MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

The information contained in this section should be read in conjunction with (1) our unaudited condensed interim consolidated financial statements as of March 31, 2009 and for the three months then ended and related notes included in this report and (2) our consolidated financial statements as of December 31, 2008 and related notes for the year then ended and (3) our Report of Form 6-K, filed February 24, 2009. Our financial statements have been prepared in accordance with generally accepted accounting principles in United States (“US GAAP”).

Following the merger with Jazz, the Company’s financial statements include Jazz results commencing September 19, 2008. The balance sheet as of March 31, 2009 and December 31, 2008 includes Jazz’s balances as of such dates.

Results of Operations

The following table sets forth certain statement of operations data as a percentage of total revenues for the periods indicated.

	Three Months Ended March 31,
	2009			2008



Statement of Operations Data:
Revenues		100	%		100	%
Cost of revenues		129.0			118.5

Gross loss		(29.0	)		(18.5	)

Research and development expenses, net		7.5			5.2
Marketing, general and administrative expenses		11.6			13.5

Operating loss		(48.1	)		(37.1	)

Financing expense, net		(1.7	)		(13.5	)
Other expenses, net		-			(0.7	)

Income tax benefit		2.2			-

Loss for the period		(47.6	)%		(51.4	)%

Three Months Ended March 31, 2009 compared to Three Months Ended March 31, 2008

Revenue. Revenue for the three months ended March 31, 2009 amounted to $58.1 million compared to $57.6 million for the three months ended March 31, 2008.

Revenues for the three months ended March 31, 2009 were basically flat as compared to the corresponding quarter in 2008, since the 50% revenue reduction we experienced following the current worldwide economic downturn and the prevailing adverse market conditions in the semiconductor industry, was offset by the inclusion of the revenues for the three months ended March 31, 2009 of our recently acquired, Jazz Technology, Inc.

Cost of Total Revenues. Cost of total revenues for the three months ended March 31, 2009 amounted to $74.9 million, compared with $68.3 million for the three months ended March 31, 2008. This modest 9.8% increase in cost of revenues, is a result of the inclusion of Jazz costs for the three months ended March 31, 2009 (as compared to not including those costs before the merger date), which was partially offset by the previously announced cost reduction plan executed by the company and synergies captured through the integration of Jazz.

Gross Loss. Gross loss for the three months ended March 31, 2009 was $16.9 million compared to a gross loss of $10.6 million for the three months ended March 31, 2008. The increase in gross loss was mainly attributable to the 9.8% increase in cost of total revenues describe above.

Research and Development. Research and development expenses for the three months ended March 31, 2009 amounted to $4.4 million as compared to $3.0 million for the three months ended March 31, 2008. This increase in research and development costs is a result of the inclusion of Jazz costs for the three months ended March 31, 2009 (as compared to not including those costs before the merger date), which was partially offset by the previously announced cost reduction plan executed by the company and synergies captured through the integration of Jazz.

Marketing, General and Administrative Expenses. Marketing, general and administrative expenses for the three months ended March 31, 2009 amounted to $6.7 million as compared to $7.8 million for the three months ended March 31, 2008. Such decrease in marketing, general and administrative expenses, which also includes the results of Jazz for the three months ended March 31, 2009, was mainly attributable to the previously announced cost reduction plan executed by the company and synergies captured through the integration of Jazz.

Operating Loss. Operating loss for the three months ended March 31, 2009 was $27.9 million, compared to $21.4 million for the three months ended March 31, 2008. The increase in the operating loss is mainly due to the above mentioned increase in the cost of revenues.

Financing Expenses, Net. Financing expenses, net for the three months ended March 31, 2009 were $1.0 million compared to financing expenses, net of $7.8 million for the three months ended March 31, 2008. This overall decrease, despite the additional expenses related to Jazz’s convertible notes included in the three months ended March 31, 2009, is mainly due to the effect of the devaluation of the NIS in relation to the dollar on our NIS denominated debentures.

Loss. Loss for the three months ended March 31, 2009 was $27.6 million, compared to $29.6 million for the three months ended March 31, 2008. This decrease is attributable mainly to the $6.8 million decrease in financing expenses and $1.3 million tax benefit recorded in the three months ended March 31, 2009 which was partially offset by $6.6 million higher operating loss, as described above.

Impact of Inflation and Currency Fluctuations

The dollar cost of our operations in Israel is influenced by changes in the rate of inflation in Israel and the extent to which such change is not offset by the change in valuation of the NIS in relation to the dollar. During the three months ended March 31, 2009, the exchange rate of the dollar in relation to the NIS increased by 10.2% and the Israeli Consumer Price Index (“CPI”) decreased by 0.1% (during the three months ended March 31, 2008 there was a decrease of 7.6% in the exchange rate of the dollar in relation to the NIS and an increase of 0.1% in the CPI).

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

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

Liquidity and Capital Resources

As of March 31, 2009, we had an aggregate of $40.3 million in cash and cash equivalents. This compares to $34.9 million we had as of December 31, 2008.

During the three months ended March 31, 2009, we raised $20.0 million through capital notes in connection with TIC investment (for further details see Notes 5A to the unaudited condensed interim consolidated financial statements as of March 31, 2009) and generated a net amount of $1.6 million from our operating activities. The above mentioned liquidity resources financed the capital investments we made during the three months ended March 31, 2009, which aggregated to an amount of $6.9 million, and the repayment of convertible debentures and other debt in the total amount of $9.3 million.

As of March 31, 2009, we had loans from banks in the amount of $233.5 million, of which $7.0 million are presented as short-term. As of such date, we presented an aggregate of $201.6 million of debentures (the carrying amounts) in our balance sheet.

See also Note 1 to the unaudited condensed interim consolidated financial statements as of March 31, 2009.