Demand for non-volatile memory devices has grown rapidly in recent years due to the expansion of digital computing and processing beyond desktop computer systems to include a broader array of consumer electronic, communications, automotive and industrial products. These products include mobile phones, still and video digital cameras, personal digital assistants, or PDAs, portable computers, portable digital music players, digital video recorders, set-top boxes, communication routers and switches, digital televisions and other electronic systems. Each of these products requires a non-volatile memory device to store the product’s operating system and may also require data storage capabilities. The flash memory market, which in 2004 was the largest segment of the non-volatile semiconductor memory market, has traditionally been divided into four segments: code flash, data flash, embedded flash and serial flash.

According to Web-Feet Research, total demand measured in bits of information stored in code, data and serial flash memory devices is expected to grow by 124.0% from 2005 to 2006, where one bit is the smallest unit of data stored with a value of either 0 or 1. This growth is a result of an increase in average bit density per device, representing the average number of bits available in a memory device, or average bit density, of 104% for code flash and 63% for data flash from 2005 to 2006.

The most widely-used technology for non-volatile semiconductor memory devices is floating gate technology, which was developed in the late 1960s and has been the prevalent technology for non-volatile semiconductor memory devices since then. A floating gate device is a variation of a standard metal oxide semiconductor in that it has an additional electrically isolated “floating gate,” made of a conductive material. A floating gate device stores information by holding electrical charge within the floating gate. Adding or removing charge from the floating gate changes the threshold voltage of the cell thereby defining whether the memory cell is in a programmed or erased state.

In addition to initial support services to assist its licensees incorporate its NROM technology into their products, the Company provides its licensees with designs and products development services. The Company’s designs and products development services are focused on its licensees’ leading products with a view to increasing its future royalty stream. These services generally involve research and development, manufacturing process development, product design, and product testing.

The Company currently also provides design and product development services to Macronix, principally in connection with the development of 130 nanometer process technology for multi-level cell NROM devices incorporating the Company’s NROM technology. The Company recently started providing development services to Sony in connection with its first product incorporating its NROM technology.

Non-volatile memory devices based on The Company’s NROM technology contain a trapping nitride layer which stores the charge, instead of a floating gate suspended above the cell. The nitride layer is surrounded by two insulating silicon dioxide layers. The Company’s proprietary technology addresses architectural aspects of the NROM array, such as segmentation of the array to handle disruption in its operation, and symmetric architecture and non-symmetric architecture for specific products, as well as the use of NROM array as a virtual ground array. The Company also holds patents directed to additional aspects at the architecture level, including the peripheral circuits that control the NROM array.

The Company has also developed methodologies directed to several key methods of operation of the NROM arrays, such as algorithms related to programming, erasing, and reading NROM arrays. The Company has developed manufacturing processes, such as the process of forming a thin nitride layer that traps the hot electrons as they are injected into the nitride layer.

The Company has developed algorithms and methods of operation for each segment or technological application, such as: fast programming methodologies in all flash memory segments, with particular focus on the data flash segment, smart programming algorithms in the code flash and EEPROM segments, and a single device containing a combination of data flash, code flash and EEPROM.

Service revenues increased by $2.6 million, or 69%, to $6.5 million in the six months ended June 26, 2005 from $3.9 million in the six months ended June 27, 2004.

Product revenues increased by $0.2 million, or 25%, to $0.9 million in the six months ended June 26, 2005 from $0.7 million in the six months ended June 27, 2004.

Cost of services increased by $2.4 million, or 88%, to $5.1 million in the six months ended June 26, 2005 from $2.7 million in the six months ended June 27, 2004.

Cost of products increased by $4.0 million, or 377%, to $5.0 million in the six months ended June 26, 2005 from $1.0 million in the six months ended June 27, 2004.

Financial income, net decreased to $38.0 million for the six months ended June 26, 2005 from $358.0 million for the six months ended June 27, 2004.