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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 0-26734
 SANDISK CORPORATION
  Delaware
    
    77-0191793(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)601 McCarthy Blvd.Milpitas, California
    
    95035(Address of principal executive offices)
    
    (Zip Code)
 (408) 801-1000
 N/A
  Title of each class
    
    Name of each exchange on which registeredCommon Stock, $0.001 par value; 
Rights to Purchase Series A
Junior Participating Preferred
Stock
    
    NASDAQ Global Select Market
   þ o
 o þ
 þ o
 þ
  þ o  ̈
 o þ
   Class
    
    Outstanding at February 15, 2007Common Stock, $0.001 par value per share
    
    227,362,985 shares
 DOCUMENTS INCORPORATED BY REFERENCE
 Document
    
    Parts Into Which IncorporatedAnnual Report to Stockholders for the Fiscal
Year Ended December 31, 2006 (Annual Report)
    
    Parts I, II, and IVProxy Statement for the Annual Meeting of
Stockholders to be held May 24, 2007 (Proxy
Statement)
    
    Part III




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##### 



SANDISK CORPORATION
 Table of Contents
 PageNo.PART IItem 1.
    
    Business
    
    3Item 1A.
    
    Risk Factors
    
    12Item 1B.
    
    Unresolved Staff Comments
    
    29Item 2.
    
    Properties
    
    30Item 3.
    
    Legal Proceedings
    
    31Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    35PART IIItem 5.
    
    Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    36Item 6.
    
    Selected Financial Data
    
    37Item 7.
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    38Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    52Item 8.
    
    Financial Statements and Supplementary Data
    
    53Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    53Item 9A.
    
    Controls and Procedures
    
    53Item 9B.
    
    Other Information
    
    54PART IIIItem 10.
    
    Directors, Executive Officers and Corporate Governance
    
    55Item 11.
    
    Executive Compensation
    
    55Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    55Item 13.
    
    Certain Relationships and Related Transactions, and Director Independence
    
    55Item 14.
    
    Principal Accountant Fees and Services
    
    55PART IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    56OTHERIndex To Financial Statements
    
    F-1Signatures
    
    S-1EXHIBIT 10.64EXHIBIT 12.1EXHIBIT 21.1EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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PART I
 
 ITEM 1. BUSINESS
 Statements in this report, which are not historical facts, are forward-looking statements
within the meaning of the federal securities laws. These statements may contain words such as
expects, anticipates, intends, plans, believes, seeks, estimates or other wording
indicating future results or expectations. Forward-looking statements are subject to risks and
uncertainties. Our actual results may differ materially from the results discussed in these
forward-looking statements. Factors that could cause our actual results to differ materially
include, but are not limited to, those discussed in Risk Factors in Item 1A of this report, and
elsewhere in this report. Our business, financial condition or results of operations could be
materially adversely affected by any of these factors. We undertake no obligation to revise or
update any forward-looking statements to reflect any event or circumstance that arises after the
date of this report. References in this report to SanDisk ® , we, our, and us,
collectively refer to SanDisk Corporation, a Delaware corporation, and its subsidiaries. All
references to years or annual periods are references to our fiscal years, which consisted of 52
weeks in 2006 and 2005 and 53 weeks in 2004.
 Overview
 Who We Are.
   Our Strategy.
  ®
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Additional Information.
 Description of Our Business
 Industry Background.
  4




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Our Primary Markets.
 
    
    Consumer.We make and sell flash storage cards that address multiple consumer markets.
Certain flash storage cards are used as the film for all major brands of digital cameras.
Our cards are also used to store video in solid-state digital camcorders and to store
digital data in many other devices including maps in global positioning system devices, or
GPS, and personal data in personal digital assistants, or PDAs. In addition, portable game
consoles now include advanced features and functionality, including storage of game
results, digital audio, video playback and photo viewing. These features demand high
capacity memory storage cards. We manufacture brightly colored SD and Memory Stick PRO Duo
cards for use in gaming devices such as the Sony PSP®, Nintendo®
Wii
and Microsoft
xBox®.
Our Cruzer® CrossFire line of USB drives are
geared toward the PC gaming market. Primary card formats for consumer devices include CF,
SD, Memory Stick® and xD-Picture Card.
    
    Computing.We provide multiple flash storage devices and solutions for a variety of
computing, industrial and enterprise markets. USB flash drives allow consumers to store
computer files on keychain-sized devices and then quickly and easily transfer these files
between laptops, desktops and other devices. USB flash drives are fast and easy to use,
they have replaced floppy disks and other types of external storage media, and are evolving
into intelligent storage devices. NAND flash memory-based data storage allows industrial
customers and PC manufacturers to offer systems with solid state drives in lieu of
traditional magnetic disk-based drives. In January 2007, we introduced our first 32
gigabyte solid state drive in a 1.8 inch form factor for the notebook PC market.
    
    Mobile Phones.We provide embedded, semi-removable and removable storage for mobile
phones. We are a leading supplier of microSD, miniSD, SD and Memory Stick PRO
Duo removable storage cards used in mobile phones. Multimedia features in
mobile phones, such as camera functionality, audio/MP3, games, video or internet access,
have been increasing in popularity. These features require additional storage capacity in
the mobile phone and transferability of data to and from other devices.
    
    Digital Audio and Video Players.Digital audio players allow consumers to download,
store and play music. We sell a broad line of digital audio players with both embedded and
removable memory under our Sansa® brand. We have also launched our first
digital video player under the Sansa brand.
 Our Sales Channels.
  
    
    Retail.We ship SanDisk brand name products directly to consumer electronics stores,
office superstores, photo retailers, mobile phone stores, mass merchants, catalog and mail
order companies, internet and e-commerce retailers, drug stores, supermarkets and
convenience stores. We also sell our products to smaller or regional retailers through
distributors.We have a separate distribution network focused on the mobile phone market. Our distributors
provide us access to mobile network operator branded storefronts as well as other retailers
with significant mobile communications offerings. We intend to continue to emphasize
offering our products throughout the mobile communication retail community as an important
driver of our planned growth in that market.We support our retail sales channels with both direct sales representatives and independent
manufacturers representatives. We have multiple domestic retail sales offices and have
organized our sales efforts in the rest of the world around three regional territories:
Europe, Middle East and Africa, or EMEA, Japan and non-Japan Asia/Pacific, which we refer to
as Asia Pacific. Information regarding our sales by geography is included in Note 6 to our
consolidated financial statements included in Item 8 of this report.
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
    
    OEM. Our OEM customers include manufacturers of mobile phones, digital cameras and
other digital consumer devices, such as GPS. Our products are sold directly to OEMs and
through distributors. We support our OEM customers with both direct sales representatives
and independent manufacturers representatives.
   Our
Customers.
 Our Products.
 
    
    Removable Cards. Our removable data storage solutions are available in almost every
major form factor in our primary markets. For example, our CompactFlash removable cards,
available in capacities up to 16 gigabytes, are well-suited for a range of consumer
applications, including digital cameras. Our professional products include the SanDisk
Ultra® and SanDisk Extreme® product lines which are designed with
additional performance and reliability. As another example, our ultra-small microSD
removable cards, available in capacities up to 4 gigabytes, are designed for use in mobile
phones.
    
    USB Drives.Our Cruzer® line of USB drives, available in capacities up to 8
gigabytes, are highly-reliable and high-performance. USB Flash Drives, or UFDs, are used in the
computing and consumer markets. A number of our Cruzers ship with U3 smart
technology which gives the user the ability to carry files and application software on a
secure USB drive. Also, our Cruzer Crossfire USB Flash Drives are specially designed to
make console or PC gaming experience portable. Using our USB flash drives, gamers can save
game data, download portable games and demos and save game replays.
    
    Embedded.Our embedded products are a set of reliable, high-capacity, high performance
and cost-effective embedded flash memory drive, or EFD, solutions for both data and code
storage. Ranging in capacities from 128 megabytes to 8 gigabytes, these products are
designed to respond to the increasing demand for embedded storage for mobile phones and
other portable devices. We also offer high-capacity solid-state drives targeted for the
personal computing market in capacities up to 32 gigabytes.
    
    MP3.The Sansa is our branded line of flash-based MP3 players for the digital audio and
video player market. Many of our Sansa models offer a removable card slot for easy
transportability of music between devices and storage capacity expansion. The Sansa MP3
players also feature built-in FM tuning for non-European models and voice recording
capabilities and are compatible with a variety of music download and subscription services.
Sansa is available in capacities ranging from 256 megabytes to 8 gigabytes.
 Technology.
 
    
    high-density flash memory process, module integration, device design and reliability;
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
    
    securing data on a flash memory device;
    
    controller design;
    
    system-level integration;
    
    compact packaging; and
    
    low-cost system testing.
    Patents and Licenses.
     Supply Chain.
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
    
    Silicon Sourcing.All of our flash memory card products require silicon chips for the
memory and controller components. The majority of our memory is supplied from our ventures
with Toshiba and our Toshiba foundry relationship. This represents captive memory supply
and we are obligated to take the output from the ventures with Toshiba. See  Ventures
With Toshiba. In fiscal year 2006, we purchased non-captive memory supply primarily from
Samsung. We are guaranteed a certain amount of the total output from Samsung and Hynix
Semiconductor Inc., or Hynix, but we are not obligated to use the guaranteed supply until
we give them an order for future purchases. Our controller wafers are currently supplied
by Tower Semiconductor Ltd., or Tower, and United Microelectronics Corporation, or UMC. We
have a foundry agreement with Tower on a purchase order basis. See Item 1A, Risk
Factors.
    
    Testing and Assembly.We sort and test our wafers at Toshiba in Yokkaichi, Japan, and
Ardentec Corp. in Taiwan. Our tested wafers are then shipped to our third-party memory
assembly subcontractors, including StatsChipPAC Ltd., or StatsChipPAC, in China, Silicon
Precision Industries Co., Ltd., or SPIL, in Taiwan, and Sharp and Mitsui & Co., Ltd., both
in Japan. Our packaged memory final test, card assembly and card test is performed at
subcontractors such as ASE Group, DataFab Systems, Inc., or DataFab, SPIL and United Test
and Assembly Center, in Taiwan, and Beautiful Enterprise Co., Ltd., DataFab, Flextronics
International, Ltd., or Flextronics, Global Brands Manufacturing Ltd. and StatsChipPAC, in
China. We believe our use of subcontractors reduces the cost of our operations and gives
us access to increased production capacity. On November 29, 2006, we entered into a
50-year land lease in the Zizhu Science-Based Park near Shanghai, China, and we are
constructing a captive assembly and test manufacturing facility to provide in-house
manufacturing capacity for a portion of our card assembly and test needs. See Item 1A,
Risk Factors and Item 7, Liquidity.
 Ventures with Toshiba
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Competition
  Key Competitive Advantages.
 
    
    we have a tradition of innovation and standards creation which provides us with
strength in growing the overall market for NAND memory;
    
    our intellectual property ownership, in particular our patent claims and MLC
manufacturing know-how, provides us certain cost advantages;
    
    our fab ventures with Toshiba provide us with an attractive cost structure;
    
    we market and sell a broader range of card formats than any of our competitors, which
gives us an advantage in obtaining strong retail and OEM distribution; and
    
    we have leading market share with number 1 worldwide market share in removable flash
cards and USB flash drives and number 2 market share in U.S. flash-based digital audio
players.
 Semiconductor Manufacturers.
 Flash Memory Card and USB Drive Manufacturers.
 Digital Audio Player Manufacturers.
 Other
Technologies.
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Employees
  Executive Officers
  Name
    
    Age
    
    PositionEli Harari
    
    61
    
    Chairman of the Board and Chief Executive OfficerSanjay Mehrotra
    
    48
    
    President and Chief Operating OfficerJudy Bruner
    
    48
    
    Executive Vice President, Administration and Chief Financial OfficerRandhir Thakur
    
    44
    
    Executive Vice President, Technology and Worldwide OperationsYoram Cedar
    
    54
    
    Executive Vice President, Handset Business and Corporate Engineering
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Item 1A. Risk Factors
 Our operating results may fluctuate significantly, which may adversely affect our operations
and our stock price
 
    
    average selling prices, net of promotions, declining at a faster rate than cost
reduction for our products due to industry or SanDisk excess supply and competitive pricing
pressures;
    
    addition of new competitors, expansion of supply from existing competitors and
ourselves creating excess market supply, which could cause our average selling prices to
decline faster than our costs decline;
    
    impairment of goodwill, business integration and other challenges related to
our acquisition of msystems and Matrix;
    
    timing, volume and cost of wafer production from the FlashVision, Flash
Partners and Flash Alliance ventures as impacted by fab start-up delays and costs,
technology transitions, yields or production interruptions due to natural disasters, power
outages, equipment failure or other factors;
    
    disruption in the manufacturing operations of suppliers, including suppliers of
sole-sourced components;
    
    unpredictable or changing demand for our products, particularly demand for
certain types or capacities of our products or demand for our products in certain markets
or geographies;
    
    excess supply from captive sources due to output increasing faster than the
growth in demand resulting in excess inventory;
    
    insufficient supply from captive and non-captive sources or insufficient
capacity from our test and assembly subcontractors to meet demand;
    
    reduction in price elasticity of demand related to pricing changes for some of
our more mature markets for NAND flash memory;
    
    potential delays in the emergence of new markets and products for NAND flash
memory and acceptance of our products in these markets;
    
    our license and royalty revenues may decline significantly in the future as our
existing license agreements and key patents expire;
    
    timing of sell-through by our distributors and retail customers;
    
    increased purchases of flash memory products from our non-captive sources,
which typically cost more than products from our captive sources;
    
    difficulty in forecasting and managing inventory levels, particularly due to
noncancelable contractual obligations to purchase materials such as flash memory and
controllers, and the need to build finished product in advance of customer purchase orders;
    
    errors or defects in our products caused by, among other things, errors or
defects in the memory or controller components, including memory and non-memory components
we procure from third-party suppliers;
    
    write-downs of our investments in fabrication capacity, equity investments and other assets;
    
    estimates used in calculating share-based compensation expense; and
    
    the other factors described under Risk Factors and elsewhere in this report.
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Our average selling prices, net of promotions, may decline faster than cost reductions due to
industry or SanDisk excess supply, competitive pricing pressures or strategic price reductions
initiated by us or our competitors.
 Sales to a small number of customers represent a significant portion of our revenues and, if
we were to lose one of our major licensees or customers or experience any material reduction in
orders from any of our customers, our revenues and operating results would suffer
 Our business depends significantly upon sales of products in the highly competitive consumer
market, a significant portion of which are made to retailers and through distributors, and if our
distributors, and, retailers are not successful in this market, we could experience substantial
product returns, which would negatively impact our business, financial condition and results of
operations.
 Our revenue depends in part on the success of products sold by our OEM customers.
 The continued growth of our business depends on the development of new markets and products
for NAND flash memory and continued elasticity in our existing markets
 We continually seek to develop new applications, products, technologies and standards, which
may not be widely adopted by consumers or, if adopted, may reduce demand by consumers for our older
products
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®
 We face competition from numerous manufacturers and marketers of products using flash memory,
as well as from manufacturers of new and alternative technologies, and if we cannot compete
effectively, our results of operations and financial condition will suffer
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
    
    price, quality and on-time delivery to our customers;
    
    product performance, availability and differentiation;
    
    success in developing new applications and new market segments;
    
    sufficient availability of supply;
    
    efficiency of production;
    
    timing of new product announcements or introductions by us, our customers and our competitors;
    
    the ability of our competitors to incorporate standards or develop formats which we do not offer;
    
    the number and nature of our competitors in a given market;
    
    successful protection of intellectual property rights; and
    
    general market and economic conditions.
  The semiconductor industry is subject to significant downturns that have harmed our business,
financial condition and results of operations in the past and may do so in the future
 Our business and the markets we address are subject to significant fluctuations in supply and
demand and our commitments to our ventures with Toshiba may result in periods of significant excess
inventory
 We depend on third-party foundries for silicon supply and any shortage or disruption in our
supply from these sources will reduce our revenues, earnings and gross margins.
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If actual manufacturing yields are lower than our expectations, this may result in increased
costs and product shortages
 We depend on our third-party subcontractors and our business could be harmed if our
subcontractors do not perform as planned
 We are constructing a captive assembly and test manufacturing facility in China.
 In transitioning to new processes, products and silicon sources, we face production and market
acceptance risks that have caused, and may in the future continue to cause significant product
delays that could harm our business
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Our products may contain errors or defects, which could result in the rejection of our
products, product recalls, damage to our reputation, lost revenues, diverted development resources
and increased service costs and warranty claims and litigation.
  We and Toshiba plan to continue to expand the wafer fabrication capacity of the Flash Partners
business venture and have formed a new venture, Flash Alliance, for which we will make substantial
capital investments and incur substantial start-up and tool relocation costs, which could adversely
impact our operating results.
 There is no assurance that Flash Partners 300-millimeter NAND flash memory facility will
perform as expected, in particular as we transition to new lithography feature sizes
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We have a contingent indemnification obligation and guarantee obligations related to the
ventures with Toshiba.
    Seasonality in our business may result in our inability to accurately forecast our product
purchase requirements
 From time-to-time, we overestimate our requirements and build excess inventory, and
underestimate our requirements and have a shortage of supply, both of which harm our financial
results
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We are sole-sourced for a number of our critical components and the absence of a back-up
supplier exposes our supply chain to unanticipated disruptions.
 We are exposed to foreign currency risks.
 Terrorist attacks, war, threats of war and government responses thereto may negatively impact
our operations, revenues, costs and stock price
 Natural disasters or epidemics in the countries in which we or our suppliers or subcontractors
operate could negatively impact our operations.
 We may be unable to protect our intellectual property rights, which would harm our business,
financial condition and results of operations.
 
    
    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;
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
    
    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 or technologies do not infringe on the patents of other
companies.
   We may be unable to license intellectual property to or from third-parties as needed, or renew
existing licenses, which could expose us to liability for damages reduce our royalty revenues,
increase our costs or limit or prohibit us from selling products.
 We are currently and may in the future be involved in litigation, including litigation
regarding our intellectual property rights or those of third parties, which may be costly, may
divert the efforts of our key personnel and could result in adverse court rulings, which could
materially harm our business
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Because of our international business and operations, we must comply with numerous
international laws and regulations, and we are vulnerable to political instability, currency
fluctuations and other risks related to international operations.
   
    
    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 Japan, such as the earthquakes experienced in Taiwan in 1999, in Japan in
2004, 2003 and previous years, and in China in previous years;
    
    reduced sales to our customers or interruption to our manufacturing processes
in the Pacific Rim that may arise from regional issues in Asia;
    
    imposition of regulatory requirements, tariffs, import and export restrictions
and other barriers and restrictions;
    
    imposition of additional duties, charges and/or fees related to customs entries
for our products, which are all manufactured offshore;
    
    inability to successfully manage our foreign exchange exposures;
    
    longer payment cycles and greater difficulty in accounts receivable collection;
    
    adverse tax rules and regulations;
    
    weak protection of our intellectual property rights; and
    
    delays in product shipments due to local customs restrictions.
 Tower Semiconductors Financial Situation is Challenging.
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Our stock price has been, and may continue to be, volatile, which could result in investors
losing all or part of their investments
 We may make acquisitions that are dilutive to existing stockholders, result in unanticipated
accounting charges or otherwise adversely affect our results of operations, and result in
difficulties in assimilating and integrating the operations, personnel, technologies, products and
information systems of acquired companies or businesses.
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Our success depends on key personnel, including our executive officers, the loss of whom could
disrupt our business
 To manage our growth, we may need to improve our systems, controls and procedures and relocate
portions of our business to new or larger facilities
 We may need to raise additional financing, which could be difficult to obtain, and which if
not obtained in satisfactory amounts may prevent us from funding the ventures with Toshiba,
increasing our wafer supply, developing or enhancing our products, taking advantage of future
opportunities, growing our business or responding to competitive pressures or unanticipated
industry changes, any of which could harm our business
 Anti-takeover provisions in our charter documents, stockholder rights plan and in Delaware law
could discourage or delay a change in control and, as a result, negatively impact our stockholders.
 Unanticipated changes in our tax provisions or exposure to additional income tax liabilities
could affect our profitability.
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Changes in securities laws and regulations have increased our costs; further, in the event we
are unable to satisfy regulatory requirements relating to internal control, or if our internal
control over financial reporting is not effective, our business could suffer
  Our debt service obligations may adversely affect our cash flow.
  
    
    increase our vulnerability to general adverse economic and industry conditions;
    
    limit our ability to obtain additional financing;
    
    require the dedication of a substantial portion of any cash flow from
operations to the payment of principal of, and interest on, our indebtedness, thereby
reducing the availability of such cash flow to fund our growth strategy, working capital,
capital expenditures and other general corporate purposes;
    
    limit our flexibility in planning for, or reacting to, changes in our business and our industry; and
    
    place us at a competitive disadvantage relative to our competitors with less debt.
 We have significant financial obligations related to our ventures with Toshiba, which could
impact our ability to comply with our obligations under our 1% Notes due 2013 and our 1% Notes due
2035
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The net share settlement feature of the 1% Notes due 2013 may have adverse consequences.
  The convertible note hedge transactions and the warrant option transactions may affect the
value of the notes and our common stock
 
    
    have entered into various over-the-counter cash-settled derivative transactions
with respect to our common stock, concurrently with, and shortly after, the pricing of the
notes; and
    
    may enter into, or may unwind, various over-the-counter derivatives and/or
purchase or sell our common stock in secondary market transactions following the pricing of
the notes, including during any observation period related to a conversion of notes.
   There are numerous risks associated with our acquisition of msystems
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Although we expect that the merger will result in benefits to us, those benefits may not occur
because of integration and other challenges, and failure to realize the benefits of the merger may
result in the dilution of our per share operating results
 
    
    retaining the customers and sales distribution channels of both companies;
    
    maintaining employee morale and retaining key employees;
    
    retaining key sources of supply;
    
    incorporating msystems technology and products into our business and future product lines;
    
    integrating msystems sales force into our worldwide product sales network;
    
    demonstrating to msystems customers that the merger will not result in adverse
changes in pricing, customer service standards or product support;
    
    coordinating research and development activities to enhance introduction of new products and technologies;
    
    integrating msystems internal control over financial reporting with our internal control over financial reporting;
    
    migrating both companies to a common enterprise resource planning information
system to integrate all operations, sales and administrative activities for the combined
companies in a timely and cost effective way;
    
    integrating msystems international operations with ours;
    
    integrating the business cultures of both companies; and
    
    ensuring there are no delays in releasing new products to market.
   The merger may result in a loss of customers
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Third-parties may terminate, alter or litigate under existing contracts or relationships with
the combined company.
 General uncertainty related to the merger could harm us
  There is pending litigation
 There are risks related to msystems prior option grant practices.
  Charges and other accounting changes resulting from the merger may adversely affect our
earnings and the market value of our common stock following the merger.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
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ITEM 2. PROPERTIES
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ITEM 3. Legal Proceedings
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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PART II
 
 ITEM 5.
    
    MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
 Market For Our Common Stock
 High
    
    Low2005First quarter
    
    $
    28.42
    
    
    $
    20.25Second quarter
    
    $
    29.03
    
    
    $
    23.45Third quarter
    
    $
    48.58
    
    
    $
    23.41Fourth quarter
    
    $
    65.49
    
    
    $
    45.652006First quarter
    
    $
    79.80
    
    
    $
    52.15Second quarter
    
    $
    66.20
    
    
    $
    49.16Third quarter
    
    $
    60.94
    
    
    $
    37.34Fourth quarter
    
    $
    62.24
    
    
    $
    42.00
 Holders.
 Dividends.
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ITEM 6. SELECTED FINANCIAL DATA
 SANDISK CORPORATION SELECTED FINANCIAL DATA
 Years EndedDecember 31, 2006(1)
    
    
    January 1, 2006(2)
    
    
    January 2, 2005(3)
    
    
    December 28, 2003(4)
    
    
    December 29, 2002(5)(In thousands, except
per share data)RevenuesProduct
    
    $
    2,926,472
    
    
    $
    2,066,607
    
    
    $
    1,602,836
    
    
    $
    982,341
    
    
    $
    492,900License and royalty
    
    
    331,053
    
    
    
    239,462
    
    
    
    174,219
    
    
    
    97,460
    
    
    
    48,373Total revenues
    
    
    3,257,525
    
    
    
    2,306,069
    
    
    
    1,777,055
    
    
    
    1,079,801
    
    
    
    541,273Cost of revenues
    
    
    2,018,052
    
    
    
    1,333,335
    
    
    
    1,091,350
    
    
    
    641,189
    
    
    
    352,452Gross profit
    
    
    1,239,473
    
    
    
    972,734
    
    
    
    685,705
    
    
    
    438,612
    
    
    
    188,821Operating income
    
    
    326,334
    
    
    
    576,582
    
    
    
    418,591
    
    
    
    257,038
    
    
    
    58,151Net income
    
    $
    198,896
    
    
    $
    386,384
    
    
    $
    266,616
    
    
    $
    168,859
    
    
    $
    36,240Net income per share(6)Basic
    
    $
    1.00
    
    
    $
    2.11
    
    
    $
    1.63
    
    
    $
    1.17
    
    
    $
    0.26Diluted
    
    $
    0.96
    
    
    $
    2.00
    
    
    $
    1.44
    
    
    $
    1.02
    
    
    $
    0.25Shares used in per share
calculations (6)Basic
    
    
    198,929
    
    
    
    183,008
    
    
    
    164,065
    
    
    
    144,781
    
    
    
    137,610Diluted
    
    
    207,451
    
    
    
    193,016
    
    
    
    188,837
    
    
    
    171,616
    
    
    
    142,460AtDecember 31, 2006
    
    January 1, 2006
    
    January 2, 2005
    
    December 28, 2003
    
    December 29, 2002(In thousands)Working capital
    
    $
    3,345,414
    
    
    $
    2,004,598
    
    
    $
    1,526,674
    
    
    $
    1,378,070
    
    
    $
    584,450Total assets
    
    
    6,967,783
    
    
    
    3,120,187
    
    
    
    2,320,180
    
    
    
    2,040,156
    
    
    
    980,725Long-term convertible notes
    
    
    1,225,000
    
    
    
    
    
    
    
    
    
    
    
    150,000
    
    
    
    150,000Total stockholders equity
    
    $
    4,768,134
    
    
    $
    2,523,791
    
    
    $
    1,940,150
    
    
    $
    1,515,872
    
    
    $
    634,867
 
 (1)
    
    Includes IPR&D charges of ($225.6) million related to acquisitions of Matrix in
January 2006 and msystems in November 2006, share-based compensation of ($100.6) million and
amortization of acquisition-related intangible assets of ($27.8) million.(2)
    
    Includes other-than-temporary impairment charges of ($10.1) million, or ($6.4)
million net of tax related to our investment in Tower.(3)
    
    Includes other-than-temporary impairment charges of ($11.8) million, or ($7.4)
million net of tax related to our investment in Tower, and a gain from a settlement of $6.2
million, or $3.9 million net of tax, from a third-party brokerage firm related to the fiscal
2003 unauthorized disposition of our investment in UMC.(4)
    
    Includes a loss of approximately ($18.3) million, or ($12.8) million net of tax, as
a result of the unauthorized sale of approximately 127.8 million shares of UMC stock, a gain
of approximately $7.0 million, or $4.9 million net of tax, related to the sale of 35 million
shares of UMC stock, write-downs related to the recoverability of our Tower wafer credits of
($3.9) million, or ($2.7) million net of tax.(5)
    
    Includes other-than-temporary impairment charges of ($14.4) million on our Tower
shares, or ($8.7) million net of tax, write-downs related to the recoverability of our Tower
wafer credits of ($2.8) million, or ($1.8) million net of tax.(6)
    
    Net income per share and the share numbers each gives retroactive effect to a
2-for-1 stock split, in the form of a 100% stock dividend, effected on February 18, 2004. 37




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##### Table of Contents



ITEM 7.
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Overview
 Years Ended% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofDecember 31, 2006
    
    
    Revenue
    
    
    January 1, 2006
    
    
    Revenue
    
    
    January 2, 2005
    
    
    Revenue(in thousands, except percentages)Product revenues
    
    $
    2,926,472
    
    
    
    89.8
    %
    
    $
    2,066,607
    
    
    
    89.6
    %
    
    $
    1,602,836
    
    
    
    90.2
    %License and royalty
revenues
    
    
    331,053
    
    
    
    10.2
    %
    
    
    239,462
    
    
    
    10.4
    %
    
    
    174,219
    
    
    
    9.8
    %Total revenues
    
    
    3,257,525
    
    
    
    100.0
    %
    
    
    2,306,069
    
    
    
    100.0
    %
    
    
    1,777,055
    
    
    
    100.0
    %Cost of product revenues
    
    
    2,018,052
    
    
    
    62.0
    %
    
    
    1,333,335
    
    
    
    57.8
    %
    
    
    1,091,350
    
    
    
    61.4
    %Gross profit
    
    
    1,239,473
    
    
    
    38.0
    %
    
    
    972,734
    
    
    
    42.2
    %
    
    
    685,705
    
    
    
    38.6
    %Operating expensesResearch and development
    
    
    306,866
    
    
    
    9.4
    %
    
    
    194,810
    
    
    
    8.5
    %
    
    
    124,994
    
    
    
    7.0
    %Sales and marketing
    
    
    203,406
    
    
    
    6.3
    %
    
    
    122,232
    
    
    
    5.3
    %
    
    
    91,296
    
    
    
    5.1
    %General and
administrative
    
    
    159,835
    
    
    
    4.9
    %
    
    
    79,110
    
    
    
    3.4
    %
    
    
    50,824
    
    
    
    2.9
    %Write-off of acquired
in-process technology
    
    
    225,600
    
    
    
    6.9
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of
acquisition-related
intangible assets
    
    
    17,432
    
    
    
    0.5
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total operating
expenses
    
    
    913,139
    
    
    
    28.0
    %
    
    
    396,152
    
    
    
    17.2
    %
    
    
    267,114
    
    
    
    15.0
    %Operating income
    
    
    326,334
    
    
    
    10.0
    %
    
    
    576,582
    
    
    
    25.0
    %
    
    
    418,591
    
    
    
    23.6
    %Other income, net
    
    
    104,374
    
    
    
    3.2
    %
    
    
    36,725
    
    
    
    1.6
    %
    
    
    4,609
    
    
    
    0.2
    %Income before taxes
    
    
    430,708
    
    
    
    13.2
    %
    
    
    613,307
    
    
    
    26.6
    %
    
    
    423,200
    
    
    
    23.8
    %Provision for income taxes
    
    
    230,193
    
    
    
    7.1
    %
    
    
    226,923
    
    
    
    9.8
    %
    
    
    156,584
    
    
    
    8.8
    %Minority interest
    
    
    1,619
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    $
    198,896
    
    
    
    6.1
    %
    
    $
    386,384
    
    
    
    16.8
    %
    
    $
    266,616
    
    
    
    15.0
    %
 General
    ®
 38




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##### Table of Contents



Share Based
Payments
 .
  39




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##### Table of Contents



Critical Accounting Policies & Estimates
  Revenue Recognition, Sales Returns and Allowances and Sales Incentive Programs.
  Inventories and Inventory Valuation.
 Accounting for Investments. Accounting for Variable Interest Entities.
   40




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##### Table of Contents



Deferred Tax Assets.
  Share-Based Compensation  Employee Incentive Plans and Employee Stock Purchase Plans . Share-Based
Payments Accounting for Stock Issued to Employees, Accounting For Stock-Based Compensation  Transition and Disclosure Accounting For Stock-Based Compensation
 Business Combinations. Business Combinations
  41




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##### Table of Contents



Results of Operations
 Product Revenues.
 Percent
    
    
    
    
    
    
    PercentFY 2006
    
    
    Change
    
    
    FY 2005
    
    
    Change
    
    
    FY 2004(in millions, except percentages)Retail
    
    $
    1,975.4
    
    
    
    22
    %
    
    $
    1,621.0
    
    
    
    31
    %
    
    $
    1,236.0OEM
    
    
    951.0
    
    
    
    113
    %
    
    
    445.6
    
    
    
    21
    %
    
    
    366.8Product revenues
    
    $
    2,926.4
    
    
    
    42
    %
    
    $
    2,066.6
    
    
    
    29
    %
    
    $
    1,602.8
   Geographical Product Revenues.
 FY 2006
    
    
    FY 2005
    
    
    FY 2004Percent
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    PercentRevenue
    
    
    of Total
    
    
    Revenue
    
    
    of Total
    
    
    Revenue
    
    
    of Total(in millions, except percentages)North America
    
    $
    1,298.6
    
    
    
    44
    %
    
    $
    1,049.6
    
    
    
    51
    %
    
    $
    768.1
    
    
    
    48
    %Japan
    
    
    194.0
    
    
    
    7
    %
    
    
    104.4
    
    
    
    5
    %
    
    
    165.4
    
    
    
    10
    %EMEA
    
    
    728.4
    
    
    
    25
    %
    
    
    501.0
    
    
    
    24
    %
    
    
    420.6
    
    
    
    26
    %Other foreign countries
    
    
    705.4
    
    
    
    24
    %
    
    
    411.6
    
    
    
    20
    %
    
    
    248.7
    
    
    
    16
    %Product revenues
    
    $
    2,926.4
    
    
    
    100
    %
    
    $
    2,066.6
    
    
    
    100
    %
    
    $
    1,602.8
    
    
    
    100
    %
   43




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##### Table of Contents



License and Royalty Revenues.
 FY 2006
    
    Percent Change
    
    FY 2005
    
    Percent Change
    
    FY 2004(in millions, except percentages)License and royalty revenues
    
    $
    331.1
    
    
    
    38
    %
    
    $
    239.5
    
    
    
    37
    %
    
    $
    174.2The increase in our 2006 license and royalty revenues was primarily due to increased
royalty-bearing sales by our licensees.The increase in our 2005  license and royalty revenues was primarily due to increased
royalty-bearing sales by our licensees.Gross Margins.FY 2006
    
    Percent Change
    
    FY 2005
    
    Percent Change
    
    FY 2004(in millions, except percentages)Product gross margins
    
    $
    908.4
    
    
    
    24
    %
    
    $
    733.3
    
    
    
    43
    %
    
    $
    511.5Product gross margins (as
a percent of product
revenue)
    
    
    31.0
    %
    
    
    
    
    
    
    35.5
    %
    
    
    
    
    
    
    31.9
    %Total gross margins (as a
percent of total revenue)
    
    
    38.0
    %
    
    
    
    
    
    
    42.2
    %
    
    
    
    
    
    
    38.6
    %The 2006 product gross margin decreased from 2005 to 2006 by 4.5 percentage points.
Approximately 2.9 percentage points of the gross margin decline was due to average selling prices
declining at a faster rate than our product cost. In addition, our margins were negatively
impacted by approximately 0.8% due to the acquisition of msystems, whose business in the fourth
quarter was primarily based on non-captive memory supply. In addition, cost of product increased
due to amortization of acquisition-related intangible assets of $27.8 million and share-based
compensation expense related to implementation of FAS 123(R) of $8.0 million, which combined
accounted for approximately 0.8% of the decrease in the product gross margins over 2005.The largest driver of the 2005 increase in product gross margins was the reduction in our cost
per megabyte due to the transition to 90-nanometer technology partially offset by decreases in our
average selling price per megabyte. Fiscal 2005 gross margins were also benefited due to more
production supply coming from captive sources which have lower costs.Research and Development.FY 2006
    
    Percent Change
    
    FY 2005
    
    Percent Change
    
    FY 2004(in millions, except percentages)Research and development
    
    $
    306.9
    
    
    
    58
    %
    
    $
    194.8
    
    
    
    56
    %
    
    $
    125.0Percent of revenue
    
    
    9.4
    %
    
    
    
    
    
    
    8.4
    %
    
    
    
    
    
    
    7.0
    %
   44




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Sales and Marketing.
 FY 2006
    
    Percent Change
    
    FY 2005
    
    Percent Change
    
    FY 2004(in millions, except percentages)Sales and marketing
    
    $
    203.4
    
    
    
    66
    %
    
    $
    122.2
    
    
    
    34
    %
    
    $
    91.3Percent of revenue
    
    
    6.2
    %
    
    
    
    
    
    
    5.3
    %
    
    
    
    
    
    
    5.1
    %
   General and Administrative.
 FY 2006
    
    Percent Change
    
    FY 2005
    
    Percent Change
    
    FY 2004(in millions, except percentages)General and administrative
    
    $
    159.8
    
    
    
    102
    %
    
    $
    79.1
    
    
    
    56
    %
    
    $
    50.8Percent of revenue
    
    
    4.9
    %
    
    
    
    
    
    
    3.4
    %
    
    
    
    
    
    
    2.9
    %
   Write-off of Acquired In-process Technology.
 FY 2006
    
    Percent Change
    
    FY 2005
    
    Percent Change
    
    FY 2004(in millions, except percentages)Write-off of acquired in-process technology
    
    $
    225.6
    
    
    
    
    
    
    
    n/a
    
    
    
    
    
    
    
    n/aPercent of revenue
    
    
    6.9
    %
    
    
    
    
    
    
    n/a
    
    
    
    
    
    
    
    n/a
  45




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Amortization of Acquisition-Related Intangible Assets.
 FY 2006
    
    
    Percent Change
    
    
    FY 2005
    
    
    Percent Change
    
    
    FY 2004(in millions, except percentages)Amortization of acquisition-related
intangible assets
    
    $
    17.4
    
    
    
    
    
    
    
    n/a
    
    
    
    
    
    
    
    n/aPercent of revenue
    
    
    0.5
    %
    
    
    
    
    
    
    n/a
    
    
    
    
    
    
    
    n/aOur expense from the amortization of acquisition-related intangible assets for the year ended
December 31, 2006 was directly related to our acquisition of Matrix in January 2006 and msystems in
November 2006. See Note 10, Business Acquisitions, to our consolidated financial statements
included in Item 8 of this report.Other Income.FY 2006
    
    
    Percent Change
    
    
    FY 2005
    
    
    Percent Change
    
    
    FY 2004(in millions, except percentages)Equity in income of business ventures
    
    $
    0.5
    
    
    
    25
    %
    
    $
    0.4
    
    
    
    (20
    )%
    
    $
    0.5Interest income
    
    
    101.1
    
    
    
    136
    %
    
    
    42.8
    
    
    
    110
    %
    
    
    20.4Interest expense
    
    
    (10.6
    )
    
    
    1667
    %
    
    
    (0.6
    )
    
    
    (90
    )%
    
    
    (5.9
    )Gain (loss) in investment in foundries
    
    
    6.1
    
    
    
    (174
    )%
    
    
    (8.2
    )
    
    
    (36
    )%
    
    
    (12.9
    )Recovery on unauthorized sale of UMC
shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6.2Other income (loss), net
    
    
    7.3
    
    
    
    217
    %
    
    
    2.3
    
    
    
    (162
    )%
    
    
    (3.7
    )Total other income, net
    
    $
    104.4
    
    
    
    184
    %
    
    $
    36.7
    
    
    
    698
    %
    
    $
    4.6Other income
 for 2006 was comprised primarily of interest income of $101.1 million
offset by interest expense of ($10.6) million resulting from our $1.15 billion debt offering in May
2006. See Note 7, Financing Arrangements, to our
consolidated financial statements included in Item 8 of this report.Other income for 2005 was comprised of interest income of $42.8 million, an
other-than-temporary reduction in the value of our investment in Tower of ($10.1) million and other
items of $4.0 million.Provision for Income Taxes.FY 2006
    
    
    FY 2005
    
    
    FY 2004Provision for Income Taxes
    
    
    
    
    
    
    
    
    
    
    53.5
    %
    
    
    37.0
    %
    
    
    37.0
    %
  46




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Liquidity and Capital Resources
 Cash
Flows.
      Liquid Assets.
 Short-Term Liquidity.
  47




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Long-Term Requirements.
 Financing Arrangements.
  
    
    Convertible Bond Hedge. Counterparties agreed to sell to us up to approximately 14.0
million shares of our common stock, which is the number of shares initially issuable upon
conversion of the 1% Notes in full, at a price of $82.36 per share. The convertible bond
hedge transaction will be settled in net shares and will terminate upon the earlier of the
maturity date of the 1% Notes or the first day none of the 1% Notes remain outstanding due
to conversion or otherwise. Settlement of the convertible bond hedge in net shares on the
expiration date would result in us receiving net shares equivalent to the number of shares
issuable by us upon conversion of the 1% Notes. Should there be an early unwind of the
convertible bond hedge transaction, the number of net shares potentially received by us
will depend upon 1) the then existing overall market conditions, 2) our stock price, 3) the
volatility of our stock, and 4) the amount of time remaining before expiration of the
convertible bond hedge. The convertible bond hedge transaction cost of $386.1 million has
been accounted for as an equity transaction in accordance with Emerging Issues Task Force
No. 00-19, or EITF 00-19, Accounting for Derivative Financial Statements Indexed to, and
Potentially Settled in, a Companys Own Stock. We recorded a tax benefit of approximately
$145.6 million in stockholders equity from the deferred tax assets related to the
convertible bond hedge.
    
    Sold Warrants.We received $308.7 million from the same counterparties from the sale of
warrants to purchase up to approximately 14.0 million shares of our common stock at an
exercise price of $95.03 per share. As of December 31, 2006, the warrants have an expected
life of approximately 6.5 years and expire in August 2013. At expiration, we may, at our
option, elect to settle the warrants on a net share basis. As December 31, 2006, the
warrants had not been exercised and remained outstanding. The value of the warrants has
been classified as equity because they meet all the equity classification criteria of EITF
00-19.
  48




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Toshiba Ventures.
     49




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50




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Contractual Obligations and Off Balance Sheet Arrangements
  Impact of Currency Exchange Rates
   51




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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Interest Rate Risk.
 Foreign Currency Risk.
 Market Risk.
  52




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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  
 ITEM 9.
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures.
 Report of Management on Internal Control Over Financial Reporting. Internal Controls  Integrated Framework
     Inherent Limitations of Disclosure Controls and Procedures and Internal Control over Financial
Reporting.
 53




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##### Table of Contents



Independent Registered Public Accounting Firms Attestation Report.
 Changes in Internal Control over Financial Reporting.
 
 ITEM 9B. OTHER INFORMATION
     54




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PART III
 
 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
   
    
    From our main Web page, first click on Corporate and then on scroll down and click on
Business Conduct and Ethics.
    
    Next, click on SanDisks Worldwide Code of Business Conduct and Ethics Policy.
    
    Finally, scroll down to Part IV, SanDisk Code of Ethics for Financial Executives.
  
 ITEM 11. EXECUTIVE COMPENSATION
  
 ITEM 12.

    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
  
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, DIRECTOR INDEPENDENCE
  
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  55




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PART IV
 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 10-K
 (a) Documents filed as part of this report
 1) All financial statements
 Index to Financial Statements
    
    PageReports of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets
    
    
    F-4Consolidated Statements of Income
    
    
    F-5Consolidated Statements of Stockholders Equity
    
    
    F-6Consolidated Statements of Cash Flows
    
    
    F-7Notes to Consolidated Financial Statements
    
    
    F-8
  2) Exhibits required by Item 601 of Regulation S-K
  56




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SANDISK CORPORATION
 
 INDEX TO FINANCIAL STATEMENTS AND RELATED REPORTS
 PageReports of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets
    
    
    F-4Consolidated Statements of Income
    
    
    F-5Consolidated Statements of Stockholders Equity
    
    
    F-6Consolidated Statements of Cash Flows
    
    
    F-7Notes to Consolidated Financial Statements
    
    
    F-8
 F-1




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REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
 
    Share Based
Payment
   
 F-2




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
 
         
 F-3




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##### Table of Contents



SANDISK CORPORATION
 
 CONSOLIDATED BALANCE SHEETS
 December 31, 2006
    
    
    January 1, 2006(In thousands, except for share and per share amounts)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    1,580,700
    
    
    $
    762,058Short-term investments
    
    
    1,228,773
    
    
    
    935,639Accounts receivable from product revenues, net
of allowance for doubtful accounts of $11,452
in 2006 and $8,050 in 2005
    
    
    611,740
    
    
    
    329,014Inventory
    
    
    495,984
    
    
    
    331,584Deferred taxes
    
    
    176,007
    
    
    
    95,518Other current assets
    
    
    148,657
    
    
    
    121,922Total current assets
    
    
    4,241,861
    
    
    
    2,575,735Long-term investments
    
    
    457,184
    
    
    
    Property and equipment, net
    
    
    317,965
    
    
    
    211,092Notes receivable and investments in flash ventures
    
    
    462,307
    
    
    
    265,074Deferred taxes
    
    
    102,100
    
    
    
    Goodwill
    
    
    910,254
    
    
    
    5,415Intangibles, net
    
    
    389,078
    
    
    
    4,608Other non-current assets
    
    
    87,034
    
    
    
    58,263Total assets
    
    $
    6,967,783
    
    
    $
    3,120,187LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    261,870
    
    
    $
    231,208Accounts payable to related parties
    
    
    139,627
    
    
    
    74,121Other current accrued liabilities
    
    
    311,000
    
    
    
    115,525Deferred income on shipments to distributors
and retailers and deferred revenue
    
    
    183,950
    
    
    
    150,283Total current liabilities
    
    
    896,447
    
    
    
    571,137Convertible long-term debt
    
    
    1,225,000
    
    
    
    Non-current liabilities and deferred revenue
    
    
    72,226
    
    
    
    25,259Total liabilities
    
    
    2,193,673
    
    
    
    596,396Minority interest
    
    
    5,976
    
    
    
    Commitments and contingenciesStockholders equity:Preferred stock, $0.001 par value, Authorized
shares: 4,000,000, Issued and outstanding: none
    
    
    
    
    
    
    Common stock, $0.001 par value; Authorized
shares: 800,000,000; Issued and outstanding: 226,518,283
in 2006 and 188,221,958 in 2005
    
    
    226
    
    
    
    188Capital in excess of par value
    
    
    3,656,895
    
    
    
    1,621,819Retained earnings
    
    
    1,105,520
    
    
    
    906,624Accumulated other comprehensive income
    
    
    5,493
    
    
    
    2,635Deferred compensation
    
    
    
    
    
    
    (7,475
    )Total stockholders equity
    
    
    4,768,134
    
    
    
    2,523,791Total liabilities and stockholders equity
    
    $
    6,967,783
    
    
    $
    3,120,187
  F-4




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##### Table of Contents



SANDISK CORPORATION
 
 CONSOLIDATED STATEMENTS OF INCOME
 December 31,
    
    
    January 1,
    
    
    January 2,2006
    
    
    2006
    
    
    2005(In thousands, except per share amounts)Revenues:Product
    
    $
    2,926,472
    
    
    $
    2,066,607
    
    
    $
    1,602,836License and royalty
    
    
    331,053
    
    
    
    239,462
    
    
    
    174,219Total revenues
    
    
    3,257,525
    
    
    
    2,306,069
    
    
    
    1,777,055Cost of product revenues
    
    
    2,007,684
    
    
    
    1,333,335
    
    
    
    1,091,350Amortization of acquisition-related intangible assets
    
    
    10,368
    
    
    
    
    
    
    
    Total cost of product revenues
    
    
    2,018,052
    
    
    
    1,333,335
    
    
    
    1,091,350Gross profit
    
    
    1,239,473
    
    
    
    972,734
    
    
    
    685,705Operating expenses:Research and development
    
    
    306,866
    
    
    
    194,810
    
    
    
    124,994Sales and marketing
    
    
    203,406
    
    
    
    122,232
    
    
    
    91,296General and administrative
    
    
    159,835
    
    
    
    79,110
    
    
    
    50,824Write-off of acquired in-process technology
    
    
    225,600
    
    
    
    
    
    
    
    Amortization of acquisition-related intangible assets
    
    
    17,432
    
    
    
    
    
    
    
    Total operating expenses
    
    
    913,139
    
    
    
    396,152
    
    
    
    267,114Operating income
    
    
    326,334
    
    
    
    576,582
    
    
    
    418,591Equity in income of business ventures
    
    
    594
    
    
    
    381
    
    
    
    568Interest income
    
    
    101,088
    
    
    
    42,835
    
    
    
    20,363Gain (loss) on investment in foundries
    
    
    6,084
    
    
    
    (8,228
    )
    
    
    (12,927
    )Recovery on unauthorized sale of UMC shares
    
    
    
    
    
    
    
    
    
    
    6,193Interest expense and other income (expense), net
    
    
    (3,392
    )
    
    
    1,737
    
    
    
    (9,588
    )Total other income
    
    
    104,374
    
    
    
    36,725
    
    
    
    4,609Income before provision for income taxes
    
    
    430,708
    
    
    
    613,307
    
    
    
    423,200Provision for income taxes
    
    
    230,193
    
    
    
    226,923
    
    
    
    156,584Income after taxes
    
    
    200,515
    
    
    
    386,384
    
    
    
    266,616Minority interest
    
    
    1,619
    
    
    
    
    
    
    
    Net income
    
    $
    198,896
    
    
    $
    386,384
    
    
    $
    266,616Net income per share:Basic
    
    $
    1.00
    
    
    $
    2.11
    
    
    $
    1.63Diluted
    
    $
    0.96
    
    
    $
    2.00
    
    
    $
    1.44Shares used in computing net income per share:Basic
    
    
    198,929
    
    
    
    183,008
    
    
    
    164,065Diluted
    
    
    207,451
    
    
    
    193,016
    
    
    
    188,837
  F-5




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##### Table of Contents



SANDISK CORPORATION
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
 Capital in
    
    
    
    
    
    
    AccumulatedCommon
    
    
    Common
    
    
    Excess of
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    TotalStock
    
    
    Stock
    
    
    Par
    
    
    Retained
    
    
    Comprehensive
    
    
    Deferred
    
    
    StockholdersShares
    
    
    Amount
    
    
    Value
    
    
    Earnings
    
    
    Income(Loss)
    
    
    Compensation
    
    
    Equity(In thousands)Balance at December 28, 2003
    
    
    160,914
    
    
    $
    160
    
    
    $
    1,207,798
    
    
    $
    253,624
    
    
    $
    54,290
    
    
    $
    
    
    
    $
    1,515,872Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    266,616
    
    
    
    
    
    
    
    
    
    
    
    266,616Unrealized loss on available for
sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,765
    )
    
    
    
    
    
    
    (2,765
    )Unrealized loss on investments in
foundries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (38,216
    )
    
    
    
    
    
    
    (38,216
    )Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,584
    
    
    
    
    
    
    
    5,584Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    231,219Exercise of stock options for cash
    
    
    2,301
    
    
    
    3
    
    
    
    19,004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,007Issuance of stock pursuant to
employee stock purchase plan
    
    
    261
    
    
    
    1
    
    
    
    5,640
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,641Deferred compensation
    
    
    212
    
    
    
    
    
    
    
    6,061
    
    
    
    
    
    
    
    
    
    
    
    (6,061
    )
    
    
    Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    525
    
    
    
    525Debt conversion
    
    
    16,276
    
    
    
    16
    
    
    
    149,984
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150,000Income tax benefit from stock
options exercised
    
    
    
    
    
    
    
    
    
    
    17,886
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,886Balance at January 2, 2005
    
    
    179,964
    
    
    
    180
    
    
    
    1,406,373
    
    
    
    520,240
    
    
    
    18,893
    
    
    
    (5,536
    )
    
    
    1,940,150Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    386,384
    
    
    
    
    
    
    
    
    
    
    
    386,384Unrealized loss on available for
sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,901
    )
    
    
    
    
    
    
    (1,901
    )Unrealized loss on investments in
foundries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (840
    )
    
    
    
    
    
    
    (840
    )Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,517
    )
    
    
    
    
    
    
    (13,517
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    370,126Exercise of stock options for cash
    
    
    7,937
    
    
    
    8
    
    
    
    108,686
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    108,694Issuance of stock pursuant to
employee stock purchase plan
    
    
    321
    
    
    
    
    
    
    
    6,704
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,704Deferred compensation
    
    
    
    
    
    
    
    
    
    
    4,438
    
    
    
    
    
    
    
    
    
    
    
    (4,438
    )
    
    
    Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,499
    
    
    
    2,499Income tax benefit from stock
options exercised
    
    
    
    
    
    
    
    
    
    
    95,618
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    95,618Balance at January 1, 2006
    
    
    188,222
    
    
    
    188
    
    
    
    1,621,819
    
    
    
    906,624
    
    
    
    2,635
    
    
    
    (7,475
    )
    
    
    2,523,791Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    198,896
    
    
    
    
    
    
    
    
    
    
    
    198,896Unrealized income on available for
sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,315
    
    
    
    
    
    
    
    2,315Unrealized
loss on investments in
foundries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (227
    )
    
    
    
    
    
    
    (227
    )Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    770
    
    
    
    
    
    
    
    770Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    201,754Exercise of stock options for cash
    
    
    4,861
    
    
    
    5
    
    
    
    87,049
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    87,054Issuance of stock pursuant to
employee stock purchase plan
    
    
    264
    
    
    
    
    
    
    
    9,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,250Issuance of restricted stock
    
    
    63
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income tax benefit from stock
options exercised
    
    
    
    
    
    
    
    
    
    
    61,453
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    61,453FAS 123R compensation expense and
reversal of deferred compensation
    
    
    
    
    
    
    
    
    
    
    96,415
    
    
    
    
    
    
    
    
    
    
    
    7,475
    
    
    
    103,890Purchased calls
    
    
    
    
    
    
    
    
    
    
    (386,090
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (386,090
    )Sold Warrants
    
    
    
    
    
    
    
    
    
    
    308,672
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    308,672Tax benefit on purchased calls
    
    
    
    
    
    
    
    
    
    
    145,556
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    145,556Issuance of stock and equity awards
related to acquisitions
    
    
    33,108
    
    
    
    33
    
    
    
    1,686,356
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,686,389Reclass of premium on assumed
msystems convertible debt
    
    
    
    
    
    
    
    
    
    
    26,415
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,415Balance at December 31, 2006
    
    
    226,518
    
    
    $
    226
    
    
    $
    3,656,895
    
    
    $
    1,105,520
    
    
    $
    5,493
    
    
    $
    
    
    
    $
    4,768,134
  F-6




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##### Table of Contents



SANDISK CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Fiscal Years Ended2006
    
    
    2005
    
    
    2004(In thousands)Cash flows from operating activities:Net income
    
    $
    198,896
    
    
    $
    386,384
    
    
    $
    266,616Adjustments to reconcile net income to net cash provided by operating activities:Deferred taxes
    
    
    (25,636
    )
    
    
    (1,538
    )
    
    
    9,326(Gain) loss on investment in foundries
    
    
    (2,480
    )
    
    
    8,480
    
    
    
    12,927(Recovery) loss on unauthorized sales of UMC shares
    
    
    
    
    
    
    
    
    
    
    (6,193
    )Depreciation and amortization
    
    
    135,585
    
    
    
    65,774
    
    
    
    38,862Provision for doubtful accounts
    
    
    3,316
    
    
    
    (272
    )
    
    
    4,581FlashVision wafer cost adjustment
    
    
    
    
    
    
    (2,263
    )
    
    
    (1,282
    )Share-based compensation expense
    
    
    100,641
    
    
    
    
    
    
    
    Tax benefit from share-based compensation
    
    
    (57,393
    )
    
    
    
    
    
    
    Write-off of acquired in-process technology
    
    
    225,600
    
    
    
    
    
    
    
    Other non-cash charges
    
    
    (313
    )
    
    
    9,833
    
    
    
    3,764Changes in operating assets and liabilities:Accounts receivable from product revenues
    
    
    (115,061
    )
    
    
    (134,207
    )
    
    
    (14,880
    )Inventory
    
    
    (23,660
    )
    
    
    (135,162
    )
    
    
    (79,526
    )Other assets
    
    
    (12,094
    )
    
    
    (31,148
    )
    
    
    1,681Accounts payable
    
    
    (64,228
    )
    
    
    148,234
    
    
    
    (6,298
    )Accounts payable and other current liabilities, related parties
    
    
    24,617
    
    
    
    24,657
    
    
    
    (3,149
    )Other liabilities
    
    
    210,273
    
    
    
    142,083
    
    
    
    1,201Total adjustments
    
    
    399,167
    
    
    
    94,471
    
    
    
    (38,986
    )Net cash provided by operating activities
    
    
    598,063
    
    
    
    480,855
    
    
    
    227,630Cash flows from investing activities:Purchases of short and long term investments
    
    
    (2,135,973
    )
    
    
    (803,967
    )
    
    
    (1,147,142
    )Proceeds from sale and maturities of short and long term investments
    
    
    1,497,120
    
    
    
    722,986
    
    
    
    810,111Notes receivable from Matrix Semiconductor, Inc.
    
    
    
    
    
    
    (20,000
    )
    
    
    Acquisition of property and equipment, net
    
    
    (176,474
    )
    
    
    (134,477
    )
    
    
    (125,842
    )Acquisition of technology license
    
    
    
    
    
    
    (4,500
    )
    
    
    Consideration paid in a business combination
    
    
    
    
    
    
    
    
    
    
    (9,061
    )Notes receivable from FlashVision Ltd.
    
    
    23,538
    
    
    
    (34,249
    )
    
    
    (33,564
    )Notes receivable from Flash Partners Ltd.
    
    
    (95,445
    )
    
    
    
    
    
    
    Notes receivable from Tower Semiconductor Ltd.
    
    
    (9,705
    )
    
    
    
    
    
    
    Investment in Flash Partners Ltd. and Flash Alliance Ltd.
    
    
    (132,209
    )
    
    
    (21,790
    )
    
    
    (23,129
    )Investment in foundries
    
    
    
    
    
    
    (3,500
    )
    
    
    (704
    )Cash acquired in business combinations, net of acquisition costs
    
    
    51,087
    
    
    
    
    
    
    
    Proceeds from other sales
    
    
    
    
    
    
    
    
    
    
    6,333Net cash (used in) investing activities
    
    
    (978,061
    )
    
    
    (299,497
    )
    
    
    (522,998
    )Cash flows from financing activities:Proceeds from issuance of convertible debt, net of issuance costs
    
    
    1,125,500
    
    
    
    
    
    
    
    Proceeds from issuance of common stock under employee programs
    
    
    96,304
    
    
    
    115,398
    
    
    
    24,648Purchase of convertible bond hedge
    
    
    (386,090
    )
    
    
    
    
    
    
    Proceeds from issuance of warrants
    
    
    308,672
    
    
    
    
    
    
    
    Cash distribution to minority interest
    
    
    (4,491
    )
    
    
    
    
    
    
    Tax benefit from share-based compensation
    
    
    57,393
    
    
    
    
    
    
    
    Net cash provided by financing activities
    
    
    1,197,288
    
    
    
    115,398
    
    
    
    24,648Effect of changes in foreign currency exchange rates on cash
    
    
    1,352
    
    
    
    1,507
    
    
    
    36Net increase (decrease) in cash and cash equivalents
    
    
    818,642
    
    
    
    298,263
    
    
    
    (270,684
    )Cash and cash equivalents at beginning of the year
    
    
    762,058
    
    
    
    463,795
    
    
    
    734,479Cash and cash equivalents at end of the year
    
    $
    1,580,700
    
    
    $
    762,058
    
    
    $
    463,795Supplemental disclosure of cash flow information:Cash paid for income taxes
    
    $
    (81,100
    )
    
    $
    (164,345
    )
    
    $
    (159,436
    )Cash paid for interest expense
    
    $
    (6,965
    )
    
    $
    (17
    )
    
    $
    (6,750
    )Non-cash financing and investing activities:Conversion of subordinated notes
    
    $
    
    
    
    $
    
    
    
    $
    150,000Issuance of shares in a business combination
    
    $
    1,607,450
    
    
    $
    
    
    
    $
    4,935
  F-7




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##### Table of Contents



Notes to Consolidated Financial Statements
 Note 1: Organization and Summary of Significant Accounting Policies
 Organization and Nature of Operations.
 Basis of Presentation.
 Principles of Consolidation.
 Reclassification.
 Use of Estimates .
 Revenue Recognition, Sales Returns and Allowances and Sales Incentive Programs.
    F-8




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##### Table of Contents



Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendors
Products)
 Accounts Receivable and Allowance for Doubtful Accounts.
  Income Taxes.
 Foreign Currency.
 Cash Equivalents, and Short-Term and Long-Term Investments.
  Property and Equipment.
 Variable Interest Entities. Accounting for Variable Interest Entities
 F-9




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##### Table of Contents



Equity Investments.
 Inventories and Inventory Valuation.
   Other Long-Lived Assets . Accounting for Impairment of Disposal of Long-Lived Assets.
 Fair Value of Financial Instruments.
 F-10




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##### Table of Contents



As of December 31, 2006
    
    As of January 1, 2006Carrying
    
    Estimated Fair
    
    Carrying
    
    Estimated FairValue
    
    Value
    
    Value
    
    Value1% Convertible senior notes due 2013
    
    $
    1,150
    
    
    $
    995
    
    
    
    N/A
    
    
    
    N/A1% Convertible notes due 2035
    
    
    75
    
    
    
    98
    
    
    
    N/A
    
    
    
    N/ARestricted long-term securities
    
    $
    10
    
    
    $
    15
    
    
    $
    8
    
    
    $
    10
 Advertising Expenses.
 Research and Development Expenses.
 F-11




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##### Table of Contents



Note 2: Recent Accounting Pronouncements
 Fair Value Measurements
 Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 Accounting for
Income Taxes
 How
Sales Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented
in the Income Statement (That Is, Gross Versus Net Presentation)
 Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements
 F-12




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##### Table of Contents



Note 3: Balance Sheet Information
 Available-for-Sale Investments.
 December 31, 2006
    
    
    January 1, 2006Gross
    
    
    Gross
    
    
    
    
    
    
    
    
    
    
    Gross
    
    
    GrossUnrealized
    
    
    Unrealized
    
    
    Market
    
    
    
    
    
    
    Unrealized
    
    
    Unrealized
    
    
    MarketBook Value
    
    
    Gains
    
    
    Losses
    
    
    Value
    
    
    Book Value
    
    
    Gains
    
    
    Losses
    
    
    ValueMoney market
funds
    
    $
    617,984
    
    
    $
    
    
    
    $
    
    
    
    $
    617,984
    
    
    $
    300,833
    
    
    $
    
    
    
    $
    
    
    
    $
    300,833Commercial paper
    
    
    557,238
    
    
    
    
    
    
    
    
    
    
    
    557,238
    
    
    
    284,455
    
    
    
    
    
    
    
    
    
    
    
    284,455U.S. government
agency
    
    
    845,389
    
    
    
    257
    
    
    
    (962
    )
    
    
    844,684
    
    
    
    587,352
    
    
    
    
    
    
    
    (3,691
    )
    
    
    583,661Municipal
notes/bonds
    
    
    435,577
    
    
    
    224
    
    
    
    (200
    )
    
    
    435,601
    
    
    
    126,993
    
    
    
    
    
    
    
    (219
    )
    
    
    126,774Corporate
notes/bonds
    
    
    27,860
    
    
    
    
    
    
    
    (423
    )
    
    
    27,437
    
    
    
    59,033
    
    
    
    
    
    
    
    (322
    )
    
    
    58,711Auction instruments
    
    
    543,497
    
    
    
    
    
    
    
    
    
    
    
    543,497
    
    
    
    308,040
    
    
    
    
    
    
    
    (1
    )
    
    
    308,039Equity investments
    
    
    90,350
    
    
    
    14,528
    
    
    
    (4,938
    )
    
    
    99,940
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
available-for-sale
investments
    
    $
    3,117,895
    
    
    $
    15,009
    
    
    $
    (6,523
    )
    
    $
    3,126,381
    
    
    $
    1,666,706
    
    
    $
    
    
    
    $
    (4,233
    )
    
    $
    1,662,473
  December 31, 2006
    
    
    January 1, 2006Available-for-sale investments
    
    $
    3,126,381
    
    
    $
    1,662,473Cash on hand
    
    
    160,773
    
    
    
    35,224Other
    
    
    2,223
    
    
    
    18,338Total
    
    $
    3,289,377
    
    
    $
    1,716,035Reported as:Cash and cash equivalents
    
    $
    1,580,700
    
    
    $
    762,058Short-term investments
    
    
    1,228,773
    
    
    
    935,639Investment in foundries
    
    
    22,720
    
    
    
    18,338Long-term investments
    
    
    457,184
    
    
    
    Total
    
    $
    3,289,377
    
    
    $
    1,716,035
 F-13




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##### Table of Contents



Less than 12 Months
    
    
    12 Months or Greater
    
    
    TotalGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossUnrealized
    
    
    Market
    
    
    Unrealized
    
    
    Market
    
    
    UnrealizedMarket Value
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    Losses(in thousands)U.S. government agency
    
    $
    514,714
    
    
    $
    (517
    )
    
    $
    92,164
    
    
    $
    (446
    )
    
    $
    606,878
    
    
    $
    (963
    )Municipal notes/bonds
    
    
    248,371
    
    
    
    (180
    )
    
    
    10,764
    
    
    
    (20
    )
    
    
    259,135
    
    
    
    (200
    )Corporate notes/bonds
    
    
    12,800
    
    
    
    (27
    )
    
    
    14,637
    
    
    
    (395
    )
    
    
    27,437
    
    
    
    (422
    )Equity investments
    
    
    66,463
    
    
    
    (4,938
    )
    
    
    
    
    
    
    
    
    
    
    66,463
    
    
    
    (4,938
    )Total
    
    $
    842,348
    
    
    $
    (5,662
    )
    
    $
    117,565
    
    
    $
    (861
    )
    
    $
    959,913
    
    
    $
    (6,523
    )
    EstimatedCost
    
    
    Fair ValueShort-term investments:Due in one year or less
    
    $
    2,479,489
    
    
    $
    2,478,625Due after one year through five years
    
    
    548,057
    
    
    
    547,816Total
    
    $
    3,027,546
    
    
    $
    3,026,441
 F-14




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##### Table of Contents



Allowance for Doubtful Accounts.
 December 31, 2006
    
    
    January 1, 2006
    
    
    January 2, 2005Balance, beginning of period
    
    $
    8,050
    
    
    $
    8,462
    
    
    $
    4,882Additions charged to costs and expenses
    
    
    6,142
    
    
    
    376
    
    
    
    4,581Deductions (write-offs)
    
    
    (2,740
    )
    
    
    (788
    )
    
    
    (1,001
    )Balance, end of period
    
    $
    11,452
    
    
    $
    8,050
    
    
    $
    8,462Inventory.Inventories were as follows (in thousands):December 31, 2006
    
    
    January 1, 2006Raw material
    
    
    
    
    
    $
    157,163
    
    
    $
    99,006Work-in-process
    
    
    
    
    
    
    64,009
    
    
    
    61,900Finished goods
    
    
    
    
    
    
    274,812
    
    
    
    170,678Total inventories
    
    
    
    
    
    $
    495,984
    
    
    $
    331,584In 2006, 2005 and 2004, the Company sold $13.5 million, $12.4 million and $10.2 million,
respectively, of inventory that had been fully written-off in previous periods.Other Current Assets.Other current assets were as follows (in thousands):December 31, 2006
    
    
    January 1, 2006Royalty and other receivables
    
    
    
    
    
    $
    82,569
    
    
    $
    77,310Interest receivable
    
    
    
    
    
    
    14,561
    
    
    
    6,976Prepaid expenses
    
    
    
    
    
    
    22,276
    
    
    
    5,047Investment in foundries
    
    
    
    
    
    
    22,720
    
    
    
    18,338Other current assets
    
    
    
    
    
    
    6,531
    
    
    
    14,251Total other non-current assets
    
    
    
    
    
    $
    148,657
    
    
    $
    121,922Property and Equipment.Property and equipment consisted of the following (in thousands):December 31, 2006
    
    
    January 1, 2006Machinery and equipment
    
    
    
    
    
    $
    507,282
    
    
    $
    318,336Software
    
    
    
    
    
    
    54,411
    
    
    
    35,990Capital land lease
    
    
    
    
    
    
    3,197
    
    
    
    Furniture and fixtures
    
    
    
    
    
    
    5,604
    
    
    
    1,682Leasehold improvements
    
    
    
    
    
    
    13,957
    
    
    
    8,881Property and equipment, at cost
    
    
    
    
    
    
    584,451
    
    
    
    364,889Accumulated depreciation and amortization
    
    
    
    
    
    
    (266,486
    )
    
    
    (153,797
    )Property and equipment, net
    
    
    
    
    
    $
    317,965
    
    
    $
    211,092Depreciation expense of property, plant and equipment totaled $102.5 million, $63.1 million
and $38.1 million in fiscal 2006, 2005 and 2004, respectively. Amortization expense of intangible
assets and totaled $29.8 million, $2.7 million and
$0.8 million in fiscal 2006, 2005 and 2004,
respectively.Notes Receivables and Investments in Flash Ventures.Notes receivable and investments in
flash ventures were as follows (in thousands):December 31, 2006
    
    
    January 1, 2006Notes receivable, FlashVision Ltd.
    
    
    
    
    
    $
    38,229
    
    
    $
    61,927Notes receivable, Flash Partners Ltd.
    
    
    
    
    
    
    92,421
    
    
    
    Investment in FlashVision Ltd.
    
    
    
    
    
    
    159,144
    
    
    
    161,080Investment in Flash Partners Ltd.
    
    
    
    
    
    
    168,210
    
    
    
    42,067Investment in Flash Alliance Ltd.
    
    
    
    
    
    
    4,303
    
    
    
    Total notes receivable and investments in flash ventures
    
    
    
    
    
    $
    462,307
    
    
    $
    265,074
 F-15




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##### Table of Contents



Other Non-current Assets .
 December 31, 2006
    
    
    January 1, 2006Investment in foundries
    
    
    
    
    
    $
    17,071
    
    
    $
    11,013Deposits
    
    
    
    
    
    
    6,381
    
    
    
    4,709Other non-current assets
    
    
    
    
    
    
    63,582
    
    
    
    42,541Total other non-current assets
    
    
    
    
    
    $
    87,034
    
    
    $
    58,263Other Accrued Liabilities.Other accrued liabilities were as follows (in thousands):December 31, 2006
    
    
    January 1, 2006Accrued payroll and related expenses
    
    
    
    
    
    $
    61,050
    
    
    $
    55,614Income taxes payable
    
    
    
    
    
    
    110,009
    
    
    
    2,165Research and development liability, related party
    
    
    
    
    
    
    5,850
    
    
    
    4,200Other accrued liabilities
    
    
    
    
    
    
    134,091
    
    
    
    53,546Total other accrued liabilities
    
    
    
    
    
    $
    311,000
    
    
    $
    115,525Warranties.Liability for warranty expense is included in other accrued liabilities in the
accompanying consolidated balance sheets and the activity was as follows (in thousands):December 31, 2006
    
    
    January 1, 2006
    
    
    January 2, 2005Balance, beginning of period
    
    $
    11,257
    
    
    $
    11,380
    
    
    $
    3,694Additions (reductions) to costs of product revenue
    
    
    6,606
    
    
    
    6,033
    
    
    
    14,790Usage
    
    
    (2,525
    )
    
    
    (6,156
    )
    
    
    (7,104
    )Balance, end of period
    
    $
    15,338
    
    
    $
    11,257
    
    
    $
    11,380The majority of the Companys products have a warranty ranging from one to five years. A
provision for the estimated future cost related to warranty expense is recorded at the time of
customer invoice. The Companys warranty obligation is affected by customer and consumer returns,
product failures and repair or replacement costs incurred. Should actual product failure rates, or
repair or replacement costs differ from the Companys estimates, increases or decreases to its
warranty liability would be required.Accumulated Other Comprehensive Income.Accumulated other comprehensive income presented in
the accompanying consolidated balance sheets consists of the foreign currency translation and
accumulated gains and losses on available-for-sale marketable securities, net of taxes, for all
periods presented (in thousands):December 31, 2006
    
    
    January 1, 2006Accumulated net unrealized gain (loss) on:Available-for-sale investments
    
    
    
    
    
    $
    (1,918
    )
    
    $
    (4,233
    )Available-for-sale investments in foundries
    
    
    
    
    
    
    (610
    )
    
    
    (383
    )Foreign currency translation
    
    
    
    
    
    
    8,021
    
    
    
    7,251Total accumulated other comprehensive income
    
    
    
    
    
    $
    5,493
    
    
    $
    2,635
  F-16




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##### Table of Contents



Note 4: Goodwill and Other Intangible Assets
 Goodwill.
 Balance at January 1, 2006
    
    $
    5,415Goodwill adjustment
    
    
    97Matrix goodwill acquired (Note 10)
    
    
    145,492msystems goodwill acquired (Note 10)
    
    
    759,250Balance at December 31, 2006
    
    $
    910,254
 Goodwill
and Other Intangible Assets
 Other Intangible Assets .
 December 31, 2006
    
    
    January 1, 2006Gross Carrying
    
    
    Accumulated
    
    
    Net Carrying
    
    
    Gross Carrying
    
    
    Accumulated
    
    
    Net CarryingAmount
    
    
    Amortization
    
    
    Amount
    
    
    Amount
    
    
    Amortization
    
    
    AmountCore technology
    
    $
    311,801
    
    
    $
    (18,135
    )
    
    $
    293,666
    
    
    $
    
    
    
    $
    
    
    
    $
    Developed product
technology
    
    
    12,900
    
    
    
    (2,103
    )
    
    
    10,797
    
    
    
    1,500
    
    
    
    (542
    )
    
    
    958Trademarks
    
    
    4,000
    
    
    
    (911
    )
    
    
    3,089
    
    
    
    
    
    
    
    
    
    
    
    Backlog
    
    
    5,000
    
    
    
    (1,139
    )
    
    
    3,861
    
    
    
    
    
    
    
    
    
    
    
    Supply agreement
    
    
    2,000
    
    
    
    (46
    )
    
    
    1,954
    
    
    
    
    
    
    
    
    
    
    
    Customer relationships
    
    
    80,100
    
    
    
    (6,008
    )
    
    
    74,092
    
    
    
    
    
    
    
    
    
    
    
    Acquisition-related
intangible assets
    
    
    415,801
    
    
    
    (28,342
    )
    
    
    387,459
    
    
    
    1,500
    
    
    
    (542
    )
    
    
    958Technology licenses
    
    
    7,388
    
    
    
    (5,769
    )
    
    
    1,619
    
    
    
    7,389
    
    
    
    (3,739
    )
    
    
    3,650Total
    
    $
    423,189
    
    
    $
    (34,111
    )
    
    $
    389,078
    
    
    $
    8,889
    
    
    $
    (4,281
    )
    
    $
    4,608
  F-17




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##### Table of Contents



Estimated Amortization ExpensesAcquisition-relatedFiscal periods
    
    Intangible Assets
    
    
    Technology License(In thousands)2007
    
    $
    88,562
    
    
    $
    9032008
    
    
    76,629
    
    
    
    7162009
    
    
    72,124
    
    
    
    2010
    
    
    71,929
    
    
    
    2011
    
    
    65,164
    
    
    
    2012 and thereafter
    
    
    13,051
    
    
    
    Total
    
    $
    387,459
    
    
    $
    1,619
 F-18




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##### Table of Contents



Note 5: Compensation and Benefits
 Share-Based Benefit Plans
 2005 Incentive Plan .
 1995 Stock Option Plan and 1995 Non-Employee Directors Stock Option Plan.
 2005 Employee Stock Purchase Plan.
 msystems Ltd. 1996 Section 102 Stock Option/Stock Purchase Plan and 2003 Stock Option and
Restricted Stock Incentive Plan.
 F-19




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##### Table of Contents



Matrix Semiconductor, Inc. 2005 Stock Incentive Plan, 1999 Stock Plan and 1998 Long-term
Incentive Plan.
 Adoption of SFAS 123(R)
 Share-Based Payment
   Transition
Election Related to Accounting for Tax Effects of Share-Based Payment Awards
 F-20




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##### Table of Contents



Stock Options and Stock Appreciation Rights (SARs).
 December 31, 2006
    
    January 1, 2006
    
    January 2, 2005Dividend yield
    
    None
    
    None
    
    NoneExpected volatility
    
    
    0.52
    
    
    
    0.52
    
    
    
    0.92Risk-free interest rate
    
    
    4.63
    %
    
    
    3.94
    %
    
    
    3.07
    %Expected lives
    
    3.7 Years
    
    4.5 Years
    
    5.0 YearsWeighted average fair value at grant date
    
    $
    25.44
    
    
    $
    13.03
    
    
    $
    22.64
  WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Price
    
    
    Term (Years)
    
    
    Value(In thousands, except exercise price and contractual term)Options outstanding at January 1, 2006
    
    
    20,316
    
    
    $
    21.57Granted
    
    
    6,021
    
    
    
    58.41Exercised
    
    
    (4,861
    )
    
    
    17.91Forfeited
    
    
    (851
    )
    
    
    41.05Expired
    
    
    (40
    )
    
    
    40.29Options and SARs assumed through acquisition
    
    
    5,807
    
    
    
    30.57Options and SARs outstanding at December 31, 2006
    
    
    26,392
    
    
    
    31.97
    
    
    
    6.7
    
    
    $
    392,469Options and SARs vested and expected to vest
after December 31, 2006
    
    
    24,890
    
    
    
    31.14
    
    
    
    6.6
    
    
    $
    385,791Options and SARs exercisable at December 31, 2006
    
    
    11,343
    
    
    $
    18.19
    
    
    
    5.8
    
    
    $
    284,804
  F-21




---



##### Table of Contents



Restricted Stock.
  WeightedAverage Grant
    
    
    Aggregate IntrinsicShares
    
    
    Date Fair Value
    
    
    ValueNon-vested share units at January 1, 2006
    
    
    105,188
    
    
    $
    42.19Granted
    
    
    515,794
    
    
    
    57.69Vested
    
    
    (97,220
    )
    
    
    52.21Forfeited
    
    
    (64,911
    )
    
    
    63.85Restricted stock units assumed through acquisition
    
    
    139,338
    
    
    
    72.83Non-vested share units at December 31, 2006
    
    
    598,189
    
    
    $
    58.71
    
    
    $
    25,740,073
  F-22




---



##### Table of Contents



Employee Stock Purchase Plans (ESPP).
 December 31, 2006
    
    January 1, 2006
    
    January 2, 2005Dividend yield
    
    None
    
    None
    
    NoneExpected volatility
    
    
    0.52
    
    
    
    0.47
    
    
    
    0.57Risk-free interest rate
    
    
    4.96
    %
    
    
    2.69
    %
    
    
    2.69
    %Expected lives
    
    1/2 year
    
    1/2 year
    
    1/2 yearWeighted average fair value at exercise date
    
    $
    16.73
    
    
    $
    7.60
    
    
    $
    8.12
  Share-Based Compensation Expense.
 December 31, 2006(In thousands)Share-based compensation expense by caption:Cost of product sales
    
    $
    7,991Research and development
    
    
    40,999Sales and marketing
    
    
    21,617General and administrative
    
    
    30,034Total share-based compensation expense
    
    $
    100,641Share-based compensation expense by type of award:Stock options and SARs
    
    $
    85,862Restricted stock
    
    
    11,181ESPP
    
    
    3,598Total share-based compensation expense
    
    $
    100,641
  F-23




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##### Table of Contents



Pro Forma Disclosures
 Accounting for Stock-Based Compensation
 January 1, 2006
    
    
    January 2, 2005(In thousands, except per share amounts)Net income, as reported
    
    $
    386,384
    
    
    $
    266,616Fair value method expense, net of related tax
    
    
    (52,629
    )
    
    
    (39,550
    )Pro forma net income
    
    $
    333,755
    
    
    $
    227,066Earnings per share as reported:Basic
    
    $
    2.11
    
    
    $
    1.63Diluted
    
    $
    2.00
    
    
    $
    1.44Pro forma earnings per share:Basic
    
    $
    1.82
    
    
    $
    1.38Diluted
    
    $
    1.73
    
    
    $
    1.23
 F-24




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##### Table of Contents



Note 6: Concentrations of Risk and Segment Information
 Geographic Information and Major Customers.
   Years EndedDecember 31, 2006
    
    
    January 1, 2006
    
    
    January 2, 2005Revenues:North America
    
    $
    1,311,726
    
    
    $
    1,058,234
    
    
    $
    771,659Japan
    
    
    231,835
    
    
    
    138,507
    
    
    
    191,686EMEA
    
    
    728,355
    
    
    
    500,998
    
    
    
    420,645Other foreign countries
    
    
    985,609
    
    
    
    608,330
    
    
    
    393,065Total
    
    $
    3,257,525
    
    
    $
    2,306,069
    
    
    $
    1,777,055Long Lived Assets:North America
    
    $
    182,749
    
    
    $
    126,346
    
    
    $
    86,024Japan
    
    
    397,011
    
    
    
    286,859
    
    
    
    263,248Israel
    
    
    50,355
    
    
    
    8,868
    
    
    
    14,737Other foreign countries
    
    
    29,704
    
    
    
    608
    
    
    
    472Total
    
    $
    659,819
    
    
    $
    422,681
    
    
    $
    364,481
  Customer and Supplier Concentrations.
   F-25




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##### Table of Contents



Concentration of Credit Risk.
 Off Balance Sheet Risk.
 F-26




---



##### Table of Contents



Note 7: Financing Arrangements
  December 31, 2006
    
    January 1, 2006(In millions)1% Convertible Senior Notes due 2013
    
    $
    1,150
    
    
    $
    1% Convertible Notes due 2035
    
    $
    75
    
    
    $
    
 1% Convertible Senior Notes Due 2013.
     
    
    Convertible Bond Hedge. Counterparties agreed to sell to the Company up to approximately
14 million shares of the Companys common stock, which is the number of shares initially
issuable upon conversion of the 1% Notes due 2013 in full, at a price of $82.36 per share.
The convertible bond hedge transaction will be settled in net shares and will terminate upon
the earlier of the maturity date of the 1% Notes due 2013 or the first day none of the 1%
Notes due 2013 remain outstanding due to conversion or otherwise. Settlement of the
convertible bond hedge in net shares, based on the number of shares issued upon conversion
of the 1% Notes due 2013, on the expiration date would result in the Company receiving net
shares equivalent to the number of shares issuable by the Company upon conversion of the 1%
Notes due 2013. Should there be an early unwind of the convertible bond hedge transaction,
the number of net shares potentially received by the Company will depend upon 1) the then
existing overall market conditions, 2) the Companys stock price, 3) the volatility of the
Companys stock, and 4) the amount of time remaining before expiration of the convertible
bond hedge. The convertible bond hedge transaction cost of $386.1 million has been
accounted for as an equity transaction in
 F-27




---



##### Table of Contents



accordance with Emerging Issues Task Force No. 00-19, or EITF 00-19, Accounting for Derivative
Financial Statements Indexed to, and Potentially Settled in, a Companys Own Stock. The
Company recorded a tax benefit of approximately $145.6 million in stockholders equity from
the deferred tax assets related to the convertible bond hedge.
    
    Sold Warrants.The Company received $308.7 million from the same counterparties from the
sale of warrants to purchase up to approximately 14 million shares of the Companys common
stock at an exercise price of $95.03 per share. The warrants have an expected life of 7.25
years and expire in August 2013. At expiration, the Company may, at its option, elect to
settle the warrants on a net share basis. As of December 31, 2006, the warrants had not
been exercised and remained outstanding. The value of the warrants has been classified as
equity because they meet all the equity classification criteria of EITF 00-19.
 1% Convertible Notes Due 2035.
   Accounting for
Convertible Debt and Debt Issued with Stock Purchase Warrants
 F-28




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##### Table of Contents



Note 8: Commitments, Contingencies and Guarantees
 Commitments
 FlashVision.
  Flash Partners .
  Flash Alliance.
 F-29




---



##### Table of Contents



Toshiba Foundry.
 TwinSys.
 Business Ventures and Foundry Arrangement with Toshiba.
 Other Silicon Sources.
 Subcontractors.
 F-30




---



##### Table of Contents



Off Balance Sheet Liabilities
  Master Lease Agreements by Execution Date
    
    Lease Amounts(1)
    
    
    Expiration(Yen in billions)
    
    
    (Dollars in millions)FlashVisionJune 2006
    
    ¥
    5.8
    
    
    $
    49
    
    
    
    2009Flash PartnersDecember 2004
    
    
    19.5
    
    
    
    164
    
    
    
    2010December 2005
    
    
    15.0
    
    
    
    126
    
    
    
    2011June 2006
    
    
    14.5
    
    
    
    121
    
    
    
    2011September 2006
    
    
    23.0
    
    
    
    194
    
    
    
    2011Total Flash Partners
    
    
    72.0
    
    
    
    605Total indemnification or guarantee obligation
    
    ¥
    77.8
    
    
    $
    654
 
 (1)
    
    The maximum amount of the Companys contingent indemnification or guarantee
obligation, net of payments and any lease adjustments. FlashVision.
 Flash Partners.
 F-31




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##### Table of Contents



Guarantees
 Indemnification Agreements.
   F-32




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##### Table of Contents



Contractual Obligations and Off Balance Sheet Arrangements
 Contractual Obligations.
 More than 52 - 3 Years
    
    
    3 5 Years
    
    
    YearsLess than
    
    
    (Fiscal 2008
    
    
    (Fiscal 2010
    
    
    (BeyondTotal
    
    
    1 Year
    
    
    and 2009)
    
    
    and 2011)
    
    
    Fiscal 2011)Operating
leases
    
    $
    52,174
    
    
    $
    8,777
    
    
    $
    16,380
    
    
    $
    13,980
    
    
    $
    13,037FlashVision, fabrication capacity expansion costs, and
reimbursement for certain other costs including
depreciation
    
    
    202,144
    (4)
    
    
    75,428
    
    
    
    110,726
    
    
    
    15,990
    
    
    
    Flash Partners fabrication capacity expansion and
reimbursement for certain other costs including
depreciation (1)
    
    
    2,593,168
    (4)
    
    
    1,181,142
    
    
    
    764,014
    
    
    
    564,013
    
    
    
    83,999Flash Alliance start-up and reimbursement for certain other
costs
    
    
    10,000
    (4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000Toshiba research and development
    
    
    66,000
    (4)
    
    
    31,000
    
    
    
    35,000
    
    
    
    
    
    
    
    Capital equipment purchases commitments
    
    
    62,960
    
    
    
    62,960
    
    
    
    
    
    
    
    
    
    
    
    1% Convertible Senior Notes principal and interest
(2)
    
    
    1,319,443
    
    
    
    12,250
    
    
    
    24,500
    
    
    
    24,500
    
    
    
    1,258,193Operating expense commitments
    
    
    8,972
    
    
    
    8,972
    
    
    
    
    
    
    
    
    
    
    
    Noncancelable production purchase commitments (3)
    
    
    327,745
    (4)
    
    
    327,745
    
    
    
    
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    4,642,606
    
    
    $
    1,708,274
    
    
    $
    950,620
    
    
    $
    618,483
    
    
    $
    1,365,229
 Off Balance Sheet Arrangements.
 As ofDecember 31, 2006Indemnification of FlashVision foundry equipment lease (5)
    
    $
    48,640Guarantee of
Flash Partners
lease(6)
    
    $
    604,797
 
 (1)
    
    As of December 31, 2006, the Company and Toshiba have agreed to expand Fab 3 to
135,000 wafers per month.(2)
    
    In May 2006, the Company issued and sold $1.15 billion in aggregate principal amount
of 1% Convertible Senior Notes due May 15, 2013. The Company will pay cash interest at an
annual rate of 1%, payable semi-annually on May 15 and November 15 of each year, beginning
November 15, 2006. In addition, in November 2006, through its acquisition of msystems, the
Company assumed msystems $75 million in aggregate principal amount of 1% Convertible Notes
due March 15, 2035. The Company will pay cash interest at an annual rate of 1%, payable
semi-annually on March 15 and September 15 of each year until calendar year 2035.(3)
    
    Includes Toshiba foundries, FlashVision, Flash Partners, related parties vendors and
other silicon sources vendors purchase commitments.(4)
    
    Includes amounts denominated in Japanese yen which are subject to fluctuation in
exchange rates prior to payment and have been translated using the exchange rate at December
31, 2006.(5)
    
    The Companys contingent indemnification obligation is 5.8 billion Japanese yen, or
approximately $49 million based upon the exchange rate at December 31, 2006.(6)
    
    The Companys guarantee obligation, net of cumulative lease payments, is 72.0
billion Japanese yen, or approximately $605 million based upon the exchange rate at December
31, 2006. F-33




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##### Table of Contents



Fiscal Year Ending:2007
    
    $
    8,4712008
    
    
    8,0182009
    
    
    7,8502010
    
    
    7,6262011
    
    
    6,3082012 and beyond
    
    
    13,037Total
    
    $
    51,310
 Foreign Currency Exchange and Other Contracts.
 F-34




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##### Table of Contents



Note 9: Related Parties and Strategic Investments
 Toshiba.
 FlashVision .
  Flash Partners.
  Flash Alliance.
  F-35




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##### Table of Contents



December 31, 2006
    
    
    January 1, 2006(Unaudited)Current assets
    
    $
    448,520
    
    
    $
    373,409Property, plant and equipment and other assets
    
    
    1,652,706
    
    
    
    1,039,844Total assets
    
    
    2,101,226
    
    
    
    1,413,253Current liabilities
    
    
    1,169,543
    
    
    
    881,529Long-term liabilities
    
    $
    262,063
    
    
    $
    124,616
  Twelve Months EndedDecember 31, 2006
    
    January 1, 2006
    
    January 2, 2005(Unaudited)Net sales(1)
    
    $
    1,462,024
    
    
    $
    795,464
    
    
    $
    502,949Gross profit (loss)
    
    
    8,894
    
    
    
    (349
    )
    
    
    2,553Net income
    
    $
    1,730
    
    
    $
    763
    
    
    $
    1,139
 
 (1)
    
    Net sales represent sales to both the Company and Toshiba. In addition, Flash
Partners revenue in fiscal year 2004 of $21.2 million represents reimbursement of start-up costs. TwinSys .
 Tower Semiconductor.
 Flextronics .
 F-36




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##### Table of Contents



Note 10: Business Acquisitions
 msystems Ltd. Business Combinations
  Fair value of SanDisk common stock issued
    
    $
    1,365,150Estimated fair value of options and stock appreciation rights assumed
    
    
    115,670Direct transaction costs
    
    
    14,918Total estimated purchase price
    
    $
    1,495,738
   Vested Options
    
    Unvested Options
    
    SARsValuation method
    
    Black-Scholes-Merton
    
    Black-Scholes-Merton
    
    Binomial ModelDividend yield
    
    None
    
    None
    
    NoneExpected volatility
    
    
    0.50
    
    
    
    0.50
    
    
    
    0.50Risk-free interest rate
    
    
    5.04
    %
    
    
    4.68
    %
    
    
    4.67
    %Weighted average expected life
    
    0.9 Years
    
    3.4 Years
    
    3.7 YearsFair value
    
    $
    46.48
    
    
    $
    46.48
    
    
    $
    46.48Exercise cap
    
    
    N/A
    
    
    
    N/A
    
    
    $
    104.76
  Net Tangible Assets
 F-37




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##### Table of Contents



Cash
    
    $
    41,657Short-term investments
    
    
    101,445Accounts receivable
    
    
    163,275Inventory
    
    
    133,512Property and equipment, net
    
    
    38,790Other assets
    
    
    49,127Total assets acquired
    
    
    527,806Accounts payable
    
    
    (133,263
    )Other liabilities
    
    
    (180,555
    )Total liabilities assumed
    
    
    (313,818
    )Net tangible assets acquired
    
    $
    213,988
 Purchase Price Allocation
  Net tangible assets acquired
    
    $
    213,988Goodwill
    
    
    759,250Other identifiable intangible assetsCore technology
    
    
    235,500Trademarks
    
    
    4,000Customer relationships
    
    
    66,000Backlog
    
    
    5,000Supply agreement
    
    
    2,000Total other identifiable intangible assets
    
    
    312,500Acquired in-process technology
    
    
    186,000Deferred tax liability
    
    
    (31,339
    )Assumed unvested stock-based awards to be expensed
    
    
    55,339Total preliminary estimated purchase price
    
    $
    1,495,738
  Acquisition-Related Restructuring
 U3 LLC
 In-process Technology.
 F-38




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F-39




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##### Table of Contents



Matrix Semiconductor, Inc. ®
 Net Tangible Liabilities.
 Cash
    
    $
    9,432Accounts receivable
    
    
    6,956Inventory
    
    
    4,010Property and equipment, net
    
    
    1,919Other assets
    
    
    1,786Total assets acquired
    
    
    24,103Accounts payable
    
    
    (2,302
    )Other liabilities
    
    
    (23,081
    )Total liabilities assumed
    
    
    (25,383
    )Net tangible liabilities acquired
    
    $
    (1,280
    )
 Purchase Price Allocation.
 Net tangible liabilities acquired
    
    $
    (1,280
    )Acquired in-process technology
    
    
    39,600Acquisition-related restructuring
    
    
    (17,462
    )Deferred income tax assets, net
    
    
    13,666Goodwill
    
    
    145,492Other intangible assets:Core technology
    
    
    76,300Developed product technology
    
    
    11,400Customer relationships
    
    
    14,100281,816Assumed unvested equity instruments to be expensed
    
    
    14,563Purchase price
    
    $
    296,379
  Acquisition-Related Restructuring
 F-40




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##### Table of Contents



In-process Technology.
   Pro Forma Results.
 December 31, 2006
    
    January 1, 2006Net revenues
    
    $
    4,030,645
    
    
    $
    2,925,431Net income
    
    $
    346,784
    
    
    $
    295,305Net income per share:Basic
    
    $
    1.51
    
    
    $
    1.39Diluted
    
    $
    1.42
    
    
    $
    1.29
  F-41




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##### Table of Contents



Note 11: Income Taxes
  December 31, 2006
    
    
    January 1, 2006
    
    
    January 2, 2005Current:Federal
    
    $
    174,320
    
    
    $
    159,147
    
    
    $
    138,558State
    
    
    27,788
    
    
    
    24,592
    
    
    
    13,731Foreign
    
    
    63,841
    
    
    
    32,323
    
    
    
    25,336265,949
    
    
    
    216,062
    
    
    
    177,625Deferred:Federal
    
    
    (22,623
    )
    
    
    15,663
    
    
    
    (20,963
    )State
    
    
    (9,585
    )
    
    
    (3,413
    )
    
    
    (78
    )Foreign
    
    
    (3,548
    )
    
    
    (1,389
    )
    
    
    (35,756
    )
    
    
    10,861
    
    
    
    (21,041
    )Provision for income taxes
    
    $
    230,193
    
    
    $
    226,923
    
    
    $
    156,584
  December 31, 2006
    
    
    January 1, 2006
    
    
    January 2, 2005United States
    
    $
    193,845
    
    
    $
    500,727
    
    
    $
    414,968International
    
    
    236,863
    
    
    
    112,580
    
    
    
    8,232Total
    
    $
    430,708
    
    
    $
    613,307
    
    
    $
    423,200
   December 31, 2006
    
    January 1, 2006
    
    January 2, 2005U.S. Federal statutory rate
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %State taxes, net of federal benefit
    
    
    3.1
    
    
    
    2.2
    
    
    
    2.1Non-deductible stock option expense
    
    
    2.9
    
    
    
    
    
    
    
    Write-off of acquired in-process technology
    
    
    18.3
    
    
    
    
    
    
    
    Tax exempt interest income
    
    
    (2.7
    )
    
    
    (0.8
    )
    
    
    (0.5
    )Foreign earnings at other than U.S. rates
    
    
    (2.3
    )
    
    
    
    
    
    
    Other
    
    
    (0.8
    )
    
    
    0.6
    
    
    
    0.453.5
    %
    
    
    37.0
    %
    
    
    37.0
    %
 F-42




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##### Table of Contents



December 31, 2006
    
    
    January 1, 2006Deferred tax assets:Inventory valuation
    
    $
    14,600
    
    
    $
    2,000Deferred revenue recognized for tax purposes
    
    
    57,400
    
    
    
    51,000Accruals and reserves not currently deductible
    
    
    133,800
    
    
    
    56,600Unrealized loss on investments
    
    
    24,500
    
    
    
    20,400Fixed assets and amortizable intangibles
    
    
    44,800
    
    
    
    15,500Deductible stock options
    
    
    19,800
    
    
    
    Deductible original issue discount
    
    
    136,700
    
    
    
    Net operating loss and tax credit carryforwards
    
    
    53,000
    
    
    
    Other
    
    
    3,400
    
    
    
    5,200Subtotal: Deferred tax assets
    
    
    488,000
    
    
    
    150,700Valuation allowance for deferred tax assets
    
    
    (60,100
    )
    
    
    (14,900
    )Total deferred tax assets
    
    $
    427,900
    
    
    $
    135,800Deferred tax liabilities:Acquired intangibles
    
    $
    (63,800
    )
    
    $
    Unrealized gain on sale of foundry shares
    
    
    (28,200
    )
    
    
    (19,500
    )U.S. taxes provided on unremitted earnings of foreign subsidiaries
    
    
    (88,500
    )
    
    
    (26,500
    )Total deferred tax liabilities
    
    
    (180,500
    )
    
    
    (46,000
    )Total net deferred tax assets
    
    $
    247,400
    
    
    $
    89,800
      F-43




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F-44




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##### Table of Contents



Note 12: Stockholders Rights Plan
  F-45




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##### Table of Contents



Note 13: Net Income per Share
  FY 2006
    
    
    FY 2005
    
    
    FY 2004Numerator:Numerator for basic net income per share:Net income
    
    $
    198,896
    
    
    $
    386,384
    
    
    $
    266,616Denominator for basic net income per share: Weighted average
common shares outstanding
    
    
    198,929
    
    
    
    183,008
    
    
    
    164,065Basic net income per share
    
    $
    1.00
    
    
    $
    2.11
    
    
    $
    1.63Numerator for diluted net income per share:Net income
    
    $
    198,896
    
    
    $
    386,384
    
    
    $
    266,616Tax-effected interest and bond amortization expenses
attributable to the notes
    
    
    58
    
    
    
    
    
    
    
    5,368Net income for diluted income per share
    
    $
    198,954
    
    
    $
    386,384
    
    
    $
    271,984Denominator for diluted net income per share:Weighted average common shares
    
    
    198,929
    
    
    
    183,008
    
    
    
    164,065Incremental common shares attributable to exercise of
outstanding employee stock options, restricted stock, restricted
stock units and warrants (assuming proceeds would be used to
purchase common stock)
    
    
    8,284
    
    
    
    10,008
    
    
    
    10,406Conversion of the Notes
    
    
    238
    
    
    
    
    
    
    
    14,366Shares used in computing diluted net income per share
    
    
    207,451
    
    
    
    193,016
    
    
    
    188,837Diluted net income per share
    
    $
    0.96
    
    
    $
    2.00
    
    
    $
    1.44Anti-dilutive shares excluded from net income per share calculation
    
    
    33,381
    
    
    
    98
    
    
    
    6,141
  F-46




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##### Table of Contents



Note 14: Litigation
      F-47




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##### Table of Contents



F-48




---



##### Table of Contents



F-49




---



##### Table of Contents



F-50




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##### Table of Contents



Note
15: Condensed Consolidating Financial Statements
   Condensed
Consolidating Statements of Operations
For the year ended December 31, 2006
 Other
    
    
    CombinedParent
    
    
    Subsidiary
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    Consolidating
    
    
    TotalCompany
    
    
    Issuer
    
    
    Subsidiary
    
    
    Subsidiaries
    
    
    Adjustments
    
    
    Company(In thousands)Total revenues
    
    $
    2,101,601
    
    
    $
    
    
    
    $
    89,411
    
    
    $
    4,165,416
    
    
    $
    (3,098,903)
    
    
    $
    3,257,525Total cost of revenues
    
    
    1,280,102
    
    
    
    
    
    
    
    84,763
    
    
    
    3,664,513
    
    
    
    (3,011,326
    )
    
    
    2,018,052Gross profits
    
    
    821,499
    
    
    
    
    
    
    
    4,648
    
    
    
    500,903
    
    
    
    (87,577
    )
    
    
    1,239,473Total operating expenses
    
    
    467,259
    
    
    
    
    
    
    
    212,735
    
    
    
    324,587
    
    
    
    (91,442
    )
    
    
    913,139Operating income
    
    
    354,240
    
    
    
    
    
    
    
    (208,087
    )
    
    
    176,316
    
    
    
    3,865
    
    
    
    326,334Total other income (expense)
    
    
    96,415
    
    
    
    5
    
    
    
    1,663
    
    
    
    44,925
    
    
    
    (40,253
    )
    
    
    102,755Income (loss) before taxes
    
    
    450,655
    
    
    
    5
    
    
    
    (206,424
    )
    
    
    221,241
    
    
    
    (36,388
    )
    
    
    429,089Provision (benefit) for income taxes
    
    
    229,376
    
    
    
    
    
    
    
    (1,485
    )
    
    
    2,302
    
    
    
    
    
    
    
    230,193Equity in net income of
consolidated subsidiaries
    
    
    207,438
    
    
    
    
    
    
    
    528
    
    
    
    26,077
    
    
    
    (234,043
    )
    
    
    Net income (loss)
    
    $
    428,717
    
    
    $
    5
    
    
    $
    (204,411
    )
    
    $
    245,016
    
    
    $
    (270,431
    )
    
    $
    198,896
 F-51




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##### Table of Contents



Condensed
Consolidating Balance Sheets
As of December 31, 2006
 CombinedOther
    
    
    Non-Parent
    
    
    Subsidiary
    
    
    Guarantor
    
    
    Guarantor
    
    
    Consolidating
    
    
    TotalCompany
    
    
    Issuer
    
    
    Subsidiary
    
    
    Subsidiaries
    
    
    Adjustments
    
    
    Company(In thousands)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    1,165,473
    
    
    $
    48
    
    
    $
    71,839
    
    
    $
    340,291
    
    
    $
    3,049
    
    
    $
    1,580,700Short-term investments
    
    
    1,192,084
    
    
    
    
    
    
    
    26,294
    
    
    
    2,681
    
    
    
    7,714
    
    
    
    1,228,773Accounts receivable, net
    
    
    256,801
    
    
    
    
    
    
    
    55,864
    
    
    
    313,407
    
    
    
    (14,332
    )
    
    
    611,740Inventory
    
    
    106,772
    
    
    
    
    
    
    
    71,839
    
    
    
    318,154
    
    
    
    (781
    )
    
    
    495,984Deferred taxes
    
    
    152,791
    
    
    
    
    
    
    
    
    
    
    
    23,217
    
    
    
    (1
    )
    
    
    176,007Other current assets
    
    
    344,722
    
    
    
    69,992
    
    
    
    74,434
    
    
    
    229,912
    
    
    
    (570,403
    )
    
    
    148,657Total current assets
    
    
    3,218,643
    
    
    
    70,040
    
    
    
    300,270
    
    
    
    1,227,662
    
    
    
    (574,754
    )
    
    
    4,241,861Property and equipment, net
    
    
    182,750
    
    
    
    
    
    
    
    34,870
    
    
    
    100,345
    
    
    
    
    
    
    
    317,965Goodwill
    
    
    
    
    
    
    
    
    
    
    759,729
    
    
    
    150,470
    
    
    
    55
    
    
    
    910,254Intangibles, net
    
    
    
    
    
    
    
    
    
    
    312,682
    
    
    
    76,396
    
    
    
    
    
    
    
    389,078Other non-current assets
    
    
    1,735,998
    
    
    
    2,882
    
    
    
    111,754
    
    
    
    368,467
    
    
    
    (1,110,476
    )
    
    
    1,108,625Total assets
    
    $
    5,137,391
    
    
    $
    72,922
    
    
    $
    1,519,305
    
    
    $
    1,923,340
    
    
    $
    (1,685,175
    )
    
    $
    6,967,783LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    43,910
    
    
    $
    
    
    
    $
    46,349
    
    
    $
    312,219
    
    
    $
    (981
    )
    
    $
    401,497Other current accrued liabilities
    
    
    515,042
    
    
    
    226
    
    
    
    59,287
    
    
    
    512,525
    
    
    
    (592,130
    )
    
    
    494,950Total current liabilities
    
    
    558,952
    
    
    
    226
    
    
    
    105,636
    
    
    
    824,744
    
    
    
    (593,111
    )
    
    
    896,447Convertible long-term debt
    
    
    1,150,000
    
    
    
    71,471
    
    
    
    
    
    
    
    4,614
    
    
    
    (1,085
    )
    
    
    1,225,000Non-current liabilities and deferred revenue
    
    
    18,029
    
    
    
    
    
    
    
    32,229
    
    
    
    35,746
    
    
    
    (7,802
    )
    
    
    78,202Total liabilities
    
    
    1,726,981
    
    
    
    71,697
    
    
    
    137,865
    
    
    
    865,104
    
    
    
    (601,998
    )
    
    
    2,199,649Stockholders Equity:Common stock
    
    
    2,387,819
    
    
    
    
    
    
    
    1,085,277
    
    
    
    675,218
    
    
    
    (491,193
    )
    
    
    3,657,121Retained earnings
    
    
    1,018,566
    
    
    
    1,225
    
    
    
    290,390
    
    
    
    373,881
    
    
    
    (578,542
    )
    
    
    1,105,520Accumulated other comprehensive income
    
    
    4,025
    
    
    
    
    
    
    
    5,773
    
    
    
    9,137
    
    
    
    (13,442
    )
    
    
    5,493Total stockholders equity
    
    
    3,410,410
    
    
    
    1,225
    
    
    
    1,381,440
    
    
    
    1,058,236
    
    
    
    (1,083,177
    )
    
    
    4,768,134Total liabilities and stockholders equity
    
    $
    5,137,391
    
    
    $
    72,922
    
    
    $
    1,519,305
    
    
    $
    1,923,340
    
    
    $
    (1,685,175
    )
    
    $
    6,967,783
 F-52




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##### Table of Contents



Condensed Consolidating Statements of Cash Flows
For the year ended December 31, 2006
 CombinedOther
    
    
    Non-Parent
    
    
    Subsidiary
    
    
    Guarantor
    
    
    Guarantor
    
    
    Consolidating
    
    
    TotalCompany
    
    
    Issuer
    
    
    Subsidiary
    
    
    Subsidiaries
    
    
    Adjustments
    
    
    Company(In thousands)Net cash provided by (used in) operating
activities
    
    
    458,012
    
    
    
    
    
    
    
    (15,214
    )
    
    
    330,026
    
    
    
    (174,761
    )
    
    
    598,063Net cash provided by (used in) investing
activities
    
    
    (1,039,970
    )
    
    
    
    
    
    
    73,927
    
    
    
    (12,018
    )
    
    
    
    
    
    
    (978,061
    )Net cash provided by (used in) financing
activities
    
    
    1,201,779
    
    
    
    
    
    
    
    (3,222
    )
    
    
    (1,269
    )
    
    
    
    
    
    
    1,197,288Effect of changes in foreign currency
exchange rates on cash
    
    
    1,542
    
    
    
    
    
    
    
    247
    
    
    
    (437
    )
    
    
    
    
    
    
    1,352Net increase (decrease) in cash and cash
equivalents
    
    
    621,363
    
    
    
    
    
    
    
    55,738
    
    
    
    316,302
    
    
    
    (174,761
    )
    
    
    818,642Cash and cash equivalents at beginning of
period
    
    
    544,110
    
    
    
    48
    
    
    
    16,101
    
    
    
    23,990
    
    
    
    177,809
    
    
    
    762,058Cash and cash equivalents at end of period
    
    $
    1,165,473
    
    
    $
    48
    
    
    $
    71,839
    
    
    $
    340,292
    
    
    $
    3,048
    
    
    $
    1,580,700
 F-53




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##### Table of Contents



Note 16: Supplementary Financial Data (Unaudited)
 Quarters EndedApril 2, 2006
    
    
    July 2, 2006
    
    
    October 1, 2006
    
    
    December 31, 2006(In thousands, except per share data)2006RevenuesProduct
    
    $
    537,728
    
    
    $
    636,675
    
    
    $
    673,189
    
    
    $
    1,078,880License and royalty
    
    
    85,532
    
    
    
    82,510
    
    
    
    78,196
    
    
    
    84,815Total revenues
    
    
    623,260
    
    
    
    719,185
    
    
    
    751,385
    
    
    
    1,163,695Gross profit(1)
    
    
    238,393
    
    
    
    289,008
    
    
    
    296,040
    
    
    
    416,032Operating income(1)
    
    
    57,925
    
    
    
    128,542
    
    
    
    128,327
    
    
    
    11,540Net income (loss)
    
    $
    35,115
    
    
    $
    95,641
    
    
    $
    103,281
    
    
    $
    (35,141
    )Net income (loss) per shareBasic
    
    $
    0.18
    
    
    $
    0.49
    
    
    $
    0.53
    
    
    $
    (0.17
    )Diluted
    
    $
    0.17
    
    
    $
    0.47
    
    
    $
    0.51
    
    
    $
    (0.17
    )Quarters EndedApril 3, 2005
    
    
    July 3, 2005
    
    
    October 2, 2005
    
    
    January 1, 2006(In thousands, except per share data)2005RevenuesProduct
    
    $
    399,679
    
    
    $
    453,762
    
    
    $
    529,735
    
    
    $
    683,431License and royalty
    
    
    51,296
    
    
    
    61,134
    
    
    
    59,896
    
    
    
    67,136Total revenues
    
    
    450,975
    
    
    
    514,896
    
    
    
    589,631
    
    
    
    750,567Gross profit
    
    
    199,787
    
    
    
    214,099
    
    
    
    256,784
    
    
    
    302,064Operating income
    
    
    113,519
    
    
    
    106,044
    
    
    
    158,568
    
    
    
    198,451Net income(2)
    
    $
    74,516
    
    
    $
    70,496
    
    
    $
    107,458
    
    
    $
    133,914Net income per shareBasic(3)
    
    $
    0.41
    
    
    $
    0.39
    
    
    $
    0.59
    
    
    $
    0.72Diluted(3)
    
    $
    0.39
    
    
    $
    0.37
    
    
    $
    0.55
    
    
    $
    0.68(1)
        Includes the following charges related to acquisitions of Matrix in January 2006 and
msystems in November 2006, share-based
            compensation and amortization of acquisition-related
intangible assets:
 Quarters EndedApril 2, 2006
    
    
    July 2, 2006
    
    
    October 1, 2006
    
    
    December 31, 2006(In thousands)Write-off of acquired
in-process technology
    
    $
    39,600
    
    
    $
    
    
    
    $
    
    
    
    $
    186,000Share-based compensation
    
    
    18,786
    
    
    
    25,870
    
    
    
    25,192
    
    
    
    30,793Amortization of
acquisition-related
intangible assets
    
    
    3,715
    
    
    
    4,432
    
    
    
    4,432
    
    
    
    15,221Total
    
    $
    62,101
    
    
    $
    30,302
    
    
    $
    29,624
    
    
    $
    232,014
 
 (2)
    
    In the first and second quarter of 2005, we recognized a loss of ($10.1) million and
($0.1) million on the other-than-temporary decline in the fair value of our investment in
Tower and our Tower warrants, respectively.(3)
    
    Quarterly earnings per share figures may not total to yearly earnings per share, due
to rounding and fluctuations in the number of options included or omitted from diluted
calculations based on the stock price or option strike prices. F-54




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##### Table of Contents



Note 17: Subsequent Events
   F-55




---



##### Table of Contents



SIGNATURES
  SANDISK CORPORATIONBy:
    /s/ Judy BrunerJudy BrunerExecutive Vice President, Administration and
Chief Financial Officer
(On behalf of the Registrant and as Principal
Financial and Accounting Officer)  POWER OF ATTORNEY
   Signature
    
    Title
    
    DateBy:
    
    /s/ Eli Harari

(Dr. Eli Harari)
    
    Chairman of the
Board and Chief
Executive Officer
(Principal
Executive Officer)
    
    February 27, 2007By:
    
    /s/ Judy Bruner

(Judy Bruner)
    
    Executive Vice
President,
Administration and
Chief Financial
Officer (Principal
Financial and
Accounting Officer)
    
    February 27, 2007By:
    
    /s/ Irwin Federman

(Irwin Federman)
    
    Vice Chairman of
the Board and Lead
Independent
Director
    
    February 27, 2007By:
    
    /s/ Steven J. Gomo
    
    Director
    
    February 27, 2007(Steven J. Gomo)By:
    
    /s/ Catherine P. Lego
    
    Director
    
    February 27, 2007(Catherine P. Lego)By:
    
    /s/ Michael E. Marks
    
    Director
    
    February 27, 2007(Michael E. Marks)By:
    
    /s/ James D. Meindl
    
    Director
    
    February 27, 2007(James D. Meindl)
 S-1




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##### Table of Contents



INDEX TO EXHIBITS
 ExhibitNumber
    
    Exhibit Title2.1
    
    
    Agreement and Plan of Merger, dated as of October 20, 2005, by and among the Registrant, Mike
Acquisition Company LLC, Matrix Semiconductor, Inc. and Bruce Dunlevie as the stockholder
representative for the stockholders of Matrix Semiconductor, Inc.(26)2.2
    
    
    Agreement and Plan of Merger, dated as of July 30, 2006, by and among the Registrant, Project Desert
Ltd. and msystems Ltd.(30)3.1
    
    
    Restated Certificate of Incorporation of the Registrant.(2)3.2
    
    
    Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant dated December
9, 1999.(7)3.3
    
    
    Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant dated May 11,
2000.(10)3.4
    
    
    Certificate of Amendment to the Amended Restated Certificate of Incorporation of the Registrant dated
May 26, 2006.(33)3.5
    
    
    Restated Bylaws of the Registrant, as amended April 5, 2006.(27)3.6
    
    
    Certificate of Designations for the Series A Junior Participating Preferred Stock, as filed with the
Delaware Secretary of State on April 24, 1997.(4)3.7
    
    
    Amendment to Certificate of Designations for the Series A Junior Participating Preferred Stock, as
filed with the Delaware Secretary of State on September 24, 2003.(19)4.1
    
    
    Reference is made to Exhibits 3.1, 3.2, 3.3, and 3.4.(2), (7), (10), (33)4.2
    
    
    Rights Agreement, dated as of September 15, 2003, between the Registrant and Computershare Trust
Company, Inc.(18)4.3
    
    
    Amendment No. 1 to Rights Agreement by and between the Registrant and Computershare Trust Company,
Inc., dated as of November 6, 2006.(36)4.4
    
    
    SanDisk Corporation Form of Indenture (including notes).(28)4.5
    
    
    Indenture (including form of Notes) with respect to the Registrants 1.00% Convertible Senior Notes due
2013 dated as of May 15, 2006 by and between the Registrant and The Bank of New York.(29)10.1
    
    
    Form of Indemnification Agreement entered into between the Registrant and its directors and officers.(2)10.2
    
    
    License Agreement between the Registrant and Dr. Eli Harari, dated September 6, 1988.(2)10.3
    
    
    Lease Agreement between the Registrant and G.F. Properties, dated March 1, 1996.(3)10.4
    
    
    Amendment to Lease Agreement between the Registrant and G.F. Properties, dated April 3, 1997.(5)10.5
    
    
    Lease Agreement between the Registrant and G.F. Properties, dated June 10, 1998.(6)10.6
    
    
    SanDisk Corporation 1995 Stock Option Plan, as Amended and Restated January 2, 2002.(15), (*)10.7
    
    
    SanDisk Corporation 1995 Non-Employee Directors Stock Option Plan, as Amended and Restated as of
January 2, 2004.(16), (*)10.8
    
    
    Share Purchase Agreement, dated as of July 4, 2000, by and between the Registrant and Tower
Semiconductor Ltd.(8)
 1




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##### Table of Contents



ExhibitNumber
    
    Exhibit Title10.9
    
    
    Escrow Agreement, dated as of August 14, 2000, by and between the Registrant, Tower Semiconductor Ltd.
and Union Bank of California, N.A.(8)10.10
    
    
    Additional Purchase Obligation Agreement, dated as of July 4, 2000, by and between the Registrant and
Tower Semiconductor Ltd.(8)10.11
    
    
    Registration Rights Agreement, dated as of January 18, 2001, by and between the Registrant, The Israel
Corporation, Alliance Semiconductor Ltd., Macronix International Co., Ltd. and Quick Logic
Corporation.(9)10.12
    
    
    Consolidated Shareholders Agreement, dated as of January 18, 2001, by and among the Registrant, The
Israel Corporation, Alliance Semiconductor Ltd. and Macronix International Co., Ltd.(9)10.13
    
    
    Agreement, dated as of September 28, 2006, by and among the Registrant, Bank Leumi Le Israel B.M., a
banking corporation organized under the laws of the State of Israel, The Israel Corporation Ltd.,
Alliance Semiconductor Corporation and Macronix International Co. Ltd.(35)10.14
    
    
    Agreement, dated as of September 28, 2006, by and among the Registrant, Bank Hapoalim B.M., a banking
corporation organized under the laws of the State of Israel, The Israel Corporation Ltd., Alliance
Semiconductor Corporation and Macronix International Co. Ltd.(35)10.15
    
    
    Amendment to Share Purchase Agreement, dated as of March 20, 2002, by and between the Registrant and
Tower Semiconductor Ltd.(11)10.16
    
    
    Amendment to Share Purchase Agreement, dated as of February 21, 2003, by and between the Registrant,
Tower Semiconductor Ltd. and the other parties thereto.(17)10.17
    
    
    Side Letter to Amendment to Share Purchase Agreement, dated as of February 24, 2003, by and between the
Registrant, Tower Semiconductor Ltd. and the other parties thereto.(17)10.18
    
    
    Side Letter to Amendment to Share Purchase Agreement, dated as of April 14, 2003, by and between the
Registrant, Tower Semiconductor Ltd. and the other parties thereto.(17)10.19
    
    
    Amendment No. 3 to Payment Schedule of Series A-5 Additional Purchase Obligations, Waiver of Series A-5
Conditions, Conversion of Series A-4 Wafer Credits and Other Provisions, dated as of November 11, 2003,
by and between the Registrant, Tower Semiconductor Ltd. and the other parties thereto.(19)10.20
    
    
    New Master Agreement, dated as of April 10, 2002, by and between the Registrant and Toshiba
Corporation.(12), (1)10.21
    
    
    Amendment to New Master Agreement, dated and effective as of August 13, 2002 by and between the
Registrant and Toshiba Corporation.(13), (1)10.22
    
    
    New Operating Agreement, dated as of April 10, 2002, by and between the Registrant and Toshiba
Corporation.(12), (1)10.23
    
    
    Indemnification and Reimbursement Agreement, dated as of April 10, 2002, by and between the Registrant
and Toshiba Corporation.(12), (1)10.24
    
    
    Amendment to Indemnification and Reimbursement Agreement, dated as of May 29, 2002 by and between the
Registrant and Toshiba Corporation.(12)10.25
    
    
    Amendment No. 2 to Indemnification and Reimbursement Agreement, dated as of May 29, 2002 by and between
the Registrant and Toshiba Corporation.(34)10.26
    
    
    Settlement Agreement, dated as of November 14, 2003, by and among the Registrant, Lee and Li and
certain Lee and Li partners.(19), (1)10.27
    
    
    Form of Change of Control Agreement entered into by and between the Registrant and each of the
following officers of the Registrant: the Chief Financial Officer; the Executive Vice President and
Chief Operating Officer; the Sr. Vice President and General Manager, Retail Business Unit; the Sr.
Vice President, Engineering; the Vice President and General Counsel; and the Vice President, Business
Development.(20), (*)
 2




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##### Table of Contents



ExhibitNumber
    
    Exhibit Title10.28
    
    
    Change of Control Agreement entered into by and between the Registrant and the President and Chief
Executive Officer of the Registrant.(20), (*)10.29
    
    
    Settlement and Release Agreement, dated as of June 29, 2004, by and between the Registrant and Michael
Gray.(21)10.30
    
    
    Flash Partners Master Agreement, dated as of September 10, 2004, by and among the Registrant and the
other parties thereto.(21), (1)10.31
    
    
    Flash Alliance Master Agreement, dated as of July 7, 2006, by and among the Registrant, Toshiba
Corporation and SanDisk (Ireland) Limited.(31), (+)10.32
    
    
    Operating Agreement of Flash Partners Ltd., dated as of September 10, 2004, by and between SanDisk
International Limited and Toshiba Corporation.(21), (1)10.33
    
    
    Operating Agreement of Flash Alliance, Ltd., dated as of July 7, 2006, by and between Toshiba
Corporation and SanDisk (Ireland) Limited.(31), (+)10.34
    
    
    Amended and Restated Common R&D and Participation Agreement, dated as of September 10, 2004, by and
between the Registrant and Toshiba Corporation.(21), (1)10.35
    
    
    Second Amended and Restated Common R&D and Participation Agreement, dated as of July 7, 2006, by and
between the Registrant and Toshiba Corporation.(31), (+)10.36
    
    
    Amended and Restated Product Development Agreement, dated as of September 10, 2004, by and between the
Registrant and Toshiba Corporation.(21), (1)10.37
    
    
    Second Amended and Restated Product Development Agreement, dated as of July 7, 2006, by and between the
Registrant and Toshiba Corporation.(31), (+)10.38
    
    
    Mutual Contribution and Environmental Indemnification Agreement, dated as of September 10, 2004, by and
among the Registrant and the other parties thereto.(21), (1)10.39
    
    
    Flash Alliance Mutual Contribution and Environmental Indemnification Agreement, dated as of July 7,
2006, by and between Toshiba Corporation and SanDisk (Ireland) Limited.(31), (+)10.40
    
    
    Patent Indemnification Agreement, dated as of September 10, 2004 by and among the Registrant and the
other parties thereto.(21), (1)10.41
    
    
    Patent Indemnification Agreement, dated as of July 7, 2006, by and among the Registrant and the other
parties thereto.(31), (+)10.42
    
    
    Master Lease Agreement, dated as of December 24, 2004, by and among Mitsui Leasing & Development, Ltd.,
IBJ Leasing Co., Ltd., and Sumisho Lease Co., Ltd. and Flash Partners Ltd.(22), (1)10.43
    
    
    Master Lease Agreement, dated as of September 22, 2006, by and among Flash Partners Limited Company,
SMBC Leasing Company, Limited, Toshiba Finance Corporation, Sumisho Lease Co., Ltd., Fuyo General Lease
Co., Ltd., Tokyo Leasing Co., Ltd., STB Leasing Co., Ltd. and IBJ Leasing Co., Ltd.(31), (+)10.44
    
    
    Guarantee Agreement, dated as of December 24, 2004, by and between the Registrant and Mitsui Leasing &
Development, Ltd.(22)10.45
    
    
    Guarantee Agreement, dated as of September 22, 2006, by and among the Registrant, SMBC Leasing Company,
Limited and Toshiba Finance Corporation.(31)10.46
    
    
    Amended and Restated SanDisk Corporation 2005 Incentive Plan.(34), (*)10.47
    
    
    SanDisk Corporation Form of Notice of Grant of Stock Option.(23), (*)
 3




---



##### Table of Contents



ExhibitNumber
    
    Exhibit Title10.48
    
    
    SanDisk Corporation Form of Notice of Grant of Non-Employee Director Automatic Stock Option (Initial
Grant).(23), (*)10.49
    
    
    SanDisk Corporation Form of Notice of Grant of Non-Employee Director Automatic Stock Option (Annual
Grant).(23), (*)10.50
    
    
    SanDisk Corporation Form of Stock Option Agreement.(23), (*)10.51
    
    
    SanDisk Corporation Form of Automatic Stock Option Agreement.(23), (*)10.52
    
    
    SanDisk Corporation Form of Restricted Stock Unit Issuance Agreement.(23), (*)10.53
    
    
    SanDisk Corporation Form of Restricted Stock Unit Issuance Agreement (Director Grant).(23), (*)10.54
    
    
    SanDisk Corporation Form of Restricted Stock Award Agreement.(23), (*)10.55
    
    
    SanDisk Corporation Form of Restricted Stock Award Agreement (Director Grant).(23), (*)10.56
    
    
    Form of Amendment to Change of Control Agreement for those officers of the Registrant who are party to
such Agreement.(24), (*)10.57
    
    
    Guarantee Agreement between the Registrant, IBJ Leasing Co., Ltd., Sumisho Lease Co., Ltd., and Toshiba
Finance Corporation.(25)10.58
    
    
    Guarantee Agreement, dated as of June 20, 2006, by and between the Registrant, IBJ Leasing Co., Ltd.,
Sumisho Lease Co., Ltd. and Toshiba Finance Corporation.(34)10.59
    
    
    Basic Lease Contract between Flash Partners Yuken Kaisha, IBJ Leasing Co., Ltd., Sumisho Lease Co.,
Ltd., and Toshiba Finance Corporation.(25), (+)10.60
    
    
    Basic Lease Contract, dated as of June 20, 2006, by and between Flash Partners Yuken Kaisha, IBJ
Leasing Co., Ltd., Sumisho Lease Co., Ltd. and Toshiba Finance Corporation.(34), (+)10.61
    
    
    SanDisk Corporation Form of Voting Agreement.(30)10.62
    
    
    Sublease (Building 3), dated as of December 21, 2005 by and between Maxtor Corporation and the
Registrant.(34)10.63
    
    
    Sublease (Building 4), dated as of December 21, 2005 by and between Maxtor Corporation and the
Registrant.(34)10.64
    
    
    Sublease
(Building 5), dated as of November 1, 2006 by and between Maxtor Corporation and the
Registrant.(**)10.65
    
    
    Sublease (Building 6), dated as of December 21, 2005 by and between Maxtor Corporation and the
Registrant.(34)10.66
    
    
    Separation
Agreement between the Registrant and Nelson Chan, dated as of December 8, 2006.(32)12.1
    
    
    Computation of ratio of earnings to fixed charges. (**)21.1
    
    
    Subsidiaries of the Registrant(**)23.1
    
    
    Consent of Independent Registered Public Accounting Firm(**)31.1
    
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(**)31.2
    
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(**)32.1
    
    
    Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002(**)
 4




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##### Table of Contents



ExhibitNumber
    
    Exhibit Title32.2
    
    
    Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002(**)
 
 *
    
    Indicates management contract or compensatory plan or arrangement.**
    
    Filed herewith.+
    
    Confidential treatment has been requested with respect to certain portions hereof.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. (File
No. 0-26734)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 Form 10-Q for the quarter ended June 30,
1998.7.
    
    Previously filed as an Exhibit to the Registrants Form 10-Q for the quarter ended June 30,
2000.8.
    
    Previously filed as an Exhibit to the Registrants Form 10-Q for the quarter ended September
30, 2000.9.
    
    Previously filed as an Exhibit to the Registrants Schedule 13(d) dated January 26, 2001.10.
    
    Previously filed as an Exhibit to the Registrants Registration Statement on Form S-3 (No.
333-85686).11.
    
    Previously filed as an Exhibit to the Registrants Form 10-Q for the quarter ended March 31,
2002.12.
    
    Previously filed as an Exhibit to the Registrants Form 10-Q for the quarter ended June 30,
2002.13.
    
    Previously filed as an Exhibit to the Registrants Form 10-Q for the quarter ended September
30, 2002.14.
    
    Previously filed as an Exhibit to the Registrants Registration Statement on Form S-8 (No.
333-63076).15.
    
    Previously filed as an Exhibit to the Registrants Registration Statement on Form S-8 (No.
333-85320).16.
    
    Previously filed as an Exhibit to the Registrants Registration Statement on Form S-8 (No.
333-112139).17.
    
    Previously filed as an Exhibit to the Registrants Form 10-Q for the quarter ended March 30,
2003.18.
    
    Previously filed as an Exhibit to the Registrants Registration Statement on Form 8-A dated
September 25, 2003.19.
    
    Previously filed as an Exhibit to the Registrants 2003 Annual Report on Form 10-K.20.
    
    Previously filed as an Exhibit to the Registrants Form 10-Q for the quarter ended June 27,
2004.21.
    
    Previously filed as an Exhibit to the Registrants Form 10-Q for the quarter ended September
26, 2004.22.
    
    Previously filed as an Exhibit to the Registrants 2004 Annual Report on Form 10-K.23.
    
    Previously filed as an Exhibit to the Registrants Current Report on Form 8-K dated June 3,
2005. 5




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##### Table of Contents



24.
    
    Previously filed as an Exhibit to the Registrants Form 10-Q for the quarter ended July 3,
2005.25.
    
    Previously filed as an Exhibit to the Registrants 2005 Annual Report on Form 10-K.26.
    
    Previously filed as an Exhibit to the Registrants Form 8-K dated January 20, 2006.27.
    
    Previously filed as an Exhibit to the Registrants Form 8-K dated April 10, 2006.28.
    
    Previously filed as an Exhibit to the Registrants Form 8-K dated May 9, 2006.29.
    
    Previously filed as an Exhibit to the Registrants Form 8-K dated May 15, 2006.30.
    
    Previously filed as an Exhibit to the Registrants Form 8-K/A dated August 1, 2006.31.
    
    Previously filed as an Exhibit to the Registrants Form 10-Q for the quarter ended October
1, 200632.
    
    Previously filed as an Exhibit to the Registrants Form 8-K dated December 8, 2006.33.
    
    Previously filed as an Exhibit to the Registrants Form 8-K dated June 1, 2006.34.
    
    Previously filed as an Exhibit to the Registrants Form 10-Q for the quarter ended July 2,
2006.35.
    
    Previously filed as an Exhibit to the Registrants Schedule 13(d)/A dated October 12, 2006.36.
    
    Previously filed as an Exhibit to the Registrants Form 8-A/A dated November 8, 2006. 6