promulgated under the Securities Exchange Act of 1934, as amended, and is to be included in the Corporation’s proxy statement for an annual meeting of stockholders shall be deemed to comply with the requirements of this Section 2.11.

              The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 2.11, and if he should so determine, the chairman shall so declare to the meeting that any such business not properly brought before the meeting shall not be transacted.

              Section 2.12  Inspectors. The Board of Directors may, in advance of any meeting of stockholders, appoint one or more inspectors to act at such meeting or any adjournment thereof. If any of the inspectors so appointed shall fail to appear or act, the chairman of the meeting may appoint one or more inspectors. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath to execute faithfully the duties of inspector at such meeting with strict impartiality and according to the best of his ability. The inspectors shall determine the number of shares represented at the meeting, the existence of a quorum, and the validity and effect of proxies and shall receive votes, ballots, or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots, or consents, determine the results, and do such acts as are proper to conduct the election or vote with fairness to all stockholders. On request of the chairman of the meeting, the inspectors shall make a report in writing of any challenge, request or matter determined by them

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and shall execute a certificate of any fact found by them. No director or candidate for the office of director shall act as an inspector of an election of directors. Inspectors need not be stockholders.

        Section 2.13  Action without Meeting. Unless otherwise provided in the Certificate of Incorporation, any action required or permitted to be taken by stockholders for or in connection with any corporate action may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the Corporation by delivery to its registered office in Delaware or to its principal place of business by hand or certified or registered mail, return receipt requested, or to an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Each su ch written consent shall bear the date of signature of each stockholder who signs the consent. No written consent shall be effective to take the corporate action referred to therein unless written consents signed by a number of stockholders sufficient to take such action are delivered to the Corporation in the manner specified in this paragraph within sixty (60) days of the earliest dated consent so delivered.

        If action is taken by consent of stockholders and in accordance with the foregoing, there shall be filed with the records of the meetings of stockholders the writing or writings comprising such consent.

        If action is taken by less than unanimous consent of stockholders, prompt notice of the taking of such action without a meeting shall be given to those who have not consented in writing and a certificate signed and attested to by the Secretary of the Corporation that such notice was given shall be filed with the records of the meetings of stockholders.

        In the event that the action which is consented to is such as would have required the filing of a certificate under any provision of the General Corporation Law of the State of Delaware, if such action had been voted upon by the stockholders at a meeting thereof, the certificate filed under such provision shall state, in lieu of any statement required by such provision concerning a vote of stockholders, that written consent has been given under Section 228 of said General Corporation Law and that written notice has been given as provided in such Section 228.

        Notwithstanding the foregoing, if at any time the Corporation shall have a class of stock registered pursuant to the provisions of the Securities Exchange Act of 1934, as amended, for so long as such class is registered, any action by the stockholders of such class must be taken at an annual or special meeting of stockholders and may not be taken by written consent.

        Section 2.14  Organization. The Chairman of the Board, or in his absence the Vice Chairman of the Board designated by the Chairman of the Board, if any, or the President, in the order named, shall call meetings of the stockholders to order, and shall act as chairman of such meeting; provided, however, that the Board of Directors may appoint any stockholder to act as chairman of any meeting in the absence of the Chairman of the Board. The Secretary of the Corporation shall act as secretary at all meetings of the stockholders; but in the absence of the Secretary at any meeting of the stockholders, the presiding officer may appoint any person to act as secretary of the meeting.

ARTICLE III
DIRECTORS

        Section 3.1  General Powers. The business and affairs of the Corporation shall be managed by or under the direction of a Board of Directors, who may exercise all of the powers of the Corporation except as otherwise provided by law, the Certificate of Incorporation or these Bylaws. In the event of a vacancy in the Board of Directors, the remaining directors, except as otherwise provided by law, may exercise the powers of the full Board until the vacancy is filled.

        Section 3.2  Number; Election and Qualification. Unless and until changed by amendment to this bylaw, the number of directors which shall constitute the whole Board of Directors shall be four. The directors shall be elected at the annual or special meeting of stockholders or by written consent. Directors need not be stockholders of the Corporation.

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        Section 3.3  Terms of Office. Each director shall serve until the next annual meeting after he or she is elected ; provided, that the term of each director shall be subject to the election and qualification of his successor and to his earlier death, resignation or removal.

        Section 3.4  Vacancies. Any vacancy in the Board of Directors, however occurring, including a vacancy resulting from an enlargement of the size of the Board, shall be filled by appointment by a majority of the directors then in office, although less than a quorum, or by a sole remaining director, and such appointee shall hold office for the unexpired term in respect of which such vacancy occurred or until the next election of directors by stockholders, subject to the election and qualification of a successor and to the earlier death, resignation or removal of the appointee. Notwithstanding the foregoing, for so long as that certain Stockholders Agreement, dated as of August 7, 2000, by and between the Corporation and its stockholders (the “Stockholders Agreement”), shall be in effect, (i) if the office of a director designated under such Stockholders Agreement becomes vacant by reason of death, disabili ty, resignation or removal, the remaining directors shall appoint a successor to such office as the party entitled under the Stockholders’ Agreement to designate such director or such party’s assignee shall direct; and (ii) if the office of a director designated under such Stockholders Agreement becomes vacant by reason of enlargement of the board, the remaining directors shall appoint a director to such office so as to conform with Section 4(a) of the Stockholders’ Agreement.

        Section 3.5  Resignation. Any director may resign by delivering his written resignation to the Corporation at its principal office or to the President or Secretary. Such resignation shall be effective upon receipt unless it is specified to be effective at some other time or upon the happening of some other event.

        Section 3.6  Annual Meetings. Annual meetings of the Board of Directors shall be held without notice immediately following and at the same place as the annual meeting of stockholders.

        Section 3.7  Regular Meetings. Regular meetings of the Board of Directors shall be held at least on a quarterly basis, with fourteen (14) days written notice, at such time and place, either within or without the State of Delaware, as shall be determined from time to time by the Board of Directors; provided that any director who is absent when such a determination is made shall be given notice of the determination; and provided that at least one regular meeting a year shall be held in Grenoble, France and at least one meeting a year shall be held in Sunnyvale, CA.

        Section 3.8  Special Meetings. Special meetings of the Board of Directors may be held at any time and place, within or without the State of Delaware, designated in a call by the Chairman of the Board, President, two or more directors, or by one director in the event that there is only a single director in office.

        Section 3.9  Notice of Special Meetings. Notice of any special meeting of directors shall be given to each director by the Secretary or by the officer or one of the directors calling the meeting. Notice shall be duly given to each director (i) by giving notice to such director in person or by telephone at least 72 hours in advance of the meeting, (ii) by sending a telegram, telecopy, telex or electronic mail message, or delivering written notice by hand, to his last known business or home address at least 72 hours in advance of the meeting, or (iii) by mailing written notice to his last known business or home address at least 14 days in advance of the meeting. A notice or waiver of notice of a meeting of the Board of Directors need not specify the purposes of the meeting.

        Section 3.10  Meetings by Telephone Conference Calls. Directors or any members of any committee designated by the directors may participate in a meeting of the Board of Directors or such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation by such means shall constitute presence in person at such meeting.

        Section 3.11  Quorum. A majority of the total number of the whole Board of Directors shall constitute a quorum at all meetings of the Board of Directors. In the absence of a quorum at any such meeting, a majority of the directors present may adjourn the meeting from time to time without further notice other than announcement at the meeting, until a quorum shall be present.

        Section 3.12  Required Consent. At any meeting of the Board of Directors at which a quorum is present, the vote of a majority of those present shall be sufficient to take any action, unless a different vote is specified by law, the Certificate of Incorporation or these Bylaws

        Section 3.13  *

   *    INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24b-2. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

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        Section 3.14  Action by Consent. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee of the Board of Directors may be taken without a meeting, if all members of the Board or committee, as the case may be, consent to the action in writing, and the written consents are filed with the minutes of proceedings of the Board or committee.

        Section 3.15  Presumption of Assent. A director of the Corporation who is present at the meeting of the Board of Directors at which action on any corporate matter is taken shall be presumed to have assented to the action unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as secretary of the meeting before the adjournment thereof or shall forward any dissent by certified or officer is present at or participates in the meeting of the Board of Directors or a committee of the Board of Directors which authorizes the contract or transaction or solely because his or their votes are counted for such purpose if:

        Section 3.16  Committees. The Board of Directors may designate one or more committees, each committee to consist of one or more of persons, who need not be directors of the Corporation. The Board may designate one or more persons as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members of the committee present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another person to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors and subject to the provisions of the General Corporation Law of the State of Delaware, shall have and may exercise all the powers and authority of the Board of Direc tors in the management of the business and affairs of the Corporation and may authorize the seal of the Corporation to be affixed to all papers which may require it; provided that committees containing members who are not directors shall serve on such committees in an advisory capacity only. Each such committee shall keep minutes and make such reports as the Board of Directors may from time to time request. Except as the Board of Directors may otherwise determine, any committee may make rules for the conduct of its business, but unless otherwise provided by the directors or in such rules, its business shall be conducted as nearly as possible in the same manner as is provided in these Bylaws for the Board of Directors.

        Section 3.17  Compensation of Directors. Directors may be paid such compensation for their services and such reimbursement for expenses of attendance at meetings as the Board of Directors may from time to time determine. No such payment shall preclude any director from serving the Corporation or any of its parent or subsidiary corporations in any other capacity and receiving compensation for such service.

ARTICLE IV
OFFICERS

        Section 4.1  Enumeration. The officers of the Corporation shall consist of a Chairman, a President and Chief Executive Officer, a Secretary, a Treasurer and such other officers with such other titles as the Board of Directors shall determine, including a Vice Chairman of the Board and one more Vice Presidents, Assistant Treasurers and Assistant Secretaries. The Board of Directors may appoint such other officers as it may deem appropriate

        Section 4.2  Election. During the Restricted Period (as defined in the Stockholders’ Agreement), the Chairman shall be appointed annually in accordance with Section 5 of the Stockholders’ Agreement. The President and Chief Executive Officer, the Treasurer and the Secretary shall be appointed annually by the Board of Directors at its first meeting following the annual meeting of stockholders; provided that the President and Chief Executive Officer shall be appointed only with the approval of both Approval Agents. Other officers may be appointed by the Board of Directors at such meeting or at any other meeting.

        Section 4.3  Qualification. No officer need be a stockholder. Any two or more offices may be held by the same person; provided that the President and Chief Executive Officer shall not serve as Chairman.

        Section 4.4  Tenure. Except as otherwise provided by law, by the Certificate of Incorporation or by these Bylaws, each officer shall hold office until his successor is elected and qualified, unless a different term is specified in the vote choosing or appointing him, or until his earlier death, resignation or removal.

        Section 4.5  Resignation and Removal. Any officer may resign by delivering his or her written resignation to the Corporation at its principal office or to the President or Secretary. Such resignation shall be

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effective upon receipt unless it is specified to be effective at some other time or upon the happening of some other event.

        Any officer, other than the Chairman and President and Chief Executive Officer, may be removed at any time, with or without cause, by vote of a majority of the entire number of directors then in office. The Chairman and President and Chief Executive Officer may be removed at any time, with or without cause, by the vote of the holders of a majority of the shares of capital stock of the Corporation issued and outstanding and entitled to vote.

        Except as the Board of Directors may otherwise determine, no officer who resigns or is removed shall have any right to any compensation as an officer for any period following his resignation or removal, or any right to damages on account of such removal, whether his compensation be by the month or by the year or otherwise, unless such compensation is expressly provided in a duly authorized written agreement with the Corporation.

        Section 4.6  Vacancies. The Board of Directors may fill any vacancy occurring in any office for any reason and may, in its discretion, leave unfilled for such period as it may determine any offices, other than those of President and Chief Executive Officer, Treasurer and Secretary. Each such successor shall hold office for the unexpired term of his predecessor and until his successor is elected and qualified, or until his earlier death, resignation or removal. Notwithstanding the foregoing, (a) for so long as the Stockholders’ Agreement shall be in effect, if the office of Chairman becomes vacant, the remaining directors shall appoint a successor to such office as the party entitled under the Stockholders’ Agreement to designate the Chairman or such party’s assignee shall direct; and (b) if the office of President and Chief Executive Officer becomes vacant, the Board shall appoint a successor to such office only with approval of both Approval Agents.

        Section 4.7  Chairman of the Board and Vice Chairman of the Board. The Chairman of the Board shall perform such duties and possess such powers as are assigned to him by the Board of Directors. Unless otherwise provided by the Board of Directors, he shall preside at all meetings of the stockholders and at all meetings of the Board of Directors. If the Board of Directors appoints a Vice Chairman of the Board, he shall, in the absence or disability of the Chairman of the Board, perform the duties and exercise the powers of the Chairman of the Board and shall perform such other duties and possess such other powers as may from time to time be vested in him by the Board of Directors.

          Section 4.8  President and Chief Executive Officer. The President and Chief Executive Officer shall be the general manager of the Corporation and shall have general charge and supervision of the business of the Corporation. He shall perform such other duties and shall have such other powers as the Board of Directors may from time to time prescribe. The President and Chief Executive Officer shall, in no event, fulfill the position of Chairman of the Board.

        Section 4.9  Vice Presidents. Any Vice Presidents shall perform such duties and possess such powers as the Board of Directors or the President may from time to time prescribe. In the event of the absence, inability or refusal to act of the President, the Vice President (or if there shall be more than one, the Vice Presidents in the order determined by the Board of Directors) shall perform the duties of the President and when so performing shall have all the powers of and be subject to all the restrictions upon the President. The Board of Directors may assign to any Vice President the title of Executive Vice President, Senior Vice President or any other title selected by the Board of Directors.

        Section 4.10  Secretary and Assistant Secretaries. The Secretary shall perform such duties and shall have such powers as the Board of Directors or the President may from time to time prescribe. In addition, the Secretary shall perform such duties and have such powers as are incident to the office of the secretary, including without limitation the duty and power to give notices of all meetings of stockholders and special meetings of the Board of Directors and keep a record of the proceedings, to maintain a stock ledger and prepare lists of stockholders and their addresses as required, to be custodian of corporate records and the corporate seal and to affix and attest to the same on documents.

        Any Assistant Secretary shall perform such duties and possess such powers as the Board of Directors, the President or the Secretary may from time to time prescribe. In the event of the absence, inability or refusal to act of the Secretary, the Assistant Secretary (or if there shall be more than one, the Assistant Secretaries in the order determined by the Board of Directors) shall perform the duties and exercise the powers of the Secretary.

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        In the absence of the Secretary or any Assistant Secretary at any meeting of stockholders or directors, the person presiding at the meeting shall designate a temporary secretary to keep a record of the meeting.

        Section 4.11  Treasurer and Assistant Treasurer. The Treasurer shall perform such duties and shall have such powers as may from time to time be assigned to him or her by the Board of Directors or the President. In addition, the Treasurer shall perform such duties and have such powers as are incident to the office of treasurer, including without limitation the duty and power to keep and be responsible for all funds and securities of the Corporation, to deposit funds of the Corporation in depositories selected in accordance with these Bylaws, to disburse such funds, and to render, as required by the Board of Directors, statements of all such transactions and of the financial condition of the Corporation.

        The Assistant Treasurers shall perform such duties and possess such powers as the Board of Directors, the President or the Treasurer may from time to time prescribe. In the event of the absence, inability or refusal to act of the Treasurer, the Assistant Treasurer (or if there shall be more than one, the Assistant Treasurers in the order determined by the Board of Directors) shall perform the duties and exercise the powers of the Treasurer.

        Section 4.12  Salaries. Officers of the Corporation shall be entitled to such salaries, compensation or reimbursement as shall be fixed or allowed from time to time by the Board of Directors.

ARTICLE V
CAPITAL STOCK

        Section 5.1  Issuance of Stock. Unless otherwise voted by the stockholders and subject to the provisions of the Certificate of Incorporation, the whole or any part of any unissued balance of the authorized capital stock of the Corporation or the whole or any part of any unissued balance of the authorized capital stock of the Corporation held in its treasury may be issued, sold, transferred or otherwise disposed of by vote of the Board of Directors in such manner, for such consideration and on such terms as the Board of Directors may determine.

        Section 5.2  Certificates of Stock. Every holder of stock of the Corporation shall be entitled to have a certificate, in such form as may be prescribed by law and by the Board of Directors, certifying the number and class of shares owned by him or her in the Corporation. Each such certificate shall be signed by, or in the name of the Corporation by, the Chairman or Vice Chairman, if any, of the Board of Directors, or the President or a Vice President, and the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the Corporation. Any or all of the signatures on the certificate may be a facsimile.

        Each certificate for shares of stock which are subject to any restriction on transfer pursuant to the Certificate of Incorporation, these Bylaws, applicable securities laws or any agreement among any number of stockholders, or among such holders and the Corporation, shall have conspicuously noted on the face or back of the certificate either the full text of the restriction or a statement of the existence of such restriction.

        Section 5.3  Transfers. Except as otherwise established by rules and regulations adopted by the Board of Directors, and subject to applicable law, shares of stock may be transferred on the books of the Corporation by the surrender to the Corporation or its transfer agent of the certificate representing such shares properly endorsed or accompanied by a written assignment or power of attorney properly executed, and with such proof of authority or the authenticity of signature as the Corporation or its transfer agent may reasonably require. Except as may be otherwise required by law, by the Certificate of Incorporation or by these Bylaws, the Corporation shall be entitled to treat the record holder of stock as shown on its books as the owner of such stock for all purposes, including the payment of dividends and the right to vote with respect to such stock, regardless of any transfer, pledge or other disposition of such stock until the shares have been transferred on the books of the Corporation in accordance with the requirements of these Bylaws.

        Section 5.4  Lost, Stolen or Destroyed Certificates. The Corporation may issue a new certificate of stock in place of any previously issued certificate alleged to have been lost, stolen or destroyed, upon such terms and conditions as the Board of Directors may prescribe, including the presentation of reasonable evidence of such loss, theft or destruction and the giving of such indemnity as the Board of Directors may require for the protection of the Corporation or any transfer agent or registrar.

        Section 5.5  Record Date. The Board of Directors may fix, in advance, a date as a record date for the determination of the stockholders entitled to notice of or to vote at any meeting of stockholders, or entitled to

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receive payment of any dividend or other distribution or allotment of any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action. Such record date shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action to which such record date relates.

        If no record date is fixed, the record date for determining stockholders entitled to notice of, or to vote at, a meeting of stockholders shall be at the close of business on the day before the day on which notice is given, or, if notice is waived, at the close of business on the day before the day on which the meeting is held. The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating to such purpose.

        A determination of stockholders of record entitled to notice of, or to vote at, a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting.

        Section 5.6   Dividends. Profits and cash distributions shall be made on an annual basis to stockholders on a pro rata basis, subject to agreed prior allocations of profit and R&D, reserves and other items approved by the Board of Directors.

ARTICLE VI
GENERAL PROVISIONS

        Section 6.1  Fiscal Year. Except as from time to time otherwise designated by the Board of Directors, the fiscal year of the Corporation shall begin on the first day of January in each year and end on the last day of the following December

        Section 6.2  Corporate Seal. The corporate seal shall be in such form as shall be approved by the Board of Directors.

        Section 6.3  Waiver of Notice. Whenever any notice whatsoever is required to be given by law, by the Certificate of Incorporation or by these Bylaws, a waiver of such notice either in writing signed by the person entitled to such notice or such person’s duly authorized attorney, or by telegraph, cable or any other available method, whether before, at or after the time stated in such waiver, or the appearance of such person or persons at such meeting in person or by proxy, shall be deemed equivalent to such notice.

        Section 6.4  Voting for Securities. Except as the directors may otherwise designate, the President or Treasurer may waive notice of, and act as, or appoint any person or persons to act as, proxy or attorney-in-fact for the Corporation (with or without power of substitution) at any meeting of stockholders or shareholders of any other corporation or organization, the securities of which may be held by the Corporation.

        Section 6.5  Evidence of Authority. A certificate by the Secretary, or an Assistant Secretary, or a temporary Secretary, as to any action taken by the stockholders, directors, a committee or any officer or representative of the Corporation shall, as to all persons who rely on the certificate in good faith, be conclusive evidence of such action.

        Section 6.6  Certificate of Incorporation. All references in these Bylaws to the Certificate of Incorporation shall be deemed to refer to the Certificate of Incorporation of the Corporation, as amended and in effect from time to time.

        Section 6.7  Transactions with Interested Parties. No contract or transaction between the Corporation and one or more of the directors or officers, or between the Corporation and any other corporation, partnership, association or other organization in which one or more of the directors or officers have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or a committee of the Board of Directors which authorizes the contract or transaction or solely because his or their votes are counted for such purpose if:

              (1)  The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum;

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              (2)  The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or

              (3)  The contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee of the Board of Directors, or the stockholders.

        Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction.

        Section 6.8  Dissolution. Dissolution of the Corporation shall only be by mutual agreement by the holders of at least two-thirds (2/3) of the shares of capital stock of the Corporation issued and outstanding and entitled to vote, or at the request of at least half (½), if (i) the Corporation is unprofitable for two years in succession, or (ii) after exhausting the mechanisms of dispute resolution, the Board of Directors remains deadlocked on a matter deemed to be essential to the successful future of the Corporation and no buy/sell process is initiated within thirty (30) days, or (iii) bankruptcy or equivalent proceedings are commenced.

        Section 6.9  Severability Any determination that any provision of these Bylaws is for any reason inapplicable, illegal or ineffective shall not affect or invalidate any other provision of these Bylaws.

        Section 6.10  Pronouns. All pronouns used in these Bylaws shall be deemed to refer to the masculine, feminine or neuter, singular or plural, as the identity of the person or persons may require.

ARTICLE VII
AMENDMENTS

              Except as otherwise provided by law, these Bylaws may be altered, amended or repealed or new bylaws may be adopted by the affirmative vote of the holders of a majority of the shares of the capital stock of the Corporation issued and outstanding and entitled to vote at any regular or special meeting of stockholders, provided notice of such alteration, amendment, repeal or adoption of new bylaws shall have been stated in the notice of such regular or special meeting.