TOWER SEMICONDUCTOR LTD. EMPLOYEE SHARE OPTION PLAN 2005

1.

Name and Purpose:

1.1

This plan, as amended from time to time, shall be known as the Tower Semiconductor Ltd. Employee Share Option Plan 2005 (the “ 2005 Plan ” or the “ Plan ”).

1.2

The purpose and intent of the Plan is to provide incentives to employees of Tower Semiconductor Ltd. (the “ Company ”) and its wholly-owned subsidiaries (each, a “ Subsidiary ”) by providing them with options (“ Options ”) to purchase ordinary shares (“ Ordinary Shares ”) in the Company, pursuant to a plan approved by the Board of Directors of the Company (the “ Board ”). Options under this Plan will be granted to the Company’s employees pursuant to the provisions of Section 102 (“ Section 102 ”) of the Israeli Income Tax Ordinance (New Version), 1961 as amended from time to time, the Law Amending the Income Tax Ordinance (Number 132) 2002 (as amended, the “ Ordinance ”) and the rules promulgated thereunder (the “ Rules ”). Options under this Plan will be granted to United States residents who are employees of the Company’s United States Subsidiaries, Tower Semiconductor USA, Inc. (“ TSU ”) and Jazz Technologies Inc. and/or Jazz Semiconductor Inc. (collectively, “ Jazz ”) pursuant to the United States Internal Revenue Code of 1986, as amended (the “ Code ”).

1.3

The Plan shall become effective upon its adoption by the Board and the Company’s shareholders (the “ Effective Date ”).

2.

Scope:

2.1

The total number of Options that may be granted under this Plan is 15,104,598. Each Option shall be exercisable into one Ordinary Share of the Company (nominal value NIS 1.00 per share) (the “ Underlying Share ”).

2.2

The total number of ISO (as defined below) Options that may be granted under this Plan is 2,390,000 Options. Accordingly, the maximum number of Underlying Shares that may be issued as result of the exercise of ISO Options granted under this Plan is 2,390,000.

3.

Options granted under Section 102:

Options granted pursuant to Section 102(b) shall be either (a) capital gains track options under Section 102(b)(2), in which income resulting from the sale of Underlying Shares is taxed as capital gain (“ 102 Capital Gains Track Options ”), or (b) ordinary income track options under Section 102(b)(1), in which income resulting from the sale of Underlying Shares is taxed as ordinary income (“ 102 Ordinary Income Track Options ”; together with 102 Capital Gains Track Options, “ 102 Trustee Options ”). Pursuant to the Company’s election filed with the Israeli Income Tax Authorities to issue 102 Capital Gains Track Options under the Company’s Employee Share Option Plan 2003/1, the Company may currently grant only 102 Capital Gains Track Options. The Company may change such election not earlier than January 1, 2005, following the approval of the Board, all in accordance with the provisions of Section 102(g) of the Ordinance.

4.

Options granted under the Code:

Options granted to US residents who are employees of TSU or Jazz shall either qualify as Incentive Stock Options within the meaning of Section 422 of the Code (“ ISOs ”), or not qualify as ISOs and be classified as Non-qualified Stock Options (“ NSOs ”) as designated in the Option Letter (as defined below). Options granted as ISO’s shall comply with the requirements of Section 422 of the Code.

5.

Eligible Grantees:

5.1.

Options may be granted to any employee of the Company or any Subsidiary (“ Grantee ”). No Option under this Plan may be granted to any person serving as a member of the Board. The grant of an Option to a Grantee hereunder shall neither entitle such Grantee to participate, nor disqualify him/her from participating, in any other grant of Options pursuant to this Plan or any other share incentive or share option plan of the Company or any Subsidiary.

5.2.

Options designated as ISOs will be treated as NSOs if (i) a Grantee of ISOs at the Date of Grant (as defined in Section 6.2 below) owns shares representing more than 10% of the voting power of the Company or its parent or a Subsidiary, (ii) at the Date of Grant, the aggregate Fair Market Value (as defined in Section 8 below) of the shares underlying ISOs which first become exercisable during any calendar year exceeds $100,000 (taking such Options into account in the order in which they were granted), (iii) a disposition of Underlying Shares is made within two years from the Date of Grant of the Options or within one year from the exercise thereof, (iv) the Grantee was not an employee of the Company at all times during the period beginning on the Date of Grant and ending on the day 3 months before the date of exercise of such Grantee’s Options, or (v) such Options otherwise fail to fully comply with the requirements for ISOs under the Code.

6.

Options:

6.1.

Options may be granted from the later of (i) the Effective Date; or (ii) 30 (thirty) days from the filing of this Plan with the Israeli Income Tax Authorities in accordance with applicable law.

6.2.

Options may be granted until 10 (ten) years from the Effective Date.

6.3.

Options shall be granted by issuance of an Option letter to the Grantee stating, inter alia, the number of Underlying Shares, the dates when the Options may be exercised, the Option exercise price and such other terms and conditions at the discretion of the Compensation and Options Committee (the “ Committee ”), provided that they are consistent with this Plan and with applicable law (the “ Option Letter ”). The date of the Option Letter shall be the date of grant of the respective Options (the “ Date of Grant ”).

6.4.

The Options will not be listed in any stock exchange and are not transferable (except to the Grantee’s legal heirs or estate).

6.5.

The Grantee shall have no right to vote or receive dividends (subject to Section 12.1) or any other rights of a shareholder prior to his/her exercise of the Options and until the issuance of the stock certificate evidencing the Underlying Shares.

7.

Vesting and Exercise of Options:

7.1.

Unless otherwise explicitly determined by the Board and stated in an individual Option Agreement, Options shall vest and become exercisable as follows, subject to the terms under which they were awarded: one-quarter (1/4) of the Options shall vest and become exercisable 12 months after the Date of Grant, one-quarter (1/4) of the Options shall vest and become exercisable 24 months after the Date of Grant, one-quarter (1/4) of the Options shall vest and become exercisable 36 months after the Date of Grant, and one-quarter (1/4) of the Options shall vest and become exercisable 48 months after the Date of Grant, all provided that the Grantee is employed by the Company or any Subsidiary on such dates.

7.2.

The consideration to be paid for the Underlying Shares, including the method of payment, shall be determined by the Company and may consist entirely of (1) cash, (2) check, or (3) cashless in the case of same day sale. The procedure for exercise of the Options shall be provided to each Grantee together with the Option Letter. The Company may change the procedures for exercise of the Options at its discretion, by giving notice thereof to the Grantee.

7.3.

If a