Updated from 12:27 p.m. EDT

Investors pummeled

Saifun Semiconductor's

(SFUN) - Get Report

stock Friday, after the Israeli company announced it has lost one of its most important customers, raising doubts about the viability of its technology.

Saifun said that

Qimonda

( QI), the memory division of German chipmaker

Infineon

( IFX), is ramping down its use of NROM technology licensed from Saifun.

As a result, Saifun said it does not expect any license or service fees, and only limited royalty fees, from Qimonda after the fourth quarter.

Qimonda-parent Infineon accounted for 57% of Saifun's $65.8 million in licensing revenue in 2005. Saifun licenses intellectual property for a flash-like memory technology dubbed NROM.

Saifun shares were recently off more than 26%, or $7.68, to $21.40 in midday trading Friday -- well below its previous 52-week low of $24.36.

The news represents not only a major blow to Saifun's immediate revenue stream, but also puts in doubt the future of the company's flagship IP asset. The fact that Infineon, a longtime believer in Saifun's technology, now appears to have given up on NROM does not bode well.

Like flash memory, NROM is nonvolatile memory technology, meaning it can retain data even when the power is switched off. Saifun claims NROM has several advantages compared to traditional flash memory, including the fact that it is

better suited to store four bits of data per cell (traditional flash chips currently retain two bits of data per cell).

Despite all the potential of Saifun's NROM however, many companies appear to have struggled bringing the technology to market.

Infineon has been working with Saifun's technology since 2003. This effort yielded a paltry $167 million in flash sales last year for Infineon, roughly 1.4% of the market, according to industry research firm Gartner. Compare that to

Hynix Semiconductor

which rang up a whopping $1.48 billion in flash sales in 2005, only a year after entering the market using standard NAND flash technology.

Qimonda has "consistently been behind in terms of the technology, the volume and in terms of the density of chip they've been manufacturing," said Gartner analyst Joe Unsworth.

But he said there's still some hope for NROM, as another Saifun licensee,

Spansion

( SPSN), appears to be having better luck manufacturing chips with the technology.

Qimonda's move is "troubling for NROM as a competing technology for data storage, but I think we still have to wait to see how Spansion does," Unsworth said.

A Qimonda representative said the company was temporarily exiting the flash memory business due to "economic" reasons.

"There's jut not a big enough market share for us right now," said Qimonda spokesperson Donna Wilson. "It just made sense for us to put our resources into the higher margin products - DRAM products."

According to Saifun, Qimonda will continue to license NROM technology on a limited basis, under an amended license agreement. Those licensing fees will dry up after the fourth quarter, Saifun said.

The news will not affect Saifun's third-quarter financial results, which are due to be reported on Oct. 25, but will have an impact beginning in the fourth quarter, Saifun said.

Shares of Qimonda recently gained 67 cents, or 4.3%, to $16.17 in Friday trading.