UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON,
D.C.  20549
  FORM
10-K
  (Mark
      One)þ
                  ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d)OF
      THE SECURITIES EXCHANGE ACT OF 1934
  For the
fiscal year ended December 28, 2008
 OR
 o
                        TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d)OF
      THE SECURITIES EXCHANGE ACT OF
1934
 
 For the
transition period
from                                               
to




0000-26734







SANDISK
CORPORATION


(Exact
name of registrant as specified in its charter)


Delaware
            
            77-0191793(State
      or other jurisdiction of
              incorporation
      or organization)
            
            (I.R.S.  Employer
              Identification
      No.)601
      McCarthy Blvd.
              Milpitas,
      California
            
            95035(Address
      of principal executive offices)
            
            (Zip
      Code)





(408)
801-1000


(Registrant’s
telephone number, including area code)




Securities
registered pursuant to Section 12(b) of the Act:





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




Securities
registered pursuant to Section 12(g) of the Act: None







Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.  Yesþ     No  ̈





Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Exchange Act.  Yes ̈     No þ





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes þ     No  ̈





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.   ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See definitions of “large accelerated filer,” “accelerated
filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.  (Check one):




Large
      accelerated filer þ
            Accelerated
      filer  ̈
            Non
      accelerated filer  ̈
            Smaller
      reporting company  ̈


(Do
not check if a smaller reporting company)





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes  ̈     No þ





As of
June 29, 2008, the aggregate market value of the registrant’s common stock
held by non-affiliates of the registrant was $3,426,356,806 based on the closing
sale price as reported on the NASDAQ Global Select Market.





Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.





Class
                
                Outstanding at January 30,2009Common
      Stock, $0.001 par value per share
                
                226,149,437
      shares








DOCUMENTS
INCORPORATED BY REFERENCE





Document
                
                Parts Into Which
    IncorporatedAnnual
      Report to Stockholders for the Fiscal Year Ended December 28,
      2008 (Annual Report)
                
                Parts
      I, II, and IVProxy
      Statement for the Annual Meeting of Stockholders to be held
      May 27, 2009 (Proxy Statement)
                
                Part
      III
















SANDISK
CORPORATION




Table of Contents





Page
                No.PART
      IItem
      1.
            Business
            3Item
      1A.
            Risk Factors
            12Item
      1B.
            Unresolved Staff
      Comments
            33Item
      2.
            Properties
            34Item
      3.
            Legal Proceedings
            35Item
      4.
            Submission of Matters to a Vote of Security
      Holders
            41PART
      IIItem
      5.
            Market for Registrant’s Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity Securities
            42Item
      6.
            Selected Financial Data
            44Item
      7.
            Management’s Discussion and Analysis of Financial Condition
      and Results of Operation
            45Item
      7A.
            Quantitative and Qualitative Disclosures About Market
      Risk
            61Item
      8.
            Financial Statements and Supplementary
    Data
            62Item
      9.
            Changes in and Disagreements with Accountants on Accounting
      and Financial Disclosure
            63Item
      9A.
            Controls and Procedures
            63Item
      9B.
            Other Information
            63PART
      IIIItem
      10.
            Directors, Executive Officers and Corporate
      Governance
            64Item
      11.
            Executive Compensation
            64Item
      12.
            Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
            64Item
      13.
            Certain Relationships and Related Transactions, and
      Director Independence
            64Item
      14.
            Principal Accountant Fees and Services
            64PART
      IVItem
      15.
            Exhibits and Financial Statement
    Schedules
            65OTHERIndex To Financial
    Statements
            F-1Signatures
            S-1







- 2
-
 Table of Contents
  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 2008,
2007 and 2006.
 
 Overview
 
 Who We
Are.SanDisk Corporation, a S&P 500 company, is the
inventor of and worldwide leader in NAND-based flash storage
cards.  Flash storage technology allows data to be stored in a
durable, compact format that retains the digital information even after the
power has been switched off.  Our mission is to provide simple,
reliable and affordable storage at different capacities for consumer use in a
wide variety of formats and devices.  We sell SanDisk branded products
for consumer electronics through broad global retail and original equipment
manufacturer, or OEM, distribution channels.
 
 We
design, develop and manufacture products and solutions in a variety of form
factors using our flash memory, controller and firmware
technologies.  We source the vast majority of our flash memory supply
through our significant flash venture relationships with Toshiba Corporation, or
Toshiba, which provide us with leading-edge, low-cost memory
wafers.  Our card products are used in a wide range of consumer
electronics devices such as mobile phones, digital cameras, gaming devices and
laptop computers.  We also provide high-speed and high-capacity
storage solutions, known as solid-state drives, or SSDs, that can be used in
lieu of hard disk drives in a variety of computing devices, including personal
computers and enterprise servers.  We also produce Universal Serial
Bus, or USB, drives, and MP3 players as well as embedded flash storage products
that are used in a variety of systems for the enterprise, industrial, military
and other markets.
 
 Our
Strategy.Our strategy is to be an industry-leading supplier
of flash storage solutions and to develop large scale markets for flash-based
storage products.  We maintain our technology leadership by investing
in advanced technologies and flash memory fabrication capacity in order to
produce leading-edge, low-cost flash memory for use in end-products that we
design and market.  We are a one-stop-shop for our retail and OEM
customers, selling all major flash storage card formats for our target markets
in high volumes.
 
 Our
revenues are driven by the sale of our products and the licensing of our
intellectual property.  We believe the market for flash storage is
price elastic, meaning that a decrease in the price per megabyte results in
demand for higher capacity and the emergence of new applications for flash
storage.  We continuously reduce the cost of NAND flash memory, which
we believe over time will enable new markets and expand existing markets and
allow us to achieve higher overall revenue.  However, pricing in the
NAND flash industry depends on the balance between supply and demand, and in
periods of oversupply, price declines can more than offset unit growth, leading
to a decline in product revenues, as was the case in fiscal year
2008.  In the last three years, price decline has been greater than
cost decline due to industry-wide oversupply of NAND flash memory, resulting in
a decline in our product gross margin, which was negative in fiscal year
2008.
 
  - 3
-
 Table of Contents
  We enable
new markets for NAND flash memory through a variety of embedded and removable
card form factors.  We are founders or co-founders of most major form
factors of flash storage cards in the market today.  We pioneered the
Secure Digital, or SDTM, card,
together with a subsidiary of Toshiba and Panasonic Corporation, or
Panasonic.  The SD card is currently the most popular form factor of
flash storage cards used in digital cameras.  Subsequent to pioneering
the SD card, we worked with mobile network operators and handset manufacturers
to develop the miniSDTM card and
microSDTM card to
satisfy the need for even smaller form factor memory cards.  The
microSD card has become the leading card format for mobile
phones.  With Sony Corporation, or Sony, we co-own the Memory Stick
PROTM
format and co-developed the SxS memory card specification for high-capacity and
high-speed file transfer in professional camcorders.  We also worked
with Canon, Inc. to co-found the CompactFlash®, or CF,
standard.  Through our internal development and technology obtained
through acquisitions, we also hold key intellectual property for USB
drives.  We plan to continue to work with leading mobile
communications and digital consumer device companies to discover new markets for
flash storage products.
 
 Our team
has a deep understanding of flash memory technology and we develop and own
leading-edge technology and patents for the design, manufacture and operation of
flash memory and data storage cards.  One of the key technologies that
we have patented and successfully commercialized is multi-level cell technology,
or MLC, which allows a flash memory cell to be programmed to store two or more
bits of data in approximately the same area of silicon that is typically
required to store one bit of data.  We have an extensive patent
portfolio that has been licensed by several leading semiconductor companies and
other companies in the flash memory business.  Our cumulative license
and royalty revenues over the last three fiscal years were more than
$1.29 billion.
 
 We have
invested with Toshiba in high volume, state-of-the-art flash manufacturing
facilities in Japan.  Our commitment takes the form of capital
investments and loans to the flash ventures with Toshiba, credit enhancements of
these ventures’ leases of semiconductor manufacturing equipment, take-or-pay
commitments to purchase up to 50% of the output of these flash ventures with
Toshiba at manufacturing cost plus a mark-up and sharing in the cost of
SanDisk-Toshiba joint research and development activities related to flash
memory.  We refer to the flash memory which we purchase from the
SanDisk-Toshiba joint ventures as captive memory.  Our long-term
strategy is to have a mix of captive and non-captive supply and we have
historically supplemented our sourcing of captive flash memory with purchases of
non-captive memory, primarily from Samsung Electronics Co., Ltd., or Samsung,
Toshiba and Hynix Semiconductor, Inc., or Hynix.
 
 In fiscal
year 2008, we purchased almost no non-captive memory and our inventory balances
grew due to the growth of output from the flash ventures with Toshiba and weak
consumer demand influenced by worldwide macroeconomic
conditions.  Recently, we have implemented measures that we believe
will provide us with a better supply/demand balance and allow us to return our
flash memory supply model to a mix of captive and non-captive
memory.  The primary measure taken is to restructure our joint
ventures by selling more than 20% of the venture’s capacity to
Toshiba.  In addition, we and Toshiba will be operating the fabs at
less than full capacity for at least the first quarter of fiscal year
2009.
 
 In
addition to flash memory, our products include controllers that interface
between the flash memory and digital consumer devices.  We design the
controllers in-house and fabricate the controllers at third-party
foundries.  Our flash memory products are assembled at our in-house
assembly and test facility in Shanghai, China, and through our network of
contract manufacturers.
 
 We sell
our products globally to retail and OEM customers.  We continue to
expand our retail customer base to new geographic regions as well as to new
outlets such as mobile storefronts, supermarkets and drug stores.  We
also sell directly and through distributors to OEM customers, which include
mobile phone and digital camera manufacturers, that include our products with
their products when sold to end users.  This strategy allows us to
leverage the market position, geographic footprint and brand strength of our
customers to achieve broad market penetration for our products.  In
North America, we sell our products principally through retailers such as Best
Buy Co., Inc., or Best Buy, Costco Wholesale Corporation, RadioShack
Corporation, Staples, Inc., and Wal-Mart Stores, Inc.  In Europe and
Asia, our key customers include Duttenhofer GmbH & Co. KG, Hama GmbH &
Co. KG, or Hama, Kaga Electronics Co. Ltd., Nokia Corporation, Sony Ericsson
Mobile Communications AB and Zenitron Corporation.
 
  - 4
-
 Table of Contents
  Additional
Information.We were incorporated in Delaware in
June 1988 under the name SunDisk Corporation and changed our name to
SanDisk Corporation in August 1995.  We file reports and other
information with the Securities and Exchange Commission, or SEC, including
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and proxy or information statements.  Those reports and
statements and all amendments to those documents filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act (1) may be read and copied
at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C.
20549, (2) are available at the SEC’s internet site (http://www.sec.gov), which
contains reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC and (3) are available
free of charge through our website as soon as reasonably practicable after
electronic filing with, or furnishing to, the SEC.  Information
regarding the operation of the SEC’s Public Reference Room may be obtained by
calling the SEC at 1-800-SEC-0330.  Our website address is
www.sandisk.com.  Information on our website is not incorporated by
reference nor otherwise included in this report.  Our principal
executive offices are located at 601 McCarthy Blvd., Milpitas, CA 95035, and our
telephone number is (408) 801-1000.  SanDisk is a trademark of SanDisk
Corporation, and is registered in the United States, or U.S., and other
countries.  Other brand names mentioned herein are for identification
purposes only and may be the trademarks of their respective
holder(s).
 
 Description
of Our Business
 
 Industry
Background.We operate in the digital electronics industry,
which encompasses personal computers, or PCs, notebook computers, consumer
electronics, communications and industrial products.  Our products use
flash memory to store digital information for devices such as mobile phones,
digital cameras, digital video camcorders, gaming devices, portable digital
audio/video players, PCs, blade servers and global positioning system, or GPS,
devices.  These applications require storage that is small in form
factor, portable and removable, highly reliable, high capacity, low in power
consumption and heat dissipation, and capable of withstanding high levels of
shock vibration and temperature fluctuation.
 
 The flash
memory market is primarily comprised of NOR and NAND
technologies.  NOR is traditionally used for code storage and is
characterized by fast read speeds.  NOR generally costs more
per megabyte and has lower storage capacities than NAND.  NAND
flash memory is traditionally used for embedded and removable data storage and
is characterized by fast write speeds and high capacities.  We
internally develop NAND flash memory technologies, produce the flash memory
primarily through the flash ventures with Toshiba and utilize this production
output in products that we design and sell to our various end
markets.
 
 Our Primary End
Markets.We currently focus on three primary
markets:
 
 ·
              Consumer.We
      make and sell flash storage products 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, such as maps in GPS devices.  In addition,
      portable game devices now include advanced features that require high
      capacity memory storage cards and we provide SD cards, Memory Stick PRO
      DuoTM
      cards and USB drives that are all specifically packaged for the gaming
      market.  We also sell a line of digital media players with both
      embedded and removable memory under our Sansa®
      brand with varying combinations of audio and video
      capabilities.  We recently introduced slotMusicTM
      cards which are preloaded with music content and can be used in a wide
      variety of mobile phones and digital media players.  Primary
      card formats for consumer devices include CF, SD, Memory Stick®
      and xD-Picture CardTM.
  ·
              Mobile
      Phones.We provide embedded, semi-removable and
      removable storage for mobile phones.  We are a leading supplier
      of the microSD, SD and Memory Stick product lines of 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 between
devices.
   - 5
-
 Table of Contents
  ·
              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, pictures and music on
      keychain-sized devices and then quickly and easily transfer these files
      between laptops, notebooks, desktops and other devices that incorporate a
      USB connection.  USB flash drives are easy to use, have replaced
      floppy disks and other types of external storage media, and are evolving
      into intelligent storage devices.  In addition, we sell SSDs
      that are flash-based storage devices with capacities currently up to 64
      gigabytes.  We believe SSDs will become a major market for flash
      memory over the next several years as they increasingly replace hard disk
      drives in personal and notebook computers, and enterprise server
      products.
  Our Sales
Channels.Our products are delivered to end-users through
worldwide retail storefronts and also by bundling data storage cards with host
products or by embedding our data storage products in host devices sold by our
OEM customers.
 
 Our sales
are made through the following channels:
 
 ·
              Retail.We
      ship SanDisk brand 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 branded storefronts as well as
other retailers with significant mobile communications offerings.
  We
support our retail sales channels with both direct sales representatives and
independent manufacturers’ representatives.  We have organized our
sales activities into four regional territories: Americas, Europe, Middle East
and Africa, or EMEA, Asia Pacific, or APAC, and Japan.
  ·
              OEM.  Our OEM
      customers include manufacturers of mobile phones, digital cameras, PCs,
      GPS and other digital consumer devices, such as gaming
      devices.  Our products are sold directly to OEMs and through
      distributors.  We support our OEM customers through our direct
      sales representatives as well as through independent manufacturers’
      representatives.
  As of the
end of fiscal years 2008 and 2007, our backlog was $169 million and
$224 million, respectively.  Due to industry practice that allows
customers to change or cancel orders with limited advance notice prior to
shipment, we do not believe that backlog, as of any particular date, is
indicative of future sales.
 
 Our
revenues are generally highest in our fourth quarter due to the holiday buying
season.  In the fourth quarter of fiscal year 2008, the seasonal lift
in our revenues was less than usual due to worldwide recessionary conditions and
aggressive industry pricing.
 
  - 6
-
 Table of Contents
  Our
Customers.In fiscal years 2008, 2007 and 2006, revenues from
our top 10 customers and licensees accounted for approximately 48%, 46% and 52%
of our total revenues, respectively.  In fiscal year 2008, Samsung
accounted for 13% of our total revenues through a combination of license and
royalty and product revenues.  All customers were less than 10% of our
total revenues in fiscal years 2007 and 2006.  The composition of our
major customer base has changed over time, and we expect this pattern to
continue as our markets and strategies evolve.  Sales to our customers
are generally made pursuant to purchase orders rather than long-term
contracts.
 
 Our
Products.Our products are sold under the SanDisk brand in a
wide variety of form factors and include the following:
 
 ·
              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 32 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.  Our ultra-small microSD removable cards, available
      in capacities up to 16 gigabytes, are designed for use in mobile
      phones.
  ·
              USB
      Drives.Our Cruzer®
      line of USB Flash Drives, or UFDs, are used in the computing and consumer
      markets, are available in capacities up to 16 gigabytes, are
      highly-reliable and are designed for high-performance.  Our
      Cruzer products provide the user with the ability to carry files and
      application software on a portable USB drive.  Also, our Cruzer
      Crossfire UFDs are specially designed to make the console or PC gaming
      experience portable.  Our Professional and Enterprise line of
      UFDs are geared towards the corporate user and are specifically designed
      to support secure and authorized access to corporate
      information.
  ·
              Embedded and Semi-Removable
      Products.Our embedded products are a set of reliable,
      high-capacity, high performance and cost-effective embedded flash memory
      drive solutions for both data and code storage.  Our iNANDTM
      embedded flash product line, with capacities up to 16 gigabytes, are
      designed to respond to the increasing demand for embedded storage for
      mobile phones and other portable devices.  We also offer
      high-capacity SSDs targeted for the personal computing and network server
      markets in capacities up to
64 gigabytes.
  ·
              Digital Media
      Players.Sansa is our branded line of flash-based
      digital media 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.  Features within our Sansa line of products include
      FM radio, voice recording and support for a variety of audio and video
      music download and subscription services.  Sansa media players
      are available in capacities up to 32 gigabytes.  We
      recently launched our slotMusicTMand
      slotRadioTM
      products that greatly simplify music content availability for
      consumers.
   - 7
-
 Table of Contents
  Technology.Since
our inception, we have focused our research, development and standardization
efforts on developing highly reliable, high-performance, cost-effective flash
memory storage products in small form factors to address a variety of emerging
markets.  We have been actively involved in all aspects of this
development, including flash memory process development, module integration,
chip design, controller development and system-level integration, to help ensure
the creation of fully-integrated, broadly interoperable products that are
compatible with both existing and newly developed system
platforms.  We developed and commercialized 2-bits/cell flash MLC, or
X2, and more recently 3-bits/cell flash MLC, or X3, technology.  We
are also investing in the development of 4-bits/cell flash MLC, or X4, storage
technologies.  In addition, we are investing in the development of
three-dimensional, or 3D, memory architecture with multiple read-write
capabilities.  We have also initiated, defined and developed standards
to meet new market needs and to promote wide acceptance of these standards
through interoperability and ease-of-use.  We believe our core
technical competencies are in:
 
 ·
              high-density
      flash memory process, module integration, device design and
      reliability;
  ·
              securing
      data on a flash memory device;
  ·
              controller
      design;
  ·
              system-level
      integration;
  ·
              compact
      packaging; and
  ·
              low-cost
      system testing.
  To
achieve compatibility with various electronic platforms regardless of the host
processors or operating systems used, we developed new capabilities in flash
memory chip design and created intelligent controllers.  We also
developed an architecture that can leverage advances in process technology
designed for scaleable, high-yielding, cost-effective and highly reliable
manufacturing processes.  We design our products to be compatible with
industry-standard interfaces used in standard operating systems for PCs, mobile
phones, gaming devices, digital media players and other consumer and industrial
products.
 
 Our
patented intelligent controller technology, with its advanced defect management
system, permits our flash storage card products to achieve a high level of
reliability and longevity.  Each one of our flash devices
contains millions of flash memory cells.  A failure in any one of
these cells can result in loss of data such as picture files, and this can occur
several years into the life of a flash storage card.  The controller
chip inside our cards is designed to detect such defects and recover data under
most standard conditions.
 
 Patents and
Licenses.We rely on a combination of patents, trademarks,
copyright and trade secret laws, confidentiality procedures and licensing
arrangements to protect our intellectual property rights.  See Item
1A, “Risk Factors.”
 
 As of the
end of fiscal year 2008, we owned, or had rights to, more than 1,100 U.S.
patents and more than 600 foreign patents.  We had more than 1,450
patent applications pending in the U.S., and had foreign counterparts pending on
many of the applications in multiple jurisdictions.  We continually
seek additional international and U.S. patents on our technology.
 
 We have
various patent licenses with several companies including, among others, Hynix,
Intel Corporation, or Intel, Lexar Media, Inc., or Lexar, a subsidiary of Micron
Technology, Inc., or Micron, Panasonic, Renesas Technology Corporation, or
Renesas, Samsung, Sharp Electronics KK, or Sharp, Sony and
Toshiba.  From time-to-time, we have also entered into discussions
with other companies regarding potential license agreements for our
patents.
 
 Trade
secrets and other confidential information are also important to our
business.  We protect our trade secrets through confidentiality and
invention assignment agreements.
 
  - 8
-
 Table of Contents
  Supply
Chain.Our supply chain is an important competitive
advantage.
 
 ·
              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 the flash ventures with
      Toshiba.  This represents captive memory supply and we are
      obligated to take our share of the output from the flash ventures with
      Toshiba or pay the fixed costs associated with that
      capacity.  See “Ventures with Toshiba.”  We also
      purchase non-captive NAND memory supply primarily from Samsung and Hynix,
      and source our 3D one-time programmable, or OTP, memory on a foundry basis
      at Taiwan Semiconductor Manufacturing Company, Ltd., or
      TSMC.  We are guaranteed a certain amount of the total output
      from Samsung and 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 Semiconductor Manufacturing
      International Corporation, or SMIC, TSMC, Tower Semiconductor Ltd., or
      Tower, and United Microelectronics Corporation, or UMC.  We have
      a foundry agreement with Tower on a purchase order
  basis.
  ·
              Assembly and
      Testing.We sort and test our wafers at Toshiba in
      Yokkaichi, Japan, and Ardentec Corporation in Taiwan.  Our flash
      memory products are assembled in both our in-house assembly and test
      facility in Shanghai, China, and through our network of contract
      manufacturers, including STATS ChipPAC Ltd., or STATS ChipPAC, in China,
      and Siliconware Precision Industries Co., Ltd., or SPIL, in
      Taiwan.  Our packaged memory final test, card assembly and card
      test is performed at our in-house facility and at subcontractors such as
      SPIL and United Test and Assembly Center Ltd., in Taiwan, and Beautiful
      Enterprise Co., Ltd., Flextronics International Ltd., or Flextronics,
      Global Brands Manufacture Ltd. and STATS ChipPAC, in China.  We
      believe the use of our in-house assembly and test facility as well as
      subcontractors reduces the cost of our operations and gives us access to
      increased production capacity.
  
  Ventures
with Toshiba
 
 We and
Toshiba have entered into several business ventures.  In May 2000, we
formed FlashVision Ltd., or FlashVision, which produced 200-millimeter NAND
flash memory wafers.  In September 2004, we and Toshiba formed
Flash Partners Ltd., or Flash Partners, or Fab 3, which produces 300-millimeter
NAND flash wafers and operated at full production capacity of
approximately 150,000 wafers per month during fiscal year 2008.  In
July 2006, we and Toshiba formed Flash Alliance Ltd., or Flash Alliance, or
Fab 4, a 300-millimeter wafer fabrication facility which began initial
production in the third quarter of fiscal year 2007 with full capacity estimated
to be approximately 210,000 wafers per month.  Fab 4 was ramped to
more than 50% of this estimated full capacity by the end of fiscal year
2008.  We are currently not investing in further capacity expansion of
Fab 4 as weak macroeconomic conditions coupled with the growth of our NAND
supply base have resulted in us carrying excess inventory.  During
fiscal year 2008, the 200-millimeter FlashVision venture ceased operation as
planned.  The FlashVision venture is in the process of selling its
equipment.
 
 With the
Flash Partners and Flash Alliance ventures, or hereinafter referred to as Flash
Ventures, located at Toshiba’s Yokkaichi Japan operations, we and Toshiba
collaborate in the development and manufacture of NAND-based flash memory
products using the semiconductor manufacturing equipment owned or leased by each
venture entity.  We hold a 49.9% ownership position in each of the
current Toshiba and SanDisk venture entities.  Each venture entity
purchases wafers from Toshiba at cost and then resells those wafers to us and
Toshiba at cost plus a mark-up.  We are committed to purchase half of
each venture’s NAND wafer supply or pay for half of the venture’s fixed costs
regardless of the output we choose to purchase.  We are also committed
to fund 49.9% of each venture’s costs to the extent that the venture’s revenues
from wafer sales to us and Toshiba are insufficient to cover these
costs.  The investments in each venture entity are shared equally
between us and Toshiba.  In addition, we have the right to purchase a
certain amount of wafers from Toshiba on a foundry basis.  See Note
20, “Subsequent Events,” of the Notes to Consolidated Financial Statements
of this Form 10-K included in Item 8 of this report, for further information
regarding our definitive agreement with Toshiba to restructure Flash Ventures
current production capacity.
 
  - 9
-
 Table of Contents
  Competition
 
 We face
competition from numerous semiconductor manufacturers and manufacturers and
resellers of flash memory cards, USB drives, digital audio players and other
consumer electronics devices.  We also face competition from
manufacturers of hard disk drives and from new technologies.
 
 Key Competitive
Advantages.Our key competitive advantages are:
 
 ·
              we
      have a tradition of innovation and standards creation which enables us to
      grow the overall market for flash
memory;
  ·
              our
      intellectual property ownership, in particular our patent claims and MLC
      manufacturing know-how, provides us with license and royalty revenue
      as well as certain cost advantages;
  ·
              Flash
      Ventures provide us with leading edge, low-cost flash
    memory;
  ·
              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;
  ·
              we
      have global retail distribution of our products through worldwide retail
      storefronts; and
  ·
              we
      have worldwide leading market share in removable flash cards and
      UFDs.
  Semiconductor
Manufacturers.Our primary semiconductor competitors currently
include Hynix, IM Flash Technologies LLC, or IMFT (a company formed by Micron
and Intel), Micron, Samsung, and Toshiba.
 
 Flash Memory Card
and USB Drive Manufacturers.Our primary card and USB drive
competitors currently include, among others, A-DATA Technology Co., Ltd., or
A-DATA, Buffalo, Inc., or Buffalo, Chips and More GmbH, or CnMemory, Dane-Elec
Memory, or Dane-Elec, Eastman Kodak Company, or Kodak, Elecom Co., Ltd., or
Elecom, FUJIFILM Corporation, or FUJI, Gemalto N.V., or Gemalto, Hagiwara
Sys-Com Co., Ltd., or Hagiwara, Hama, Hynix, Imation Corporation, or Imation,
and its division Memorex Products, Inc., or Memorex, I-O Data Device, Inc., or
I-O Data, Kingmax Digital, Inc., or KingMax, Kingston Technology Company, Inc.,
or Kingston, Lexar, Micron, Netac Technology Co., Ltd., or Netac, Panasonic, PNY
Technologies, Inc., or PNY, RITEK Corporation, or RITEK, Samsung, Sony,
STMicroelectronics N.V., or STMicroelectronics, Toshiba, Tradebrands
International, or Tradebrands, Transcend Information, Inc., or Transcend, and
Verbatim Americas LLC, or Verbatim.
 
 Solid-State
Drive and Hard Disk Drive Manufacturers.  Our SSDs face
competition from other manufacturers of SSDs, including Intel, Samsung, Toshiba,
and others.  Our SSDs also face competition from hard disk drives,
which are offered by companies including, among others, Seagate Technology LLC,
or Seagate, Samsung and Western Digital Corporation, or Western
Digital.
 
 Digital
Audio/Video Player Manufacturers.Our digital audio/video
players face strong competition from products offered by companies, including
Apple Inc., or Apple, ARCHOS Technology, or ARCHOS, Coby Electronics
Corporation, or Coby, Creative Technology Ltd., or Creative, Koninklijke Philips
Electronics N.V., or Royal Philips Electronics, Microsoft Corporation, or
Microsoft, Samsung and Sony.
 
 Other
Technologies.Other technologies compete with our product
offerings and many companies are attempting to develop memory cells that use
different designs and materials in order to reduce memory
costs.  These potential competitive technologies include 3D, which we
are also developing with Toshiba, phase-change and charge-trap flash
technologies.
  - 10
-
 Table of Contents
  
 Employees
 
 As of
December 28, 2008, we had 3,565 full-time employees, including 1,341 in
research and development, 500 in sales and marketing, 468 in general and
administration, and 1,256 in operations.  As of December 28, 2008,
approximately 249 of our employees had been notified that their positions were
being eliminated and they remained employed during a notice
period.  None of our employees are represented by a collective
bargaining agreement and we have never experienced any work
stoppage.  We believe that our employee relations are
satisfactory.
 
 Executive
Officers
 
 Our
executive officers, who are elected by and serve at the discretion of our board
of directors, are as follows (all ages are as of
February 15, 2009):
 
 Name
              
              Age
              
              PositionEli
      Harari
              
              63
              
              Chairman
      of the Board and Chief Executive OfficerSanjay
      Mehrotra
              
              50
              
              President
      and Chief Operating OfficerJudy
      Bruner
              
              50
              
              Executive
      Vice President, Administration and Chief Financial
  OfficerYoram
      Cedar
              
              56
              
              Executive
      Vice President, OEM Business and Corporate
  Engineering
 
 Dr. Eli
Harari, the founder of SanDisk, has served as Chief Executive Officer and as a
director of SanDisk since June 1988.  He was appointed Chairman
of the Board in June 2006.  Dr. Harari also served as President
from June 1988 to June 2006.  From 1973 to 1988, Dr. Harari
held various technical and management positions with Waferscale Integration,
Inc., Honeywell Inc., Intel Corporation and Hughes Microelectronics
Ltd.  Dr. Harari holds a Ph.D. in Solid State Sciences from Princeton
University and has more than 100 patents issued in the field of non-volatile
memories and storage systems.
 
 Sanjay
Mehrotra co-founded SanDisk in 1988 and has been our President since
June 2006.  He continues to serve as our Chief Operating Officer,
a position he has held since 2001, and he has previously served as our Executive
Vice President, Vice President of Engineering, Vice President of Product
Development, and Director of Memory Design and Product
Engineering.  Mr. Mehrotra has more than 29 years of experience in the
non-volatile semiconductor memory industry including engineering and engineering
management positions at SanDisk, Integrated Device Technology, Inc., SEEQ
Technology, Inc., Intel Corporation and Atmel Corporation.  Mr.
Mehrotra earned B.S. and M.S. degrees in Electrical Engineering and Computer
Sciences from the University of California, Berkeley.  He also holds
several patents and has published articles in the area of non-volatile memory
design and flash memory systems.
 Judy
Bruner has been our Chief Financial Officer and Executive Vice President,
Administration since June 2004.  She served as a member of our
board of directors from July 2002 to July 2004.  Ms. Bruner
has over 25 years of financial management experience, including serving as
Senior Vice President and Chief Financial Officer of Palm, Inc., a provider of
handheld computing and communications solutions, from September 1999 until
June 2004.  Prior to Palm, Inc., Ms. Bruner held financial
management positions with 3Com Corporation, Ridge Computers and Hewlett-Packard
Company.  Since January 2009, Ms. Bruner has served on the board of
directors and the audit committee of Brocade Communications Systems,
Inc.  Ms. Bruner holds a B.A. degree in Economics from the University
of California, Los Angeles and an M.B.A. degree from Santa Clara
University.
 
 Yoram
Cedar is our Executive Vice President, OEM Business and Corporate
Engineering.  Prior to October 2005, Mr. Cedar served as our
Senior Vice President of Engineering and Emerging Market Business
Development.  Mr. Cedar began his career at SanDisk in 1998 when he
joined as Vice President of Systems Engineering.  He has extensive
experience working in product definition, marketing and development of systems
and embedded flash-based semiconductors.  Prior to SanDisk, he was the
Vice President of New Business Development at Waferscale Integration, Inc. and
has more than 30 years of experience in design and engineering management of
electronic systems.  Mr. Cedar earned B.S. and M.S. degrees in
Electrical Engineering and Computer Architecture from Technion, Israel Institute
of Technology, Haifa, Israel.
 
  - 11
-
 Table of Contents
  ITEM 1A.  RISK FACTORS
  Our
operating results may fluctuate significantly, which may adversely affect our
financial condition and our stock price.Our
quarterly and annual operating results have fluctuated significantly in the past
and we expect that they will continue to fluctuate in the future.  Our
results of operations are subject to fluctuations and other risks, including,
among others:
  ·
                  competitive
      pricing pressures, and industry or our excess supply, resulting in
      significantly lower average selling prices and lower or negative product
      gross margins;
  ·
                  significant
      reduction in demand due to a prolonged and severe global economic
      downturn, or other conditions;
  ·
                  reduction
      in price elasticity of demand related to pricing changes for our markets
      and products;
  ·
                  our
      license and royalty revenues may decline significantly in the future as
      our existing license agreements and key patents expire or if licensees
      fail to perform on a portion or all of their contractual obligations,
      which may also lead to increased patent litigation
  costs;
  ·
                  reduced
      sales due to continued declines in consumer confidence or worldwide
      economic weakness;
  ·
                  a
      potential future downgrade in our corporate rating by Rating &
      Investment Information, Inc., leading to non-compliance with certain
      covenants in, or potential default under, certain Flash Venture master
      equipment leases;
  ·
                  inability
      to match our captive memory output to overall market demand for our
      products, which could result in write-downs for excess inventory, lower of
      cost or market reserves, fixed costs associated with our investments,
      restructuring of our joint ventures with Toshiba, or other
      actions;
  ·
                  inability
      to complete the restructuring transactions with Toshiba announced on
      January 29, 2009 in a timely manner, or at
  all;
  ·
                  increased
      memory component and other costs as a result of currency exchange rate
      fluctuations to the U.S. dollar, particularly with respect to the Japanese
      yen;
  ·
                  inability
      to reduce operating expenses to reflect the current environment while
      continuing to invest in future technologies and
  products;
  ·
                  expansion
      of supply from existing competitors and ourselves creating excess market
      supply, causing our average selling prices to decline faster than our
      costs;
  ·
                  inability
      to develop or unexpected difficulties or delays in developing or
      manufacturing with acceptable yields, X3, X4, 3D Read/Write, or other
      advanced, alternative technologies or difficulty in bringing advanced
      technologies such as 32-nanometer NAND flash memory into volume production
      at cost competitive levels;
  ·
                  increased
      purchases of non-captive flash memory, including due to our plan to
      restructure and slow the growth of captive capacity, which typically costs
      more than captive flash memory and may be of less consistent
      quality;
  ·
                  unpredictable
      or changing demand for our products, particularly demand for certain types
      or capacities of our products or for our products in certain markets or
      geographies;
  -
12 -
 Table of Contents
  ·
                  difficulty
      in forecasting and managing inventory levels due to noncancelable
      contractual obligations to purchase materials, such as custom non-memory
      materials, and the need to build finished product in advance of customer
      purchase orders;
  ·
                  timing,
      volume and cost of wafer production from Flash Ventures as impacted by fab
      start-up delays and costs, technology transitions, yields or production
      interruptions;
  ·
                  disruption
      in the manufacturing operations of suppliers, including suppliers of
      sole-sourced components;
  ·
                  potential
      delays in the emergence of new markets and products for NAND-based flash
      memory and acceptance of our products in these
  markets;
  ·
                  timing
      of sell-through and the financial liquidity of our distributors and retail
      customers;
  ·
                  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
      or impairments of our investments in fabrication capacity, equity
      investments and other assets;
  ·
                  impairment
      of intangible assets related to our
  acquisitions;
  ·
                  insufficient
      assembly and test capacity from our Shanghai facility or our contract
      manufacturers; and
  ·
                  other
      factors described under “Risk Factors” and elsewhere in this
      report.
  Competitive
pricing pressuresand
excess supply have resulted in lower average selling prices and negative product
grossmarginwhich
may continueand
if we do not experience adequate price elasticity, our revenues may continue to
decline.The
NAND flash memory industry is currently in the midst of a severe downturn,
characterized by supply exceeding demand, which has led to significant declines
in average selling prices.  For example, our average selling price per
gigabyte for product revenues declined 70% in the fourth quarter of fiscal year
2008 as compared to the same period of fiscal year 2007, and declined 62% in
fiscal year 2008 compared to fiscal year 2007.  The price decline was
especially aggressive in the second half of fiscal year 2008, with sequential
price declines of 30% in the third quarter and 28% in the fourth
quarter.  Price declines have exceeded cost declines in each of the
last three fiscal years, resulting in negative product gross margin in fiscal
year 2008.  Price declines may be influenced by, among other factors,
supply exceeding demand, macroeconomic factors, technology transitions,
conversion of industry DRAM capacity to NAND and new technologies or other
strategic actions by us or our competitors to gain market share.  If
our technology transitions take longer or are more costly than anticipated to
complete, or our cost reductions continue to fail to keep pace with the rate of
price declines, our product gross margin and operating results will continue to
be negatively impacted, leading to quarterly or annual net
losses.
  Over
our history, price decreases have generally been more than offset by increased
unit demand and demand for products with increased storage
capacity.  However, in fiscal year 2008, price declines outpaced unit
and megabyte growth resulting in reduced revenue as compared to fiscal year
2007.  There can be no assurance that current and future price
reductions will result in sufficient demand for increased product capacity or
unit sales, which could continue to harm our margins and revenue.
  We
have incurred negative product grossmarginsand
net losses, which may continue to reduce our cash flows and harm our financial
condition.In the fourth quarter of fiscal year 2008, we had
negative product gross margins due to sustained aggressive industry price
declines as well as higher inventory charges primarily due to lower of cost or
market write downs.  We expect product gross margins to continue to be
negative through the first quarter of fiscal year 2009.  Our ability
to return to or sustain profitability on a quarterly or annual basis in the
future depends in part on industry and our supply/demand balance, our ability to
develop new products and technologies, the rate of growth of our target markets,
the competitive position of our products, the continued acceptance of our
products by our customers, and our ability to manage expenses.  If we
fail to return to profitability, continued operating losses will reduce our cash
flows and cash resources, and negatively harm our business and financial
condition.  If we are unable to generate sufficient cash, we may have
to reduce, curtail or terminate certain business
activities.
   -
13 -
 Table of Contents
  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.In
fiscal years 2008, 2007 and 2006, revenues from our top 10 customers and
licensees accounted for approximately 48%, 46% and 52% of our total revenues,
respectively.  In fiscal year 2008, Samsung accounted for 13% of our
total revenues through a combination of license and royalty and product
revenues.  All customers were less than 10% of our total revenues in
fiscal years 2007 and 2006.  The composition of our major customer
base has changed over time, and we expect this pattern to continue as our
markets and strategies evolve.  Sales to our customers are generally
made pursuant to purchase orders rather than long-term contracts.  The
composition of our major customer base has changed over time, and we expect this
pattern to continue as our markets and strategies evolve.  If we were
to lose one of our major customers or licensees, or experience any material
reduction in orders from any of our customers or in sales of licensed products
by our licensees, our revenues and operating results would
suffer.  Additionally, our license and royalty revenues may decline
significantly in the future as our existing license agreements and key patents
expire or if licensees fail to perform on a portion or all of their contractual
obligations.  Our sales are generally made from standard purchase
orders rather than long-term contracts.  Accordingly, our customers
may generally terminate or reduce their purchases from us at any time without
notice or penalty.  In addition, the composition of our major customer
base changes from year-to-year as we enter new markets, making our revenues from
these major customers less predictable from
year-to-year.
  Our
business depends significantly upon sales through retailers and distributors,
and if our retailers and distributors are not successful, we could experience
reduced sales, substantial product returns or increased price protection, any of
which would negatively impact our business, financial condition and results of
operations.A
significant portion of our sales are made through retailers, either directly or
through distributors.  Sales through these channels typically include
rights to return unsold inventory and protection against price declines, as well
as participation in various cooperative marketing programs.  As a
result, we do not recognize revenue until after the product has been sold
through to the end user, in the case of sales to retailers, or to our
distributors’ customers, in the case of sales to distributors.  Price
protection against declines in our selling prices has the effect of reducing our
deferred revenues and eventually, our revenues.  If our retailers and
distributors are not successful, due to weak consumer retail demand caused by
the current worldwide economic downturn, decline in consumer confidence, or
other factors, we could continue to experience reduced sales as well as
substantial product returns or priceprotection
claims, which would harm our business, financial condition and results of
operations.  Except in limited circumstances, we do not have exclusive
relationships with our retailers or distributors, and therefore, must rely on
them to effectively sell our products over those of our
competitors.  Certain of our retail and distributor partners are
experiencing financial difficulty and prolonged negative economic conditions
could cause liquidity issues for our retail and distributor customers and
channels.  For example, two of our North American retail
customers,CircuitCity,
Inc. and Ritz Camera Centers, Inc.,
recently filed for bankruptcy protection.  Negative changes in
customer credit worthiness; the ability of our customers to access credit; or
the bankruptcy or shutdown of any of our significant retail or distribution
partners would harm our revenue and our ability to collect outstanding
receivable balances.  In addition, we have certain retail customers to
which we provide inventory on a consigned basis, and a bankruptcy or shutdown of
these customers could preclude us from taking possession of our consigned
inventory, which could result in inventory or impairment
charges.
   -
14 -
 Table of Contents
  We
may be unable to renew existing licenses, which could reduce our license and
royalty revenues.If our existing licensees do not renew their
licenses upon expiration and we are not successful in signing new licensees in
the future, our license revenue, profitability, and cash provided by operating
activities would be harmed.  Our current license agreement with
Samsung expires in August 2009, and to the extent that we are unable to
renew this agreement under similar terms or at all, our financial results would
be adversely impacted by the reduced license and royalty revenue and the
significant patent litigation costs to enforce our patents against and renew our
license agreement with Samsung.  In
addition, we may be subject to disputes, claims or other disagreements on the
timing, amount or collection of royalties from Samsung as the current agreement
nears
expiration.
  We
may be unableto
completethe
transactions with Toshiba, announced on January 29, 2009, in a timely
manner, or at all.On January 29, 2009, we entered into a
definitive agreement with Toshiba to restructure Flash Ventures by sellingtoToshiba more
than 20% of Flash Ventures current production capacity through the acquisition
by Toshiba of certain owned and leased equipment.  The total value of
the restructuring transaction to us is approximately $890 million based upon the
exchange rate as of January 29, 2009.  Approximately one-third of this
value will be in cash paid to us and approximately two-thirds of this value
represents a transfer of lease obligations to Toshiba which should reduce our
outstanding lease obligations and associated lease guarantees by approximately
28%.  These transactions are expected to occur at several closings
between January 30, 2009 and March 31, 2009, subject to certain
closing conditions and contingencies.  However, if we fail to complete
the transactions with Toshiba on a timely basis, or at all, we may continue to
experience significant excess captive capacity and the associated fixed costs,
and we would not benefit from the expected cash and reduction in lease
obligations.  This would harm our business, financial condition and
results of
operations.
  Our
financial performance depends significantly on worldwide economic conditions and
the related impact on levels of consumer spending, which has recently
deteriorated significantly in many countries and regions, including theU.S.,
and may remain depressed for the foreseeable future.Demand
for our products is adversely affected by negative macroeconomic factors
affecting consumer spending.  The severe tightening of consumer
credit, low level of consumer liquidity, and extreme volatility in credit and
equity markets have weakened consumer confidence and decreased consumer
spending.  These and other economic factors have reduced demand for
our products and harmed our business, financial condition and results of
operations, and to the extent such economic conditions continue, they could
cause further harm to our business, financial condition and results of
operations.
  Our
revenues depend in part on the success of products sold by our OEM
customers.A significant portion of our sales are to OEMs,
which either bundle or embed our flash memory products with their products, such
as mobile phones, GPS devices and computers.  Our sales to these
customers are dependent upon the OEMs choosing our products over those of our
competitors and on the OEMs’ ability to create, introduce, market and sell their
products successfully in their markets.  Should our OEM customers be
unsuccessful in selling their current or future products that include our
products, or should they decide to discontinue using our products, our results
of operations and financial condition could be
harmed.
  Thefuturegrowth
of our business depends on the development and performance of new markets and
products for NAND-basedflashmemory.Our
future growth is dependent on development of new markets, new applications and
new products for NAND-based flash memory.  Historically, the digital
camera market provided the majority of our revenues, but it is now a more mature
market, and the mobile handset market has emerged as the largest segment of our
revenues.  Other markets for flash memory include digital audio and
video players, USB drives and SSDs.  We cannot assure you that the use
of flash memory in mobile handsets or other existing markets and products will
develop and grow fast enough, or that new markets will adopt NAND flash
technologies in general or our products in particular, to enable us to
grow.  Our future growth is also dependent on continued geographic
expansion and we may face difficulties entering or maintaining sales in
international markets.  Some international markets are subject to a
higher degree of commodity pricing or tariffs and import taxes than in the U.S.,
subjecting us to increased risk of pricing and margin
pressure.
   -
15 -
 Table of Contents
  Our
strategy of investing in captive manufacturing sources could harm us if our
competitors are able to produce products at lower costs or if industry supplycontinues
toexceed
demand.We secure captive sources of NAND through our
significant investments in manufacturing capacity.  We believe that by
investing in captive sources of NAND, we are able to develop and obtain supply
at the lowest cost and access supply during periods of high
demand.  Our significant investments in manufacturing capacity require
us to obtain and guarantee capital equipment leases and use available cash,
which could be used for other corporate purposes.  To the extent we
secure manufacturing capacity and supply that is in excess of demand, or our
cost is not competitive with other NAND suppliers, we may not achieve an
adequate return on our significant investments and our revenues, gross margins
and related market share may be negatively impacted.  We may also
incur increased inventory or impairment charges related to our captive
manufacturing investments and may not be able to exit those investments without
significant cost to us.  For example, in fiscal year 2008, we took
impairment charges related to FlashVision,
Flash Partners and Flash Alliance of approximately $93 million,
primarily due to NAND industry pricing conditions due to supply exceeding
demand.  In addition, in fiscal year 2008, we recorded inventory
reserves primarily for lower-of-cost-or-market for both inventory on-hand and in
the channel of $394 million. We also recorded a charge of $121 million
in fiscal year 2008 for adverse purchase commitments associated with under
utilization of Flash Partners and Flash Alliance capacity for the 90-day period
in which we have non-cancelable
orders.
  Our
business and the markets we address are subject to significant fluctuations in
supply and demand and our commitments to Flash Ventures may result in periods of
significant excess inventory.The start of production at Fab 4
at the end of fiscal year 2007 and the continuing ramp of production has
increased our captive supply and resulted in excess inventory in fiscal year
2008.  Our obligation to purchase 50% of the supply from Flash
Ventures could continue to harm our business and results of operations if our
committed supply exceeds demand for our products.  The adverse effects
could include, among other things, significant decreases in our product prices,
and significant excess, obsolete or lower of cost or market inventory
write-downs, such as those we experienced in fiscal year 2008, which would harm
our gross margins and could result in the impairment of our investments in Flash
Ventures.
  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 for our older products; and our competitors seek to develop new
standards which could reduce demand for our products.We
continually devote significant resources to the development of new applications,
products and standards and the enhancement of existing products and standards
with higher memory capacities and other enhanced features.  Any new
applications, products, technologies, standards or enhancements we develop may
not be commercially successful.  The success of new product
introductions is dependent on a number of factors, including market acceptance,
our ability to manage risks associated with new products and production ramp
issues.  New applications, such as the adoption of flash-based SSDs
that are designed to replace hard disk drives in devices such as computers and
servers, can take several years to develop.  We cannot guarantee that
manufacturers will adopt SSDs or that this market will grow as we
anticipate.  For the solid-state drive market to become sizeable, the
cost of flash memory must decline significantly so that the cost to consumers is
competitive with the cost of hard disk drives.  We believe this will
require us to implement multi-level cell, or MLC, technology into our SSDs,
which will require us to develop new controllers.  There can be no
assurance that our MLC-based SSDs will be able to meet the specifications
required to gain customer qualification and acceptance or will be delivered to
the market on a timely basis as compared with our competitors.  Other
new products, such as slotMusicTM,
our pre-recorded flash memory cards, may not gain market acceptance, and we may
not be successful in penetrating the new markets that we target.  For
example, our Sansa®ConnectTM
product, a Wi-Fi®
enabled MP3 player, did not achieve market acceptance or our expected sales
volume.
   -
16 -
 Table of Contents
  New
applications may require significant up-front investment with no assurance of
long-term commercial success or profitability.  As we introduce new
standards or technologies, it can take time for these new standards or
technologies to be adopted, for consumers to accept and transition to these new
standards or technologies and for significant sales to be generated, if at
all.
  Competitors
or other market participants could seek to develop new standards for flash
memory products that, if accepted by device manufacturers or consumers, could
reduce demand for our products.  For example, certain handset
manufacturers and flash memory chip producers are currently advocating the
development of a new standard, referred to as Universal Flash Storage, or UFS,
for flash memory cards used in mobile phones.  Intel and Micron have
also developed a new specification for a NAND flash interface, called Open NAND
Flash Interface, or ONFI, which would be used primarily in computing
devices.  Broad acceptance of new standards, technologies or products
may reduce demand for some of our products.  If this decreased demand
is not offset by increased demand for new form factors or products that we
offer, our results of operations would be harmed.
  Alternative
storage solutions such as high bandwidth wireless or internet-based storage
could reduce the need for physical flash storage within electronic
devices.  These alternative technologies could negatively impact the
overall market for flash-based products, which could seriously harm our results
of operations.
  Consumer
devices that use NAND-based flash memory do so in either a removable card or an
embedded format.  We offer NAND-based flash memory products in both
categories; however, our market share is strongest for removable flash memory
products.  If designers and manufacturers of consumer devices,
including mobile phones, increase their usage of embedded flash memory, we may
not be able to sustain our market share.  In addition, if NAND-based
flash memory is used in an embedded format, we would have less opportunity to
influence the capacity of the NAND-based flash products and we would not have
the opportunity for additional after-market retail sales related to these
consumer devices or mobile phones.  Any loss of market share or
reduction in the average capacity of our product sales or any loss in our retail
after-market opportunity could harm our operating results and business
condition.
  We
are developing X4, a new generation of MLC technology which is expected to
contribute to planned future memory cost reductions.  The performance,
reliability, yields and time-to-market of X4 technology is uncertain, and there
can be no assurance of the commercial success of this technology.
  In
addition, we are investing in future alternative technologies, particularly our
3D semiconductor memory.  We are investing significant resources to
develop this technology for multiple read-write applications; however, there can
be no assurance that we will be successful in developing this or other
technologies or that we will be able to achieve the yields, quality or
capacities to be cost competitive with existing or other alternative
technologies.
   -
17 -
 Table of Contents
  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.Our competitors include many large
companies that may have greater advanced wafer manufacturing capacity and
substantially greater financial, technical, marketing and other resources than
we do, which allows them to produce flash memory chips in high volumes at low
costs and to sell these flash memory chips themselves or to our flash card
competitors at a low cost.  Some of our competitors may sell their
flash memory chips at or below their true manufacturing costs to gain market
share and to cover their fixed costs.  Such practices occurred in the
DRAM industry during periods of excess supply and resulted in substantial losses
in the DRAM industry.  Our primary semiconductor competitors include
Hynix, IMFT, Micron, Samsung and Toshiba.  We, along with Hynix, IMFT,
Samsung and Toshiba, are increasing NAND output and are expected to continue to
produce significant NAND output in the future.  In addition, current
and future competitors produce or could produce alternative flash or other
memory technologies that compete against our NAND-based flash memory technology
or our alternative technologies, which may reduce demand or accelerate price
declines for NAND.  Furthermore, the future rate of scaling of the
NAND-based flash technology design that we employ may slow down significantly,
which would slow down cost reductions that are fundamental to the adoption of
flash memory technology in new applications.  If the scaling of
NAND-based flash technology slows down or alternative technologies prove to be
more economical, our business would be harmed, and our investments in captive
fabrication facilities could be
impaired.
  We
also compete with flash memory card manufacturers and
resellers.  These companies purchase or have a captive supply of flash
memory components and assemble memory cards.  Our primary competitors
currently include, among others, A-DATA, Buffalo, CnMemory, Dane-Elec, Elecom,
FUJI, Gemalto, Hagiwara, Hama, Imation, I-O Data, KingMax, Kingston, Kodak,
Lexar, Memorex, Micron, Netac, Panasonic, PNY, RITEK, Samsung, Sony,
STMicroelectronics, Toshiba, Tradebrands, Transcend, and Verbatim.
  Some
of our competitors have substantially greater resources than we do, have well
recognized brand names or have the ability to operate their business on lower
margins than we do.  The success of our competitors may adversely
affect our future revenues or margins and may result in the loss of our key
customers.  For example, Toshiba and other manufacturers have
increased their market share of flash memory cards for mobile phones, including
the microSDTM
card, which have been a significant driver of our growth.  In the
digital audio market, we face competition from well established companies such
as Apple, ARCHOS, Coby, Creative, Microsoft, Royal Philips Electronics, Samsung
and Sony.  In the USB flash drive market, we face competition from a
large number of competitors, including Hynix, Imation, Kingston, Lexar, Memorex,
PNY, Sony and Verbatim.  In the market for SSDs, we face competition
from large NAND flash producers such as Intel, Samsung and Toshiba, as well as
from hard drive manufacturers, such as Seagate, Samsung, Western Digital and
others, who have established relationships with computer
manufacturers.  We also face competition from third-party solid-state
drive solutions providers such as Kingston, STEC Inc., and
Transcend.
  Furthermore, many
companies are pursuing new or alternative technologies or alternative forms of
NAND, such as phase-change and charge-trap flash technologies which may compete
with NAND-based flash memory.  New or
alternative technologies, if successfully developed by our competitors, and if
we are unable to scale our technology on an equivalent basis, could provide an
advantage to these competitors.
  -
18 -
 Table of Contents
  These
new or alternative technologies may enable products that are smaller, have a
higher capacity, lower cost, lower power consumption or have other
advantages.  If we cannot compete effectively, our results of
operations and financial condition will suffer.
  We
believe that our ability to compete successfully depends on a number of factors,
including:
  ·
                  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, the absence of which could lead to loss of market
      share;
  ·
                  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.
  There
can be no assurance that we will be able to compete successfully in the
future.
  Under
certain conditions, a portion or the entire outstanding lease obligations
related to Flash Ventures’ master equipment lease agreementscould
be accelerated, whichwould
harm our business, resultsofoperations,
cash flows, and liquidity.Flash Ventures’ master lease
agreements contain customary covenants for Japanese lease
facilities.  In addition to containing customary events of default
related to Flash Ventures that could result in an acceleration of Flash
Ventures’ obligations, the master lease agreements contain an acceleration
clause for certain events of default related to us as guarantor, including,
among other things, our failure to maintain a minimum stockholder equity of at
least $1.51 billion, and our failure to maintain a minimum corporate rating
of either BB- from Standard & Poors, or S&P, or Moody’s Corporation, or
a minimum corporate rating of BB+ from Rating & Investment Information,
Inc., or R&I.  As of December 28, 2008, Flash Ventures was in
compliance with all of its master lease covenants.  While our S&P
credit rating was B, two levels below the required minimum corporate rating
threshold from S&P, our R&I credit rating was BBB-, one level above the
required minimum corporate rating threshold from
R&I.
  On
February 4, 2009, R&I confirmed our credit rating at BBB- with a change in
outlook from stable to negative.  If R&I were to downgrade our
credit rating below the minimum corporate rating threshold, Flash Ventures would
become non-compliant with certain covenants under its master equipment lease
agreements and would be required to negotiate a resolution to the non-compliance
to avoid acceleration of the obligations under such agreements.  Such
resolution could include, among other things, supplementary security to be
supplied by us, as guarantor, or increased interest rates or waiver fees, should
the lessors decide they need additional collateral or financial consideration
under the circumstances.  If a resolution is unsuccessful, we may be
required to pay a portion or the entire outstanding lease obligations up to
$2.09 billion, based upon the exchange rate at December 28, 2008,
covered by our guarantee under such Flash Ventures master lease agreements,
which would substantially deplete our cash position and may force us to seek
additional financing, which may or may not be available.
   -
19 -
 Table of Contents
  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.The semiconductor industry is highly
cyclical and is characterized by constant and rapid technological change, rapid
product obsolescence, price declines, evolving standards, short product life
cycles and wide fluctuations in product supply and demand.  The
industry has experienced significant downturns, often in connection with, or in
anticipation of, maturing product cycles of both semiconductor companies’ and
their customers’ products and declines in general economic
conditions.  The flash memory industry is currently experiencing
significant excess supply, reduced demand, high inventory levels, and
accelerated declines in selling prices.  If the oversupply of
NAND-based flash products continues, we may be forced to hold excessive
inventory, sell our inventory below cost, and record inventory write-downs, all
of which would place additional pressure on our results of operation and our
cash position.  We are currently experiencing these conditions in our
business and may experience such downturns in the
future.
  We
depend onFlash
Venturesand
third parties for silicon supply and any disruption or shortage in our supply
from these sources will reduce our revenues, earnings and gross
margins.All of our flash memory products require silicon
supply for the memory and controller components.  The substantial
majority of our flash memory is currently supplied by Flash Ventures and to a
much lesser extent by third-party silicon suppliers.  Any disruption
or shortage in supply of flash memory from our captive or non-captive sources
would harm our operating results.  The risks of supply disruption are
magnified at Toshiba’s Yokkaichi, Japan operations, where Flash Ventures are
operated and Toshiba’s foundry capacity is located.  Earthquakes and
power outages have resulted in production line stoppages and loss of wafers in
Yokkaichi and similar stoppages and losses may occur in the
future.  For example, in the first quarter of fiscal year 2006, a
brief power outage occurred at Fab 3, which resulted in a loss of wafers and
significant costs associated with bringing the fab back on line.  In
addition, the Yokkaichi location is often subject to earthquakes, which could
result in production stoppage, a loss of wafers and the incurrence of
significant costs.  Moreover, Toshiba’s employees that produce Flash
Ventures’ products are covered by collective bargaining agreements and any
strike or other job action by those employees could interrupt our wafer supply
from Flash Ventures.  If we have disruption in our captive wafer
supply or if our non-captive sources fail to supply wafers in the amounts and at
the times we expect, we may not have sufficient supply to meet demand and our
operating results could be
harmed.
  Currently,
our controller wafers are manufactured by SMIC, TSMC, Tower and
UMC.  Any disruption in the manufacturing operations of our controller
wafer vendors would result in delivery delays, adversely affect our ability to
make timely shipments of our products and harm our operating results until we
could qualify an alternate source of supply for our controller wafers, which
could take several quarters to complete.  In times of significant
growth in global demand for flash memory, demand from our customers may outstrip
the supply of flash memory and controllers available to us from our current
sources.  If our silicon vendors are unable to satisfy our
requirements on competitive terms or at all, we may lose potential sales and our
business, financial condition and operating results may suffer.  Any
disruption or delay in supply from our silicon sources could significantly harm
our business, financial condition and results of operations.
  If
actual manufacturing yields are lower than our expectations, this may result in
increased costs and product shortages.The fabrication of our
products requires wafers to be produced in a highly controlled and ultra clean
environment.  Semiconductor manufacturing yields and product
reliability are a function of both design technology and manufacturing process
technology and production delays may be caused by equipment malfunctions,
fabrication facility accidents or human errors.  Yield problems may
not be identified or improved until an actual product is made and can be
tested.  As a result, yield problems may not be identified until the
wafers are well into the production process.  We have from
time-to-time experienced yields that have adversely affected our business and
results of operations.  We have experienced adverse yields on more
than one occasion when we have transitioned to new generations of
products.  If actual yields are low, we will experience higher costs
and reduced product supply, which could harm our business, financial condition
and results of operations.  For example, if the production ramp and/or
yield of 43-nanometer X3 technology wafers, or 43-nanometer or 32-nanometer X2
technology wafers do not increase as expected in fiscal year 2009, our cost
competitiveness would be harmed, we may not have adequate supply or the right
product mix to meet demand, and our business, financial condition and results of
operations will be
harmed.
   -
20 -
 Table of Contents
  Wedepend
on ourcaptive
assembly and test manufacturing facility inChinaand
our business could be harmed if this facility does not perform as
planned.Our
reliance on our captive assembly and test manufacturing facility near Shanghai,
China has increased significantly during fiscal year 2008 and we now
utilize this factory to satisfy a majority of our assembly and test
requirements, and also to produce products with leading-edge technologies such
as multi-stack die packages.  Any delays or interruptions in the
production ramp or targeted yields or any quality issues at our captive facility
could harm our results of operations and financial
condition.
  We
depend on our third-party subcontractors and our business could be harmed if our
subcontractors do not perform as planned.We rely on
third-party subcontractors for a portion of our wafer testing, IC assembly,
packaged testing, product assembly, product testing and order
fulfillment.  From time-to-time, our subcontractors have experienced
difficulty meeting our requirements.  If we are unable to increase the
capacity of our current subcontractors or qualify and engage additional
subcontractors, we may not be able to meet demand for our
products.  We do not have long-term contracts with our existing
subcontractors nor do we expect to have long-term contracts with any new
subcontract suppliers.  We do not have exclusive relationships with
any of our subcontractors, and therefore, cannot guarantee that they will devote
sufficient resources to manufacturing our products.  We are not able
to directly control product delivery schedules.  Furthermore, we
manufacture on a turnkey basis with some of our subcontract
suppliers.  In these arrangements, we do not have visibility and
control of their inventories of purchased parts necessary to build our products
or of the progress of our products through their assembly line.  Any
significant problems that occur at our subcontractors, or their failure to
perform at the level we expect, could lead to product shortages or quality
assurance problems, either of which would have adverse effects on our operating
results.
  In
transitioning to new processes, products and silicon sources, we face production
and market acceptance risks that may cause significant product delays, cost
overruns or performance issues that could harm our
business.Successive generations of our products have
incorporated semiconductors with greater memory capacity per
chip.  The transition to new generations of products, such as products
containing 32-nanometer X2 technology or 43-nanometer X3 technology, is highly
complex and requires new controllers, new test procedures and modifications of
numerous aspects of manufacturing, as well as extensive qualification of the new
products by both us and our OEM customers.  There can be no assurance
that these transitions or other future technology transitions will occur on
schedule or at the yields or costs that we anticipate.  If Flash
Ventures encounters difficulties in transitioning to new technologies, our cost
per gigabyte may not remain competitive with the costs achieved by other flash
memory producers, which would harm our gross margins and financial
results.  Any material delay in a development or qualification
schedule could delay deliveries and adversely impact our operating
results.  We periodically have experienced significant delays in the
development and volume production ramp-up of our products.  Similar
delays could occur in the future and could harm our business, financial
condition and results of
operations.
  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.Our products are complex, must meet stringent user
requirements, may contain errors or defects and the majority of our products are
warrantied for one to five years.  Errors or defects in our products
may be caused by, among other things, errors or defects in the memory or
controller components, including components we procure from non-captive
sources.  In addition, the substantial majority of our flash memory is
supplied by Flash Ventures, and if the wafers contain errors or defects, our
overall supply could be adversely affected.  These factors could
result in the rejection of our products, damage to our reputation, lost
revenues, diverted development resources, increased customer service and support
costs and warranty claims and litigation.  We record an allowance for
warranty and similar costs in connection with sales of our products, but actual
warranty and similar costs may be significantly higher than our recorded
estimate and result in an adverse effect on our results of operations and
financial
condition.
  Our
new products have from time-to-time been introduced with design and production
errors at a rate higher than the error rate in our established
products.  We must estimate warranty and similar costs for new
products without historical information and actual costs may significantly
exceed our recorded estimates.  Warranty and similar costs may be even
more difficult to estimate as we increase our use of non-captive
supply.  Underestimation of our warranty and similar costs would have
an adverse effect on our results of operations and financial
condition.
   -
21 -
 Table of Contents
  Our
remaining investment of approximately $64 million in our FlashVision
venture may not be recoverable.In the second quarter of
fiscal year 2008, we determined that the production of NAND flash memory
products utilizing 200-millimeter wafers is no longer cost effective and signed
an agreement with Toshiba to wind-down our FlashVision venture.  As of
the end of May 2008, the operations of FlashVision were discontinued and a plan
was put in place to sell or otherwise dispose of the tools owned or leased by
FlashVision.  In fiscal year 2008, we took an impairment on our
investment of approximately $10 million due to FlashVision’s difficulty in
selling its excess capital equipment due to deteriorating market
conditions.  As of December 28, 2008, we had an investment in
FlashVision of $64 million denominated in Japanese yen, offset by
$43 million of cumulative translation adjustments recorded in Accumulated
Other Comprehensive Income, or OCI.  A depreciation of the Japanese
yen to U.S. dollar exchange rate or a decrease in the expected final cash
distribution from FlashVision could result in further impairments on this
investment, which could harm our financial
results.
  From
time-to-time, we overestimate our requirements and build excess inventory, or
underestimate our requirements and have a shortage of supply, either of which
harm our financial results.The majority of our products are
sold into consumer markets, which are difficult to accurately
forecast.  Also, a substantial majority of our quarterly sales are
from orders received and fulfilled in that quarter.  Additionally, we
depend upon timely reporting from our retail and distributor customers as to
their inventory levels and sales of our products in order to forecast demand for
our products.  We have in the past significantly over-forecasted or
under-forecasted actual demand for our products.  The failure to
accurately forecast demand for our products will result in lost sales or excess
inventory, both of which will have an adverse effect on our business, financial
condition and results of operations.  In addition, at times inventory
may increase in anticipation of increased demand or as captive wafer capacity
ramps.  If demand does not materialize, we may be forced to write-down
excess inventory or write-down inventory to the lower of cost or market, as was
the case in fiscal year 2008, which may harm our financial condition and results
of
operations.
  During
periods of excess supply in the market for our flash memory products, we may
lose market share to competitors who aggressively lower their
prices.  In order to remain competitive, we may be forced to sell
inventory below cost.  If we lose market share due to price
competition or we must write-down inventory, our results of operations and
financial condition could be harmed.  Conversely, under conditions of
tight flash memory supply, we may be unable to adequately increase our
production volumes or secure sufficient supply in order to maintain our market
share.  If we are unable to maintain market share, our results of
operations and financial condition could be harmed.
  Our
ability to respond to changes in market conditions from our forecast is limited
by our purchasing arrangements with our silicon sources.  Some of
these arrangements provide that the first three months of our rolling six-month
projected supply requirements are fixed and we may make only limited percentage
changes in the second three months of the period covered by our supply
requirement projections.
  We
have some non-silicon components which have long-lead times requiring us to
place orders several months in advance of our anticipated demand.  The
extended period of time to secure these long-lead time parts increases our risk
that forecasts will vary substantially from actual demand, which could lead to
excess inventory or loss of sales.
  We
are sole-sourcedfrom
time to timeforcertainof
our components and the absence of a back-up supplier exposes our supply chain to
unanticipated disruptions.We rely on our vendors, some of
which are the sole source of supply for certain of our
components.  We do not have long-term supply agreements with most of
these vendors.  Our business, financial condition and operating
results could be significantly harmed by delays or reductions in shipments if we
are unable to obtain sufficient quantities of these components or develop
alternative sources of
supply.
   -
22 -
 Table of Contents
  Our
global operations and operations at Flash Ventures and third-party
subcontractors are subject to risks for which we may not be adequately
insured.Our global operations are subject to many risks
including errors and omissions, infrastructure disruptions, such as large-scale
outages or interruptions of service from utilities or telecommunications
providers, supply chain interruptions, third-party liabilities and fires or
natural disasters.  No assurance can be given that we will not incur
losses beyond the limits of, or outside the scope of, coverage of our insurance
policies.  From time-to-time, various types of insurance have not been
available on commercially acceptable terms or, in some cases, have been
unavailable.  We cannot assure you that in the future we will be able
to maintain existing insurance coverage or that premiums will not increase
substantially.  We maintain limited insurance coverage and in some
cases no coverage for natural disasters and sudden and accidental environmental
damages as these types of insurance are sometimes not available or available
only at a prohibitive cost.  Accordingly, we may be subject to an
uninsured or under-insured loss in such situations.  We depend upon
Toshiba to obtain and maintain sufficient property, business interruption and
other insurance for Flash Ventures.  If Toshiba fails to do so, we
could suffer significant unreimbursable losses, and such failure could also
cause Flash Ventures to breach various financing covenants.  In
addition, we insure against property loss and business interruption resulting
from the risks incurred at our third-party subcontractors; however, we have
limited control as to how those sub-contractors run their operations and manage
their risks, and as a result, we may not be adequately
insured.
  We
are exposed to foreign currency exchange rate fluctuations that could negatively
impact our business, results of operations and financial
condition.A significant portion of our business is conducted
in currencies other than the U.S. dollar, which exposes us to adverse changes in
foreign currency exchange rates.  These exposures may change over time
as our business and business practices evolve, and they could have a material
adverse impact on our financial results and cash flows.  Our most
significant exposure is related to our purchases of NAND-based flash memory from
Flash Ventures, which is denominated in Japanese yen.  In fiscal year
2008, the Japanese yen significantly appreciated relative to the U.S. dollar and
this has increased our costs of NAND flash wafers, negatively impacting our
gross margins and results of operations.  In addition, our investments
in Flash Ventures are denominated in Japanese yen and adverse changes in the
exchange rate could increase the cost to us of future funding or increase our
exposure to asset impairments.  We also have foreign currency
exposures related to certain non-U.S. dollar-denominated revenue and operating
expenses in Europe and Asia.  Additionally, we have exposures to
emerging market currencies, which can be extremely volatile.  An
increase in the value of the U.S. dollar could increase the real cost to our
customers of our products in those markets outside the U.S. where we sell in
dollars, and a weakened U.S. dollar could increase local operating expenses and
the cost of raw materials to the extent purchased in foreign
currencies.  We also have significant monetary assets and liabilities
that are denominated in non-functional
currencies.
  We enter
into foreign exchange forward contracts to reduce the short-term impact of
foreign currency fluctuations on certain foreign currency assets and
liabilities.  In addition, we hedge certain anticipated foreign
currency cash flows with foreign exchange forward and option
contracts.  We generally have not hedged our future investments and
distributions denominated in Japanese yen related to Flash
Ventures.
 Our
attempts to hedge against currency risks may not be successful, resulting in an
adverse impact on our results of operations.  In addition, if we do
not successfully manage our hedging program in accordance with current
accounting guidelines, we may be subject to adverse accounting treatment of our
hedging program, which could harm our results of operations and financial
condition.  There can be no assurance that this hedging program will
be economically beneficial to us.  Further, the availability of
foreign exchange credit lines from financial institutions is based upon
available credit.  Continued operating losses, third party downgrades
of our credit rating or continued instability in the worldwide financial markets
could impact our ability to effectively manage our foreign currency exchange
rate fluctuation risk, which could negatively impact our business, results of
operations and financial condition.
   -
23 -
 Table of Contents
  We
may be unable to protect our intellectual property rights, which would harm our
business, financial condition and results of operations.We
rely on a combination of patents, trademarks, copyright and trade secret laws,
confidentiality procedures and licensing arrangements to protect our
intellectual property rights.  In the past, we have been involved in
significant and expensive disputes regarding our intellectual property rights
and those of others, including claims that we may be infringing third-parties’
patents, trademarks and other intellectual property rights.  We expect
that we may be involved in similar disputes in the
future.
  We
cannot assure you that:
  ·
                  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;
  ·
                  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.
  In
addition, our competitors may be able to design their products around our
patents and other proprietary rights.  We also have patent
cross-license agreements with several of our leading
competitors.  Under these agreements, we have enabled competitors to
manufacture and sell products that incorporate technology covered by our
patents.  While we obtain license and royalty revenue or other
consideration for these licenses, if we continue to license our patents to our
competitors, competition may increase and may harm our business, financial
condition and results of operations.
  There
are both flash memory producers and flash memory card manufacturers who we
believe may require a license from us.  Enforcement of our rights
often requires litigation.  If we bring a patent infringement action
and are not successful, our competitors would be able to use similar technology
to compete with us.  Moreover, the defendant in such an action may
successfully countersue us for infringement of their patents or assert a
counterclaim that our patents are invalid or unenforceable.  If we do
not prevail in the defense of patent infringement claims, we could be required
to pay substantial damages, cease the manufacture, use and sale of infringing
products, expend significant resources to develop non-infringing technology,
discontinue the use of specific processes, or obtain licenses to the infringing
technology.
  On
October 24, 2007, we initiated two patent infringement actions in the United
States District Court for the Western District of Wisconsin and one action in
the United States International Trade Commission against 25 companies that
manufacture, sell and import USB flash drives, CompactFlash cards, multimedia
cards, MP3/media players and/or other removable flash storage
products.  There can be no assurance that we will be successful in
these actions, that the validity of the asserted patents will be preserved or
that we will not face counterclaims of the nature described above.
   -
24 -
 Table of Contents
  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.We are involved in a number of lawsuits, including
among others, several cases involving our patents and the patents of third
parties.  We are the plaintiff in some of these actions and the
defendant in other of these actions.  Some of the actions seek
injunctions against the sale of our products and/or substantial monetary
damages, which if granted or awarded, could have a material adverse effect on
our business, financial condition and results of
operations.
  We
and other companies have been sued in the United States District Court of the
Northern District of California in purported consumer class actions alleging a
conspiracy to fix, raise, maintain or stabilize the pricing of flash memory, and
concealment thereof, in violation of state and federal laws.  The
lawsuits purport to be on behalf of classes of purchasers of flash
memory.  The lawsuits seek restitution, injunction and damages,
including treble damages, in an unspecified amount.
  In
addition, in September 2007, we and Dr. Eli Harari, our founder, chairman
and chief executive officer, received grand jury subpoenas issued from the
United States District Court for the Northern District of California indicating
a Department of Justice investigation into possible antitrust violations in the
NAND flash memory industry.  We also received a notice from the
Canadian Competition Bureau that the Bureau has commenced an industry-wide
investigation with respect to alleged anti-competitive activity regarding the
conduct of companies engaged in the supply of NAND flash memory chips to Canada
and requesting that we preserve any records relevant to such
investigation.  We intend to cooperate in these
investigations.  We are unable to predict the outcome of these
lawsuits and investigations.  The cost of discovery and defense in
these actions as well as the final resolution of these alleged violations of
antitrust laws could result in significant liability and expense and may harm
our business, financial condition and results of operations.  For
additional information concerning these proceedings, see Part I, Item 3, “Legal
Proceedings.”
  Litigation
is subject to inherent risks and uncertainties that may cause actual results to
differ materially from our expectations.  Factors that could cause
litigation results to differ include, but are not limited to, the discovery of
previously unknown facts, changes in the law or in the interpretation of laws,
and uncertainties associated with the judicial decision-making
process.  If we receive an adverse judgment in any litigation, we
could be required to pay substantial damages and/or cease the manufacture, use
and sale of products.  Litigation, including intellectual property
litigation, can be complex, can extend for a protracted period of time, can be
very expensive, and the expense can be unpredictable.  Litigation
initiated by us could also result in counter-claims against us, which could
increase the costs associated with the litigation and result in our payment of
damages or other judgments against us.  In addition, litigation may
divert the efforts and attention of some of our key personnel.
  We
have been, and expect to continue to be, subject to claims and legal proceedings
regarding alleged infringement by us of the patents, trademarks and other
intellectual property rights of third parties.  From time-to-time we
have sued, and may in the future sue, third parties in order to protect our
intellectual property rights.  Parties that we have sued and that we
may sue for patent infringement may countersue us for infringing their
patents.  If we are held to infringe the intellectual property of
others, we may need to spend significant resources to develop non-infringing
technology or obtain licenses from third parties, but we may not be able to
develop such technology or acquire such licenses on terms acceptable to us or at
all.  We may also be required to pay significant damages and/or
discontinue the use of certain manufacturing or design processes.  In
addition, we or our suppliers could be enjoined from selling some or all of our
respective products in one or more geographic locations.  If we or our
suppliers are enjoined from selling any of our respective products or if we are
required to develop new technologies or pay significant monetary damages or are
required to make substantial royalty payments, our business would be
harmed.
   -
25 -
 Table of Contents
  We
may be obligated to indemnify our current or former directors or employees, or
former directors or employees of companies that we have acquired, in connection
with litigation or regulatory or Department of Justice
investigations.  These liabilities could be substantial and may
include, among other things, the costs of defending lawsuits against these
individuals; the cost of defending any shareholder derivative suits; the cost of
governmental, law enforcement or regulatory investigations; civil or criminal
fines and penalties; legal and other expenses; and expenses associated with the
remedial measures, if any, which may be imposed.
  We
continually evaluate and explore strategic opportunities as they arise,
including business combinations, strategic partnerships, collaborations, capital
investments and the purchase, licensing or sale of assets.  Potential
continuing uncertainty surrounding these activities may result in legal
proceedings and claims against us, including class and derivative lawsuits on
behalf of our stockholders.  We may be required to expend significant
resources, including management time, to defend these actions and could be
subject to damages or settlement costs related to these actions.
  Moreover,
from time-to-time we agree to indemnify certain of our suppliers and customers
for alleged patent infringement.  The scope of such indemnity varies
but generally includes indemnification for direct and consequential damages and
expenses, including attorneys’ fees.  We may from time-to-time be
engaged in litigation as a result of these indemnification
obligations.  Third-party claims for patent infringement are excluded
from coverage under our insurance policies.  A future obligation to
indemnify our customers or suppliers may have a material adverse effect on our
business, financial condition and results of operations.  For
additional information concerning legal proceedings, see Part I, Item 3, “Legal
Proceedings.”
  We
may be unable to license intellectual property to or from third parties as
needed, which could expose us to liability for damages, increase our costs or
limit or prohibit us from selling products.If we incorporate
third-party technology into our products or if we are found to infringe others’
intellectual property, we could be required to license intellectual property
from a third party.  We may also need to license some of our
intellectual property to others in order to enable us to obtain important
cross-licenses to third-party patents.  We cannot be certain that
licenses will be offered when we need them, that the terms offered will be
acceptable, or that these licenses will help our business.  If we do
obtain licenses from third parties, we may be required to pay license fees or
royalty payments.  In addition, if we are unable to obtain a license
that is necessary to manufacture our products, we could be required to suspend
the manufacture of products or stop our product suppliers from using processes
that may infringe the rights of third parties.  We may not be
successful in redesigning our products, or the necessary licenses may not be
available under reasonable
terms.
  Seasonality
in our business may result in our inability to accurately forecast our product
purchase requirements.Sales of our products in the consumer
electronics market are subject to seasonality.  For example, sales
have typically increased significantly in the fourth quarter of each fiscal
year, sometimes followed by significant declines in the first quarter of the
following fiscal year.  This seasonality makes it more difficult for
us to forecast our business, especially in the current global economic
environment and its corresponding decline in consumer confidence, which may
impact typical seasonal trends.  If our forecasts are inaccurate, we
may lose market share or procure excess inventory or inappropriately increase or
decrease our operating expenses, any of which could harm our business, financial
condition and results of operations.  This seasonality also may lead
to higher volatility in our stock price, the need for significant working
capital investments in receivables and inventory and our need to build inventory
levels in advance of our most active selling
seasons.
   -
26 -
 Table of Contents
  Because
of our international business and operations, we must comply with numerous
international laws and regulations, and we are vulnerable to political
instability and other risks related to international
operations.Currently, a large portion of our revenues is
derived from our international operations, and all of our products are produced
overseas in China, Israel, Japan, South Korea and Taiwan.  We are,
therefore, affected by the political, economic, labor, environmental, public
health and military conditions in these
countries.
  For
example, China does not currently have a comprehensive and highly developed
legal system, particularly with respect to the protection of intellectual
property rights.  This results, among other things, in the prevalence
of counterfeit goods in China.  The enforcement of existing and future
laws and contracts remains uncertain, and the implementation and interpretation
of such laws may be inconsistent.  Such inconsistency could lead to
piracy and degradation of our intellectual property
protection.  Although we engage in efforts to prevent counterfeit
products from entering the market, those efforts may not be
successful.  Our results of operations and financial condition could
be harmed by the sale of counterfeit products.
  Our
international business activities could also be limited or disrupted by any of
the following factors:
  ·
                  the
      need to comply with foreign government
  regulation;
  ·
                  changes
      in diplomatic and trade
relationships;
  ·
                  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;
  ·
                  changes
      in, or the particular application of, government
    regulations;
  ·
                  duties
      and/or fees related to customs entries for our products, which are all
      manufactured offshore;
  ·
                  longer
      payment cycles and greater difficulty in accounts receivable
      collection;
  ·
                  adverse
      tax rules and regulations;
  ·
                  weak
      protection of our intellectual property
rights;
  ·
                  delays
      in product shipments due to local customs restrictions;
  and
  ·
                  delays
      in research and development that may arise from political unrest at our
      development centers in Israel.
   -
27 -
 Table of Contents
   Our
stock price has been, and may continue to be, volatile, which could result in
investors losing all or part of their investments.The market
price of our stock has fluctuated significantly in the past and may continue to
fluctuate in the future.  We believe that such fluctuations will
continue as a result of many factors, including financing plans, future
announcements concerning us, our competitors or our principal customers
regarding financial results or expectations, technological innovations, industry
supply or demand dynamics, new product introductions, governmental regulations,
the commencement or results of litigation or changes in earnings estimates by
analysts.  In addition, in recent years the stock market has
experienced significant price and volume fluctuations and the market prices of
the securities of high technology and semiconductor companies have been
especially volatile, often for reasons outside the control of the particular
companies.  These fluctuations as well as general economic, political
and market conditions may have an adverse affect on the market price of our
common stock as well as the price of our outstanding convertible
notes.
  We
may engage in business combinations 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.We continually
evaluate and explore strategic opportunities as they arise, including business
combinations, strategic partnerships, collaborations, capital investments and
the purchase, licensing or sale of assets.  If we issue equity
securities in connection with an acquisition, the issuance may be dilutive to
our existing stockholders.  Alternatively, acquisitions made entirely
or partially for cash would reduce our cash
reserves.
  Acquisitions
may require significant capital infusions, typically entail many risks and could
result in difficulties in assimilating and integrating the operations,
personnel, technologies, products and information systems of acquired
companies.  We may experience delays in the timing and successful
integration of acquired technologies and product development through volume
production, unanticipated costs and expenditures, changing relationships with
customers, suppliers and strategic partners, or contractual, intellectual
property or employment issues.  In addition, key personnel of an
acquired company may decide not to work for us.  The acquisition of
another company or its products and technologies may also result in our entering
into a geographic or business market in which we have little or no prior
experience.  These challenges could disrupt our ongoing business,
distract our management and employees, harm our reputation, subject us to an
increased risk of intellectual property and other litigation and increase our
expenses.  These challenges are magnified as the size of the
acquisition increases, and we cannot assure you that we will realize the
intended benefits of any acquisition.  Acquisitions may require large
one-time charges and can result in increased debt or contingent liabilities,
adverse tax consequences, substantial depreciation or deferred compensation
charges, the amortization of identifiable purchased intangible assets or
impairment of goodwill, any of which could have a material adverse effect on our
business, financial condition or results of operations.
  Mergers
and acquisitions of high-technology companies are inherently risky and subject
to many factors outside of our control, and no assurance can be given that our
previous or future acquisitions will be successful and will not materially
adversely affect our business, operating results, or financial
condition.  Failure to manage and successfully integrate acquisitions
could materially harm our business and operating results.  Even when
an acquired company has already developed and marketed products, there can be no
assurance that such products will be successful after the closing, will not
cannibalize sales of our existing products, that product enhancements will be
made in a timely fashion or that pre-acquisition due diligence will have
identified all possible issues that might arise with respect to such
company.  Failed business combinations, or the efforts to create a
business combination, can also result in litigation.
   -
28 -
 Table of Contents
  Our
success depends on our key personnel, including our executive officers, the loss
of whom could disrupt our business.Our success greatly
depends on the continued contributions of our senior management and other key
research and development, sales, marketing and operations personnel, including
Dr. Eli Harari, our founder, chairman and chief executive officer.  We
do not have employment agreements with any of our executive officers and they
are free to terminate their employment with us at any time.  Our
success will also depend on our ability to recruit additional highly skilled
personnel.  Historically, a significant portion of our employee
compensation has been dependent on equity compensation, which is directly tied
to our stock price.  Currently, the equity incentives for virtually
all of our employees are underwater, and as a result, our equity compensation
has little or no retention value.  In addition, we are not paying
annual cash performance bonuses in fiscal year 2009 and may not pay cash bonuses
in fiscal year 2010.  Furthermore, we have frozen salaries, instituted
forced shutdown days, and reduced certain employee benefits to reduce
costs.  These actions or any further reduction in compensation
elements may make it more difficult for us to hire or retain key
personnel.
  We
may incur additional restructuring charges or not realize the expected benefits
of new initiatives to reduce costs across our operations.In
fiscal year 2008, we pursued a number of initiatives to reduce costs across our
operations.  These initiatives included workforce reductions in
certain areas as we realigned our business.  In fiscal year 2008, we
recorded charges of $36 million for employee severance and benefits for
employee reductions worldwide, marketing contract termination costs, technology
license impairments, fixed asset impairments, and other charges.  We
may record additional employee severance and related costs for terminated
employees in fiscal year 2009.  We may not realize the expected
benefits of these initiatives.  In addition, we continue to focus on
reducing our costs.  As a result of these initiatives, we expect to
incur restructuring or other charges and we may experience disruptions in our
operations and loss of key
personnel.
  Terrorist
attacks, war, threats of war and government responses thereto may negatively
impact our operations, revenues, costs and stock
price.Terrorist attacks, U.S. military responses to these
attacks, war, threats of war and any corresponding decline in consumer
confidence could have a negative impact on consumer retail demand, which is the
largest channel for our products.  Any of these events may disrupt our
operations or those of our customers and suppliers and may affect the
availability of materials needed to manufacture our products or the means to
transport those materials to manufacturing facilities and finished products to
customers.  Any of these events could also increase volatility in the
U.S. and world financial markets, which could harm our stock price and may limit
the capital resources available to us and our customers or suppliers, or
adversely affect consumer confidence.  We have substantial operations
in Israel including a development center in Northern Israel, near the border
with Lebanon, and a research center in Omer, Israel, which is near the Gaza
Strip, areas that have recently experienced significant violence and political
unrest.  Continued turmoil and unrest in Israel or the Middle East
could cause delays in the development or production of our
products.  This could harm our business and results of
operations.
  Natural
disasters or epidemics in the countries in which we or our suppliers or
subcontractors operate could negatively impact our
operations.Our operations, including those of our suppliers
and subcontractors, are concentrated in Milpitas, California; Raleigh, North
Carolina; Brno, Czech Republic; Astugi and Yokkaichi, Japan; Hsinchu and
Taichung, Taiwan; and Dongguan, Futian, Shanghai and Shenzen,
China.  In the past, these areas have been affected by natural
disasters such as earthquakes, tsunamis, floods and typhoons, and some areas
have been affected by epidemics, such as avian flu.  If a natural
disaster or epidemic were to occur in one or more of these areas, our operations
could be significantly impaired and our business may be harmed.  This
is magnified by the fact that we do not have insurance for most natural
disasters, including earthquakes.  This could harm our business and
results of
operations.
   -
29 -
 Table of Contents
  To
manage our business complexity, we may need to improve our systems, controls,
processes and procedures.  We have experienced and mayagainexperience
rapid growth or changes in business requirements, which could place a
significant strain on our managerial, financial and operations resources and
personnel.We must continually enhance our operational,
accounting and financial systems to accommodate the growth, changing practices,
and increasing complexity of our business.  For example, we are
planning to replace our enterprise resource planning, or ERP, system in fiscal
year 2009.  This project requires significant investment, the
re-engineering of many processes used to run our business, and the attention of
many employees and managers who would otherwise be focused on other aspects of
our business.  The design and implementation of the new ERP system
could also take longer than anticipated and put further strain on our ability to
run our business on the older, existing ERP system.  For example, our
current system integrator, Satyam Computer Services Ltd., is experiencing
financial difficulty which has resulted in some project delays and loss of
productivity.  If the system integrator were to lose key personnel,
declare bankruptcy or otherwise be unable to perform at the level we expect, we
would have to engage a new integrator, which would likely result in significant
delays in our implementation and additional cost.  Any design flaws or
delays in the new ERP system or any distraction of our workforce from competing
business requirements could harm our business or results of
operations.  We must also continue to enhance our controls and
procedures and workforce training.  If we do not manage or adapt our
systems, processes and procedures to our changing or growing business and
organization, our business and results of operations could be
harmed.
  We
may need to raise additional financing, which could be difficult to obtain, and
which if not obtained in satisfactory amounts mayprevent
us from fundingFlash
Ventures,
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.We
currently believe that we have sufficient cash resources to fund our operations
as well as our anticipated investments in Flash Ventures for at least the next
twelve months; however, we may decide to raise additional funds to maintain the
strength of our balance sheet, and we cannot be certain that we will be able to
obtain additional financing on favorable terms, if at all.  The
current worldwide financing environment is extremely challenging, which could
make it more difficult for us to raise funds on reasonable terms or at
all.  From time-to-time, we may decide to raise additional funds
through equity, public or private debt, or lease financings.  If we
issue additional equity securities, our stockholders will experience dilution
and the new equity securities may have rights, preferences or privileges senior
to those of existing holders of common stock.  If we raise funds
through debt or lease financing, we will have to pay interest and may be subject
to restrictive covenants, which could harm our business.  If we cannot
raise funds on acceptable terms, if and when needed, our credit rating may be
downgraded, and we may not be able to develop or enhance our technology or
products, fulfill our obligations to Flash Ventures, take advantage of future
opportunities, grow our business or respond 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 inDelawarelaw
could discourage or delay a change in control and, as a result, negatively
impact our stockholders.We have taken a number of actions
that could have the effect of discouraging a takeover attempt.  For
example, we have a stockholders’ rights plan that would cause substantial
dilution to a stockholder, and substantially increase the cost paid by a
stockholder, who attempts to acquire us on terms not approved by our board of
directors.  This could discourage an acquisition of us.  In
addition, our certificate of incorporation grants our board of directors the
authority to fix the rights, preferences and privileges of and issue up to
4,000,000 shares of preferred stock without stockholder action (2,000,000 of
which have already been reserved under our stockholder rights
plan).  Issuing preferred stock could have the effect of making it
more difficult and less attractive for a third party to acquire a majority of
our outstanding voting stock.  Preferred stock may also have other
rights, including economic rights senior to our common stock that could have a
material adverse effect on the market value of our common stock.  In
addition, we are subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law.  This section provides that a
corporation may not engage in any business combination with any interested
stockholder during the three-year period following the time that a stockholder
became an interested stockholder.  This provision could have the
effect of delaying or discouraging a change of control of
SanDisk.
   -
30 -
 Table of Contents
  Unanticipated
changes in our tax provisions or exposure to additional income tax liabilities
could affect our profitability.We are subject to income tax
in the U.S. and numerous foreign jurisdictions.  Our tax liabilities
are affected by the amounts we charge for inventory, services, licenses, funding
and other items in intercompany transactions.  We are subject to
ongoing tax audits in various jurisdictions.  Tax authorities may
disagree with our intercompany charges or other matters and assess additional
taxes.  We regularly assess the likely outcomes of these audits in
order to determine the appropriateness of our tax provision.  However,
there can be no assurance that we will accurately predict the outcomes of these
audits, and the actual outcomes of these audits could have a material impact on
our results of operations or financial condition.  In addition, our
effective tax rate in the future could be adversely affected by changes in the
mix of earnings in countries with differing statutory tax rates, changes in the
valuation of deferred tax assets and liabilities, changes in tax laws, and the
discovery of new information in the course of our tax return preparation
process.  In particular, the carrying value of deferred tax assets,
which are predominantly in the U.S., is dependent on our ability to generate
future taxable income in the U.S.  Any of these changes could affect
our
profitability.
  We
may be subject to risks associated with environmental
regulations.Production and marketing of products in certain
states and countries may subject us to environmental and other regulations
including, in some instances, the responsibility for environmentally safe
disposal or recycling.  Such laws and regulations have recently been
passed in several jurisdictions in which we operate, including Japan and certain
states within the U.S.  Although we do not anticipate any material
adverse effects in the future based on the nature of our operations and the
focus of such laws, there is no assurance such existing laws or future laws will
not harm our financial condition, liquidity or results of
operations.
  In
the event we are unable to satisfy regulatory requirements relating to internal
controls, or if our internal control over financial reportingisnot
effective, our business could suffer.In connection with our
certification process under Section 404 of Sarbanes-Oxley Act, we have
identified in the past and will from time-to-time identify deficiencies in our
internal control over financial reporting.  We cannot assure you that
individually or in the aggregate these deficiencies would not be deemed to be a
material weakness.  A material weakness or deficiency in internal
control over financial reporting could materially impact our reported financial
results and the market price of our stock could significantly
decline.  Additionally, adverse publicity related to the disclosure of
a material weakness or deficiency in internal controls could have a negative
impact on our reputation, business and stock price.  Any internal
control or procedure, no matter how well designed and operated, can only provide
reasonable assurance of achieving desired control objectives and cannot prevent
intentional misconduct or
fraud.
   -
31 -
 Table of Contents
  Our
debt service obligations may adversely affect our cash
flow.While the 1% Senior Convertible Notes due 2013 and the
1% Convertible Notes due 2035 are outstanding, we are obligated to pay to the
holders thereof approximately $12.3 million per year in
interest.  If we issue other debt securities in the future, our debt
service obligations will increase.  If we are unable to generate
sufficient cash to meet these obligations and must instead use our existing cash
or investments, we may have to reduce, curtail or terminate other business
activities.  We intend to fulfill our debt service obligations from
cash generated by our operations, if any, and from our existing cash and
investments.  Our indebtedness could have significant negative
consequences.
  For
example, it could:
  ·
                  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;
  ·
                  place
      us at a competitive disadvantage relative to our competitors with less
      debt; and
  ·
                  increase
      our risk of credit rating
downgrades.
  We
have significant financial obligations related to Flash Ventures, which could
impact our ability to comply with our obligations under our 1% Senior
Convertible Notes due 2013 and our 1% Convertible Notes due
2035.  We have entered into agreements to guarantee or provide
financial support with respect to lease and certain other obligations of Flash
Ventures in which we have a 49.9% ownership interest.  In addition, we
may enter into future agreements to increase manufacturing capacity, including
the expansion of Fab 4.  As of December 28, 2008, we had
guarantee obligations for Flash Venture master lease agreements of approximately
$2.09 billion.  In addition, we have significant commitments for
the future fixed costs of Flash Ventures.  Due to these and our other
commitments, we may not have sufficient funds to make payments under
or repay the
notes.
  The
settlement of the 1% Senior Convertible Notes due 2013 or the 1% Convertible
Notes due 2035 may have adverse consequences.The 1% Senior Convertible
Notes due 2013 are subject to net share settlement, which means that we will
satisfy our conversion obligation to holders by paying cash in settlement of the
lesser of the principal amount or the conversion value of the 1% Senior
Convertible Notes due 2013 and by delivering shares of our common stock in
settlement of any and all conversion obligations in excess of the daily
conversion values.  The holders of the 1% Convertible Notes due 2035
have a put option in March 2010 and various dates thereafter under which they
can demand cash repayment of the principal amount of
$75 million.
  Our
failure to convert the 1% Senior Convertible Notes due 2013 into cash or a
combination of cash and common stock upon exercise of a holder’s conversion
right in accordance with the provisions of the indenture would constitute a
default under the indenture.  Similarly, our failure to settle the 1%
Convertible Notes due 2035 if we were forced to repurchase the Notes in March
2010 or thereafter would constitute a default under the indenture.  We
may not have the financial resources or be able to arrange for financing to pay
such principal amount in connection with the surrender of the 1% Senior
Convertible Notes due 2013 or the 1% Convertible Notes due
2035.  While we currently only have debt related to the 1% Senior
Convertible Notes due 2013 and the 1% Convertible Notes due 2035 and we do not
have other agreements that would restrict our ability to pay the principal
amount of any convertible notes in cash, we may enter into such an agreement in
the future, which may limit or prohibit our ability to make any such
payment.  In addition, a default under the indenture could lead to a
default under existing and future agreements governing our
indebtedness.  If, due to a default, the repayment of related
indebtedness were to be accelerated after any applicable notice or grace
periods, we may not have sufficient funds to repay such indebtedness and amounts
owing in respect of the conversion, maturity, or put of any convertible
notes.
   -
32 -
 Table of Contents
  The
convertible note hedge transactions and the warrant option transactions may
affect the value of the notes and our common stock.We have
entered into convertible note hedge transactions with Morgan Stanley & Co.
International Limited and Goldman, Sachs & Co., or the
dealers.  These transactions are expected to reduce the potential
dilution upon conversion of the 1% Senior Convertible Notes due
2013.  We used approximately $67.3 million of the net proceeds of
funds received from the 1% Senior Convertible Notes due 2013 to pay the net cost
of the convertible note hedge in excess of the warrant
transactions.  These transactions were accounted for as an adjustment
to our stockholders’ equity.  In connection with hedging these
transactions, the dealers or their
affiliates:
  ·
                    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.
  The
dealers or their affiliates are likely to modify their hedge positions from
time-to-time prior to conversion or maturity of the notes by purchasing and
selling shares of our common stock, our securities or other instruments they may
wish to use in connection with such hedging.  In particular, such
hedging modification may occur during any observation period for a conversion of
the 1% Senior Convertible Notes due 2013, which may have a negative effect on
the value of the consideration received in relation to the conversion of those
notes.  In addition, we intend to exercise options we hold under the
convertible note hedge transactions whenever notes are converted.  To
unwind their hedge positions with respect to those exercised options, the
dealers or their affiliates expect to sell shares of our common stock in
secondary market transactions or unwind various over-the-counter derivative
transactions with respect to our common stock during the observation period, if
any, for the converted notes.
  The
effect of any of these transactions on the market price of our common stock or
the 1% Senior Convertible Notes due 2013 will depend in part on market
conditions and cannot be ascertained at this time.  However, any of
these activities could adversely affect the value of our common stock and the
value of the 1% Senior Convertible Notes due 2013, and consequently affect the
amount of cash and the number of shares of common stock the holders will receive
upon the conversion of the notes.
 
   ITEM 1B.  UNRESOLVED STAFF
COMMENTS
 
 Not
applicable.
  -
33 -
 Table of Contents
  ITEM 2.  PROPERTIES
 
 Our
principal facilities are located in Milpitas, California.  We lease
four adjacent buildings comprising approximately 444,000 square
feet.  These facilities house our corporate offices, the majority of
our engineering team, as well as a portion of our sales, marketing, operations
and corporate services organizations.  We occupy this space under
lease agreements that expire in 2011 and 2013.  In addition, we own
two buildings comprising approximately 157,000 square feet located in Kfar Saba,
Israel, that house administrative offices and research and development
facilities.  The buildings are located on a 99-year land lease of
approximately 268,000 square feet of which approximately 70,000 square feet is
vacant land for future expansion.  We have a 50-year land lease in
Tefen, Israel of approximately 87,000 square feet of vacant land for future
expansion.
  We
have a 50-year land lease in Shanghai, China of approximately 653,000 square
feet on which we own an advanced testing and
assembly facility of approximately 363,000 square feet. We lease office space of
approximately 29,000 square feet and manufacturing space of approximately 21,000
square feet in Madrid, Spain.
  We
also lease sales and marketing offices in the U.S., China, France, Germany,
India, Ireland, Israel, Japan, Korea, Russia, Scotland, Spain, Sweden, Taiwan
and the United Arab Emirates; operation support offices in Taichung, Taiwan;
Hong Kong, Shanghai and Shenzhen, China; and New Delhi, India; and design
centers in Omer and Tefen, Israel; Edinburgh, Scotland; Bangalore, India and
Madrid, Spain.
   -
34 -
 Table of Contents
  ITEM 3.  LEGAL
PROCEEDINGS
 
 The flash
memory industry is characterized by significant litigation seeking to enforce
patent and other intellectual property rights.  The Company's patent
and other intellectual property rights are primarily responsible for generating
license and royalty revenue.  The Company seeks to protect its
intellectual property through patents, copyrights, trademarks, trade secret
laws, confidentiality agreements and other methods, and has been, and likely
will, continue to enforce such rights as appropriate through litigation and
related proceedings.  The Company expects that its competitors and
others who hold intellectual property rights related to its industry will pursue
similar strategies against it in litigation and related
proceedings.  From time-to-time, it has been and may continue to be
necessary to initiate or defend litigation against third
parties.  These and other parties could bring suit against the
Company.  In each case listed below where the Company is the
defendant, the Company intends to vigorously defend the action.  At
this time, the Company does not believe it is reasonably possible that losses
related to the litigation described below have occurred beyond the amounts, if
any, that have been accrued.
 
 On
October 15, 2004, the Company filed a complaint for patent infringement and
declaratory judgment of non-infringement and patent invalidity against
STMicroelectronics N.V. and STMicroelectronics, Inc. (collectively, “ST”) in the
United States District Court for the Northern District of California, captioned
SanDisk Corporation v. STMicroelectronics, Inc., et al., Civil Case No. C 04
04379 JF.  The complaint alleges that ST’s products infringe one of
the Company’s U.S. patents, U.S. Patent No. 5,172,338 (the “’338 patent”), and
also alleges that several of ST’s patents are invalid and not
infringed.  On June 18, 2007, the Company filed an amended complaint,
removing several of the Company’s declaratory judgment claims.  At a
case management conference conducted on June 29, 2007, the parties agreed that
the remaining declaratory judgment claims would be dismissed pursuant to a
settlement agreement in two matters being litigated in the Eastern District of
Texas (Civil Case No. 4:05CV44 and Civil Case No. 4:05CV45, discussed
below).  The parties also agreed that the ’338 patent and a second
Company patent, presently at issue in Civil Case No. C0505021 JF (discussed
below), will be litigated together in this case.  ST filed an answer
and counterclaims on September 6, 2007.  ST’s counterclaims
included assertions of antitrust violations.  On October 19, 2007, the
Company filed a motion to dismiss ST’s antitrust counterclaims.  On
December 20, 2007, the Court entered a stipulated order staying all
procedural deadlines until the Court resolves the Company’s motion to
dismiss.   At a hearing held on January 25, 2008, the Court
converted the Company’s motion to dismiss into a motion for summary
judgment.  On June 17, 2008, the Court issued a stipulated order
rescheduling the hearing on the Company’s motion for summary judgment for
September 12, 2008.  On October 17, 2008, the Court issued an
order granting in part and denying in part the Company’s motion for summary
judgment on ST’s antitrust counterclaims.  The Court has not yet
established new procedural deadlines in this matter.
 
  - 35
-
 Table of Contents
  On
October 14, 2005, STMicroelectronics, Inc. (“STMicro”) filed a complaint against
the Company and the Company’s CEO, Dr. Eli Harari, in the Superior Court of the
State of California for the County of Alameda, captioned STMicroelectronics,
Inc. v. Harari, Case No. HG 05237216 (the “Harari Matter”).  The
complaint alleges that STMicro, as the successor to Wafer Scale Integration,
Inc.’s (“WSI”) legal rights, has an ownership interest in several Company
patents that were issued from applications filed by Dr. Harari, a former WSI
employee.  The complaint seeks the assignment or co-ownership of
certain inventions and patents conceived of by Dr. Harari, including some of the
patents asserted by the Company in its litigations against STMicro, as well as
damages in an unspecified amount.  On November 15, 2005,
Dr. Harari and the Company removed the case to the U.S. District Court for
the Northern District of California, where it was assigned case number
C05-04691.  On December 13, 2005, STMicro filed a motion to
remand the case back to the Superior Court of Alameda County.  The
case was remanded to the Superior Court of Alameda County on July 18, 2006,
after briefing and oral argument on a motion by STMicro for reconsideration of
an earlier order denying STMicro’s request for remand.  Due to the
remand, the District Court did not rule upon a summary judgment motion
previously filed by the Company.  In the Superior Court of Alameda
County, the Company filed a Motion to Transfer Venue to Santa Clara County on
August 10, 2006, which was denied on September 12, 2006.  On
October 6, 2006, the Company filed a Petition for Writ of Mandate with the First
District Court of Appeal, which asked that the Superior Court’s
September 12, 2006 Order be vacated, and the case transferred to Santa
Clara County.  On October 20, 2006, the Court of Appeal requested
briefing on the Company’s petition for a writ of mandate and stayed the action
during the pendency of the writ proceedings.  On January 17, 2007, the
Court of Appeal issued an alternative writ directing the Superior Court to issue
a new order granting the Company’s venue transfer motion or to show cause why a
writ of mandate should not issue compelling such an order.  On January
23, 2007, the Superior Court of Alameda transferred the case to Santa Clara
County as a result of the writ proceeding at the Court of Appeal.  The
Company also filed a special motion to strike STMicro’s unfair competition
claim, which the Superior Court denied on September 11,
2006.  The Company appealed the denial of that motion, and the
proceedings at the Superior Court were stayed during the pendency of the
appeal.  On August 7, 2007, the First District Court of Appeal
affirmed the Superior Court’s decision, and the Supreme Court subsequently
denied the Company’s petition for review.  On February 7, 2008, the
Company and Dr. Harari moved for judgment on the pleadings on the ground that
the federal courts have exclusive jurisdiction over the claims in the
case.  The Superior Court denied this motion and litigation then
proceeded at the Superior Court until May 7, 2008, when the Company and Dr.
Harari again removed the case to the U.S. District Court for the Northern
District of California.  The District Court consolidated the case and
the previously-removed action under case number C05-04691.  STMicro
filed a motion to remand which was granted on August 26, 2008.  The
case was remanded to the Superior Court for the County of Santa Clara, Case No.
1-07-CV-080123, and trial has been set for September 8, 2009.  On
January 30, 2009, the Company and Dr. Harari filed a motion for summary judgment
on the grounds that STMicro’s claims are time-barred.  The motion for
summary judgment is scheduled to be heard on April 27, 2009.
 
 On
December 6, 2005, the Company filed a complaint for patent infringement in
the United States District Court for the Northern District of California against
ST (Case No. C0505021 JF).  In the suit, the Company seeks damages and
injunctions against ST from making, selling, importing or using flash memory
chips or products that infringe the Company’s U.S. Patent No. 5,991,517 (the
“’517 patent”).  As discussed above, the ’517 patent will be litigated
together with the ’338 patent in Civil Case No. C 04 04379JF.
 
 On
September 11, 2006, Mr. Rabbi, a shareholder of msystems Ltd. (“msystems”), a company
subsequently acquired by the Company in or about November 2006, filed a
derivative action in Israel and a motion to permit him to file the derivative
action against msystems and four directors of msystems arguing that options were
allegedly allocated to officers and employees of msystems in violation of
applicable law.  Mr. Rabbi claimed that the aforementioned actions
allegedly caused damage to msystems.  On January 25, 2007, SanDisk IL
Ltd. (“SDIL”), successor in interest to msystems, filed a motion to dismiss the
motion to seek leave to file the derivative action and the derivative action on
the grounds, inter alia, that Mr. Rabbi ceased to be a shareholder of msystems
after the merger between msystems and the Company.  On March 12, 2008,
the court granted SDIL’s motion and dismissed the motion to seek leave to file
the derivative action and consequently, the derivative action itself was
dismissed.  On May 15, 2008, Mr. Rabbi filed an appeal with the
Supreme Court of Israel, the hearing of which is set for March 19,
2009.
 
  - 36
-
 Table of Contents
  On
February 16, 2007, Texas MP3 Technologies, Ltd. (“Texas MP3”) filed suit against
the Company, Samsung Electronics Co., Ltd., Samsung Electronics America, Inc.
and Apple Inc., Case No. 2:07-CV-52, in the Eastern District of Texas, Marshall
Division, alleging infringement of U.S. Patent 7,065,417 (the “’417
patent”).  On June 19, 2007, the Company filed an answer and
counterclaim:  (a) denying infringement; (b) seeking a declaratory
judgment that the ’417 patent is invalid, unenforceable and not infringed by the
Company.  On July 31, 2007, Texas MP3 filed an amended complaint
against the Company and the other parties named in the original complaint,
alleging infringement of the ’417 patent.  On August 1, 2007,
defendant Apple, Inc. filed a motion to stay the litigation pending completion
of an inter-partes reexamination of the ’417 patent by the U.S. Patent and
Trademark Office.  That motion was denied.  On August 10,
2007, the Company filed an answer to the amended complaint and a counterclaim:
(a) denying infringement; (b) seeking a declaratory judgment that the ’417
patent is invalid, unenforceable and not infringed by the
Company.  Texas MP3 and the Company have reached a settlement,
effective January 16, 2009.  As a result of the settlement the Court
dismissed all claims against the Company with prejudice on January 23,
2009.
 
 On or
about May 11, 2007, the Company received written notice from Alcatel-Lucent,
S.A. (“Lucent”), alleging that the Company’s digital music players require a
license to U.S. Patent No. 5,341,457 (the “’457 patent”) and U.S. Patent No. RE
39,080 (the “’080 patent”).  On July 13, 2007, the Company filed a
complaint for a declaratory judgment of non-infringement and patent invalidity
against Lucent Technologies Inc. and Lucent in the United States District Court
for the Northern District of California, captioned SanDisk Corporation v. Lucent
Technologies Inc., et al., Civil Case No. C 07 03618.  The complaint
sought a declaratory judgment that the Company does not infringe the two patents
asserted by Lucent against the Company’s digital music players.  The
complaint further sought a judicial determination and declaration that Lucent’s
patents are invalid.  Defendants answered and asserted a counterclaim
of infringement in connection with the ’080 patent.  Defendants also
moved to dismiss the case without prejudice and/or stay the case pending their
appeal of a judgment involving the same patents in suit entered by the United
States District Court for the Southern District of California.  The
Company moved for summary judgment on its claims for declaratory relief and
moved to dismiss defendant Lucent’s counterclaim for infringement of the ’080
patent as a matter of law.  The Court granted Defendants’ motion to
stay and dismissed all other motions without prejudice.  In November
2008, this case was settled with Lucent stipulating to non-infringement by the
Company and dismissing its counterclaim with prejudice.
 
 On August
10, 2007, Lonestar Invention, L.P. (“Lonestar”) filed suit against the Company
in the Eastern District of Texas, Civil Action No.
6:07-CV-00374-LED.  The complaint alleges that a memory controller
used in the Company’s flash memory devices infringes U.S. Patent No.
5,208,725.  Lonestar sought a permanent injunction, actual damages,
treble damages for willful infringement, and costs and attorney
fees.  The Company answered Lonestar’s complaint, denying the
allegations.  Pursuant to a settlement agreement reached, the lawsuit
was dismissed on November 14, 2008.  Lonestar’s claims were dismissed
with prejudice with respect to the particular products accused of
infringement.  SanDisk’s counterclaims were dismissed without
prejudice.
 
 On
September 11, 2007, the Company and the Company’s CEO, Dr. Eli Harari,
received grand jury subpoenas issued from the United States District Court for
the Northern District of California indicating a Department of Justice
investigation into possible antitrust violations in the NAND flash memory
industry.  The Company also received a notice from the Canadian
Competition Bureau (“Bureau”) that the Bureau has commenced an industry-wide
investigation with respect to alleged anti-competitive activity regarding the
conduct of companies engaged in the supply of NAND flash memory chips to Canada
and requesting that the Company preserve any records relevant to such
investigation.  The Company is cooperating in these
investigations.
 
  - 37
-
 Table of Contents
  On
September 11, 2007, Premier International Associates LLC (“Premier”) filed
suit against the Company and 19 other named defendants, including Microsoft
Corporation, Verizon Communications Inc. and AT&T Inc., in the United States
District Court for the Eastern District of Texas (Marshall
Division).  The suit, Case No. 2-07-CV-396, alleges infringement of
Premier's U.S. Patents 6,243,725 (the “’725”) and 6,763,345 (the “’345”) by
certain of the Company’s portable digital music players, and seeks an injunction
and damages in an unspecified amount.  On December 10, 2007, an
amended complaint was filed.  On February 5, 2008, the Company filed
an answer to the amended complaint and counterclaims: (a) denying infringement;
(b) seeking a declaratory judgment that the ’725 and ’345 patents are invalid,
unenforceable and not infringed by the Company.  On February 5, 2008,
the Company, along with the other defendants in the action, filed a motion to
stay the litigation pending completion of reexaminations of the ’725 and ’345
patents by the U.S. Patent and Trademark Office.  This motion was
granted and on June 4, 2008, the action is currently stayed.
 
 On
October 24, 2007, the Company filed a complaint under Section 337 of the Tariff
Act of 1930 (as amended) (Inv. No. 337-TA-619) titled, “In the matter of flash
memory controllers, drives, memory cards, and media players and products
containing same” in the ITC (hereinafter, “the 619 Investigation”), naming the
following companies as respondents:  Phison Electronics Corp.
(“Phison”); Silicon Motion Technology Corp., Silicon Motion, Inc. (Taiwan),
Silicon Motion, Inc. (California), and Silicon Motion International, Inc.
(collectively, “Silicon Motion”); USBest Technology, Inc. dba Afa Technologies,
Inc. (“USBest”); Skymedi Corp. (“Skymedi”); Chipsbrand Microelectronics (HK)
Co., Ltd., Chipsbank Technology (Shenzhen) Co., Ltd., and Chipsbank
Microelectronics Co., Ltd., (collectively, “Chipsbank”); Zotek Electronic Co.,
Ltd., dba Zodata Technology Ltd. (collectively, “Zotek”); Infotech Logistic LLC
(“Infotech”); Power Quotient International Co., Ltd., and PQI Corp.
(collectively, “PQI”); Power Quotient International (HK) Co., Ltd.; Syscom
Development Co. Ltd.; PNY Technologies, Inc. (“PNY”); Kingston Technology Co.,
Inc., Kingston Technology Corp., Payton Technology Corp., and MemoSun, Inc.
(collectively, “Kingston”); Buffalo, Inc., Melco Holdings, Inc., and Buffalo
Technology (USA), Inc. (collectively, “Buffalo”); Verbatim Corp. (“Verbatim”);
Transcend Information Inc. (Taiwan), Transcend Information Inc. (California),
and Transcend Information Maryland, Inc., (collectively, “Transcend”); Imation
Corp., Imation Enterprises Corp., and Memorex Products, Inc. (collectively,
“Imation”); Add-On Computer Peripherals, Inc. and Add-On Computer Peripherals,
LLC (collectively, “Add-On Computer Peripherals”); Add-On Technology Co.; A-Data
Technology Co., Ltd., and A-Data Technology (USA) Co., Ltd., (collectively,
“A-DATA”); Apacer Technology Inc. and Apacer Memory America, Inc. (collectively,
“Apacer”); Acer, Inc. (“Acer”); Behavior Tech Computer Corp. and Behavior Tech
Computer (USA) Corp. (collectively, “Behavior”); Emprex Technologies
Corp.(“Emprex”); Corsair Memory, Inc. (“Corsair”); Dane-Elec Memory S.A., and
Dane-Elec Corp. USA, (collectively, “Dane-Elec”); Deantusaiocht Dane-Elec TEO;
EDGE Tech Corp. (“EDGE”); Interactive Media Corp, (“Interactive”); Kaser Corp.
(“Kaser”); LG Electronics, Inc., and LG Electronics U.S.A., Inc., (collectively,
“LG”); TSR Silicon Resources Inc. (“TSR”); and Welldone Co.
(“Welldone”).  In the complaint, the Company asserts that respondents’
accused flash memory controllers, drives, memory cards, and media players
infringe the following: U.S. Patent No. 5,719,808 (the “’808 patent”); U.S.
Patent No. 6,763,424 (the “’424 patent”); U.S. Patent No. 6,426,893 (the “’893
patent”); U.S. Patent No. 6,947,332 (the “’332 patent”); and U.S. Patent No.
7,137,011 (the “’011 patent”).  The Company seeks an order excluding
the accused products from entry into the United States as well as a permanent
cease and desist order against the respondents.  Since filing its
complaint, the Company has terminated the investigation as to the’808 patent,
the ’893 patent, and the ’332 patent.  After filing its complaint, the
Company reached settlement agreements with Add-On Computer Peripherals, EDGE,
Infotech, Interactive, Kaser, PNY, TSR, Verbatim, Chipsbank, USBest and
Welldone.  The investigation has been terminated as to these
respondents in light of these settlement agreements.  Three of the
remaining respondents – Buffalo, Corsair, and A-Data – were terminated from the
investigation after entering consent orders.  The investigation has
also been terminated as to Add-On Tech. Co., Behavior, Emprex, and Zotek after
these respondents were found in default.  The investigation has also
been terminated as to Acer, Payton, Silicon Motion Tech. Corp., and Silicon
Motion, Int’l Inc.  The Company also terminated PQI from the
investigation as to the ’011 patent.  On July 15, 2008, the ALJ issued
a Markman ruling regarding the ’011 patent, the ’893 patent, the ’332 patent,
and the ’424 patent. Beginning October 27, 2008, the ALJ held an evidentiary
hearing.  At the hearing, the respondents denied infringement and
raised several affirmative defenses including, among others, lack of domestic
industry, invalidity, unenforceability, patent misuse, license, patent
exhaustion, intervening rights, and laches.  After the hearing, the
parties filed a series of post-hearing briefs.  On February 9, 2009,
the ALJ extended the target date for conclusion of the investigation to August
10, 2009.  The ALJ is expected to issue an initial determination on
the merits by April 10, 2009.
 
  - 38
-
 Table of Contents
  On
October 24, 2007, the Company filed a complaint for patent infringement in the
United States District Court for the Western District of Wisconsin against the
following defendants: Phison, Silicon Motion, Synergistic Sales, Inc.
(“Synergistic”), USBest, Skymedi, Chipsbank, Infotech, Zotek, PQI, PNY,
Kingston, Buffalo, Verbatim, Transcend, Imation, Add-On Computer Peripherals,
A-DATA, Apacer, Behavior, Corsair, Dane-Elec, EDGE, Interactive, LG, TSR and
Welldone.  In this action, Case No. 07-C-0607-C, the Company asserts
that the defendants infringe the ’808 patent, the ’424 patent, the ’893 patent,
the ’332 patent and the ’011 patent.  The Company seeks damages and
injunctive relief.  In light of the above mentioned settlement
agreements, the Company dismissed its claims against Add-On Computer
Peripherals, EDGE, Infotech, Interactive, PNY, TSR and Welldone.  The
Company also voluntarily dismissed its claims against Acer and Synergistic
without prejudice.  The Company also voluntarily dismissed its claims
against Corsair in light of its agreement to sell flash memory products only
under license or consent from the Company.   On November 21,
2007, defendant Kingston filed a motion to stay this action.  Several
defendants joined in Kingston’s motion.  On December 19, 2007,
the Court issued an order staying the case in its entirety until the 619
Investigation becomes final.  On January 14, 2008, the Court issued an
order clarifying that the entire case is stayed for all parties.
 
 On
October 24, 2007, the Company filed a complaint for patent infringement in the
United States District Court for the Western District of Wisconsin against the
following defendants: Phison, Silicon Motion, Synergistic, USBest, Skymedi,
Zotek, Infotech, PQI, PNY, Kingston, Buffalo, Verbatim, Transcend, Imation,
A-DATA, Apacer, Behavior, and Dane-Elec.  In this action, Case No.
07-C-0605-C, the Company asserts that the defendants infringe U.S. Patent No.
6,149,316 (the “’316 patent”) and U.S. Patent No. 6,757,842 (the “’842
patent”).  The Company seeks damages and injunctive
relief.  In light of above mentioned settlement agreements, the
Company dismissed its claims against Infotech and PNY.  The Company
also voluntarily dismissed its claims against Acer and Synergistic without
prejudice.  On November 21, 2007, defendant Kingston filed a motion to
consolidate and stay this action.  Several defendants joined in
Kingston’s motion.  On December 17, 2007, the Company filed an
opposition to Kingston’s motion.  That same day, several defendants
filed another motion to stay this action.  On January 7, 2008, the
Company opposed the defendants’ second motion to stay.  On January 22,
2008, defendants Phison, Skymedi and Behavior filed motions to dismiss the
Company’s complaint for lack of personal jurisdiction.  That same day,
defendants Phison, Silicon Motion, USBest, Skymedi, PQI, Kingston, Buffalo,
Verbatim, Transcend, A-DATA, Apacer, and Dane-Elec answered the Company’s
complaint denying infringement and raising several affirmative
defenses.  These defenses included, among others, lack of personal
jurisdiction, improper venue, lack of standing, invalidity, unenforceability,
express license, implied license, patent exhaustion, waiver, latches, and
estoppel.  On January 24, 2008, Silicon Motion filed a motion to
dismiss the Company’s complaint for lack of personal jurisdiction.  On
January 25, 2008, Dane-Elec also filed a motion to dismiss the Company’s
complaint for lack of personal jurisdiction.  On January 28, 2008, the
Court issued an order staying the case in its entirety with respect to all
parties until the proceeding in the 619 Investigation become
final.  In its order, the Court also consolidated this action (Case
Nos. 07-C-0605-C) with the action discussed in the preceding paragraph
(07-C-0607-C).
 
 Between
August 31, 2007 and December 14, 2007, the Company (along with a number of
other manufacturers of flash memory products) was sued in the Northern District
of California, in eight purported class action complaints.  On
February 7, 2008, all of the civil complaints were consolidated into two
complaints, one on behalf of direct purchasers and one on behalf of indirect
purchasers, in the Northern District of California in a purported class action
captioned In re Flash Memory Antitrust Litigation, Civil Case No.
C07-0086.  Plaintiffs allege the Company and a number of other
manufacturers of flash memory products conspired to fix, raise, maintain, and
stabilize the price of NAND flash memory in violation of state and federal
laws.  The lawsuits purport to be on behalf of purchasers of flash
memory between January 1, 1999 through the present.  The lawsuits seek
an injunction, damages, restitution, fees, costs, and disgorgement of
profits.  On April 8, 2008, the Company, along with co-defendants,
filed motions to dismiss the direct purchaser and indirect purchaser
complaints.  Also on April 8, 2008, the Company, along with
co-defendants, filed a motion for a protective order to stay
discovery.  On April 22, 2008, direct and indirect purchaser
plaintiffs filed oppositions to the motions to dismiss.  The
Company’s, along with co-defendants’, reply to the oppositions was filed May 13,
2008.  The Court took the motions to dismiss and the motion for a
protective order under submission on June 3, 2008, and has yet to issue its
ruling.
 
  - 39
-
 Table of Contents
  On
November 6, 2007, Gil Mosek, a former employee of SanDisk IL Ltd. (“SDIL”),
filed a lawsuit against SDIL, Dov Moran and Amir Ban in the Tel-Aviv District
Court, claiming that he and Amir Ban, another former employee of SDIL, reached
an agreement according to which a jointly-held company should have been
established together with SDIL. According to Mr. Mosek, SDIL knew about the
agreement, approved it and breached it, while deciding not to establish the
jointly-held company.  On January 1, 2008, SDIL filed a statement of
defense. Simultaneously, SDIL filed a request to dismiss the lawsuit, claiming
that Mr. Mosek signed a waiver in favor of SDIL, according to which he has no
claim against SDIL.  On February 12, 2008, Mr. Mosek filed a request to
allow him to present certain documents, which contain confidential information
of SDIL.  On February 26, 2008, SDIL opposed this request, claiming that
SDIL’s documents are the sole property of SDIL and Mr. Mosek has no right to
hold and to use them.  On March 6, 2008, the court decided that
Mr. Mosek has to pay a fee according to the estimated amount of the claim.
 On April 3, 2008, Mr. Mosek filed a request to amend the claim by setting
the claim on an amount of NIS 3,000,000.  On April 9, 2008, SDIL filed its
response to this request, according to which it has no objection to the
amendment, subject to the issuance of an order for costs.  On April 10,
2008, the Court accepted Mr. Mosek’s request.  According to the settlement
agreement, reached between the SDIL and Amir Ban in January 2008, Amir Ban shall
indemnify and hold SDIL harmless with regard to the claim filed by Mosek, as
described in this section above.  At a pre-trial hearing held on
February 9, 2009, the Court indicated that Mr. Mosek should transfer his claim
to the Tel-Aviv Labor Court due to the District Court’s lack of
jurisdiction.  Mr. Mosek asked for the Court's permission to divide
the lawsuit into two parts so the action against Amir Ban may be transferred to
the Labor Court whereas the claim against SDIL would remain in the District
Court.  The District Court has not yet ruled as to whether the portion
of the claim against Amir Ban should be transferred to the Labor Court together
with the claim against SDIL.
 In April
2006, the Company's subsidiary SanDisk IL Ltd. (“SDIL”) terminated its supply
and license agreement (the “Agreement”) with Samsung.  As a result of
this termination, the Company’s subsidiary no longer was entitled to purchase
products on favorable pricing terms from Samsung, Samsung no longer had a
life-of-patent license to the Company’s subsidiary’s patents, and no further
patent licensing payments would be due.  Samsung contested the
termination and SDIL commenced an arbitration proceeding seeking a declaration
that its termination was valid.  Samsung asserted various defenses and
counterclaims in the arbitration.  A hearing was held in
December 2007, and the arbitration panel issued an award on May 16, 2008
declaring that SDIL’s termination of the agreement was valid and effective, and
dismissing all Samsung’s counterclaims (the “Award”).  On July 24,
2008, in an action captioned Samsung Electronics Co., Ltd. v. SanDisk IL f/k/a
M-Systems Ltd., No. 08 Civ. 6596 (AKH), Samsung filed a petition to vacate the
award in the District Court for the Southern District of New York (“Samsung's
Petition”).  On September 18, 2008, in an action captioned
SanDisk IL, Ltd. f/k/a msystems Ltd., No. 08 Civ. 8069 (AKH), SDIL petitioned to
confirm the award pursuant to the dispute resolution provisions of the Agreement
and Section 207 of the Federal Arbitration Act, 9 U.S.C. § 207.  On
September 22, 2008, Samsung withdrew its petition for vacatur and asked the
Court to immediately enter judgment against itself with respect to SDIL's
petition to confirm.  On September 24, 2008, the Court entered
judgment in favor of SDIL on SDIL's petition to confirm the award.  On
October 7, 2008, SDIL filed a motion for attorneys’ fees and expenses incurred
in connection with Samsung's withdrawn petition to vacate the
award.  On October 20, 2008, after Samsung offered to pay in full the
expenses claimed by SDIL, the motion for attorneys’ fees and expenses was denied
by the District Court.
 
 On
September 14, 2008, Daniel Harkabi and Gidon Elazar, former employees and
founders of MDRM, Inc., filed a breach of contract action in the U.S. District
Court for the Southern District of New York seeking earn-out payments of
approximately $3.8 million in connection with SanDisk’s acquisition of
MDRM, Inc. in fiscal year 2004.  A mediation was held in June 2007, as
required by the acquisition agreement, but was unsuccessful.  The
Company filed its answer on November 14, 2008 and discovery is
proceeding.
 
  - 40
-
 Table of Contents
  On
September 17, 2008, a purported shareholder class action, captioned McBride
v. Federman, et al., Case No. 1-08-CV-122921, was filed in the Superior Court of
California in Santa Clara County.  The lawsuit was brought by a
purported shareholder of the Company and names as defendants the Company and its
directors, Irwin Federman, Steven J. Gomo, Dr. Eli Harari, Eddy W. Hartenstein,
Catherine P. Lego, Michael E. Marks, and Dr. James D. Meindl.  The
complaint alleges breach of fiduciary duty by the Company and its directors in
rejecting Samsung Electronics Co., Ltd.'s non-binding proposal to acquire all of
the outstanding common stock of the Company for $26.00 per share.  On
September 29, 2008, plaintiff served his first request for production of
documents on the Company.  On October 17, 2008, the Company and its
directors filed a demurrer seeking dismissal of the lawsuit, and plaintiff
served his first requests for production of documents on the Company's
directors.  On November 4, 2008, the parties filed a stipulation to
dismiss the litigation without prejudice, with each party to bear its own
costs.  On November 11, 2008, the Court dismissed the case without
prejudice.
 
 On
October 1, 2008, NorthPeak Wireless LLC (“NorthPeak”) filed suit against the
Company and 30 other named defendants including Dell, Inc., Fujitsu Computer
Systems Corp., Gateway, Inc., Hewlett-Packard Company and Toshiba America, Inc.,
in the United States District Court for the Northern District of Alabama,
Northeastern Division.  The suit, Case No. CV-08-J-1813, alleges
infringement of U.S. Patents 4,977,577 and 5,978,058 by certain of the Company’s
discontinued wireless electronic products.  On January 21, 2009, the
Court granted a motion by the defendants to transfer the case to the United
States District Court for the Northern District of California, where it is now
Case No. 3:09-CV-01813.
 
  ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
 
 No
matters were submitted to a vote of security holders during the fourth quarter
of fiscal year 2008.
 
  - 41
-
 Table of Contents
  PART
II
 
 
 ITEM 5.  MARKET FOR REGISTRANT’S COMMON
EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
 Market For Our
Common Stock.  Our common stock is traded on the NASDAQ Global
Select Market, or NASDAQ, under the symbol “SNDK.”  The following
table summarizes the high and low sale prices for our common stock as reported
by the NASDAQ.
 
 High
                
                
                Low2007First
      quarter
                
                $
                46.24
                
                
                $
                35.82Second
      quarter
                
                $
                49.61
                
                
                $
                41.48Third
      quarter
                
                $
                59.75
                
                
                $
                47.14Fourth
      quarter
                
                $
                55.98
                
                
                $
                33.152008First
      quarter
                
                $
                33.73
                
                
                $
                19.54Second
      quarter
                
                $
                33.17
                
                
                $
                18.95Third
      quarter
                
                $
                23.50
                
                
                $
                13.06Fourth
      quarter
                
                $
                21.82
                
                
                $
                5.07
 
 Holders.As
of January 30, 2009, we had approximately 425 stockholders of
record.
 
 Dividends.We
have never declared or paid any cash dividends on our common stock and do not
expect to pay cash dividends on our common stock in the foreseeable
future.
 
  - 42
-
 Table of Contents
  Stock
Performance Graph *
 
 Five-Year
Stockholder Return Comparison.The following graph compares
the cumulative total stockholder return on our common stock with that of the
Standard & Poors (“S&P”) 500 Stock Index, a broad market index
published by S&P, a selected S&P Semiconductor Company stock index
compiled by Morgan Stanley & Co. Incorporated and the
Philadelphia, or PHLX, Semiconductor Index for the five-year period ended
December 28, 2008.  These indices, which reflect formulas for dividend
reinvestment and weighting of individual stocks, do not necessarily reflect
returns that could be achieved by an individual investor.
 
 The
comparison for each of the periods assumes that $100 was invested on
December 26, 2003 in our common stock, the stocks included in the S&P
500 Stock Index, the stocks included in the S&P Semiconductor Company Stock
Index and the stocks included in the PHLX Semiconductor Index, and assumes all dividends
are reinvested.  For each reported year, our reported dates are
the last trading dates of our fiscal quarters (which ends on the Sunday closest
to March 31, June 30 and September 30, respectively) and year (which ends on the
Sunday closest to December 31), and the S&P 500 Stock Index,
S&P Semiconductor Company Stock Index and PHLX Semiconductor Index are
based on our fiscal quarters and year.
 
 
 2003
                
                
                2004
                
                
                2005
                
                
                2006
                
                
                2007
                
                
                2008SanDisk
      Corporation
                
                $
                100.00
                
                
                $
                81.71
                
                
                $
                205.56
                
                
                $
                140.81
                
                
                $
                109.75
                
                
                $
                30.04S&P
      500 Index
                
                
                100.00
                
                
                
                110.59
                
                
                
                113.91
                
                
                
                129.42
                
                
                
                134.91
                
                
                
                79.64S&P
      Semiconductor Stock Index
                
                
                100.00
                
                
                
                80.42
                
                
                
                89.41
                
                
                
                80.51
                
                
                
                89.28
                
                
                
                45.18PHLX
      Semiconductor Index
                
                
                100.00
                
                
                
                86.89
                
                
                
                96.15
                
                
                
                93.83
                
                
                
                82.21
                
                
                
                40.51
 
 *
              The material in this report is
      not deemed "filed" with the SEC and is not to be incorporated by reference
      into any of our filings under the Securities Act of 1933 or the Securities
      Exchange Act of 1934, whether made before or after the date hereof and
      irrespective of any general incorporation language in any such
      filing.
 
  - 43
-
 Table of Contents
  ITEM 6.  SELECTED FINANCIAL
DATA
 
 SANDISK
CORPORATION SELECTED FINANCIAL DATA
 
 Fiscal
      Years EndedDecember 28,
                          2008
      (1)
                      
                      
                      December 30,
                          2007
      (2)
                      
                      
                      December 31,
                          2006
      (3)
                      
                      
                      January 1,
                          2006
      (4)
                      
                      
                      January 2,
                          2005
      (5)(In
      thousands, except per share data)RevenuesProduct
                      
                      $
                      2,843,243
                      
                      
                      $
                      3,446,125
                      
                      
                      $
                      2,926,472
                      
                      
                      $
                      2,066,607
                      
                      
                      $
                      1,602,836License
      and royalty
                      
                      
                      508,109
                      
                      
                      
                      450,241
                      
                      
                      
                      331,053
                      
                      
                      
                      239,462
                      
                      
                      
                      174,219Total
      revenues
                      
                      
                      3,351,352
                      
                      
                      
                      3,896,366
                      
                      
                      
                      3,257,525
                      
                      
                      
                      2,306,069
                      
                      
                      
                      1,777,055Cost
      of product revenues
                      
                      
                      3,288,265
                      
                      
                      
                      2,693,647
                      
                      
                      
                      2,018,052
                      
                      
                      
                      1,333,335
                      
                      
                      
                      1,091,350Gross
      profit
                      
                      
                      63,087
                      
                      
                      
                      1,202,719
                      
                      
                      
                      1,239,473
                      
                      
                      
                      972,734
                      
                      
                      
                      685,705Operating
      income (loss)
                      
                      
                      (1,973,480
                      )
                      
                      
                      276,514
                      
                      
                      
                      326,334
                      
                      
                      
                      576,582
                      
                      
                      
                      418,591Net
      income (loss)
                      
                      $
                      (2,056,776
                      )
                      
                      $
                      218,357
                      
                      
                      $
                      198,896
                      
                      
                      $
                      386,384
                      
                      
                      $
                      266,616Net
      income (loss) per share:Basic
                      
                      $
                      (9.13
                      )
                      
                      $
                      0.96
                      
                      
                      $
                      1.00
                      
                      
                      $
                      2.11
                      
                      
                      $
                      1.63Diluted
                      
                      $
                      (9.13
                      )
                      
                      $
                      0.93
                      
                      
                      $
                      0.96
                      
                      
                      $
                      2.00
                      
                      
                      $
                      1.44Shares
      used in computing net income (loss) per share:Basic
                      
                      
                      225,292
                      
                      
                      
                      227,744
                      
                      
                      
                      198,929
                      
                      
                      
                      183,008
                      
                      
                      
                      164,065Diluted
                      
                      
                      225,292
                      
                      
                      
                      235,857
                      
                      
                      
                      207,451
                      
                      
                      
                      193,016
                      
                      
                      
                      188,837
 
 
 AtDecember 28,
                          2008
                      
                      
                      December 30,
                          2007
                      
                      
                      December 31,
                          2006
                      
                      
                      January 1,
                          2006
                      
                      
                      January 2,
                          2005(In
      thousands)Working
      capital
                      
                      $
                      1,440,336
                      
                      
                      $
                      2,385,774
                      
                      
                      $
                      3,345,414
                      
                      
                      $
                      2,004,598
                      
                      
                      $
                      1,526,674Total
      assets
                      
                      
                      5,926,936
                      
                      
                      
                      7,234,819
                      
                      
                      
                      6,967,783
                      
                      
                      
                      3,120,187
                      
                      
                      
                      2,320,180Convertible
      long-term debt
                      
                      
                      1,225,000
                      
                      
                      
                      1,225,000
                      
                      
                      
                      1,225,000
                      
                      
                      
                      —
                      
                      
                      
                      —Total
      stockholders’ equity
                      
                      
                      3,174,799
                      
                      
                      
                      4,959,617
                      
                      
                      
                      4,768,134
                      
                      
                      
                      2,523,791
                      
                      
                      
                      1,940,150
 
  
  (1)
              Includes
      impairment charges related to goodwill of ($845.5) million,
      acquisition-related intangible assets of ($175.8) million,
      investments in our flash ventures with Toshiba of
      ($93.4) million, and our investment in Tower of ($18.9)
      million.  Also includes share-based compensation of
      ($97.8) million, amortization of acquisition-related intangible
      assets of ($71.6) million and restructuring and other charges of
      ($35.5) million.
  (2)
              Includes
      share-based compensation of ($133.0) million and amortization of
      acquisition-related intangible assets of
      ($90.1) million.  Also includes other-than-temporary
      impairment charges of ($10.0) million related to our investment in
      FlashVision.
  (3)
              Includes
      acquired in-process technology charges of ($225.6) million related to
      acquisitions of Matrix Semiconductor Inc., or Matrix, in
      January 2006 and msystems Ltd., or msystems, in
      November 2006, share-based compensation of ($100.6) million and
      amortization of acquisition-related intangible assets of
      ($27.8) million.
  (4)
              Includes
      other-than-temporary impairment charges of ($10.1) million related to
      our investment in Tower.
  (5)
              Includes
      other-than-temporary impairment charges of ($11.8) million related to
      our investment in Tower, and a gain from a settlement of $6.2 million
      from a third-party brokerage firm related to the fiscal year 2003
      unauthorized disposition of our investment in
  UMC.
   - 44
-
 Table of Contents
  
 ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
 Overview
 
 Fiscal
      Years EndedDecember 28,
                                2008
                            
                            
                            %
      of
                                Revenue
                            
                            
                            December 30,
                                2007
                            
                            
                            %
      of
                                Revenue
                            
                            
                            December 31,
                                2006
                            
                            
                            %
      of
                                Revenue(In thousands, except percentages)Product
      revenues
                            
                            $
                            2,843,243
                            
                            
                            
                            84.8
                            %
                            
                            $
                            3,446,125
                            
                            
                            
                            88.4
                            %
                            
                            $
                            2,926,472
                            
                            
                            
                            89.8
                            %License
      and royalty revenues
                            
                            
                            508,109
                            
                            
                            
                            15.2
                            %
                            
                            
                            450,241
                            
                            
                            
                            11.6
                            %
                            
                            
                            331,053
                            
                            
                            
                            10.2
                            %Total
      revenues
                            
                            
                            3,351,352
                            
                            
                            
                            100.0
                            %
                            
                            
                            3,896,366
                            
                            
                            
                            100.0
                            %
                            
                            
                            3,257,525
                            
                            
                            
                            100.0
                            %Cost
      of product revenues
                            
                            
                            3,288,265
                            
                            
                            
                            98.1
                            %
                            
                            
                            2,693,647
                            
                            
                            
                            69.1
                            %
                            
                            
                            2,018,052
                            
                            
                            
                            62.0
                            %Gross
      profit
                            
                            
                            63,087
                            
                            
                            
                            1.9
                            %
                            
                            
                            1,202,719
                            
                            
                            
                            30.9
                            %
                            
                            
                            1,239,473
                            
                            
                            
                            38.0
                            %Operating
      expensesResearch
      and development
                            
                            
                            429,949
                            
                            
                            
                            12.8
                            %
                            
                            
                            418,066
                            
                            
                            
                            10.7
                            %
                            
                            
                            306,866
                            
                            
                            
                            9.4
                            %Sales
      and marketing
                            
                            
                            328,079
                            
                            
                            
                            9.8
                            %
                            
                            
                            294,594
                            
                            
                            
                            7.6
                            %
                            
                            
                            203,406
                            
                            
                            
                            6.3
                            %General
      and administrative
                            
                            
                            204,765
                            
                            
                            
                            6.1
                            %
                            
                            
                            181,509
                            
                            
                            
                            4.7
                            %
                            
                            
                            159,835
                            
                            
                            
                            4.9
                            %Impairment
      of goodwill
                            
                            
                            845,453
                            
                            
                            
                            25.2
                            %
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —Impairment
      of acquisition-related intangible assets
                            
                            
                            175,785
                            
                            
                            
                            5.3
                            %
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —Amortization
      of acquisition-related intangible assets
                            
                            
                            17,069
                            
                            
                            
                            0.5
                            %
                            
                            
                            25,308
                            
                            
                            
                            0.6
                            %
                            
                            
                            17,432
                            
                            
                            
                            0.5
                            %Write-off
      of acquired in-process technology
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            225,600
                            
                            
                            
                            6.9
                            %Restructuring
      and other
                            
                            
                            35,467
                            
                            
                            
                            1.1
                            %
                            
                            
                            6,728
                            
                            
                            
                            0.2
                            %
                            
                            
                            —
                            
                            
                            
                            —Total
      operating expenses
                            
                            
                            2,036,567
                            
                            
                            
                            60.8
                            %
                            
                            
                            926,205
                            
                            
                            
                            23.8
                            %
                            
                            
                            913,139
                            
                            
                            
                            28.0
                            %Operating
      income (loss)
                            
                            
                            (1,973,480
                            )
                            
                            
                            (58.9
                            )%
                            
                            
                            276,514
                            
                            
                            
                            7.1
                            %
                            
                            
                            326,334
                            
                            
                            
                            10.0
                            %Other
      income
                            
                            
                            70,446
                            
                            
                            
                            2.1
                            %
                            
                            
                            121,902
                            
                            
                            
                            3.1
                            %
                            
                            
                            104,374
                            
                            
                            
                            3.2
                            %Income
      (loss) before provision for taxes
                            
                            
                            (1,903,034
                            )
                            
                            
                            (56.8
                            )%
                            
                            
                            398,416
                            
                            
                            
                            10.2
                            %
                            
                            
                            430,708
                            
                            
                            
                            13.2
                            %Provision
      for income taxes
                            
                            
                            153,742
                            
                            
                            
                            4.6
                            %
                            
                            
                            174,848
                            
                            
                            
                            4.5
                            %
                            
                            
                            230,193
                            
                            
                            
                            7.1
                            %Minority
      interest
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            5,211
                            
                            
                            
                            0.1
                            %
                            
                            
                            1,619
                            
                            
                            
                            —Net
      income (loss)
                            
                            $
                            (2,056,776
                            )
                            
                            
                            (61.4
                            )%
                            
                            $
                            218,357
                            
                            
                            
                            5.6
                            %
                            
                            $
                            198,896
                            
                            
                            
                            6.1
                            %
 
 General
 
 We are
the inventor of and worldwide leader in NAND-based flash storage
cards.  Our mission is to provide simple, reliable and affordable
storage for consumer use in portable devices.  We sell SanDisk branded
products for consumer electronics through broad global retail and OEM
distribution channels.
 
 We
design, develop and manufacture products and solutions in a variety of form
factors using our flash memory, controller and firmware
technologies.  We source the vast majority of our flash memory supply
through our significant venture relationships with Toshiba which provide us with
leading-edge, low-cost memory wafers.  Our cards are used in a wide
range of consumer electronics devices such as mobile phones, digital cameras,
gaming devices and laptop computers.  We also produce USB drives, MP3
players, SSDs, and embedded flash storage products.
 
  - 45
-
 Table of Contents
  Our
results are primarily driven by worldwide demand for flash storage devices,
which in turn depends on end-user demand for electronic products.  We
believe the market for flash storage is generally price
elastic.  Accordingly, we expect that as we reduce the price of our
flash devices, consumers will demand an increasing number of gigabytes and/or
units of memory and that over time, new markets will emerge.  In order
to profitably capitalize on price elasticity of demand in the market for flash
storage products, we must reduce our cost per gigabyte at a rate similar to the
change in selling price per gigabyte, and the average capacity of our products
must grow enough to offset price declines.  We seek to achieve these
cost reductions through technology improvements, primarily by increasing the
amount of memory stored in a given area of silicon.
 
 We
adopted Statement of Financial Accounting Standards No. 157, or SFAS 157, Fair
Value Measurements, as of the beginning of fiscal year
2008.  In February 2008, the Financial Accounting Standards Board, or
FASB, issued FASB Staff Position No. FAS 157-2, Effective
Date of FASB Statement No. 157, which provides a one year deferral of the
effective date of SFAS 157 for non-financial assets and non-financial
liabilities, except those that are recognized or disclosed in the financial
statements at fair value at least annually.  Therefore, we have only
adopted the provisions of SFAS 157 with respect to our financial assets and
liabilities.  SFAS 157 defines fair value, establishes a framework for
measuring fair value under generally accepted accounting principles and enhances
disclosures about fair value measurements.  Fair value is defined
under SFAS 157 as the exchange price that would be received for an asset or paid
to transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market
participants on the measurement date.  Valuation techniques used to
measure fair value under SFAS 157 must maximize the use of observable inputs and
minimize the use of unobservable inputs.  The adoption of this
statement did not have a material impact on our consolidated results of
operations and financial condition.  See Note 3, “Investments and Fair
Value Measurements,” of the Notes to Consolidated Financial Statements of this
Form 10-K included in Item 8 of this report.
 We
adopted Statement of Financial Accounting Standards No. 159, or SFAS 159,
Establishing the Fair Value
Option for Financial Assets and Liabilities, which permits entities to
elect, at specified election dates, to measure eligible financial instruments at
fair value.  As of December 28, 2008, we did not elect the fair
value option for any financial assets and liabilities that were not previously
measured at fair value.  See Note 3, “Investments and Fair Value
Measurements,” of the Notes to Consolidated Financial Statements of this Form
10-K included in Item 8 of this report.
 
 The
provision for income taxes for the year ended December 28, 2008, has been
corrected to $153.7 million from $166.8 million as reported in our
Form 8-K filed with the Securities and Exchange Commission on
February 2, 2009.  This correction has correspondingly reduced
our net loss and net loss per share for fiscal year 2008 and adjusted net assets
at December 28, 2008.
 
 Critical
Accounting Policies & Estimates
 
 Our
discussion and analysis of our financial condition and results of operations is
based upon our Consolidated Financial Statements, which have been prepared in
accordance with accounting principles generally accepted in the United States,
or U.S. GAAP.
 
 Use
of Estimates.The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent liabilities.  On an
ongoing basis, we evaluate our estimates, including, among others, those related
to customer programs and incentives, product returns, bad debts, inventories and
related reserves, investments, long-lived assets, income taxes, warranty
obligations, restructuring, contingencies, share-based compensation, and
litigation.  We base our estimates on historical experience and on
other assumptions that we believe are reasonable under the circumstances, the
results of which form the basis for our judgments about the carrying values of
assets and liabilities when those values are not readily apparent from other
sources.  Estimates have historically approximated actual
results.  However, future results will differ from these estimates
under different assumptions and conditions.
  - 46
-
 Table of Contents
  Valuation of
Long-Lived Assets, Intangible Assets and Goodwill.In accordance with
Statement of Financial Accounting Standards No. 144, or SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, we perform tests for impairment of
long-lived assets whenever events or circumstances suggest that other long-lived
assets may not be recoverable.  This analysis differs from our
goodwill analysis in that an impairment is only deemed to have occurred if the
sum of the forecasted undiscounted future cash flows related to the assets are
less than the carrying value of the asset we are testing for
impairment.  If the forecasted cash flows are less than the carrying
value, then we must write down the carrying value to its estimated fair value
based primarily upon forecasted discounted cash flows.  We recorded
impairments of certain acquisition-related amortizable intangible assets of
$176 million in fiscal year 2008 based primarily upon forecasted discounted
cash flows.  In addition, we recorded impairments of our investments
in Flash Partners and Flash Alliance of $83 million in fiscal year 2008
based primarily upon forecasted discounted cash flows.  These
forecasted discounted cash flows include estimates and assumptions related to
revenue growth rates and operating margins, risk-adjusted discount rates based
on our weighted average cost of capital, future economic and market conditions
and determination of appropriate market comparables.  Our estimates of
market segment growth and our market segment share and costs are based on
historical data, various internal estimates and certain external sources, and
are based on assumptions that are consistent with the plans and estimates we are
using to manage the underlying business.  Our business consists of
both established and emerging technologies and our forecasts for emerging
technologies are based upon internal estimates and external sources rather than
historical information.  If future forecasts are revised, they may
indicate or require future impairment charges.  We base our fair value
estimates on assumptions we believe to be reasonable but that are unpredictable
and inherently uncertain.  Actual future results may differ from those
estimates.
 
 We
perform our annual impairment analysis of goodwill on the first day of the
fourth quarter of each year, or more often if there are indicators of impairment
present.  The provisions of Statement of Financial Accounting
Standards No. 142, or SFAS 142, Goodwill and Other Intangible
Assets, require that a two-step impairment test be performed on
goodwill.  In the first step, or Step 1, we compare our fair value to
our carrying value.  If the fair value exceeds the carrying value of
the net assets, goodwill is considered not impaired and we are not required to
perform further testing.  If the carrying value of the net assets
exceeds the fair value, then we must perform the second step, or Step 2, of the
impairment test in order to determine the implied fair value of
goodwill.  If the carrying value of goodwill exceeds its implied fair
value, then we would record an impairment loss equal to the
difference.  To determine the fair value used in Step 1, we use our
market capitalization based upon our quoted closing stock price per NASDAQ,
including an estimated control premium that an investor would be willing to pay
for a controlling interest in us.  The determination of a control
premium requires the use of judgment and is based primarily on comparable
industry and deal-size transactions, related synergies and other
benefits.  When we are required to perform a Step 2 analysis,
determining the fair value of our net assets and our off-balance sheet
intangibles used in Step 2 requires us to make judgments and involves the use of
significant estimates and assumptions.  We performed our annual
impairment test on the first day of  the fourth quarter of fiscal year
2008 and determined that the goodwill was not impaired.  However,
based on a combination of factors, including the economic environment, our
current and forecasted operating results, NAND-industry pricing
conditions  and a sustained decline in our market capitalization, we
concluded that there were sufficient indicators to require us to perform an
interim goodwill impairment analysis during the fourth quarter of fiscal year
2008 and we recognized an impairment charge of $845.5 million.
 
 Revenue
Recognition, Sales Returns and Allowances and Sales Incentive
Programs.We recognize revenues when the earnings process is
complete, as evidenced by an agreement with the customer, transfer of title and
acceptance, if applicable, fixed pricing and reasonable assurance of
realization.  Sales made to distributors and retailers are generally
under agreements allowing price protection and/or right of return and,
therefore, the sales and related costs of these transactions are deferred until
the retailers or distributors sell the merchandise to their end customer, or the
rights of return expire.  At December 28, 2008 and
December 30, 2007, deferred income from sales to distributors and
retailers was $75.7 million and $167.3 million,
respectively.  Estimated sales returns are provided for as a reduction
to product revenue and deferred revenue and were not material for any period
presented in our Consolidated Financial Statements.
 
  - 47
-
 Table of Contents
  We record
estimated reductions to revenue or to deferred revenue for customer and
distributor incentive programs and offerings, including price protection,
promotions, co-op advertising, and other volume-based incentives and expected
returns.  Additionally, we have incentive programs that require us to
estimate, based on historical experience, the number of customers who will
actually redeem the incentive.  All sales incentive programs are
recorded as an offset to product revenues or deferred revenues.  In
calculating the value of sales incentive programs, actual and estimated activity
is used based upon reported weekly sell-through data from our
customers.  The timing and resolution of these claims could materially
impact product revenues or deferred revenues.  In addition, actual
returns and rebates in any future period could differ from our estimates, which
could impact the revenue we report.
 
 Inventories and
Inventory Valuation.Inventories are stated at the lower of
cost (first-in, first-out) or market.  Market value is based upon an
estimated average selling price reduced by estimated costs of
disposal.  The determination of market value involves numerous
judgments including estimating average selling prices based upon recent sales,
industry trends, existing customer orders, current contract prices, industry
analysis of supply and demand and seasonal factors.  Should actual
market conditions differ from our estimates, our future results of operations
could be materially affected.  The valuation of inventory also
requires us to estimate obsolete or excess inventory.  The
determination of obsolete or excess inventory requires us to estimate the future
demand for our products within specific time horizons, generally six to twelve
months.  To the extent our demand forecast for specific products is
less than both our product on-hand and on noncancelable orders, we could be
required to record additional inventory reserves, which would have a negative
impact on our gross margin.
 
 Accounting for
Variable Interest Entities.We evaluate whether entities in
which we have invested are variable interest entities within the definition of
the FASB Interpretation No. 46R, or FIN 46R, Accounting for Variable Interest
Entities.If those entities are variable interest entities, or
VIEs, we then determine whether we are the primary beneficiary of that entity by
reference to our contractual and business arrangements with respect to expected
gains and losses.  The assessment of the primary beneficiary includes
an analysis of the forecast and contractual stipulations of the
VIE.  Determining whether we would consolidate or apply the equity
method to a particular VIE requires review of the VIE’s forecast, which involves
analysis of company specific data, industry data, known trends and
uncertainties, which are inherently subjective.  Consolidating a VIE
under FIN 46R rather than using the equity method can materially impact revenue,
gross margin and operating income trends.
 
 Deferred Tax
Assets.We must make certain estimates in determining income
tax expense for financial statement purposes.  These estimates occur
in the calculation of certain tax assets and liabilities, which arise from
differences in the timing of recognition of revenue and expense for tax and
financial statement purposes.  In determining the need for and amount
of our valuation allowance, we assess the likelihood that we will be able to
recover our deferred tax assets using historical levels of income, estimates of
future income and tax planning strategies.  We have incurred
cumulative losses in recent years and determined in the fourth quarter of fiscal
year 2008, based on all available evidence, that there was substantial
uncertainty as to the realizability of the deferred tax assets in future periods
and accordingly we recorded a valuation allowance against a significant portion
of our U.S. and certain foreign net deferred tax assets.
 
 Our
estimates for tax uncertainties require substantial judgment based upon the
period of occurrence, complexity of the matter, available federal tax case law,
interpretation of foreign laws and regulations and other
estimates.  There is no assurance that domestic or international tax
authorities will agree with the tax positions we have taken which could
materially impact future results.
  - 48
-
 Table of Contents
  Results
of Operations
 
 Product
Revenues.
 FY
      2008
                    
                    
                    Percent
      Change
                    
                    
                    FY
      2007
                    
                    
                    Percent
      Change
                    
                    
                    FY
      2006(in millions,
      except percentages)Retail
                    
                    $
                    1,812.9
                    
                    
                    
                    (16
                    )%
                    
                    $
                    2,162.5
                    
                    
                    
                    9
                    %
                    
                    $
                    1,975.5OEM
                    
                    
                    1,030.3
                    
                    
                    
                    (20
                    )%
                    
                    
                    1,283.6
                    
                    
                    
                    35
                    %
                    
                    
                    951.0Product
      revenues
                    
                    $
                    2,843.2
                    
                    
                    
                    (17
                    )%
                    
                    $
                    3,446.1
                    
                    
                    
                    18
                    %
                    
                    $
                    2,926.5
 
 The
decrease in our fiscal year 2008 product revenues compared to fiscal year 2007
reflected a 62% reduction in average selling price per gigabyte, partially
offset by a 125% increase in the number of gigabytes sold, which reflected 15%
growth in memory product units sold and 96% growth in average
capacity.  The decline in retail product revenues in fiscal year 2008
compared to fiscal year 2007 was due to aggressive price declines partially
offset by a 116% increase in gigabytes sold.  The decline in original
equipment manufacturer, or OEM, product revenues in fiscal year 2008 compared to
fiscal year 2007 was due to aggressive price declines, partially offset by a
135% increase in gigabytes sold, and the discontinuation of TwinSys Data Storage
Limited Partnership, or TwinSys, operations on March 31, 2007, which contributed
$53 million of product revenues in the first quarter of fiscal year 2007
prior to ceasing operations.  We believe the unit growth of 15% in
fiscal year 2008 was below the 75% unit growth in fiscal year 2007 due primarily
to deteriorating worldwide economic conditions.
 
 The
increase in our fiscal year 2007 product revenues was comprised of a 190%
increase in the number of gigabytes sold, partially offset by a 60% reduction in
average selling price per gigabyte.  Our unit sales increased 75%
compared to fiscal year 2006 with the strongest unit growth coming from cards
for mobile phones.  OEM revenue particularly benefited from higher
sales of mobile cards and embedded products to mobile handset
vendors.  Retail revenue growth benefited from the growing market for
cards for mobile phones as well as increased sales of USB flash
drives.
 
 Geographical
Product Revenues.
 FY
      2008
                        
                        
                        FY
      2007
                        
                        
                        FY
      2006Revenue
                        
                        
                        Percent
                            of
      Total
                        
                        
                        Revenue
                        
                        
                        Percent
                            of
      Total
                        
                        
                        Revenue
                        
                        
                        Percent
                            of
      Total(in millions,
      except percentages)United
      States
                        
                        $
                        1,006.7
                        
                        
                        
                        35
                        %
                        
                        $
                        1,193.6
                        
                        
                        
                        35
                        %
                        
                        $
                        1,259.8
                        
                        
                        
                        43
                        %Asia-Pacific
                        
                        
                        834.8
                        
                        
                        
                        29
                        %
                        
                        
                        944.7
                        
                        
                        
                        27
                        %
                        
                        
                        649.5
                        
                        
                        
                        22
                        %Europe,
      Middle East and Africa
                        
                        
                        752.6
                        
                        
                        
                        27
                        %
                        
                        
                        889.7
                        
                        
                        
                        26
                        %
                        
                        
                        728.4
                        
                        
                        
                        25
                        %Japan
                        
                        
                        178.3
                        
                        
                        
                        6
                        %
                        
                        
                        283.8
                        
                        
                        
                        8
                        %
                        
                        
                        194.0
                        
                        
                        
                        7
                        %Other
      foreign countries
                        
                        
                        70.8
                        
                        
                        
                        3
                        %
                        
                        
                        134.3
                        
                        
                        
                        4
                        %
                        
                        
                        94.8
                        
                        
                        
                        3
                        %Product
      revenues
                        
                        $
                        2,843.2
                        
                        
                        
                        100
                        %
                        
                        $
                        3,446.1
                        
                        
                        
                        100
                        %
                        
                        $
                        2,926.5
                        
                        
                        
                        100
                        %
 Product
revenues in fiscal year 2008 compared to fiscal year 2007 decreased in all
geographical regions due to aggressive industry price declines partially offset
by unit sales growth in all regions except Japan.  Revenue and unit
sales in Japan declined on a year over year basis due to lower sales of OEM USB
drives and cards, and the discontinuation of TwinSys operations on March 31,
2007, which contributed $53 million of product revenues in the first
quarter of fiscal year 2007 prior to ceasing operations.
 
 In fiscal
year 2007, revenue growth was strong in both APAC and EMEA primarily as a result
of increased sales to OEM mobile handset vendors and the growth of mobile card
and USB sales in international retail channels.  Japan revenue
increased from fiscal year 2006 to fiscal year 2007 primarily as a result of
product revenue from our msystems acquisition in
November 2006.  Unit sales in the U.S. increased 41% over fiscal
year 2006; however total revenues in the U.S. were lower by 2% due primarily to
aggressive price reductions in fiscal year 2007.
 
  - 49
-
 Table of Contents
  License
and Royalty Revenues.
 FY
      2008
                  
                  
                  Percent
      Change
                  
                  
                  FY
      2007
                  
                  
                  Percent
      Change
                  
                  
                  FY
      2006(in millions,
      except percentages)License
      and royalty revenues
                  
                  $
                  508.1
                  
                  
                  
                  13
                  %
                  
                  $
                  450.2
                  
                  
                  
                  36
                  %
                  
                  $
                  331.1
 
 The
increase in our fiscal year 2008 license and royalty revenues was primarily due
to the addition of new licensees.
 
 The
increase in our fiscal year 2007 license and royalty revenues was primarily due
to new license agreements as well as increased royalty-bearing sales by our
existing licensees.
 
 Gross
Margins.
 FY
      2008
                  
                  
                  Percent
      Change
                  
                  
                  FY
      2007
                  
                  
                  Percent
      Change
                  
                  
                  FY
      2006(in millions,
      except percentages)Product
      gross profit (loss)
                  
                  $
                  (445.0
                  )
                  
                  
                  (159
                  )%
                  
                  $
                  752.5
                  
                  
                  
                  (17
                  )%
                  
                  $
                  908.4Product
      gross margins (as a percent of product revenue)
                  
                  
                  (15.7
                  )%
                  
                  
                  
                  
                  
                  
                  21.8
                  %
                  
                  
                  
                  
                  
                  
                  31.0
                  %Total
      gross margins (as a percent of total revenue)
                  
                  
                  1.9
                  %
                  
                  
                  
                  
                  
                  
                  30.9
                  %
                  
                  
                  
                  
                  
                  
                  38.0
                  %
 
 Product
gross margins in fiscal year 2008 decreased 37.5 percentage points compared
to fiscal year 2007 primarily due to aggressive industry price declines
resulting in the sale of products at negative gross margins and related
charges.  The related charges in fiscal year 2008
included:
 
 -
              Inventory
      reserves primarily to reduce the carrying value to the
      lower-of-cost-or-market for both inventory on-hand and in the channel of
      $394 million.
 -
              Charges
      of $121 million for adverse purchase commitments associated with
      under-utilization of Flash Ventures capacity for the 90-day period in
      which we have non-cancellable
orders.
 -
              Impairment
      in our investments in Flash Partners and Flash Alliance of
      $83 million.
 
 Amortization
expense of acquisition-related intangible assets is expected to decline in
fiscal year 2009 primarily due to impairments recorded in fiscal year
2008.
 
 In fiscal
years 2008, 2007 and 2006, we sold $27 million, $13 million and
$14 million, respectively, of inventory that had been fully written-off in
previous periods.
 
 Product
gross margins in fiscal year 2007 decreased 9.2 percentage points compared
to fiscal year 2006 due to excess industry supply which led to price per
megabyte declining faster than cost per megabyte and also led to
lower-of-cost-or-market inventory charges.  Gross margin was also
negatively impacted by charges for excess inventory of certain products and
Flash Alliance venture costs, partially offset by insurance proceeds related to
claims on a fab power outage that occurred in the first quarter of fiscal year
2006.  In addition, cost of product increased due to amortization of
acquisition-related intangible assets of $65 million, which accounted for
approximately 1.4 percentage points.
 
  - 50
-
 Table of Contents
  Research
and Development.
 FY
      2008
                  
                  
                  Percent
      Change
                  
                  
                  FY
      2007
                  
                  
                  Percent
      Change
                  
                  
                  FY
      2006(in millions,
      except percentages)Research
      and development
                  
                  $
                  429.9
                  
                  
                  
                  3
                  %
                  
                  $
                  418.1
                  
                  
                  
                  36
                  %
                  
                  $
                  306.9Percent
      of revenue
                  
                  
                  12.8
                  %
                  
                  
                  
                  
                  
                  
                  10.7
                  %
                  
                  
                  
                  
                  
                  
                  9.4
                  %
 
 Our
fiscal year 2008 research and development expense growth was primarily due to an
increase in payroll, payroll-related expenses and headcount-related expenses of
approximately $21 million, an increase in consulting and material and
equipment costs of $6 million, partially offset by lower share-based
compensation expense of ($10) million and lower Flash Venture related costs
of ($7) million.  The growth in fiscal year 2008 research and
development expense reflects parallel investment in NAND X2, X3 and X4 storage
technologies, and 3D Read/Write memory architecture technology.
 
 Our
fiscal year 2007 research and development expense growth was primarily due to an
increase in payroll and payroll-related expenses of $43 million associated
with headcount growth and our acquisition of msystems, higher consultant and
outside service costs of $17 million, higher non-recurring engineering and
material costs of $11 million and share-based compensation expense of
$8 million related to increased headcount.  In addition, in
fiscal year 2007 we recognized Flash Alliance start-up costs of
$18 million.
 
 Sales
and Marketing.
 FY
      2008
                  
                  
                  Percent
      Change
                  
                  
                  FY
      2007
                  
                  
                  Percent
      Change
                  
                  
                  FY
      2006(in millions,
      except percentages)Sales
      and marketing
                  
                  $
                  328.1
                  
                  
                  
                  11
                  %
                  
                  $
                  294.6
                  
                  
                  
                  45
                  %
                  
                  $
                  203.4Percent
      of revenue
                  
                  
                  9.8
                  %
                  
                  
                  
                  
                  
                  
                  7.6
                  %
                  
                  
                  
                  
                  
                  
                  6.3
                  %
 
 Our
fiscal year 2008 sales and marketing expense growth over the comparable period
in fiscal year 2007 was primarily due to increased branding and merchandising
costs of $34 million and increased employee-related costs of
$13 million, partially offset by lower share-based compensation expense of
($12) million.  The growth in branding and merchandising and
employee-related costs primarily reflected expansion of our international sales
channels.  Due to our restructuring activities in the fourth quarter
of fiscal year 2008, we anticipate that our sales and marketing expenses will be
lower in fiscal year 2009 than in fiscal year 2008.  For further
discussion, see “Restructuring Charges and Other” below.
 
 Our
fiscal year 2007 sales and marketing expense growth included increased
advertising and promotional costs on a worldwide basis of approximately
$41 million.  In addition, payroll and payroll-related expenses
increased $31 million and share-based compensation expense increased
$9 million, both related to full-year increased headcount and our
acquisition of msystems in November 2006.
 
 
  - 51
-
 Table of Contents
  General
and Administrative.
 FY
      2008
                  
                  
                  Percent
      Change
                  
                  
                  FY
      2007
                  
                  
                  Percent
      Change
                  
                  
                  FY
      2006(in millions,
      except percentages)General
      and administrative
                  
                  $
                  204.8
                  
                  
                  
                  13
                  %
                  
                  $
                  181.5
                  
                  
                  
                  14
                  %
                  
                  $
                  159.8Percent
      of revenue
                  
                  
                  6.1
                  %
                  
                  
                  
                  
                  
                  
                  4.7
                  %
                  
                  
                  
                  
                  
                  
                  4.9
                  %
 
 Our
fiscal year 2008 general and administrative expense growth over the comparable
period in fiscal year 2007 was primarily related to increased legal and outside
advisor costs of $30 million and bad debt expense of $5 million,
partially offset by lower share-based compensation costs of ($9) million
and payroll and employee-related costs of ($3) million.  Our
legal and outside advisor costs increased in fiscal year 2008 as compared to
fiscal year 2007 primarily due to increased patent and anti-trust litigation
expenses as well as expenses incurred in connection with strategic
initiatives.  Due to our restructuring activities in the fourth
quarter of fiscal year 2008, we expect that our general and administrative
payroll and employee-related expenses will be lower in fiscal year 2009 than in
fiscal year 2008.  For further discussion, see “Restructuring Charges
and Other” below.
 
 Our
fiscal year 2007 general and administrative expense increases were primarily
related to increased payroll, payroll-related expenses and share-based
compensation expense associated with headcount increases including our
acquisition of msystems in November 2006.
  Impairment
of Goodwill.
 FY
      2008
                  
                  
                  Percent
      Change
                  
                  
                  FY
      2007
                  
                  
                  Percent
      Change
                  
                  
                  FY
      2006(in millions,
      except percentages)Impairment
      of goodwill
                  
                  $
                  845.5
                  
                  
                  
                  100
                  %
                  
                  
                  n/a
                  
                  
                  
                  —
                  
                  
                  
                  n/aPercent
      of revenue
                  
                  
                  25.2
                  %
                  
                  
                  
                  
                  
                  
                  n/a
                  
                  
                  
                  
                  
                  
                  
                  n/a
 
 In
accordance with SFAS 142, goodwill is not amortized, but instead is
reviewed and tested for impairment at least annually and whenever events or
circumstances occur which indicate that goodwill might be
impaired.  We performed our annual impairment test on the first day of
the fourth quarter of fiscal year 2008 and determined that the goodwill was not
impaired.  However, based on a combination of factors, including the
economic environment, current and forecasted operating results, NAND-industry
pricing conditions and a sustained decline in our market capitalization, we
concluded that there were sufficient indicators to require an interim
goodwill impairment analysis during the fourth quarter of fiscal year 2008 and
we recognized an impairment charge of $845.5 million.
 
 Impairment
of Acquisition-Related Intangible Assets.
 FY
      2008
                  
                  
                  Percent
      Change
                  
                  
                  FY
      2007
                  
                  
                  Percent
      Change
                  
                  
                  FY
      2006(in millions,
      except percentages)Impairment
      of acquisition-related intangible assets
                  
                  $
                  175.8
                  
                  
                  
                  100
                  %
                  
                  
                  n/a
                  
                  
                  
                  —
                  
                  
                  
                  n/aPercent
      of revenue
                  
                  
                  5.3
                  %
                  
                  
                  
                  
                  
                  
                  n/a
                  
                  
                  
                  
                  
                  
                  
                  n/a
 
 In
accordance with SFAS 144, we recorded a $176 million impairment on
acquisition-related intangible assets in the fourth quarter of fiscal year
2008.  This impairment was based upon forecasted discounted cash flows
which considered factors including a reduced business outlook primarily due to
NAND-industry pricing conditions.
 
 
  - 52
-
 Table of Contents
  
 Amortization
of Acquisition-Related Intangible Assets.
 FY
      2008
                  
                  
                  Percent
      Change
                  
                  
                  FY
      2007
                  
                  
                  Percent
      Change
                  
                  
                  FY
      2006(in millions,
      except percentages)Amortization
      of acquisition-related intangible assets
                  
                  $
                  17.1
                  
                  
                  
                  (32
                  )%
                  
                  $
                  25.3
                  
                  
                  
                  45
                  %
                  
                  $
                  17.4Percent
      of revenue
                  
                  
                  0.5
                  %
                  
                  
                  
                  
                  
                  
                  0.6
                  %
                  
                  
                  
                  
                  
                  
                  0.5
                  %
 
 Amortization
of acquisition-related intangible assets in fiscal year 2008 compared to fiscal
year 2007 was lower due to intangible assets that were fully amortized in fiscal
year 2007.  Our expense from the amortization of acquisition-related
intangible assets was primarily related to our acquisitions of Matrix in January
2006 and msystems in November 2006.  Amortization expense of
acquisition-related intangible assets is expected to decline in fiscal year 2009
primarily due to impairments recorded in fiscal year
2008.
 The
increase of amortization of acquisition-related intangible assets for the fiscal
year ended December 31, 2007 was directly related to twelve months of
amortization in fiscal year 2007 from our acquisition of msystems compared to
less than two months of amortization in fiscal year 2006.
 
 Write-off
of Acquired In-Process Technology.
 FY
      2008
                  
                  
                  Percent
      Change
                  
                  
                  FY
      2007
                  
                  
                  Percent
      Change
                  
                  
                  FY
      2006(in millions,
      except percentages)Write-off
      of acquired in-process technology
                  
                  
                  n/a
                  
                  
                  
                  —
                  
                  
                  
                  n/a
                  
                  
                  
                  —
                  
                  
                  $
                  225.6Percent
      of revenue
                  
                  
                  n/a
                  
                  
                  
                  
                  
                  
                  
                  n/a
                  
                  
                  
                  
                  
                  
                  
                  6.9
                  %
 
 As part
of the Matrix acquisition in the first quarter of fiscal year 2006 and the
msystems acquisition in the fourth quarter of fiscal year 2006, a portion of
each purchase price was allocated to acquired in-process technology, which was
determined through established valuation techniques in the high-technology
industry and written-off at the date of acquisition because technological
feasibility had not been established and no alternative future uses
existed.  The value was determined by estimating the net cash flows
and discounting forecasted net cash flows to their present values.  As
of December 28, 2008, we estimated that the remaining in-process
projects related to the msystems acquisition would be completed over the next
two quarters at an estimated total cost of $4 million.  As of
December 28, 2008, all in-process projects related to the Matrix acquisition
were completed.
 
 Restructuring
Charges and Other.
 FY
      2008
                  
                  
                  Percent
      Change
                  
                  
                  FY
      2007
                  
                  
                  Percent
      Change
                  
                  
                  FY
      2006(in millions,
      except percentages)Restructuring
      and other
                  
                  $
                  35.5
                  
                  
                  
                  430
                  %
                  
                  $
                  6.7
                  
                  
                  
                  100
                  %
                  
                  
                  n/aPercent
      of revenue
                  
                  
                  1.1
                  %
                  
                  
                  
                  
                  
                  
                  0.2
                  %
                  
                  
                  
                  
                  
                  
                  n/a
 
 During
fiscal years 2008 and 2007, we implemented several restructuring plans which
included reductions of our workforce and consolidation of
operations.  We recorded restructuring charges and other of
$36 million and $7 million in fiscal years 2008 and 2007,
respectively.  The goal of these restructuring and other charges was
to bring our operational expenses to appropriate levels relative to our net
revenues, while simultaneously implementing extensive company-wide
expense-control programs.  All expenses, including adjustments,
associated with our restructuring plans are included in Restructuring Charges
and Other in the Consolidated Statements of Operations.  For further
discussion of our restructuring plans, refer to Note 10, “Restructuring Plans,”
of the Notes to Consolidated Financial Statements of this Form 10-K
included in Item 8 of this report.
 
  - 53
-
 Table of Contents
  Fiscal
2008 Restructuring and Other
 
 We
recorded restructuring and other charges of $36 million for plans implemented in fiscal year
2008.  Of these charges, $15 million related to severance and
benefits for employee reductions worldwide and $21 million related to
marketing contract termination costs, technology license impairments and fixed
asset impairments related to outsourcing certain manufacturing
activities.  In addition, restructuring and other charges include an
accrual for unrelated litigation settlements.
 
 We expect
to reduce our annual cost and operating expenses by approximately
$53 million as a result of our fiscal year 2008 restructuring
plans.  Approximately 19%, 33%, 31% and 17% of the restructuring cost
savings related to the fiscal year 2008 restructuring plans are expected to be
reflected as a reduction in cost of revenues, research and development expense,
sales and marketing expense, and general and administrative expense,
respectively.
 
 Fiscal
2007 Restructuring
 
 In the
first quarter of fiscal year 2007, management approved and initiated plans to
bring our operational expenses to appropriate levels relative to our net
revenues, while simultaneously implementing extensive company-wide
expense-control programs.  This restructuring plan eliminated certain
duplicative assets and resources in all functions of the organization worldwide
due to consolidating certain processes in order to reduce our cost structure,
which resulted in a charge of $7 million in fiscal year 2007.
 
 Other
Income.
 FY
      2008
                  
                  
                  Percent
                      Change
                  
                  
                  FY
      2007
                  
                  
                  Percent
                      Change
                  
                  
                  FY
      2006(in millions,
      except percentages)Interest
      income
                  
                  $
                  94.4
                  
                  
                  
                  (29
                  )%
                  
                  $
                  133.4
                  
                  
                  
                  32
                  %
                  
                  $
                  101.1Interest
      expense
                  
                  
                  (16.5
                  )
                  
                  
                  (2
                  )%
                  
                  
                  (16.9
                  )
                  
                  
                  59
                  %
                  
                  
                  (10.6
                  )Income
      (loss) in equity investments
                  
                  
                  (39.6
                  )
                  
                  
                  300
                  %
                  
                  
                  (9.9
                  )
                  
                  
                  (248
                  )%
                  
                  
                  6.7Other
      income, net
                  
                  
                  32.1
                  
                  
                  
                  110
                  %
                  
                  
                  15.3
                  
                  
                  
                  113
                  %
                  
                  
                  7.2Total
      other income, net
                  
                  $
                  70.4
                  
                  
                  
                  (42
                  )%
                  
                  $
                  121.9
                  
                  
                  
                  17
                  %
                  
                  $
                  104.4
 
 Our
fiscal year 2008 other income decrease compared to fiscal year 2007 was
primarily due to lower interest income in fiscal year 2008 reflecting reduced
interest rates and lower cash and investment balances, impairment of our equity
investment in Tower of ($19) million, and an impairment of our investment
in FlashVision of ($10) million.
 
 Our
fiscal year 2007 other income increase over the comparable period of fiscal year
2006 was primarily due to interest income of $133 million offset by full
year interest expense of ($17) million resulting from our
$1.15 billion debt offering in May 2006 and the acquired msystems’
$75 million debt offering, and an impairment charge of ($10) million
to the wind-down of our FlashVision investment included in “Income (loss) in
equity investments.”
 
  - 54
-
 Table of Contents
  Provision
for Income Taxes.
 FY
      2008
                  
                  
                  Percent
                      Change
                  
                  
                  FY
      2007
                  
                  
                  Percent
                      Change
                  
                  
                  FY
      2006(in millions,
      except percentages)Provision
      for income taxes
                  
                  $
                  153.7
                  
                  
                  
                  (12
                  )%
                  
                  $
                  174.8
                  
                  
                  
                  (24
                  )%
                  
                  $
                  230.2Effective
      income tax rates
                  
                  
                  (8.1
                  )%
                  
                  
                  
                  
                  
                  
                  43.9
                  %
                  
                  
                  
                  
                  
                  
                  53.5
                  %
 
 Our
fiscal year 2008 provision for income taxes was an expense of $154 million
with a negative effective tax rate of 8.1%. This is primarily due to the
non-deductibility of the goodwill impairment charge and a valuation allowance
recorded on certain U.S. and foreign gross deferred tax assets.  The
valuation allowance significantly increased due primarily to the size of the
fiscal year 2008 net loss and that it is not more likely than not that certain
U.S. and foreign deferred tax assets will be realized in the
future.  Fiscal year 2007 had a provision for income taxes of
$175 million and an effective tax rate of 43.9%, which was higher than the
statutory rate primarily due to non-deductible share-based compensation expenses
and certain foreign losses partially offset by foreign earnings taxed at other
than U.S. rates and tax-exempt interest.
 
 Our
fiscal year 2007 effective tax rate decreased from fiscal year 2006 primarily
due to the fiscal year 2006 write-off of acquired in-process technology and
higher tax-exempt interest income in fiscal year 2007.  This decrease
was partially offset by foreign losses not benefited and non-deductible
share-based compensation expenses.
 
 Our
reserve for unrecognized tax benefits related to FASB Interpretation
No. 48, Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109,
increased by $69 million and $46 million in fiscal years 2008 and
2007, respectively.
 
  - 55
-
 Table of Contents
  Liquidity
and Capital Resources
 
 Cash
Flows.Our cash flows were as follows:
  FY
      2008
                  
                  
                  Percent
                      Change
                  
                  
                  FY
      2007
                  
                  
                  Percent
                      Change
                  
                  
                  FY
      2006(in millions,
      except percentages)Net
      cash provided by operating activities
                  
                  $
                  86.8
                  
                  
                  
                  (87
                  )%
                  
                  $
                  652.9
                  
                  
                  
                  9
                  %
                  
                  $
                  598.1Net
      cash provided by (used in) investing activities
                  
                  
                  29.3
                  
                  
                  
                  102
                  %
                  
                  
                  (1,218.4
                  )
                  
                  
                  (25
                  )%
                  
                  
                  (978.1
                  )Net
      cash provided by (used in) financing activities
                  
                  
                  11.9
                  
                  
                  
                  107
                  %
                  
                  
                  (181.0
                  )
                  
                  
                  (115
                  )%
                  
                  
                  1,197.3Effect
      of changes in foreign currency exchange rates on cash
                  
                  
                  0.3
                  
                  
                  
                  160
                  %
                  
                  
                  (0.5
                  )
                  
                  
                  (138
                  )%
                  
                  
                  1.3Net
      increase (decrease) in cash and cash equivalents
                  
                  $
                  128.3
                  
                  
                  
                  117
                  %
                  
                  $
                  (
      747.0
                  )
                  
                  
                  (191
                  )%
                  
                  $
                  818.6
 
 Operating
Activities.Cash provided by operating activities is generated
by net income (loss) adjusted for certain non-cash items and changes in assets
and liabilities.  Cash provided by operations was $87 million for
fiscal year 2008 as compared to cash provided by operations of $653 million
for fiscal year 2007.  The decline in cash provided by operations in
fiscal year 2008 compared to fiscal year 2007 resulted primarily from our net
loss of $2.06 billion offset by non-cash impairments.  Cash flow
from accounts receivable in fiscal year 2008 was positively impacted by
increased collection efforts and by reduced product accounts receivable levels
as compared with the prior year period.  The increase in inventory was
related primarily to the expansion of capacity and production at Flash Alliance
and Flash Partners while revenue from our products declined from fiscal year
2007 to fiscal year 2008.  The increase in other assets was due to the
increase in tax receivables related to tax refunds expected on carryback claims
due to the fiscal year 2008 net loss.  Within operating activities for
fiscal year 2008, there was an increase in cash provided primarily related to an
increase in related parties payables due to timing of Flash Ventures payments at
fiscal year 2008 year end, an increase in other liabilities related to Flash
Ventures capacity under utilization accrual, timing of the cash settlement of
outstanding hedge contracts, and lower deferred income on shipments to
distributors and retailers related to lower revenue levels.
 
 Operating
activities generated $652.9 million of cash during the fiscal year ended
December 30, 2007.  The primary sources of operating cash
flow for the fiscal year ended December 30, 2007 were: (1) net
income, adjusted to exclude the effect of non-cash charges including
depreciation, amortization, share-based compensation, loss on equity investments
and deferred taxes, and (2) changes in balance sheet accounts including a
decrease in accounts receivable and increases in accounts payable trade and
accounts payable to related parties, which were partially offset by increases in
inventory and other assets and a decrease in other liabilities.
 
 Investing
Activities.  Cash provided from investing activities for fiscal
year 2008 was $29 million as compared to cash used in investing activities
of $1.12 billion in fiscal year 2007.  The increase in cash
provided from investing was primarily related to reduced purchases of short and
long-term investments due to our higher liquidity requirements and the return of
$103 million on our investment in FlashVision and $40 million from the
sale of 200-millimeter fab equipment that we owned directly as compared to the
return of $38 million from FlashVision in the fiscal year
2007.  Usage of cash for investments in and loans to Flash Partners
and Flash Alliance was $384 million in fiscal year 2008 compared to
$651 million in fiscal year 2007.
 
 We used
$1.22 billion for investing activities during the fiscal year ended
December 30, 2007.  Purchases of short and long-term
investments, net of proceeds from sales and maturities of short-term
investments, totaled $318 million.  Capital expenditures for the
year were $259 million and investments and notes to FlashVision, Flash
Partners and Flash Alliance were $613 million, net of
repayments.
 
  - 56
-
 Table of Contents
  Financing
Activities.  Net cash provided by financing activities for
fiscal year 2008 of $12 million as compared to cash used in financing
activities of $181 million in fiscal year 2007 was primarily related to
lower cash proceeds from employee stock programs and repayment of debt financing
in fiscal year 2008 offset by the termination of the share repurchase programs
which used cash in fiscal year 2007.
 
 We used
$181 million of cash for financing activities during the fiscal year ended
December 30, 2007 comprised primarily of $300 million to purchase
treasury shares pursuant to our share repurchase program, partially offset by
cash received from exercises of share-based awards of
$100 million.  Additionally, during the fiscal year ended
December 30, 2007, we received a tax benefit of $18 million on
employee stock programs.
 
 Liquid
Assets.At December 28, 2008, we had cash, cash
equivalents and short-term investments of $1.44 billion.  We have
$1.10 billion of long-term investments which we believe are also liquid
assets, but are classified as long-term investments due to the remaining
maturity of the investment being greater than one year.
 
 Short-Term
Liquidity.As of December 28, 2008, our working capital
balance was $1.44 billion.  We expect our loans to and
investments in Flash Ventures as well as our investments in property, plant and
equipment to be approximately $0.5 billion in fiscal year
2009.
 
 Our
short-term liquidity is impacted in part by our ability to maintain compliance
with covenants in the outstanding Flash Ventures master lease
agreements.  The Flash Ventures master lease agreements contain
customary covenants for Japanese lease facilities as well as an acceleration
clause for certain events of default related to us as guarantor, including,
among other things, our failure to maintain a minimum shareholder equity of at
least $1.51 billion, and our failure to maintain a minimum corporate rating
of BB- from Standard & Poors, or S&P, or Moody’s Corporation, or a
minimum corporate rating of BB+ from Rating & Investment Information, Inc.,
or R&I.  As of December 28, 2008, Flash Ventures was in
compliance with all of its master lease covenants.  While our S&P
credit rating was B, two levels below the required minimum corporate rating
threshold from S&P, our R&I credit rating was BBB-, one level above the
required minimum corporate rating threshold from R&I.
 
 On
February 4, 2009, R&I confirmed our credit rating at BBB- with a change in
outlook from stable to negative.  If R&I were to downgrade our
credit rating below the minimum corporate rating threshold, Flash Ventures would
become non-compliant with certain covenants under its master equipment lease
agreements and would be required to negotiate a resolution to the non-compliance
to avoid acceleration of the obligations under such agreements.  Such
resolution could include, among other things, supplementary security to be
supplied by us, as guarantor, or increased interest rates or waiver fees, should
the lessors decide they need additional collateral or financial consideration
under the circumstances.  If a resolution was unsuccessful, we could
be required to pay a portion or the entire outstanding lease obligations covered
by our guarantee under such Flash Ventures master lease agreements of up to
$2.09 billion, based upon the exchange rate at December 28, 2008,
which could negatively impact our short-term liquidity.
 
 Long-Term
Requirements.Depending on the demand for our products, we may
decide to make additional investments, which could be substantial, in wafer
fabrication foundry capacity and assembly and test manufacturing equipment to
support our business in the future.  We may also make equity
investments in other companies or engage in merger or acquisition
transactions.  These activities may require us to raise additional
financing, which could be difficult to obtain, and which if not obtained in
satisfactory amounts could prevent us from funding Flash Ventures; increasing
our wafer supply; developing or enhancing our products; taking advantage of
future opportunities; engaging in investments in or acquisitions of companies;
growing our business or responding to competitive pressures or unanticipated
industry changes; any of which could harm our business.
 
  - 57
-
 Table of Contents
  Financing
Arrangements.At December 28, 2008, we had
$1.23 billion of aggregate principal amount in convertible notes
outstanding, consisting of $1.15 billion in aggregate principal amount of
our 1% Senior Convertible Notes due 2013 and $75.0 million in aggregate
principal amount of our 1% Convertible Notes due 2035.  Our 1%
Convertible Notes due 2035 may be redeemed in whole or in part by the holders
thereof at a redemption price equal to 100% of the principal amount of the notes
to be redeemed, plus accrued and unpaid interest on March 15, 2010 and
various dates thereafter.
 
 Concurrent
with the issuance of the 1% Senior Convertible Notes due 2013, we sold warrants
to acquire shares of our common stock at an exercise price of $95.03 per
share.  As of December 28, 2008, the warrants had an expected
life of approximately 4.6 years and expire in August 2013.  At
expiration, we may, at our option, elect to settle the warrants on a net share
basis.  As of December 28, 2008, the warrants had not been
exercised and remain outstanding.  In addition, 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%
Senior Convertible Notes due 2013 in full, at a conversion 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% Senior
Convertible Notes due 2013 or the first day that none of the 1% Senior
Convertible Notes due 2013 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% Senior Convertible
Notes due 2013.  As of December 28, 2008, we had not purchased
any shares under this convertible bond hedge agreement.  See Note 7,
“Financing Arrangements,” of the Notes to Consolidated Financial Statements of
this Form 10-K included in Item 8 of this report.
 
 Flash Partners
and Flash Alliance Ventures with Toshiba.We are a 49.9%
percent owner in both Flash Partners and Flash Alliance, or hereinafter referred
to as Flash Ventures, our business ventures with Toshiba to develop and
manufacture NAND flash memory products.  These NAND flash memory
products are manufactured by Toshiba at Toshiba’s Yokkaichi, Japan operations
using the semiconductor manufacturing equipment owned or leased by Flash
Ventures.  This equipment is funded or will be funded by investments
in or loans to the Flash Ventures from us and Toshiba as well as through
operating leases received by Flash Ventures from third-party banks and
guaranteed by us and Toshiba.  Flash Ventures purchase wafers from
Toshiba at cost and then resells those wafers to us and Toshiba at cost plus a
markup.  We are contractually obligated to purchase half of Flash
Ventures’ NAND wafer supply or to pay for 50% of the fixed costs of Flash
Ventures.  We are not able to estimate our total wafer purchase
obligations beyond our rolling three month purchase commitment because the price
is determined by reference to the future cost to produce the
wafers.  See Note 14, “Related Parties and Strategic Investments,” of
the Notes to Consolidated Financial Statements of this Form 10-K included in
Item 8 of this report.
 
 The cost
of the wafers we purchase from Flash Ventures is recorded in inventory and
ultimately cost of product revenues.  Flash Ventures are variable
interest entities; however, we are not the primary beneficiary of these ventures
because we are entitled to less than a majority of expected gains and losses
with respect to each venture.  Accordingly, we account for our
investments under the equity method and do not consolidate.
 
 Under
Flash Ventures’ agreements, we agreed to share in Toshiba’s costs associated
with NAND product development and our common semiconductor research and
development activities.  As of December 28, 2008, we had accrued
liabilities related to those common research and development expenses of
$4.0 million.  Our common research and development obligation
related to Flash Ventures is variable based on an annual forecasted joint
research and development costs as mutually agreed upon by us and
Toshiba.  In addition to general NAND product development and common
semiconductor research performed by Toshiba, both parties perform direct
research and development activities specific to Flash Ventures, and our
contribution is based on a variable computation.  We and Toshiba each
pay the cost of our own design teams and 50% of the wafer processing and similar
costs associated with this direct design and development of flash
memory.
 
  - 58
-
 Table of Contents
  For
semiconductor fixed assets that are leased by Flash Ventures, we and/or Toshiba
jointly guarantee on an unsecured and several basis, 50% of the outstanding
Flash Ventures’ lease obligations under master lease agreements entered into
from December 2004 through December 2008.  These master
lease obligations are denominated in Japanese yen and are
noncancelable.  Our total master lease obligation guarantee, net of
lease payments, as of December 28, 2008, was 189.4 billion Japanese
yen, or approximately $2.09 billion based upon the exchange rate at
December 28, 2008.
 
 From
time-to-time, we and Toshiba mutually approve increases in the wafer supply
capacity of Flash Ventures that may contractually obligate us to increase
capital funding.  As of December 28, 2008, Flash Partners’ Fab 3
had reached full capacity of approximately 150,000 wafers per month; however, we
expect to continue to invest in Flash Partners in order to convert to future
technology nodes.  The capacity of Flash Alliance’s Fab 4 at full
expansion is expected to be approximately 210,000 wafers per month, and the
timeframe to reach full capacity is to be mutually agreed upon by both
parties.  In fiscal year 2008, Fab 4 was ramped to more than 50%
of this estimated full capacity.  We are currently not investing in
further capacity expansion of Fab 4 as weak macroeconomic conditions coupled
with the growth of our NAND supply base have resulted in us carrying excess
inventory.  During the remainder of fiscal year 2009, we expect to invest
approximately $425 million in Flash Ventures primarily for future
technology nodes, which we expect will be funded through additional investments
and loans to Flash Ventures, and working capital contributions from Flash
Ventures.
 
 On
January 29, 2009, we entered into definitive agreements with Toshiba, under
which we and Toshiba agreed to restructure Flash Partners and Flash Alliance to
provide for the acquisition by Toshiba of certain production capacity in
connection with the production of NAND flash memory products at the
facilities.  The agreements specify the terms and conditions
under which each flash venture has agreed to sell to Toshiba more than 20% of
its current production capacity through the acquisition by Toshiba of certain
owned and leased equipment.  The total value of the restructuring
transaction to us is approximately $890 million based upon the exchange rate as
of January 29, 2009.  Approximately one-third of this value will be in
cash paid to us and approximately two-thirds of this value represents a transfer
of lease obligations to Toshiba which should reduce our outstanding lease
obligations and associated lease guarantees by approximately
28%.  These transactions are expected to occur at several closings
between January 30, 2009 and March 31, 2009, subject to certain
closing conditions and contingencies.
 
 FlashVision
Venture with Toshiba.In the second quarter of fiscal year
2008, we and Toshiba determined that production of NAND flash memory products
utilizing 200-millimeter wafers was no longer cost effective relative to market
prices for NAND flash memory and decided to wind-down the FlashVision
venture.  As part of the ongoing wind-down of FlashVision, Toshiba
purchased certain assets of FlashVision.  The existing master
equipment lease agreement between FlashVision and a consortium of financial
institutions has been retired, thereby releasing us from our contingent
indemnification obligation with Toshiba.  Due to the wind-down
qualifying as a reconsideration event under FIN 46R, we re-evaluated and
concluded that FlashVision is no longer a variable interest entity within the
scope of FIN 46R.  In fiscal year 2008, we received distributions of
$103 million, relating to our investment in FlashVision.  We took
impairment charges of $10 million in the fourth quarter of fiscal year 2007
and $10 million in the third quarter of fiscal year 2008 due to
FlashVision’s difficulty in selling the remaining excess capital equipment due
to deteriorating market conditions for equipment related to the production of
200-millimeter NAND-based flash memory products.  At December 28,
2008, we had a net investment in FlashVision of $64 million denominated in
Japanese yen, offset by $43 million of cumulative translation adjustments
recorded in accumulated OCI within Stockholder’s Equity of the Consolidated
Balance Sheets.
 
 
  - 59
-
 Table of Contents
  Contractual
Obligations and Off-Balance Sheet Arrangements
 
 Our
contractual obligations and off-balance sheet arrangements at December 28,
2008, and the effect those contractual obligations are expected to have on our
liquidity and cash flow over the next five years are presented in textual and
tabular format in Note 13, “Commitments, Contingencies and Guarantees,” of the
Notes to Consolidated Financial Statements of this Form 10-K included in Item 8
of this report.
 
 Impact
of Currency Exchange Rates
 
 Exchange
rate fluctuations could have a material adverse effect on our business,
financial condition and results of operations.  Our most significant
foreign currency exposure is to the Japanese yen in which we purchase the vast
majority of our NAND flash wafers.  In addition, we also have
significant costs denominated in the Chinese renminbi, or RMB, and the Israeli
New shekel, or ILS.  We do not enter into derivatives for speculative
or trading purposes.  In fiscal years 2008 and 2007, we used foreign
currency forward contracts to mitigate transaction gains and losses generated by
certain monetary assets and liabilities denominated in currencies other than the
U.S. dollar.  In addition, in fiscal year 2008, we used foreign
currency forward contracts and options to partially hedge our future Japanese
yen costs for NAND flash wafers.  Our derivative instruments are
recorded at fair value in assets or liabilities with final gains or losses
recorded in other income (expense) or as a component of accumulated OCI and
subsequently reclassified into cost of product revenues in the same period or
periods in which the cost of product revenues is recognized.  See Note
6, “Derivatives and Hedging Activities,” of the Notes to Consolidated Financial
Statements of this Form 10-K included in Item 8 of this report.
 
 For a
discussion of foreign operating risks and foreign currency risks, see Item 1A,
“Risk Factors.”
 
 Recent
Accounting Pronouncements
 
 See Note
2, “Recent Accounting Pronouncements,” of the Notes to Consolidated Financial
Statements of this Form 10-K included in Item 8 of this report.
 
  - 60
-
 Table of Contents
  ITEM 7A.  QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
 
 We are
exposed to financial market risks, including changes in interest rates, foreign
currency exchange rates and marketable equity security prices.
 
 Interest Rate
Risk.Our exposure to market risk for changes in interest
rates relates primarily to our investment portfolio.  The primary
objective of our investment activities is to preserve principal while maximizing
yields without significantly increasing risk.  This is accomplished by
investing in widely diversified investment grade marketable
securities.  As of December 28, 2008, a hypothetical 50 basis
point increase in interest rates would result in an approximate $11 million
decline (less than 0.71%) in the fair value of our available-for-sale debt
securities.
 
 Foreign Currency
Risk.  The majority of our revenues are transacted in the U.S.
dollar, with some revenues transacted in the Euro, the Great British pound, and
the Japanese yen.  Our flash memory costs, which represent the largest
portion of our cost of revenues, are denominated in the Japanese
yen.  We also have some cost of revenues denominated in
RMB.  The majority of our operating expenses are denominated in the
U.S. dollar, however, we have expenses denominated in ILS and numerous other
currencies.  On the balance sheet, we have numerous foreign currency
denominated monetary assets and liabilities, with the largest monetary exposure
being our notes receivable from the Flash Ventures, which are denominated in the
Japanese yen.
 
 We enter
into foreign currency forward contracts to hedge the gains or losses generated
by the remeasurement of our significant foreign currency denominated monetary
assets and liabilities. The fair value of these contracts is reflected as other
current assets or other current liabilities and the change in fair value of
these balance sheet hedge contracts is recorded into earnings as a component of
other income (expense) to largely offset the change in fair value of the foreign
currency denominated monetary assets and liabilities which is also recorded in
other income (expense).
 
 We use
foreign currency forward contracts and option contracts to partially hedge our
future Japanese yen flash memory costs.  These contracts are
designated as cash flow hedges and are carried on our balance sheet at fair
value with the effective portion of the contracts’ gains or losses included in
accumulated OCI and subsequently recognized in cost of product revenues in
the same period the hedged cost of product revenues is recognized.
 
 At
December 28, 2008 we had foreign currency forward exchange contracts in place
that amounted to a net sale in U.S. dollar equivalent of approximately $577
million in foreign currencies to hedge our foreign currency denominated monetary
net asset position.  The maturities of these contracts were 3 months
or less.
 
 At
December 28, 2008 we had foreign currency forward exchange contracts and option
contracts in place that amounted to a  net purchase in U.S. dollar
equivalent of approximately $352 million to partially hedge our expected future
wafer purchases in Japanese yen. The maturities of these contracts were 12
months or less.
 
  - 61
-
 Table of Contents
  The
notional amount and unrealized loss of our outstanding foreign currency forward
contracts that are designated as balance sheet hedges as of December 28, 2008 is
shown in the table below.  This table also shows the change in fair
value of these balance sheet hedges assuming a hypothetical adverse foreign
currency exchange rate movement of 10 percent.  These changes in fair
values would be largely offset in other income (expense) by corresponding
changes in the fair values of the foreign currency denominated monetary assets
and liabilities.
 
 Notional
      Amount
                      
                      
                      Unrealized
      Gain/(Loss) as of
                        December
      28,
                        2008
                      
                      
                      Change
      in Fair Value Due to 10% Adverse Rate Movement(In
      thousands)Balance
      sheet hedge forward contracts sold
                      
                      $
                      (2,583,096
                      )
                      
                      $
                      (144,041
                      )
                      
                      $
                      (282,559
                      )Balance
      sheet hedge forward contracts purchased
                      
                      
                      2,005,976
                      
                      
                      
                      12,088
                      
                      
                      
                      204,553Total
      net forward contracts sold
                      
                      $
                      (577,120
                      )
                      
                      $
                      (131,953
                      )
                      
                      $
                      (78,006
                      )
 
 The
notional amount and unrealized gain of our outstanding forward and option
contracts that are designated as cash flow hedges as of December 28, 2008 is
shown in the table below.  This table also shows the change in fair
value of these cash flow hedges assuming a hypothetical adverse foreign currency
exchange rate movement of 10 percent.
  Notional
      Amount
                      
                      
                      Unrealized
      Gain/(Loss) as of
                        December
      28,
                        2008
                      
                      
                      Change
      in Fair Value Due to 10% Adverse Rate Movement(In
      thousands)Cash
      flow hedge forward contracts purchased
                      
                      $
                      259,563
                      
                      
                      $
                      40,182
                      
                      
                      $
                      (23,373
                      )Cash
      flow hedge option contracts purchased
                      
                      
                      91,946
                      
                      
                      
                      11,394
                      
                      
                      
                      (7,334
                      )Total
      cash flow hedge contracts purchased
                      
                      $
                      351,509
                      
                      
                      $
                      51,576
                      
                      
                      $
                      (30,707
                      )
 
 Notwithstanding
our efforts to mitigate some foreign exchange risks, we do not hedge all of our
foreign currency exposures, and there can be no assurances that our mitigating
activities related to the exposures that we do hedge will adequately protect us
against risks associated with foreign currency fluctuations.
 
 Market
Risk.We also hold available-for-sale equity securities in
semiconductor wafer manufacturing companies.  As of December 28,
2008, a reduction in price of 10% of these marketable equity securities would
result in a decrease in the fair value of our investments in marketable equity
securities of approximately $0.2 million.
 
 All of
the potential changes noted above are based on sensitivity analysis performed on
our financial position at December 28, 2008.  Actual results may
differ materially.
 
  ITEM 8.  FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
 
 The
information required by this item is set forth beginning at page
F-1.
  - 62
-
 Table of Contents
  ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  Not
applicable.
 
  ITEM 9A.  CONTROLS AND
PROCEDURES
 
 Evaluation of
Disclosure Controls and Procedures.Under the supervision and
with the participation of our management, including our principal executive
officer and principal financial officer, we conducted an evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934 as of the end of the period covered by this report (the
“Evaluation Date”).  Based upon the evaluation, our principal
executive officer and principal financial officer concluded as of the Evaluation
Date that our disclosure controls and procedures were
effective.  Disclosure controls are controls and procedures designed
to reasonably ensure that information required to be disclosed in our reports
filed under the Exchange Act, such as this report, is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
forms.  Disclosure controls include controls and procedures designed
to reasonably ensure that such information is accumulated and communicated to
our management, including our chief executive officer and chief financial
officer, as appropriate to allow timely decisions regarding required
disclosure.  Our quarterly evaluation of disclosure controls and
procedures includes an evaluation of some components of our internal control
over financial reporting, and internal control over financial reporting is also
separately evaluated on an annual basis for purposes of providing the management
report which is set forth below.
 
 Report of
Management on Internal Control Over Financial Reporting.Our
management is responsible for establishing and maintaining a comprehensive
system of internal control over financial reporting to provide reasonable
assurance of the proper authorization of transactions, the safeguarding of
assets and the reliability of the financial records.  Our internal
control system was designed to provide reasonable assurance to our management
and board of directors regarding the preparation and fair presentation of
published financial statements.  The system of internal control over
financial reporting provides for appropriate division of responsibility and is
documented by written policies and procedures that are communicated to
employees.  The framework upon which management relied in evaluating
the effectiveness of our internal control over financial reporting was set forth
in Internal Controls —
Integrated Frameworkpublished by the Committee of Sponsoring
Organizations of the Treadway Commission.
 
 Based on
the results of our evaluation, our management concluded that our internal
control over financial reporting was effective as of December 28,
2008.
 
 However,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in our business
or other conditions, or that the degree of compliance with our policies or
procedures may deteriorate.
 
 Our
independent registered public accounting firm has audited the financial
statements included in Item 8 of this report and has issued an attestation
report on our internal control over financial reporting which is included at
page F-3.
 
 Inherent
Limitations of Disclosure Controls and Procedures and Internal Control over
Financial Reporting.It should be noted that any system of
controls, however well designed and operated, can provide only reasonable, and
not absolute, assurance that the objectives of the system will be
met.  In addition, the design of any control system is based in part
upon certain assumptions about the likelihood of future events.
 
 Changes in
Internal Control over Financial Reporting.There were no
changes in our internal control over financial reporting (as defined in Exchange
Act Rule 13a-15(f)) during the quarter ended December 28, 2008 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
 
  ITEM 9B.  OTHER
INFORMATION
 
 Not
applicable.
 
  - 63
-
 Table of Contents
  PART
III
 
 ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND
CORPORATE GOVERNANCE
 
 The
information required by this item is set forth under “Business-Executive
Officers” in this report and under “Election of Directors” and “Compliance with
Section 16(a) of the Securities Exchange Act of 1934” in our Proxy Statement for
our 2009 Annual Meeting of Stockholders, and is incorporated herein by
reference.
 
 We have
adopted a code of ethics that applies to our principal executive officer and
principal financial and accounting officer.  This code of ethics,
which consists of the “SanDisk Code of Ethics for Financial Executives” section
of our code of ethics that applies to employees generally, is posted on our
website, www.sandisk.com.  Our code of ethics may be found on our
website as follows:
 
 ·
              From
      our main Web page, first click on “About SanDisk” and then scroll down and
      click on “Business Conduct and
Ethics.”
  ·
              Scroll
      down to Part IV, “SanDisk Code of Ethics for Financial
      Executives.”
  We intend
to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an
amendment to, or waiver from, a provision of this code of ethics by posting the
required information on our website, at the address and location specified
above.
 
 ITEM 11.  EXECUTIVE
COMPENSATION
 
 The
information required by this item is set forth under “Director Compensation-
Fiscal 2008,” “Report of the Compensation Committee,” “Compensation Discussion
and Analysis,” “Summary Compensation Table- Fiscal 2008,” “Outstanding Equity
Awards at Fiscal 2008 Year-End” and “Option Exercises and Stock Vested in Fiscal
2008” in our Proxy Statement for our 2009 Annual Meeting of Stockholders, and is
incorporated herein by reference.
 ITEM 12.  SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
 
 The
information required by this item is set forth under “Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters” and
“Equity Compensation Information for Plans or Individual Arrangements with
Employees and Non-Employees” in our Proxy Statement for our 2009 Annual Meeting
of Stockholders, and is incorporated herein by reference.
 ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, DIRECTOR INDEPENDENCE
 The
information required by this item is set forth under “Compensation Committee
Interlocks and Insider Participation,” “Certain Transactions and Relationships,”
and under “Election of Directors” in our Proxy Statement for our 2009 Annual
Meeting of Stockholders, and is incorporated herein by reference.
 
  ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND
SERVICES
 The
information required by this item is set forth under the caption “Principal
Accountant Fees and Services” and “Report of the Audit Committee” in our Proxy
Statement for our 2009 Annual Meeting of Stockholders, and is incorporated
herein by reference.
  - 64
-
 Table of Contents
  PART
IV
 ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES
 (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
    Operations
                F-5Consolidated Statements of Stockholders’
      Equity
                F-6Consolidated Statements of Cash
    Flows
                F-7Notes to Consolidated Financial
    Statements
                F-8
 
 All other
schedules have been omitted because the required information is not present or
not present in amounts sufficient to require submission of the schedules, or
because the information required is included in the Consolidated Financial
Statements or notes thereto.
 
 2) Exhibits required by Item 601 of
Regulation S-K
 
 The
information required by this item is set forth on the exhibit index which
follows the signature page of this report.
 
  - 65
-
 Table of Contents
  SANDISK CORPORATION
 
 INDEX TO FINANCIAL STATEMENTS
 
 PageReports of Independent Registered Public Accounting
      Firm
                F-2Consolidated Balance Sheets
                F-4Consolidated Statements of
    Operations
                F-5Consolidated Statements of Stockholders’
      Equity
                F-6Consolidated Statements of Cash
    Flows
                F-7Notes to Consolidated Financial
    Statements
                F-8
 
  F-1
 Table of Contents
  REPORT OF INDEPENDENT REGISTERED
 PUBLIC
ACCOUNTING FIRM
 
 The Board
of Directors and Stockholders of
 SanDisk
Corporation
 
 We have
audited the accompanying Consolidated Balance Sheets of SanDisk Corporation as
of December 28, 2008 and December 30, 2007, and the related Consolidated
Statements of Operations, Stockholders’ Equity, and Cash Flows for each of the
three years in the period ended December 28, 2008.  These financial
statements are the responsibility of the Company’s management.  Our
responsibility is to express an opinion on these financial statements based on
our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of SanDisk Corporation at
December 28, 2008 and December 30, 2007, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 28, 2008, in conformity with U.S. generally accepted accounting
principles.
 
 We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of SanDisk Corporation’s
internal control over financial reporting as of December 28, 2008, based on
criteria established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the “COSO
criteria”) and our report, dated February202009, expressed an
unqualified opinion thereon.
  /s/
Ernst & Young LLP
  San
Jose, California
 February20,2009
  F-2
 Table of Contents
  REPORT OF INDEPENDENT REGISTERED
 PUBLIC
ACCOUNTING FIRM
  The
Board of Directors and Stockholders of
 SanDisk
Corporation
  We
have audited SanDisk Corporation’s internal control over financial reporting as
of December 28, 2008, based on criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the “COSO criteria”).  SanDisk Corporation’s
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Report of
Management on Internal Control Over Financial Reporting.  Our
responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit.
  We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects.  Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances.  We
believe that our audit provides a reasonable basis for our opinion.
  A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles.  A company’s internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
  Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
  In
our opinion, SanDisk Corporation maintained, in all material respects, effective
internal control over financial reporting as of December 28, 2008, based on
the COSO criteria.
  We
also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the Consolidated Balance Sheets of
SanDisk Corporation as of December 28, 2008 and December 30, 2007, and
the related Consolidated Statements of Operations, Stockholders’ Equity, and
Cash Flows for each of the three years in the period ended December 28,
2008 of SanDisk Corporation and our report dated February20,2009 expressed an
unqualified opinion thereon.
  /s/ Ernst & Young
LLP
  San
Jose, California
 February20,2009
  F-3
 Table of Contents
  
 SANDISK CORPORATION
 CONSOLIDATED
BALANCE SHEETS
  December 28,
                    2008
                
                
                December 30,
                    2007(In
      thousands, except for share and per share amounts)ASSETSCurrent
      assets:Cash
      and cash equivalents
                
                $
                962,061
                
                
                $
                833,749Short-term
      investments
                
                
                477,296
                
                
                
                1,001,641Accounts
      receivable from product revenues, net of allowance for doubtful accounts
      of $13,881 in fiscal year 2008 and $13,790 in fiscal year
    2007
                
                
                122,092
                
                
                
                462,983Inventory
                
                
                598,251
                
                
                
                555,077Deferred
      taxes
                
                
                73,684
                
                
                
                212,255Other
      current assets
                
                
                469,961
                
                
                
                233,952Total
      current assets
                
                
                2,703,345
                
                
                
                3,299,657Long-term
      investments
                
                
                1,097,302
                
                
                
                1,060,393Property
      and equipment, net
                
                
                396,987
                
                
                
                422,895Notes
      receivable and investments in flash ventures with Toshiba
                
                
                1,602,291
                
                
                
                1,108,905Deferred
      taxes
                
                
                15,188
                
                
                
                117,130Goodwill
                
                
                —
                
                
                
                840,870Intangible
      assets, net
                
                
                63,182
                
                
                
                322,023Other
      non-current assets
                
                
                48,641
                
                
                
                62,946Total
      assets
                
                $
                5,926,936
                
                
                $
                7,234,819LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable trade
                
                $
                240,985
                
                
                $
                285,711Accounts
      payable to related parties
                
                
                370,006
                
                
                
                158,443Other
      current accrued liabilities
                
                
                502,443
                
                
                
                286,850Deferred
      income on shipments to distributors and retailers and deferred
      revenue
                
                
                149,575
                
                
                
                182,879Total
      current liabilities
                
                
                1,263,009
                
                
                
                913,883Convertible
      long-term debt
                
                
                1,225,000
                
                
                
                1,225,000Non-current
      liabilities
                
                
                263,977
                
                
                
                135,252Total
      liabilities
                
                
                2,751,986
                
                
                
                2,274,135Minority
      interest
                
                
                151
                
                
                
                1,067Commitments
      and contingencies (see Note 13)Stockholders’
      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: 226,128,177 in fiscal year 2008 and 224,166,707 in fiscal
      year 2007
                
                
                226
                
                
                
                224Capital
      in excess of par value
                
                
                3,912,303
                
                
                
                3,796,849Retained
      earnings (accumulated deficit)
                
                
                (926,707
                )
                
                
                1,130,069Accumulated
      other comprehensive income
                
                
                188,977
                
                
                
                32,475Total
      stockholders’ equity
                
                
                3,174,799
                
                
                
                4,959,617Total
      liabilities and stockholders’ equity
                
                $
                5,926,936
                
                
                $
                7,234,819
  The
accompanying notes are an integral part of these consolidated financial
statements.
  F-4
 Table of Contents
  SANDISK CORPORATION
 CONSOLIDATED
STATEMENTS OF OPERATIONS
   Fiscal
      Years EndedDecember
      28,
                                      2008
                                    
                                    
                                    December
      30,
                                      2007
                                    
                                    
                                    December
      31,
                                      2006(In
      thousands, except per share amounts)RevenuesProduct
                                    
                                    $
                                    2,843,243
                                    
                                    
                                    $
                                    3,446,125
                                    
                                    
                                    $
                                    2,926,472License
      and royalty
                                    
                                    
                                    508,109
                                    
                                    
                                    
                                    450,241
                                    
                                    
                                    
                                    331,053Total
      revenues
                                    
                                    
                                    3,351,352
                                    
                                    
                                    
                                    3,896,366
                                    
                                    
                                    
                                    3,257,525Cost
      of product revenues
                                    
                                    
                                    3,233,753
                                    
                                    
                                    
                                    2,628,838
                                    
                                    
                                    
                                    2,007,684Amortization
      of acquisition-related intangible assets
                                    
                                    
                                    54,512
                                    
                                    
                                    
                                    64,809
                                    
                                    
                                    
                                    10,368Total
      cost of product revenues
                                    
                                    
                                    3,288,265
                                    
                                    
                                    
                                    2,693,647
                                    
                                    
                                    
                                    2,018,052Gross
      profit
                                    
                                    
                                    63,087
                                    
                                    
                                    
                                    1,202,719
                                    
                                    
                                    
                                    1,239,473Operating
      expensesResearch
      and development
                                    
                                    
                                    429,949
                                    
                                    
                                    
                                    418,066
                                    
                                    
                                    
                                    306,866Sales
      and marketing
                                    
                                    
                                    328,079
                                    
                                    
                                    
                                    294,594
                                    
                                    
                                    
                                    203,406General
      and administrative
                                    
                                    
                                    204,765
                                    
                                    
                                    
                                    181,509
                                    
                                    
                                    
                                    159,835Impairment
      of goodwill
                                    
                                    
                                    845,453
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Impairment
      of acquisition-related intangible assets
                                    
                                    
                                    175,785
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Amortization
      of acquisition-related intangible assets
                                    
                                    
                                    17,069
                                    
                                    
                                    
                                    25,308
                                    
                                    
                                    
                                    17,432Write-off
      of acquired in-process technology
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    225,600Restructuring
      and other
                                    
                                    
                                    35,467
                                    
                                    
                                    
                                    6,728
                                    
                                    
                                    
                                    —Total
      operating expenses
                                    
                                    
                                    2,036,567
                                    
                                    
                                    
                                    926,205
                                    
                                    
                                    
                                    913,139Operating
      income (loss)
                                    
                                    
                                    (1,973,480
                                    )
                                    
                                    
                                    276,514
                                    
                                    
                                    
                                    326,334Interest
      income
                                    
                                    
                                    94,417
                                    
                                    
                                    
                                    133,355
                                    
                                    
                                    
                                    101,088Income
      (loss) in equity investments
                                    
                                    
                                    (39,568
                                    )
                                    
                                    
                                    (9,949
                                    )
                                    
                                    
                                    6,678Interest
      (expense) and other income (expense), net
                                    
                                    
                                    15,597
                                    
                                    
                                    
                                    (1,504
                                    )
                                    
                                    
                                    (3,392
                                    )Total
      other income
                                    
                                    
                                    70,446
                                    
                                    
                                    
                                    121,902
                                    
                                    
                                    
                                    104,374Income
      (loss) before provision for income taxes
                                    
                                    
                                    (1,903,034
                                    )
                                    
                                    
                                    398,416
                                    
                                    
                                    
                                    430,708Provision
      for income taxes
                                    
                                    
                                    153,742
                                    
                                    
                                    
                                    174,848
                                    
                                    
                                    
                                    230,193Income
      (loss) after taxes
                                    
                                    
                                    (2,056,776
                                    )
                                    
                                    
                                    223,568
                                    
                                    
                                    
                                    200,515Minority
      interest
                                    
                                    
                                    —
                                    
                                    
                                    
                                    5,211
                                    
                                    
                                    
                                    1,619Net
      income (loss)
                                    
                                    $
                                    (2,056,776
                                    )
                                    
                                    $
                                    218,357
                                    
                                    
                                    $
                                    198,896Net
      income (loss) per share:Basic
                                    
                                    $
                                    (9.13
                                    )
                                    
                                    $
                                    0.96
                                    
                                    
                                    $
                                    1.00Diluted
                                    
                                    $
                                    (9.13
                                    )
                                    
                                    $
                                    0.93
                                    
                                    
                                    $
                                    0.96Shares
      used in computing net income (loss) per share:Basic
                                    
                                    
                                    225,292
                                    
                                    
                                    
                                    227,744
                                    
                                    
                                    
                                    198,929Diluted
                                    
                                    
                                    225,292
                                    
                                    
                                    
                                    235,857
                                    
                                    
                                    
                                    207,451
 The
accompanying notes are an integral part of these consolidated financial
statements.
  F-5
 Table of Contents
  SANDISK CORPORATION
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
  Common
      Stock Shares
                    
                    
                    Common
      Stock
                        Par
      Value
                    
                    
                    Capital
      in Excess of Par Value
                    
                    
                    Retained
      Earnings (AccumulatedDeficit)
                    
                    
                    Accumulated
      Other Comprehensive
                        Income
      (Loss)
                    
                    
                    Deferred
                        Compensation
                    
                    
                    Total
      Stockholders’
                        Equity(In
      thousands)Balance
      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 investments
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2,315
                    
                    
                    
                    
                    
                    
                    
                    2,315Unrealized
      loss on investments in foundries
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (227
                    )
                    
                    
                    
                    
                    
                    
                    (227
                    )Foreign
      currency translation
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    770
                    
                    
                    
                    
                    
                    
                    
                    770Comprehensive
      income
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    201,754Issuance
      of shares pursuant to equity plans
                    
                    
                    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
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    61,453Share-based
      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
                    
                    
                    
                    —
                    
                    
                    
                    4,768,134Net
      income
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    218,357
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    218,357Unrealized
      income on available-for-sale investments
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    6,770
                    
                    
                    
                    
                    
                    
                    
                    6,770Foreign
      currency translation
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    15,797
                    
                    
                    
                    
                    
                    
                    
                    15,797Unrealized
      income on hedging activities
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    4,415
                    
                    
                    
                    
                    
                    
                    
                    4,415Comprehensive
      income
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    245,339Issuance
      of shares pursuant to equity plans
                    
                    
                    4,724
                    
                    
                    
                    5
                    
                    
                    
                    87,010
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    87,015Issuance
      of stock pursuant to employee stock purchase plan
                    
                    
                    386
                    
                    
                    
                    
                    
                    
                    
                    13,296
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    13,296Income
      tax benefit from stock options exercised
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    18,442
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    18,442Share-based
      compensation expense
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    132,647
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    132,647Cumulative
      effect to prior year related to unrecognized tax benefits upon adoption of
      FIN 48
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (4,756
                    )
                    
                    
                    (993
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (5,749
                    )Share
      repurchases
                    
                    
                    (7,461
                    )
                    
                    
                    (7
                    )
                    
                    
                    (106,785
                    )
                    
                    
                    (192,815
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (299,607
                    )Consolidated
      venture capital contributions
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    100
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    100Balance
      at December 30, 2007
                    
                    
                    224,167
                    
                    
                    
                    224
                    
                    
                    
                    3,796,849
                    
                    
                    
                    1,130,069
                    
                    
                    
                    32,475
                    
                    
                    
                    —
                    
                    
                    
                    4,959,617Net
      loss
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (2,056,776
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (2,056,776
                    )Unrealized
      loss on available-for-sale investments
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (22,650
                    )
                    
                    
                    
                    
                    
                    
                    (22,650
                    )Foreign
      currency translation
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    77,368
                    
                    
                    
                    
                    
                    
                    
                    77,368Unrealized
      income on hedging activities
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    101,784
                    
                    
                    
                    
                    
                    
                    
                    101,784Comprehensive
      loss
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (1,900,274
                    )Issuance
      of shares pursuant to equity plans
                    
                    
                    1,005
                    
                    
                    
                    1
                    
                    
                    
                    5,397
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    5,398Issuance
      of stock pursuant to employee stock purchase plan
                    
                    
                    956
                    
                    
                    
                    1
                    
                    
                    
                    14,302
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    14,303Income
      tax benefit from stock options exercised
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (3,945
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (3,945
                    )Share-based
      compensation expense
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    98,719
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    98,719Change
      in unrecognized tax benefits as a result of settlement and expiration of
      statute of limitations
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    981
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    981Balance
      at December 28, 2008
                    
                    
                    226,128
                    
                    
                    $
                    226
                    
                    
                    $
                    3,912,303
                    
                    
                    $
                    (926,707
                    )
                    
                    $
                    188,977
                    
                    
                    $
                    —
                    
                    
                    $
                    3,174,799
 The
accompanying notes are an integral part of these consolidated financial
statements.
  F-6
 Table of Contents
  SANDISK CORPORATION
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
  Fiscal
      Years EndedDecember
      28,
                          2008
                        
                        
                        December
      30,
                          2007
                        
                        
                        December
      31,
                          2006(In
      thousands)Cash
      flows from operating activities:Net
      income (loss)
                        
                        $
                        (2,056,776
                        )
                        
                        $
                        218,357
                        
                        
                        $
                        198,896Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Deferred
      and other taxes
                        
                        
                        265,633
                        
                        
                        
                        (35,188
                        )
                        
                        
                        (25,636
                        )Depreciation
      and amortization
                        
                        
                        257,389
                        
                        
                        
                        255,743
                        
                        
                        
                        135,585Provision
      for doubtful accounts
                        
                        
                        8,778
                        
                        
                        
                        3,530
                        
                        
                        
                        3,316Share-based
      compensation expense
                        
                        
                        97,799
                        
                        
                        
                        133,010
                        
                        
                        
                        100,641Excess
      tax benefit from share-based compensation
                        
                        
                        (1,938
                        )
                        
                        
                        (18,375
                        )
                        
                        
                        (57,393
                        )Write-off
      of acquired in-process technology
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        225,600Impairment,
      restructuring and other charges
                        
                        
                        1,146,407
                        
                        
                        
                        —
                        
                        
                        
                        —Other
      non-cash charges (income)
                        
                        
                        18,940
                        
                        
                        
                        12,721
                        
                        
                        
                        (2,793
                        )Changes
      in operating assets and liabilities:Accounts
      receivable from product revenues
                        
                        
                        332,113
                        
                        
                        
                        145,657
                        
                        
                        
                        (115,061
                        )Inventory
                        
                        
                        (42,969
                        )
                        
                        
                        (57,586
                        )
                        
                        
                        (23,660
                        )Other
      assets
                        
                        
                        (320,593
                        )
                        
                        
                        (34,789
                        )
                        
                        
                        (12,094
                        )Accounts
      payable trade
                        
                        
                        (48,727
                        )
                        
                        
                        23,772
                        
                        
                        
                        (64,228
                        )Accounts
      payable to related parties
                        
                        
                        215,563
                        
                        
                        
                        20,966
                        
                        
                        
                        24,617Other
      liabilities
                        
                        
                        215,189
                        
                        
                        
                        (14,891
                        )
                        
                        
                        210,273Total
      adjustments
                        
                        
                        2,143,584
                        
                        
                        
                        434,570
                        
                        
                        
                        399,167Net
      cash provided by operating activities
                        
                        
                        86,808
                        
                        
                        
                        652,927
                        
                        
                        
                        598,063Cash
      flows from investing activities:Purchases
      of short and long-term investments
                        
                        
                        (1,986,338
                        )
                        
                        
                        (3,717,897
                        )
                        
                        
                        (2,135,973
                        )Proceeds
      from sales and maturities of short and long-term
    investments
                        
                        
                        2,441,374
                        
                        
                        
                        3,399,583
                        
                        
                        
                        1,497,120Proceeds
      from sales of property and equipment
                        
                        
                        39,680
                        
                        
                        
                        —
                        
                        
                        
                        —Acquisition
      of property and equipment, net
                        
                        
                        (184,033
                        )
                        
                        
                        (258,954
                        )
                        
                        
                        (176,474
                        )Investment
      in Flash Partners Ltd. and Flash Alliance Ltd.
                        
                        
                        (96,705
                        )
                        
                        
                        (125,547
                        )
                        
                        
                        (132,209
                        )Distribution
      from FlashVision Ltd.
                        
                        
                        102,530
                        
                        
                        
                        —
                        
                        
                        
                        —Notes
      receivable proceeds, FlashVision Ltd.
                        
                        
                        —
                        
                        
                        
                        37,512
                        
                        
                        
                        23,538Notes
      receivable issuance, Flash Partners Ltd.
                        
                        
                        (37,418
                        )
                        
                        
                        (525,252
                        )
                        
                        
                        (95,445
                        )Notes
      receivable proceeds (issuance), Tower Semiconductor Ltd.
                        
                        
                        3,125
                        
                        
                        
                        1,125
                        
                        
                        
                        (9,705
                        )Notes
      receivable issuance, Flash Alliance Ltd.
                        
                        
                        (250,070
                        )
                        
                        
                        —
                        
                        
                        
                        —Purchased
      technology and other assets
                        
                        
                        1,786
                        
                        
                        
                        (28,928
                        )
                        
                        
                        —Acquisition
      of MusicGremlin, Inc.
                        
                        
                        (4,604
                        )
                        
                        
                        —
                        
                        
                        
                        —Cash
      acquired in business combinations, net of acquisition
costs
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        51,087Net
      cash provided by (used in) investing activities
                        
                        
                        29,327
                        
                        
                        
                        (1,218,358
                        )
                        
                        
                        (978,061
                        )Cash
      flows from financing activities:Proceeds
      from issuance of convertible senior notes, net of issuance
      costs
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        1,125,500Proceeds
      from employee stock programs
                        
                        
                        19,701
                        
                        
                        
                        100,311
                        
                        
                        
                        96,304Proceeds
      from (repayment of) debt financing
                        
                        
                        (9,785
                        )
                        
                        
                        9,803
                        
                        
                        
                        —Purchase
      of convertible bond hedge
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (386,090
                        )Proceeds
      from issuance of warrants
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        308,672Distribution
      to minority interest
                        
                        
                        —
                        
                        
                        
                        (9,880
                        )
                        
                        
                        (4,491
                        )Excess
      tax benefit from share-based compensation
                        
                        
                        1,938
                        
                        
                        
                        18,375
                        
                        
                        
                        57,393Share
      repurchase programs
                        
                        
                        —
                        
                        
                        
                        (299,607
                        )
                        
                        
                        —Net
      cash provided by (used in) financing activities
                        
                        
                        11,854
                        
                        
                        
                        (180,998
                        )
                        
                        
                        1,197,288Effect
      of changes in foreign currency exchange rates on cash
                        
                        
                        323
                        
                        
                        
                        (522
                        )
                        
                        
                        1,352Net
      increase (decrease) in cash and cash equivalents
                        
                        
                        128,312
                        
                        
                        
                        (746,951
                        )
                        
                        
                        818,642Cash
      and cash equivalents at beginning of the year
                        
                        
                        833,749
                        
                        
                        
                        1,580,700
                        
                        
                        
                        762,058Cash
      and cash equivalents at end of the year
                        
                        $
                        962,061
                        
                        
                        $
                        833,749
                        
                        
                        $
                        1,580,700Supplemental
      disclosure of cash flow information:Cash
      paid for income taxes
                        
                        $
                        (129,141
                        )
                        
                        $
                        (193,300
                        )
                        
                        $
                        (81,100
                        )Cash
      paid for interest expense
                        
                        $
                        (12,386
                        )
                        
                        $
                        (15,168
                        )
                        
                        $
                        (6,965
                        )Non-cash
      financing and investing activities:Issuance
      of shares in a business combination
                        
                        $
                        —
                        
                        
                        $
                        —
                        
                        
                        $
                        1,607,450


The
accompanying notes are an integral part of these consolidated financial
statements.




F-7
 Table of Contents
 Notes
to Consolidated Financial Statements




Note 1: 
Organization and Summary of Significant Accounting
Policies




Organization and
Nature of Operations.SanDisk Corporation (together with its
subsidiaries, the “Company”) was incorporated in Delaware on June 1,
1988.  The Company designs, develops, markets and manufactures flash
storage card products used in a wide variety of consumer electronics
products.  The Company operates in one segment, flash memory storage
products.





Basis of
Presentation.The Company’s fiscal year ends on the Sunday
closest to December 31.  Fiscal years 2008, 2007, and 2006 each
consisted of 52 weeks.





Principles of
Consolidation.The Consolidated Financial Statements include
the accounts of the Company and its majority-owned subsidiaries.  All
intercompany balances and transactions have been eliminated.  Minority
interest represents the minority shareholders’ proportionate share of the net
assets and results of operations of the Company’s majority-owned
subsidiaries.  The Consolidated Financial Statements also include the
results of companies acquired by the Company from the date of each
acquisition.





Use of
Estimates.The preparation
of financial statements in conformity with generally accepted accounting
principles in the United States (“U.S. GAAP”), requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes.  The estimates and judgments affect
the reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent liabilities.  On an ongoing basis, the
Company evaluates its estimates, including those related to customer programs
and incentives, product returns, bad debts, inventories and related reserves,
investments, long-lived assets, income taxes, warranty obligations,
restructuring, contingencies, share-based compensation and
litigation.  The Company bases estimates on historical experience and
on other assumptions that its management believes are reasonable under the
circumstances.  These estimates form the basis for making judgments
about the carrying values of assets and liabilities when those values are not
readily apparent from other sources.  Actual results could differ from
these estimates.





Revenue
Recognition, Sales Returns and Allowances and Sales Incentive
Programs.The Company recognizes revenues when the earnings
process is complete, as evidenced by an agreement with the customer, transfer of
title and acceptance, if applicable, fixed or determinable pricing and
reasonable assurance of realization.  Sales made to distributors and
retailers are generally under agreements allowing price protection and/or a
right of return and, therefore, the revenues and related costs of these
transactions are deferred until the retailers or distributors sell-through the
merchandise to their end customer, or the rights of return
expire.  Estimated sales returns are provided for as a reduction to
product revenue and were not material for any period presented in the
accompanying Consolidated Financial Statements.  The cost of shipping
products to customers is included in Cost of Product Revenues.  The
Company recognizes expenses related to sales commissions in the period in which
they are earned.





Revenue
from patent licensing arrangements is recognized when earned and
estimable.  The timing of revenue recognition is dependent on the
terms of each license agreement and on the timing of sales of licensed
products.  The Company generally recognizes royalty revenue when it is
reported to the Company by its licensees, which is generally one quarter in
arrears from the licensees’ sales.  For licensing fees that are not
determined by the number of licensed units sold, the Company recognizes license
fee revenue on a straight-line basis over the life of the license.








F-8
 Table of Contents
 Notes
to Consolidated Financial Statements





The
Company records estimated reductions of revenue for customer and distributor
incentive programs and offerings, including price protection, promotions, co-op
advertising and other volume-based incentives, and expected
returns.  Additionally, the Company has incentive programs that
require it to estimate, based on historical experience, the number of customers
who will actually redeem the incentive.  All sales incentive programs
are recorded as an offset to product revenues or deferred
revenues.  Marketing development programs are recorded as a reduction
to revenue in compliance with Emerging Issues Task Force No. 01-9
(“EITF 01-9”), 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.Accounts
receivable include amounts owed by geographically dispersed distributors,
retailers and OEM customers.  No collateral is
required.  Provisions are provided for sales returns and credit
losses.





The
Company estimates the collectibility of its accounts receivable based on a
combination of factors.  In circumstances where the Company is aware
of a specific customer’s inability to meet its financial obligations to the
Company (e.g., bankruptcy filings or substantial down-grading of credit
ratings), the Company provides allowance for bad debts against amounts due to
reduce the net recognized receivable to the amount it reasonably believes will
be collected.





Income
Taxes.The Company accounts for income taxes using an asset
and liability approach, which requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
recognized in the Company’s Consolidated Financial Statements, but have not been
reflected in the Company's taxable income.  A valuation allowance has
been established to reduce deferred tax assets to their estimated realizable
value.  Therefore, the Company provides a valuation allowance to the
extent that the Company does not believe it is more likely than not that it will
generate sufficient taxable income in future periods to realize the benefit of
its deferred tax assets.  The Company recognizes interest and
penalties related to unrecognized tax benefits in income tax
expense.





Foreign
Currency.The Company determines the functional currency for
its parent company and each of its subsidiaries by reviewing the currencies in
which their respective operating activities occur.  Transaction gains
and losses arising from activities in other than the applicable functional
currency are calculated using average exchange rates for the applicable period
and reported in Net Income (Loss) as a non-operating item in each
period.  Non-monetary balance sheet items denominated in a currency
other than the applicable functional currency are translated using the exchange
rate in effect on the balance sheet date and any gains and losses are included
in cumulative translation adjustment.  The Company continuously
evaluates its foreign currency exposures and may continue to enter into hedges
or other risk mitigating arrangements in the future.  Aggregate gross
foreign currency transaction gain (loss) prior to corresponding foreign exchange
hedge offset recorded to Net Income (Loss) was $181.3 million,
$15.6 million and ($2.5) million in fiscal years 2008, 2007 and 2006,
respectively.





Cash Equivalents,
Short and Long-Term Investments.Cash equivalents consist of
short-term, highly liquid financial instruments with insignificant interest rate
risk that are readily convertible to cash and have maturities of three months or
less from the date of purchase.  Investments with original maturities
greater than three months and remaining maturities less than one year are
classified as short-term investments.  Investments with remaining
maturities greater than one year as of the balance sheet date are classified as
long-term investments.  Short and long-term fixed income investments
consist of commercial paper, United States (“U.S.”) government and agency
obligations, corporate/municipal notes and bonds, and variable rate demand
notes.  Both short and long-term investments also include investments
in certain equity securities.  The fair market value, based on quoted
market prices, of cash equivalents, and short and long-term investments at
December 28, 2008, approximated their carrying value.  Cost of
securities sold is based on a first-in, first-out method.





In
determining if and when a decline in market value below cost of these
investments is other-than-temporary, the Company evaluates both quantitative and
qualitative information including the market conditions, offering prices, trends
of earnings, price multiples and other key measures.  When such a
decline in value is deemed to be other-than-temporary, the Company recognizes an
impairment loss in the current period operating results to the extent of the
decline.








F-9
 Table of Contents
 Notes
to Consolidated Financial Statements





Property and
Equipment.Property and equipment are carried at cost less
accumulated depreciation, estimated residual value, if any, and
amortization.  Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the assets or the
remaining lease term, whichever is shorter, ranging from two to twenty-five
years.





Variable Interest
Entities.The Company evaluates its equity method investments
to determine whether any investee is a variable interest entity within the
meaning of the Financial Accounting Standards Board (“FASB”), Interpretation No.
46R (“FIN 46R”), Accounting for Variable Interest
Entities.  If the Company concludes that an investee is a
variable interest entity, the Company evaluates its expected gains and losses of
such investee to determine whether the Company is the primary beneficiary of the
investee.  If the Company is the primary beneficiary of a variable
interest entity, the Company consolidates such entity and reflects the minority
interest of other beneficiaries of that entity.  If the Company
concludes that an investee is not a variable interest entity, the Company does
not consolidate the investee.





Equity
Investments.The Company accounts for investments in equity
securities of other entities, including variable interest entities that are not
consolidated, under the cost method of accounting if investments in voting
equity interests of the investee is less than 20%.  The equity method
of accounting is used if the Company’s investment
in voting stock is greater than or equal to 20% but less than a
majority.  In considering the accounting method for investments less
than 20%, the Company also considers other factors such as its ability to
exercise significant influence over operating and financial policies of the
investee.  If certain factors are present, the Company could account
for investments for which it has less than a 20% ownership under the equity
method of accounting.  Investments in public companies with
restrictions of less than one year are classified as available-for-sale and are
adjusted to their fair market value with unrealized gains and losses recorded as
a component of accumulated other comprehensive income.  Investments in
public companies with restrictions greater than one year are carried at
cost.  Investments in public and non-public companies are reviewed on
a quarterly basis to determine if their value has been impaired and adjustments
are recorded as necessary.  Upon disposition of these investments, the
specific identification method is used to determine the cost basis in computing
realized gains or losses.  Declines in value that are judged to be
other-than-temporary are reported in Other Income (Expense) or Cost of Product
Revenues in the accompanying Consolidated Statements of
Operations.  See Note 4, “Balance Sheet Information - Notes Receivable
and Investments in Flash Ventures with Toshiba,” regarding impairment of
equity method investments in fiscal year 2008.





Inventories and
Inventory Valuation.Inventories are stated at the lower of
cost (first-in, first-out) or market.  Market value is based upon an
estimated average selling price reduced by estimated costs of
disposal.  Should actual market conditions differ from the Company’s
estimates, the Company’s future results of operations could be materially
affected.  Reductions in inventory valuation are included in Cost of
Product Revenues in the accompanying Consolidated Statements of
Operations.  The Company’s inventory impairment charges permanently
establish a new cost basis and are not subsequently reversed to income even if
circumstances later suggest that increased carrying amounts are
recoverable.  Rather these amounts are reversed into income only if,
as and when the inventory is sold.





The
Company reduces the carrying value of its inventory to a new basis for estimated
obsolescence or unmarketable inventory by an amount equal to the difference
between the cost of the inventory and the estimated market value based upon
assumptions about future demand and market conditions, including assumptions
about changes in average selling prices.  If actual market conditions
are less favorable than those projected by management, additional reductions in
inventory valuation may be required.





The
Company’s finished goods inventory includes consigned inventory held at customer
locations as well as at third-party fulfillment centers and
subcontractors.








F-10
 Table of Contents
 Notes
to Consolidated Financial Statements





Other Long-Lived
Assets.Intangible
assets with definite useful lives and other long-lived assets are tested for
impairment in accordance with Statement of Financial Accounting Standards No.
144 (“SFAS 144”), Accounting for Impairment of
Disposal of Long-Lived Assets.The Company assesses the
carrying value of long-lived assets, whenever events or changes in circumstances
indicate that the carrying value of these long-lived assets may not be
recoverable.  Factors the Company considers important which could
result in an impairment review include: (1) significant under-performance
relative to the historical or projected future operating results; (2)
significant changes in the manner of use of assets; (3) significant negative
industry or economic trends; and (4) significant changes in the Company’s market
capitalization relative to net book value.  Any changes in key
assumptions about the business or prospects, or changes in market conditions,
could result in an impairment charge and such a charge could have a material
adverse effect on the Company’s consolidated results of
operations.  See Note 5, “Goodwill and Intangible Assets,” regarding
impairment of long-lived assets in fiscal year 2008.





Fair Value of
Financial Instruments.For certain of the Company’s financial
instruments, including accounts receivable, short-term investments and accounts
payable, the carrying amounts approximate fair market value due to their short
maturities.  See Note 3, “Investments and Fair Value Measurements,”
for financial assets and liabilities measured at fair value.  For those
financial instruments where the carrying amounts differ from fair market value,
the following table represents the related cost basis and the estimated fair
values, which are based on quoted market prices (in millions):





As
      of December 28, 2008
              
              
              As
      of December 30, 2007CarryingValue
              
              
              Estimated
      Fair Value
              
              
              CarryingValue
              
              
              Estimated
      Fair Value1%
      Convertible senior notes due 2013
              
              $
              1,150
              
              
              $
              477
              
              
              $
              1,150
              
              
              $
              9131%
      Convertible notes due 2035
              
              
              75
              
              
              
              64
              
              
              
              75
              
              
              
              85





Advertising
Expenses.Marketing co-op development programs, where the
Company receives, or will receive, an identifiable benefit (i.e. goods or
services) in exchange for the amount paid to its customer and the Company can
reasonably estimate the fair value of the benefit it receives for the customer
incentive payment, are classified, when granted, as marketing
expense.  Advertising expenses not meeting this criteria are
classified as a reduction to product revenue.  Any other advertising
expenses not meeting these conditions are expensed as
incurred.  Advertising expenses were $39.9 million,
$35.5 million and $24.8 million in fiscal years 2008, 2007 and 2006,
respectively.





Research and
Development Expenses.Research and development expenditures
are expensed as incurred.





F-11
 Table of Contents
 Notes
to Consolidated Financial Statements




Note 2:  Recent Accounting
Pronouncements




SFAS No.
160.In December 2007, the FASB issued Statement of
Financial Accounting Standards No. 160 (“SFAS 160”), Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No.
51.  SFAS 160 changes the accounting for noncontrolling
(minority) interests in consolidated financial statements, including the
requirements to classify noncontrolling interests as a component of consolidated
stockholders’ equity, to identify earnings attributable to noncontrolling
interests reported as part of consolidated earnings, and to measure gain or loss
on the deconsolidated subsidiary based upon the fair value of the noncontrolling
equity investment.  Additionally, SFAS 160 revises the accounting for
both increases and decreases in a parent’s controlling ownership
interest.  SFAS 160 is effective for fiscal years beginning after
December 15, 2008, with early adoption prohibited.  The Company
believes that the adoption of SFAS 160 will not have a material effect to its
consolidated results of operations and financial position.





SFAS No. 141
(revised).  In December 2007, the FASB issued Statement of
Financial Accounting Standards No. 141 (revised) (“SFAS 141(R)”), Business
Combinations.  SFAS 141(R) changes the accounting for business
combinations by requiring that an acquiring entity measure and recognize
identifiable assets acquired and liabilities assumed at fair value with limited
exceptions on the acquisition date.  The changes include the treatment
of acquisition-related transaction costs, the valuation of any noncontrolling
interest at acquisition date fair value, the recording of acquired contingent
liabilities at acquisition date fair value and the subsequent re-measurement of
such liabilities after the acquisition date, the recognition of capitalized
in-process research and development, the accounting for acquisition-related
restructuring cost accruals subsequent to the acquisition date, and the
recognition of changes in the acquirer’s income tax valuation
allowance.  In addition, any changes to the recognition or measurement
of uncertain tax positions related to pre-acquisition periods will be recorded
through income tax expense, whereas the current accounting treatment requires
any adjustment to be recognized through the purchase price.  SFAS
141(R) is effective for fiscal years beginning after December 15, 2008,
with early adoption prohibited.  The adoption of SFAS 141(R) is
expected to change the Company’s accounting treatment prospectively for all
business combinations consummated after the effective date.





FSP No. APB
14-1.In May 2008, the FASB issued FASB Staff Position (“FSP”)
No. APB 14-1 (“FSP APB 14-1”), Accounting for Convertible Debt
Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash
Settlement).  FSP APB 14-1 requires the issuer to separately
account for the liability and equity components of the convertible debt
instrument that may be settled in cash upon conversion (including partial cash
settlement) in a manner that reflects the issuer’s economic interest
cost.  Further, FSP APB 14-1 requires bifurcation of a component of
the debt, classification of that component to equity, and then accretion of the
resulting discount on the debt to result in the “economic interest cost” being
reflected in the statement of operations.  FSP APB 14-1 is effective
for fiscal years beginning after December 15, 2008, with early application
prohibited, and requires retrospective application to all periods
presented.





The
following tables illustrate the Company’s convertible long-term debt, net income
(loss) and net income (loss) per share on an as reported basis and the estimated
pro forma effect if the Company had applied the provisions of FSP APB 14-1 for
all periods affected (in thousands):





December 28,
                  2008
              
              
              December 30,
                  2007Convertible
      long-term debt, as reported
              
              $
              1,225,000
              
              
              $
              1,225,000Convertible
      long-term debt, pro forma
              
              
              947,926
              
              
              
              897,518








F-12
 Table of Contents
 Notes
to Consolidated Financial Statements





Amortization
of bond discount, as described above, net of tax for the fiscal years ended
December 28, 2008, December 30, 2007 and December 31, 2006,
respectively, is estimated as follows (in thousands, except for per share
amounts):





Fiscal
      Years EndedDecember 28,
                  2008
              
              
              December 30,
                  2007
              
              
              December 31,
                  2006Net
      income (loss), as reported
              
              $
              (2,056,776
              )
              
              $
              218,357
              
              
              $
              198,896Amortization
      of bond discount
              
              
              (50,514
              )
              
              
              (46,985
              )
              
              
              (28,131
              )Tax
      effect of amortization of bond discount
              
              
              18,732
              
              
              
              17,819
              
              
              
              10,362Valuation
      allowance reversal
              
              
              98,615
              
              
              ─
              
              
              ─Pro
      forma net income (loss)
              
              $
              (1,989,943
              )
              
              $
              189,191
              
              
              $
              181,127Basic
      net income (loss) per shareAs
      reported
              
              $
              (9.13
              )
              
              $
              0.96
              
              
              $
              1.00Pro
      forma
              
              $
              (8.83
              )
              
              $
              0.83
              
              
              $
              0.91Diluted
      net income (loss) per shareAs
      reported
              
              $
              (9.13
              )
              
              $
              0.93
              
              
              $
              0.96Pro
      forma
              
              $
              (8.83
              )
              
              $
              0.80
              
              
              $
              0.87





Upon
adoption of FSP APB 14-1, the Company will record certain deferred tax
liabilities which can be offset against deferred tax assets and result in the
reversal of a portion of the valuation allowance.





The
amortization of bond discount required under FSP APB 14-1 is a
non-cash expense and has no impact on the total operating, investing and
financing cash flows in the prior period or future Consolidated Statements of
Cash Flows.  May 2006 was the date of first issuance of
convertible debt by the Company that is subject to the provisions of
FSP APB 14-1.





F-13
 Table of Contents
 Notes
to Consolidated Financial Statements




Note 3:  Investments and Fair Value
Measurements




Effective
December 31, 2007, the Company adopted the fair value measurement and disclosure
provisions of Statement of Financial Accounting Standards No. 157 (“SFAS 157”),
Fair Value
Measurements, which establishes specific criteria for the fair value
measurements of financial and nonfinancial assets and liabilities that are
already subject to fair value measurements under current accounting rules. SFAS
157 also requires expanded disclosures related to fair value
measurements.  In February 2008, the FASB approved FSP Statement of
Financial Accounting Standards No. 157-2 (“FSP SFAS 157-2”), Effective Date of FASB Statement No.
157, which allows companies to elect a one-year delay in applying SFAS
157 to certain fair value measurements, primarily related to nonfinancial
instruments.  The Company elected the delayed adoption date for the
portions of SFAS 157 impacted by FSP SFAS 157-2.  The partial adoption
of SFAS 157 was prospective and did not have a significant effect on the
Company’s Consolidated Financial Statements.  The Company is currently
evaluating the impact of applying the deferred portion of SFAS 157 to the
nonrecurring fair value measurements of its nonfinancial assets and
liabilities.  In accordance with FSP SFAS 157-2, the fair value
measurements for nonfinancial assets and liabilities will be adopted effective
for fiscal years beginning after November 15, 2008.





Concurrently
with the adoption of SFAS 157, the Company adopted Statement of Financial
Accounting Standards No. 159 (“SFAS 159”), Establishing the Fair Value Option
for Financial Assets and Liabilities, which permits entities to elect, at
specified election dates, to measure eligible financial instruments at fair
value.  As of December 28, 2008, the Company did not elect the fair
value option under SFAS 159 for any financial assets and liabilities that were
not previously measured at fair value.





Fair Value
Hierarchy.  SFAS 157 establishes a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair
value.  The hierarchy gives the highest priority to unadjusted quoted
prices in active markets for identical assets or liabilities (Level 1
measurements) and the lowest priority to unobservable inputs (Level 3
measurements).  The three levels of the fair value hierarchy under
SFAS 157 are described below:





Level
      1
                  Valuations
      based on quoted prices in active markets for identical assets or
      liabilities that the Company has the ability to directly
      access.Level
      2
                  Valuations
      based on quoted prices for similar assets or liabilities; valuations for
      interest-bearing securities based on non-daily quoted prices in active
      markets; quoted prices in markets that are not active; or other inputs
      that are observable or can be corroborated by observable data for
      substantially the full term of the assets or
  liabilities.Level
      3
                  Valuations
      based on inputs that are supported by little or no market activity and
      that are significant to the fair value of the assets or
      liabilities.





A
financial instrument’s level within the fair value hierarchy is based on the
lowest level of any input that is significant to the fair value
measurement.





The
Company’s financial assets are measured at fair value on a recurring
basis.  Instruments that are classified within Level 1 of the fair
value hierarchy generally include most money market securities, U.S. Treasury
securities and equity investments.  Instruments that are classified
within Level 2 of the fair value hierarchy generally include U.S. agency
securities, commercial paper, U.S. corporate bonds and municipal
obligations.





F-14
 Table of Contents
 Notes
to Consolidated Financial Statements





Financial
assets and liabilities measured at fair value under SFAS 157 on a recurring
basis as of December 28, 2008 were as follows (in thousands):





Total
              
              
              Quoted
      Prices in Active Markets for Identical Assets
                  (Level
      1)
              
              
              Significant
      Other Observable Inputs
                  (Level
      2)
              
              
              Significant
      Unobservable Inputs
                  (Level
      3)Fixed
      income securities
              
              $
              1,822,466
              
              
              $
              317,081
              
              
              $
              1,505,385
              
              
              $
              —Equity
      investments
              
              
              37,227
              
              
              
              37,227
              
              
              
              —
              
              
              
              —Derivative
      assets
              
              
              105,133
              
              
              
              —
              
              
              
              105,133
              
              
              
              —Other
              
              
              2,889
              
              
              
              —
              
              
              
              2,889
              
              
              
              —Total
      financial assets
              
              $
              1,967,715
              
              
              $
              354,308
              
              
              $
              1,613,407
              
              
              $
              —Derivative
      liabilities
              
              $
              153,523
              
              
              $
              —
              
              
              $
              153,523
              
              
              $
              5,714Total
      financial liabilities
              
              $
              153,523
              
              
              $
              —
              
              
              $
              153,523
              
              
              $
              5,714





Assets
and liabilities measured at fair value under SFAS 157 on a recurring basis as of
December 28, 2008 were presented on the Company’s Consolidated Balance
Sheet as follows (in thousands):








Total
              
              
              Quoted
      Prices in Active Markets for Identical Assets
                  (Level
      1)
              
              
              Significant
      Other Observable Inputs
                  (Level
      2)
              
              
              Significant
      Unobservable Inputs
                  (Level
      3)Cash
      equivalents (1)
              
              $
              317,081
              
              
              $
              317,081
              
              
              $
              —
              
              
              $
              —Short-term
      investments
              
              
              477,296
              
              
              
              2,062
              
              
              
              475,234
              
              
              
              —Long-term
      investments
              
              
              1,097,302
              
              
              
              35,165
              
              
              
              1,062,137
              
              
              
              —Other
      current assets and other non-current assets
              
              
              76,036
              
              
              
              —
              
              
              
              76,036
              
              
              
              —Total
      financial assets
              
              $
              1,967,715
              
              
              $
              354,308
              
              
              $
              1,613,407
              
              
              $
              —Other
      current accrued liabilities
              
              $
              153,523
              
              
              $
              —
              
              
              $
              153,523
              
              
              $
              —Total
      financial liabilities
              
              $
              153,523
              
              
              $
              —
              
              
              $
              153,523
              
              
              $
              —





_________________


(1)
            Excludes
      Cash of $645.0 million included in Cash and Cash Equivalents on the
      Consolidated Balance Sheet as of December 28,
  2008.








F-15
 Table of Contents
 Notes
to Consolidated Financial Statements





Available-for-Sale
Investments.Available-for-sale investments for the fiscal
years ended December 28, 2008 and December 30, 2007 were as follows
(in thousands):





December 28,
      2008
              
              
              December 30,
      2007Book
      Value
              
              
              Gross
                  Unrealized
      Gains
              
              
              Gross
                  Unrealized
      Losses
              
              
              Market
      Value
              
              
              Book
      Value
              
              
              Gross
                  Unrealized
      Gains
              
              
              Gross
                  Unrealized
      Losses
              
              
              Market
      ValueFixed
      income securities:U.S.
      Treasury and agency securities
              
              $
              40,110
              
              
              $
              476
              
              
              $
              —
              
              
              $
              40,586
              
              
              $
              142,667
              
              
              $
              269
              
              
              $
              —
              
              
              $
              142,936U.S.
      Corporate notes and bonds
              
              
              56,916
              
              
              
              267
              
              
              
              (360
              )
              
              
              56,823
              
              
              
              340,458
              
              
              
              11
              
              
              
              —
              
              
              
              340,469Municipal
      notes and bonds
              
              
              1,387,592
              
              
              
              21,714
              
              
              
              (1,330
              )
              
              
              1,407,976
              
              
              
              2,094,585
              
              
              
              12,203
              
              
              
              (109
              )
              
              
              2,106,679Total
      fixed income securities
              
              
              1,484,618
              
              
              
              22,457
              
              
              
              (1,690
              )
              
              
              1,505,385
              
              
              
              2,577,710
              
              
              
              12,483
              
              
              
              (109
              )
              
              
              2,590,084Equity
      investments
              
              
              70,226
              
              
              
              —
              
              
              
              (32,999
              )
              
              
              37,227
              
              
              
              89,678
              
              
              
              6,266
              
              
              
              (10,965
              )
              
              
              84,979Total
      available-for-sale investments
              
              $
              1,554,844
              
              
              $
              22,457
              
              
              $
              (34,689
              )
              
              $
              1,542,612
              
              
              $
              2,667,388
              
              
              $
              18,749
              
              
              $
              (11,074
              )
              
              $
              2,675,063





The
following table summarizes at December 28, 2008, those securities that have
been in an unrealized loss position, the fair value and gross unrealized losses
on the available-for-sale investments aggregated by type of investment
instrument, and the length of time that individual securities have been in a
continuous unrealized loss position.  All unrealized losses on
available-for-sale securities have been in a continuous unrealized loss position
for less than 12 months.  See Note 14, “Related Parties and Strategic
Investments – Tower Semiconductor,” for discussion on the other than temporary
impairment in the Tower equity securities.  Available-for-sale
securities that were in an unrealized gain position have been excluded from the
table (in thousands):





Unrealized
      Loss for Less than 12 MonthsMarket
      Value
              
              
              Gross
                  Unrealized
      LossesU.S.
      corporate and municipal notes and bonds
              
              $
              132,018
              
              
              $
              (1,690
              )Equity
      investments
              
              
              35,165
              
              
              
              (32,999
              )Total
              
              $
              167,183
              
              
              $
              (34,689
              )





The gross
unrealized losses related to U.S. corporate and municipal
notes and bondswere primarily due to changes in interest
rates.  The gross unrealized loss related to publicly traded
equity investments were due to changes in market prices.  The
Company has cash flow hedges designated to mitigate risk from these
equity investments as of December 28, 2008, as discussed in Note 6,
“Derivatives and Hedging Activities.”  Gross unrealized losses on all
available-for-sale fixed income securities at December 28, 2008 are
considered temporary in nature.  Factors considered in determining
whether a loss is temporary include the length of time and extent to which fair
value has been less than the cost basis, the financial condition and near-term
prospects of the investee, and the Company’s intent and ability to hold an
investment for a period of time sufficient to allow for any anticipated recovery
in market value.





Gross
realized gains and losses on sales of available-for-sale securities during the
fiscal year ended December 28, 2008 were immaterial.





Fixed
income securities at December 28, 2008 by contractual maturity are shown
below (in thousands).  Actual maturities may differ from contractual
maturities because issuers of the securities may have the right to prepay
obligations.





Cost
              
              
              Estimated
                  Fair
      ValueDue
      in one year or less
              
              $
              472,023
              
              
              $
              475,234Due
      after one year through five years
              
              
              1,012,595
              
              
              
              1,030,151Total
              
              $
              1,484,618
              
              
              $
              1,505,385








F-16
 Table of Contents
 Notes
to Consolidated Financial Statements




Note
4:  Balance Sheet
Information




Accounts
Receivable from Product Revenues, net.Accounts receivable
from product revenues, net, were as follows (in thousands):




December 28,
                  2008
              
              
              December 30,
                  2007Trade
      accounts receivable
              
              $
              584,262
              
              
              $
              1,027,588Related
      party accounts receivable
              
              
              ─
              
              
              
              4,725Allowance
      for doubtful accounts
              
              
              (13,881
              )
              
              
              (13,790
              )Price
      protection, promotions and other activities
              
              
              (448,289
              )
              
              
              (555,540
              )Total
      accounts receivable from product revenues, net
              
              $
              122,092
              
              
              $
              462,983





Allowance for
Doubtful Accounts.The activity in the allowance for doubtful
accounts was as follows (in thousands):




December 28,
                    2008
                
                
                December 30,
                    2007
                
                
                December 31,
                    2006Balance,
      beginning of period
                
                $
                13,790
                
                
                $
                11,452
                
                
                $
                8,050Additions
      charged to costs and expenses
                
                
                8,778
                
                
                
                3,519
                
                
                
                6,142Deductions
      (write-offs)
                
                
                (8,687
                )
                
                
                (1,181
                )
                
                
                (2,740
                )Balance,
      end of period
                
                $
                13,881
                
                
                $
                13,790
                
                
                $
                11,452









During
the first quarter of fiscal year 2008, the Company recorded an additional
provision for doubtful accounts as well as a reversal of $12.0 million of
product revenues associated with receivable balances related to a customer
having severe financial difficulties.





Inventory.Inventories,
net of reserves, were as follows (in thousands):




December 28,
                  2008
              
              
              December 30,
                  2007Raw
      material
              
              $
              309,436
              
              
              $
              197,077Work-in-process
              
              
              90,544
              
              
              
              94,283Finished
      goods
              
              
              198,271
              
              
              
              263,717Total
      inventory
              
              $
              598,251
              
              
              $
              555,077





Other Current
Assets.Other current assets were as follows (in
thousands):




December 28,
                  2008
              
              
              December 30,
                  2007Royalty
      and other receivables
              
              $
              81,451
              
              
              $
              103,802Prepaid
      expenses
              
              
              20,321
              
              
              
              15,109Tax
      related receivables
              
              
              294,906
              
              
              
              40,354Other
      current assets
              
              
              73,283
              
              
              
              74,687Total
      other current assets
              
              $
              469,961
              
              
              $
              233,952





Property and
Equipment.Property and equipment consisted of the following
(in thousands):




December 28,
                          2008
                    
                    
                    December 30,
                      2007Machinery
      and equipment
                    
                    $
                    659,881
                    
                    
                    $
                    649,075Software
                    
                    
                    113,190
                    
                    
                    
                    68,664Building
                    
                    
                    33,759
                    
                    
                    
                    32,972Capital
      land lease
                    
                    
                    7,885
                    
                    
                    
                    7,272Furniture
      and fixtures
                    
                    
                    6,766
                    
                    
                    
                    6,382Leasehold
      improvements
                    
                    
                    44,311
                    
                    
                    
                    33,419Property
      and equipment, at cost
                    
                    
                    865,792
                    
                    
                    
                    797,784Accumulated
      depreciation and amortization
                    
                    
                    (468,805
                    )
                    
                    
                    (374,889
                    )Property
      and equipment, net
                    
                    $
                    396,987
                    
                    
                    $
                    422,895




Depreciation
expense of property and equipment totaled $175.2 million,
$146.8 million and $102.5 million in fiscal years 2008, 2007 and 2006,
respectively.


F-17
 Table of Contents
 Notes
to Consolidated Financial Statements


Notes Receivable
and Investments in the Flash Ventures with Toshiba.Notes
receivable and investments in the flash ventures with Toshiba Corporation
(“Toshiba”) were as follows (in thousands):




December 28,
                  2008
              
              
              December 30,
                  2007Notes
      receivable, Flash Partners Ltd.
              
              $
              843,380
              
              
              $
              639,834Notes
      receivable, Flash Alliance Ltd.
              
              
              276,518
              
              
              
              —Investment
      in FlashVision Ltd.
              
              
              63,965
              
              
              
              159,146Investment
      in Flash Partners Ltd.
              
              
              202,530
              
              
              
              177,529Investment
      in Flash Alliance Ltd.
              
              
              215,898
              
              
              
              132,396Total
      notes receivable and investments in the flash ventures with
      Toshiba
              
              $
              1,602,291
              
              
              $
              1,108,905





In the
fourth quarter of fiscal year 2007 and the third quarter of fiscal year 2008,
the Company recorded a $10.0 million and $10.4 million impairment
charge, respectively, related to its equity investment in FlashVision due to
FlashVision’s difficulty in selling the remaining excess capital equipment due
to limited demand for 200-millimeter production equipment.  The
FlashVision impairment was recorded in Income (Loss) in Equity Investments as
the impairments relate to the wind-down of the venture.  At December
28, 2008, the Company had an investment in FlashVision of $64.0 million
denominated in Japanese yen, and related unrealized gains of $43.3 million
due to cumulative translation adjustments recorded in Accumulated Other
Comprehensive Income.  See Note 13, “Commitments, Contingencies and
Guarantees – FlashVision,” regarding equity method investments in fiscal year
2008.





In the
fourth quarter of fiscal year 2008, the Company recorded an impairment to the
equity investments in Flash Partners and Flash Alliance of $20.0 million
and $63.0 million, respectively, as the fair value of these investments was
determined to be less than the carrying value.  These impairments were
based upon a comparison of the forecasted discounted cash flows to the carrying
value of each venture.  The analysis considered several factors
including the volatility in foreign currencies resulting in an appreciation in
the carrying value of these Japanese yen denominated assets and a reduced
business outlook primarily due to NAND-industry pricing
conditions.  The impairment analyses and measurement is a process that
requires significant judgment and the use of significant estimates related to
valuation such as discount rates, long term growth rates, foreign currency rates
and the level and timing of future cash flows.  The Flash Partners and
Flash Alliance impairments were recorded in Cost of Product Revenues due to the
operational nature of the ventures.  See Note 13, “Commitments,
Contingencies and Guarantees – Flash Partners and Flash Alliance,” regarding
equity method investments in fiscal year 2008.





Other Current
Accrued Liabilities.Other current
accrued liabilities were as follows (in thousands):




December 28,
                  2008
              
              
              December 30,
                  2007Accrued
      payroll and related expenses
              
              $
              54,516
              
              
              $
              94,220Taxes
      payable
              
              
              7,244
              
              
              
              56,945Accrued
      restructuring
              
              
              22,545
              
              
              
              2,071Research
      and development liability, related party
              
              
              4,000
              
              
              
              8,000Foreign
      currency forward contract payables
              
              
              153,523
              
              
              
              5,714Flash
      Ventures adverse purchase commitments for under utilized capacity (see
      Note 13)
              
              
              121,486
              
              
              ─Other
      accrued liabilities
              
              
              139,129
              
              
              
              119,900Total
      other current accrued liabilities
              
              $
              502,443
              
              
              $
              286,850





Non-current
liabilities.Non-current liabilities were as follows (in
thousands):




December 28,
                  2008
              
              
              December 30,
                  2007Deferred
      tax liability
              
              $
              77,349
              
              
              $
              14,479Income
      taxes payable
              
              
              145,432
              
              
              
              79,608Accrued
      restructuring
              
              
              11,070
              
              
              
              11,891Other
      non-current liabilities
              
              
              30,126
              
              
              
              29,274Total
      non-current liabilities
              
              $
              263,977
              
              
              $
              135,252





F-18
 Table of Contents
 Notes
to Consolidated Financial Statements


Warranties.Liability
for warranty expense is included in Other Current Accrued Liabilities and
Non-current Liabilities in the accompanying Consolidated Balance Sheets and
the activity was as follows (in thousands):






December 28,
                    2008
                
                
                December 30,
                    2007
                
                
                December 31,
                    2006Balance,
      beginning of period
                
                $
                18,662
                
                
                $
                15,338
                
                
                $
                11,257Additions
      and adjustments to cost of product revenues
                
                
                19,774
                
                
                
                8,303
                
                
                
                6,606Usage
                
                
                (1,967
                )
                
                
                (4,979
                )
                
                
                (2,525
                )Balance,
      end of period
                
                $
                36,469
                
                
                $
                18,662
                
                
                $
                15,338




The
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 liability is affected by customer and consumer returns, product
failures, number of units sold, 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, hedging activities, and unrealized gains and
losses on available-for-sale investments, net of taxes, for all periods
presented (in thousands):




December 28,
                  2008
              
              
              December 30,
                  2007Accumulated
      net unrealized gain (loss) on:Available-for-sale
      investments
              
              $
              (18,408
              )
              
              $
              4,242Foreign
      currency translation
              
              
              101,186
              
              
              
              23,818Hedging
      activities
              
              
              106,199
              
              
              
              4,415Total
      accumulated other comprehensive income
              
              $
              188,977
              
              
              $
              32,475





The
amount of income tax expense allocated to unrealized gain (loss) on
available-for-sale investments and hedging actitivies was $4.2 million at
December 28, 2008.  The amount of income tax expense allocated to
unrealized gain (loss) on available-for-sale investments and hedging actitivies
was not material at December 30, 2007 and December 31, 2006,
respectively.
  F-19
 Table of Contents
 Notes
to Consolidated Financial Statements




Note 5:  Goodwill and Intangible
Assets




Goodwill.Goodwill
balance is presented below (in thousands):





Balance
      at December 31, 2006
                
                $
                910,254Goodwill
      adjustment
                
                
                (69,384
                )Balance
      at December 30, 2007
                
                
                840,870Goodwill
      additions, net
                
                
                4,583Goodwill
      impairment
                
                
                (845,453
                )Balance
      at December 28, 2008
                
                $
                —





Goodwill
increased by approximately $4.6 million primarily due to the Company’s
acquisition of MusicGremlin, Inc. (“MusicGremlin”) during the second
quarter of fiscal year 2008.  The goodwill adjustment in fiscal year
2007 was primarily the result of purchase price adjustments related to the
msystems Ltd. (“msystems”) acquisition and to a lesser extent from the Matrix
Semiconductor, Inc. (“Matrix”) acquisition.  See Note 15, “Business
Acquisitions,” regarding these acquisitions in fiscal year
2006.


In
accordance with Statement of Financial Accounting Standards No. 142,
(“SFAS 142”), Goodwill
and Other Intangible Assets, goodwill is not amortized, but instead is
reviewed and tested for impairment at least annually and whenever events or
circumstances occur which indicate that goodwill might be
impaired.  Impairment of goodwill is tested at the Company’s reporting
unit level by comparing the carrying amount, including goodwill, to the fair
value.  In performing the analysis, the Company uses the best
information available, including reasonable and supportable assumptions and
projections.  If the carrying amount of the Company exceeds its
implied fair value, goodwill is considered impaired and a second step is
performed to measure the amount of impairment loss, if any.  The
Company performed its annual impairment test on the first day of the fourth
quarter of fiscal year 2008 and determined that the goodwill was not
impaired.  However, based on a combination of factors, including the
economic environment, current and forecasted operating results, NAND-industry
pricing conditions and a sustained decline in the Company’s market
capitalization, the Company concluded that there were sufficient indicators to
require an interim goodwill impairment analysis during the fourth quarter of
fiscal year 2008 and the Company recognized an impairment charge of
$845.5 million.





Intangible
Assets.Intangible asset
balances are presented below (in thousands):





December 28,
      2008
              
              
              December 30,
      2007Gross
      Carrying Amount
              
              
              Impairment
              
              
              Accumulated
      Amortization
              
              
              Net
      Carrying Amount
              
              
              Gross
      Carrying Amount
              
              
              Accumulated
      Amortization
              
              
              Net
      Carrying AmountCore
      technology
              
              $
              315,301
              
              
              $
              (136,001
              )
              
              $
              (132,407
              )
              
              $
              46,893
              
              
              $
              311,801
              
              
              $
              (78,863
              )
              
              $
              232,938Developed
      product technology
              
              
              12,900
              
              
              
              —
              
              
              
              (6,318
              )
              
              
              6,582
              
              
              
              12,900
              
              
              
              (4,689
              )
              
              
              8,211Trademarks
              
              
              4,000
              
              
              
              —
              
              
              
              (4,000
              )
              
              
              —
              
              
              
              4,000
              
              
              
              (4,000
              )
              
              
              —Backlog
              
              
              5,000
              
              
              
              —
              
              
              
              (5,000
              )
              
              
              —
              
              
              
              5,000
              
              
              
              (5,000
              )
              
              
              —Supply
      agreement
              
              
              2,000
              
              
              
              —
              
              
              
              (2,000
              )
              
              
              —
              
              
              
              2,000
              
              
              
              (2,000
              )
              
              
              —Customer
      relationships
              
              
              80,100
              
              
              
              (39,784
              )
              
              
              (40,316
              )
              
              
              —
              
              
              
              80,100
              
              
              
              (23,907
              )
              
              
              56,193Acquisition-related
      intangible assets
              
              
              419,301
              
              
              
              (175,785
              )
              
              
              (190,041
              )
              
              
              53,475
              
              
              
              415,801
              
              
              
              (118,459
              )
              
              
              297,342Technology
      licenses and patents
              
              
              23,814
              
              
              
              —
              
              
              
              (14,107
              )
              
              
              9,707
              
              
              
              39,243
              
              
              
              (14,562
              )
              
              
              24,681Total
              
              $
              443,115
              
              
              $
              (175,785
              )
              
              $
              (204,148
              )
              
              $
              63,182
              
              
              $
              455,044
              
              
              $
              (133,021
              )
              
              $
              322,023





Intangible
assets increased by $3.5 million in the fiscal year ended December 28,
2008 due to the Company’s acquisition of MusicGremlin during the second quarter
of fiscal year 2008 and by $3.0 million due to technology licenses and
patents purchased from third parties.  Amortization expense of
intangible assets totaled $78.8 million, $98.9 million and
$29.8 million in fiscal years 2008, 2007 and 2006,
respectively.  In accordance with SFAS 144, circumstances
indicated that the carrying values of certain acquisition-related intangible
assets were not recoverable and the Company recorded a $175.8 million
impairment on acquisition-related intangible assets in the fourth quarter of
fiscal year 2008.  This impairment was based upon forecasted
discounted cash flows which considered factors including a reduced business
outlook primarily due to NAND-industry pricing conditions.








F-20
 Table of Contents
 Notes
to Consolidated Financial Statements





The
annual expected amortization expense of intangible assets as of
December 28, 2008 is presented below:





Estimated
      Amortization ExpensesFiscal
      periods
                
                Acquisition-related
      Intangible Assets
                
                
                Technology
      Licenses and Patents(In
      thousands)2009
                
                $
                13,695
                
                
                $
                4,5332010
                
                
                13,695
                
                
                
                3,1002011
                
                
                13,034
                
                
                
                1,2482012
                
                
                12,528
                
                
                
                6002013
                
                
                523
                
                
                
                226Total
                
                $
                53,475
                
                
                $
                9,707






Note 6:  Derivatives and Hedging
Activities


The
Company uses derivative instruments primarily to manage exposures to foreign
currency and equity security price risks.  The Company’s primary
objective in holding derivatives is to reduce the volatility of earnings and
cash flows associated with changes in foreign currency and equity security
prices.  The program is not designated for trading or speculative
purposes.  The Company’s derivatives expose the Company to credit risk
to the extent that the counterparties may be unable to meet the terms of the
agreement.  The Company seeks to mitigate such risk by limiting its
counterparties to major financial institutions and by spreading the risk across
several major financial institutions.  In addition, the potential risk
of loss with any one counterparty resulting from this type of credit risk is
monitored on an ongoing basis.





In
accordance with Statement of Financial Accounting Standards No. 133 (“SFAS
133”), Accounting for
Derivative Instruments and Hedging Activities, the Company recognizes
derivative instruments as either assets or liabilities on the balance sheet at
fair value.  Changes in fair value (i.e. gains or losses) of the
derivatives are recorded as cost of product revenues or other income (expense),
or as accumulated other comprehensive income (“OCI”).





In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161 (“SFAS
161”), Disclosures about
Derivative Instruments and Hedging Activities.  SFAS 161 amends
and expands the disclosure requirements of SFAS 133, and requires qualitative
disclosures about objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of and gains and losses on derivative
instruments, and disclosures about credit-risk-related contingent features in
derivative agreements.  The Company adopted the reporting requirements
per SFAS 161 during the second quarter of fiscal year 2008.





Cash Flow
Hedges.The Company uses a combination of forward contracts
and options designated as cash flow hedges to hedge a portion of future
forecasted purchases in Japanese yen.  The gain or loss on the
effective portion of a cash flow hedge is initially reported as a component of
accumulated OCI and subsequently reclassified into cost of product revenues in
the same period or periods in which the cost of product revenues is recognized,
or reclassified into other income (expense) if the hedged transaction becomes
probable of not occurring.  Any gain or loss after a hedge is
de-designated because it is no longer probable of occurring or related to an
ineffective portion of a hedge, as well as any amount excluded from the
Company’s hedge effectiveness, is recognized as other income (expense)
immediately.  The net gains or losses relating to ineffectiveness were
not material in the fiscal year ended December 28, 2008.  As of
December 28, 2008, the Company had forward contracts and options in place that
hedged future purchases of approximately 31.7 billion Japanese yen, or
approximately $352 million, based upon the exchange rate as of December 28,
2008.  The forward and option contracts cover future Japanese yen
purchases expected to occur over the next twelve months.





The
Company has an outstanding cash flow hedge designated to mitigate equity risk
associated with certain available-for-sale investments in equity
securities.  The gain or loss on the cash flow hedge is reported as a
component of accumulated OCI and will be reclassified into other income
(expense) in the same period that the equity securities are sold.  The
securities had a fair value of $35.2 million and $60.4 million as of
December 28, 2008 and December 30, 2007, respectively.






F-21
 Table of Contents


Other
Derivatives.Other derivatives not designated as hedging
instruments under SFAS 133 consists primarily of forward contracts to minimize
the risk associated with the foreign exchange effects of revaluing monetary
assets and liabilities.  Monetary assets and liabilities denominated
in foreign currencies and the associated outstanding forward contracts are
marked-to-market at December 28, 2008 with realized and unrealized gains and
losses included in other income (expense).  As of December 28, 2008,
the Company had foreign currency forward contracts in place hedging exposures in
European euros,  Israeli New shekels, Japanese yen and Taiwanese
dollars.  Foreign currency forward contracts were outstanding to buy
and sell U.S. dollar equivalent of approximately $2.01 billion and
($2.58) billion in foreign currencies, respectively, based upon the
exchange rates at December 28, 2008.





For the
fiscal year ended December 28, 2008, non-designated  foreign currency
forward contracts resulted in a loss of $147.6 million including
forward-point income.  For the fiscal year ended December 28, 2008,
the revaluation of the foreign currency exposures hedged by these forward
contracts resulted in a gain of $180.5 million.  All of the above
noted gains and losses are included in the Interest Expense and Other Income
(Expense), net in the Company's Consolidated Statements of
Operations.


The
amounts in the tables below include fair value adjustments related to the
Company’s own credit risk and counterparty credit risk.





Fair Value of
Derivative Contracts.Fair value of derivative contracts under
SFAS 133 were as follows (in thousands):





Derivative
      Assets Reported
                  in
      Other Current Assets
              
              
              Long-term
      Investments
              
              
              Derivative
      Liabilities Reported in Other Current Accrued
      LiabilitiesDecember 28,
                  2008
              
              
              December 30,
                  2007
              
              
              December 28,
                  2008
              
              
              December 30,
                  2007
              
              
              December 28,
                  2008
              
              
              December 30,
                  2007Foreign
      exchange contracts designated as cash flow hedges
              
              $
              51,576
              
              
              $
              —
              
              
              $
              —
              
              
              $
              —
              
              
              $
              —
              
              
              $
              —Equity
      market risk contract designated as cash flow hedge
              
              
              —
              
              
              
              —
              
              
              
              31,987
              
              
              
              4,415
              
              
              
              —
              
              
              
              —Total
      derivatives designated as hedging instruments
              
              
              51,576
              
              
              
              —
              
              
              
              31,987
              
              
              
              4,415
              
              
              
              —
              
              
              
              —Foreign
      exchange contracts not designated
              
              
              21,570
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              153,523
              
              
              
              —Total
      derivatives
              
              $
              73,146
              
              
              $
              —
              
              
              $
              31,987
              
              
              $
              4,415
              
              
              $
              153,523
              
              
              $
              —





Effect of
Designated Derivative Contracts on Accumulated Other Comprehensive
Income.The following table represents only the balance of
designated derivative contracts under SFAS 133 as of December 30, 2007 and
December 28, 2008, and the impact of designated derivative contracts on OCI for
the fiscal year ended December 28, 2008 (in thousands):





December 30,
                  2007
              
              
              Amount
      of gain (loss) recognized in OCI (effective portion)
              
              
              Amount
      of gain (loss) reclassified from OCI to income (loss) (effective
      portion)
              
              
              December 28,
                  2008Foreign
      exchange contracts designated as cash flow hedges
              
              $
              —
              
              
              $
              60,511
              
              
              $
              (13,701
              )
              
              $
              74,212Equity
      market risk contract designated as cash flow hedge
              
              
              4,415
              
              
              
              27,572
              
              
              
              —
              
              
              
              31,987





Foreign
exchange contracts designated as cash flow hedges relate primarily to wafer
purchases and the associated gains and losses are expected to be recorded in
Cost of Product Revenues when reclassed out of accumulated OCI.  Gain
and losses from the equity market risk contract are expected to be recorded in
Other Income (Expense) when reclassed out of accumulated OCI.





The
Company expects to realize the accumulated OCI balance related to foreign
exchange contracts within the next twelve months and realize the accumulated OCI
balance related to the equity market risk contract in fiscal year
2011.







F-22
 Table of Contents
 Notes
to Consolidated Financial Statements




Effect of
Designated Derivative Contracts on the Consolidated Statements of Operations.The effect of designated derivative contracts under SFAS 133 on results
of operations recognized in Cost of Product Revenues was as follows (in
thousands):





Fiscal
      Years EndedDecember 28,
                  2008
              
              
              December 30,
                  2007
              
              
              December 31,
                  2006Foreign
      exchange contracts designated as cash flow hedges
              
              $
              (9,696
              )
              
              $
              —
              
              
              $
              —Equity
      market risk contract designated as cash flow hedge
              
              
              —
              
              
              
              —
              
              
              
              —





Effect of
Non-Designated Derivative Contracts on the Consolidated Statements of
Operations.The effect of non-designated derivative contracts
on results of operations recognized in Other Income (Expense) was as follows (in
thousands):





Fiscal
      Years EndedDecember 28,
                  2008
              
              
              December 30,
                  2007
              
              
              December 31,
                  2006Gain
      (loss) on foreign exchange contracts
              
              $
              (137,927
              )
              
              $
              (8,253
              )
              
              $
              5,831





F-23
 Table of Contents
 Notes
to Consolidated Financial Statements




Note 7:  Financing
Arrangements


The
following table reflects the carrying value of the Company’s long-term
borrowings as of December 28, 2008 and
December 30, 2007:





December 30,
                  2008
              
              
              December 30,
                  2007(In millions)1%
      Convertible Senior Notes due 2013
              
              $
              1,150
              
              
              $
              1,1501%
      Convertible Notes due 2035
              
              
              75
              
              
              
              75





1% Convertible
Senior Notes Due 2013.In May 2006, the Company issued and
sold $1.15 billion in aggregate principal amount of 1% Convertible Senior
Notes due 2013 (the “1% Notes due 2013”) at par.  The 1% Notes due
2013 may be converted, under certain circumstances described below, based on an
initial conversion rate of 12.1426 shares of common stock per $1,000 principal
amount of notes (which represents an initial conversion price of approximately
$82.36 per share).  The net proceeds to the Company from the offering
of the 1% Notes due 2013 were $1.13 billion.





The 1%
Notes due 2013 may be converted prior to the close of business on the scheduled
trading day immediately preceding February 15, 2013, in multiples of
$1,000 principal amount at the option of the holder under any of the following
circumstances: 1) during the five business-day period after any five
consecutive trading-day period (the “measurement period”) in which the trading
price per note for each day of such measurement period was less than 98% of the
product of the last reported sale price of the Company’s common stock and the
conversion rate on each such day; 2) during any calendar quarter after the
calendar quarter ending June 30, 2006, if the last reported sale price
of the Company’s common stock for 20 or more trading days in a period of
30 consecutive trading days ending on the last trading day of the
immediately preceding calendar quarter exceeds 120% of the applicable conversion
price in effect on the last trading day of the immediately preceding calendar
quarter; or 3) upon the occurrence of specified corporate
transactions.  On and after February 15, 2013 until the
close of business on the scheduled trading day immediately preceding the
maturity date of May 15, 2013, holders may convert their notes at any
time, regardless of the foregoing circumstances.





Upon
conversion, a holder will receive the conversion value of the 1% Notes due 2013
to be converted equal to the conversion rate multiplied by the volume weighted
average price of the Company’s common stock during a specified period following
the conversion date.  The conversion value of each 1% Notes due 2013
will be paid in: 1) cash equal to the lesser of the principal amount of the
note or the conversion value, as defined, and 2) to the extent the
conversion value exceeds the principal amount of the note, a combination of
common stock and cash.  The conversion price will be subject to
adjustment in some events but will not be adjusted for accrued
interest.  In addition, upon a fundamental change at any time, as
defined, the holders may require the Company to repurchase for cash all or a
portion of their notes upon a “designated event” at a price equal to 100% of the
principal amount of the notes being repurchased plus accrued and unpaid
interest, if any.





The
Company pays cash interest at an annual rate of 1%, payable semi-annually
on May 15 and November 15 of each year, beginning
November 15, 2006.  Debt issuance costs of approximately
$24.5 million are being amortized to interest expense over the term of the
1% Notes due 2013.





Concurrently
with the issuance of the 1% Notes due 2013, the Company purchased a convertible
bond hedge and sold warrants.  The separate convertible bond hedge and
warrant transactions are structured to reduce the potential future economic
dilution associated with the conversion of the 1% Notes due 2013 and to increase
the initial conversion price to $95.03 per share.  Each of these
components are discussed separately below:




F-24
 Table of Contents
 Notes
to Consolidated Financial Statements





·
            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
      remains 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
      accordance with Emerging Issues Task Force No. 00-19,
      (“EITF 00-19”), Accounting for Derivative
      Financial Statements Indexed to, and Potentially Settled in, a Company’s
      Own Stock.  The Company initially recorded a tax benefit
      of approximately $145.6 million in stockholders’ equity from the
      deferred tax asset related to the convertible bond hedge at inception of
      the transaction.




·
            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 4.5 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 28, 2008, 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.In November 2006, the Company assumed the
aggregate principal amount of $75.0 million 1% Convertible Senior Notes due
March 2035 (the “1% Notes due 2035”) from msystems.  The Company
is obligated to pay interest on the 1% Notes due 2035 semi-annually on
March 15 and September 15 commencing March 15, 2007.





The 1%
Notes due 2035 are convertible, at the option of the holders at any time before
the maturity date, into shares of the Company at a conversion rate of 26.8302
shares per one thousand dollars principal amount of the 1% Notes due 2035,
representing a conversion price of approximately $37.27 per share.





Beginning
on March 15, 2008 and until March 14, 2010, the Company may redeem for
cash the notes, in whole or in part at any time at a redemption price equal to
100% of the principal amount of the notes to be redeemed, plus accrued but
unpaid interest, if any, to but excluding the redemption date, if the last
reported sales price of the Company ordinary shares has exceeded 130% of the
conversion price for at least 20 trading days in any consecutive 30-day trading
period ending on the trading day prior to the date of mailing of the notice of
redemption.





At any
time on or after March 15, 2010, the Company may redeem the notes in whole
or in part at a redemption price equal to 100% of the principal amount of the
notes to be redeemed, plus accrued and unpaid interest, if any, to but excluding
the optional redemption date.





Holders
of the notes have the right to require the Company to purchase all or a portion
of their notes on March 15, 2010, March 15, 2015, March 15,
2020, March 15, 2025 and March 15, 2030.  The purchase price
payable will be equal to 100% of the principal amount of the notes to be
purchased, plus accrued and unpaid interest, if any, to but excluding the
purchase date.





In
accordance with Accounting Principle Board Opinion No. 14, (“APBO 14”),
Accounting for Convertible
Debt and Debt Issued with Stock Purchase Warrants, the Company determined
the existence of a substantial premium over par value for the 1% Notes due 2035
based upon quoted market prices at the msystems acquisition date and recorded
the notes at par value with the resulting excess of fair value over par (the
substantial premium) recorded in Capital in Excess of Par Value in Stockholders’
Equity in the amount of $26.4 million.





F-25
 Table of Contents
 Notes
to Consolidated Financial Statements




Note 8:  Concentrations of Risk and Segment
Information


Geographic
Information and Major Customers.The Company markets and sells
flash memory products in the U.S. and in foreign countries through its sales
personnel, dealers, distributors, retailers and subsidiaries.  The
Company’s Chief Operating Decision Maker, the President and Chief Operating
Officer, evaluates performance of the Company and makes decisions regarding
allocation of resources based on total Company results.  Since the
Company operates in one segment, all financial segment information can be found
in the accompanying Consolidated Financial Statements.





Other
than sales in the U.S., Japan, Europe, Middle East and Africa (“EMEA”), and Asia
Pacific (“APAC”), international sales were not material individually in any
other international locality.  Intercompany sales between geographic
areas have been eliminated.


Information
regarding geographic areas for fiscal years 2008, 2007 and 2006 are as follows
(in thousands):





Fiscal
      Years EndedDecember 28,
                  2008
              
              
              December 30,
                  2007
              
              
              December 31,
                  2006Revenues:United
      States
              
              $
              1,047,045
              
              
              $
              1,227,303
              
              
              $
              1,272,927Asia-Pacific
              
              
              1,265,280
              
              
              
              1,342,489
              
              
              
              929,638Europe,
      Middle East and Africa
              
              
              752,848
              
              
              
              890,340
              
              
              
              728,355Japan
              
              
              215,420
              
              
              
              301,970
              
              
              
              231,835Other
      foreign countries
              
              
              70,759
              
              
              
              134,264
              
              
              
              94,770Total
              
              $
              3,351,352
              
              
              $
              3,896,366
              
              
              $
              3,257,525







As
      ofDecember 28,
                    2008
                
                
                December 30,
                    2007Long-Lived
      Assets:United
      States
                
                $
                205,022
                
                
                $
                227,630Japan
                
                
                482,980
                
                
                
                507,794China
                
                
                146,666
                
                
                
                116,936Israel
                
                
                36,519
                
                
                
                41,217Other
      foreign countries
                
                
                8,193
                
                
                
                3,981Total
                
                $
                879,380
                
                
                $
                897,558






Revenues
are attributed to countries based on the geographic location of the
customers.  Long-lived assets are attributed to the geographic
location in which they are located.  The Company includes in
long-lived assets property and equipment, long-term investment in FlashVision,
Flash Partners and Flash Alliance, and equity investments and attributes
those investments to the location of the investee’s primary
operations.  Amounts of long-lived assets related to Israel and Japan
for the fiscal year ended December 30, 2007 have been revised to properly
reflect certain reclassifications.  The reclassifications did not have
any effect on the total long-lived assets for the fiscal year ended December 30,
2007.




Customer and
Supplier Concentrations.A limited number of customers or
licensees have accounted for a substantial portion of the Company’s
revenues.  Revenues from the Company’s top 10 customers or licensees
accounted for approximately 48%, 46% and 52% of the Company’s revenues for the
fiscal years ended December 28, 2008, December 30, 2007 and
December 31, 2006, respectively.  In fiscal year 2008,
Samsung Electronics Co., Ltd (“Samsung”) accounted for 13% of the Company’s
total revenues through a combination of license and royalty and product
revenues.  All customers were less than 10% of the Company’s total
revenues in fiscal years 2007 and 2006.




F-26
 Table of Contents
 Notes
to Consolidated Financial Statements


All of
the Company’s flash memory card products require silicon wafers for the memory
components and the controller components.  The Company’s memory wafers
or components are currently supplied almost entirely from Flash Partners Ltd.
and Flash Alliance Ltd. (collectively “Flash Ventures”).  The
Company’s controller wafers are primarily manufactured by Semiconductor
Manufacturing International Corporation, Taiwan Semiconductor Manufacturing
Company, Ltd., and United Microelectronics Corporation (“UMC”).  The
failure of any of these sources to deliver silicon wafers could have a material
adverse effect on the Company’s business, financial condition and results of
operations.  Moreover, Toshiba’s employees that produce Flash
Ventures’ products are covered by collective bargaining agreements and any
strike or other job action by those employees could interrupt the Company’s
wafer supply from Toshiba’s Yokkaichi, Japan operations.


In
addition, key components are purchased from single source vendors for which
alternative sources are currently not available.  Shortages could
occur in these essential materials due to an interruption of supply or increased
demand in the industry.  If the Company were unable to procure certain
of such materials, it would be required to reduce its manufacturing operations,
which could have a material adverse effect upon its results of
operations.  The Company also relies on third-party subcontractors to
assemble and test a portion of its products.  The Company has no
long-term contracts with these subcontractors and cannot directly control
product delivery schedules or manufacturing processes.  This could
lead to product shortages or quality assurance problems that could increase the
manufacturing costs of its products and have material adverse effects on the
Company’s operating results.





Concentration of
Credit Risk.The Company’s concentration of credit risk
consists principally of cash, cash equivalents, short and long-term investments
and trade receivables.  The Company’s investment policy restricts
investments to high-credit quality investments and limits the amounts invested
with any one issuer.  The Company sells to original equipment
manufacturers, retailers and distributors in the U.S., Japan, EMEA and
APAC, performs ongoing credit evaluations of its customers’ financial condition,
and generally requires no collateral.





Off-Balance Sheet
Risk.The Company has off-balance sheet financial
obligations.  See Note 13, “Commitments, Contingencies and
Guarantees.”





F-27
 Table of Contents
 Notes
to Consolidated Financial Statements




Note 9:  Compensation and
Benefits




Share-Based
Benefit Plans





2005 Incentive
Plan.On May 27,
2005, the stockholders approved the 2005 Stock Incentive Plan, which was amended
in May 2006 and renamed the 2005 Incentive Plan (“2005 Plan”).  Shares
of the Company’s common stock may be issued under the 2005 Plan pursuant to
three separate equity incentive programs: (i) the discretionary grant
program under which stock options and stock appreciation rights may be granted
to officers and other employees, non-employee board members and independent
consultants, (ii) the stock issuance program under which shares may be awarded
to such individuals through restricted stock or restricted stock unit awards or
as a stock bonus for services rendered to the Company, and (iii) an automatic
grant program for the non-employee board members pursuant to which such
individuals will receive option grants or other stock awards at designated
intervals over their period of board service.  The 2005 Plan also
includes a performance-based cash bonus awards program for employees classified
under Section 16.  Grants and awards under the discretionary grant
program generally vest as follows: 25% of the shares will vest on the first
anniversary of the vesting commencement date and the remaining 75% will vest
proportionately each quarter over the next 36 months of continued
service.  Awards under the stock issuance program generally vest in
equal annual installments over a 4-year period.  Grants under the
automatic grant program will vest in accordance with the specific vesting
provisions set forth in that program.  A total of 22,222,931 shares of
the Company’s common stock have been reserved for issuance under this
plan.  The share reserve may increase by up to 10,000,000 shares of
common stock to the extent that outstanding options under the 1995 Stock Option
Plan and the 1995 Non-Employee Directors Stock Option Plan expire or terminate
unexercised, of which as of December 28, 2008, 1,522,931 shares of common
stock has been added to the 2005 Plan reserve.  All options granted
under the 2005 Plan were granted with an exercise price equal to the fair market
value of the common stock on the date of grant and will expire seven years from
the date of grant.





1995 Stock Option
Plan and 1995 Non-Employee Directors Stock Option Plan.Both
of these plans terminated on May 27, 2005, and no further option
grants were made under the plans after that date.  However, options
that were outstanding under these plans on May 27, 2005 will continue to be
governed by their existing terms and may be exercised for shares of the
Company’s common stock at any time prior to the expiration of the ten-year
option term or any earlier termination of those options in connection with the
optionee’s cessation of service with the Company.  Grants and awards
under these plans generally vest as follows: 25% of the shares will vest on the
first anniversary of the vesting commencement date and the remaining 75% will
vest proportionately each quarter over the next 36 months of continued
service.





2005 Employee
Stock Purchase Plan.The 2005 Employee Stock Purchase Plan
(“ESPP”), was approved by the stockholders on May 27, 2005.  The ESPP
plan consists of two components: a component for employees residing in the U.S.
and an international component for employees who are non-U.S.
residents.  The ESPP plan allows eligible employees to purchase shares
of the Company’s common stock at the end of each six-month offering period at a
purchase price equal to 85% of the lower of the fair market value per share on
the start date of the offering period or the fair market value per share on the
purchase date.  The ESPP plan had an original authorization of
5,000,000 shares to be issued, of which 3,392,848 shares were available to be
issued as of December 28 2008.  In the fiscal years ended
December 28, 2008, December 30, 2007 and December 31, 2006,
a total of 956,187, 385,989 and 264,976 shares of common stock, respectively,
have been issued under this plan.





msystems Ltd.
1996 Section 102 Stock Option/Stock Purchase Plan and 2003 Stock Option and
Restricted Stock IncentivePlan.The
msystems Ltd. 1996 Section 102 Stock Option/Stock Purchase Plan and 2003 Stock
Option and Restricted Stock Incentive Plan acquired through the Company’s
acquisition of msystems Ltd. (“msystems”), were terminated on
November 19, 2006, and no further grants were made under these plans
after that date.  However, award grants that were outstanding under
these plans on November 19, 2006 will continue to be governed by their
existing terms and may be exercised for shares of the Company’s common stock at
any time prior to the expiration of the ten-year option term or any earlier
termination of those options in connection with the optionee’s cessation of
service with the Company.  Awards granted under these plans generally
vest as follows:  50% of the shares will vest on the second
anniversary of the vesting commencement date and the remaining 50% will vest
proportionately each quarter over the next 24 months of continued
service.




F-28
 Table of Contents
 Notes
to Consolidated Financial Statements




Matrix
Semiconductor, Inc. 2005 Stock Incentive Plan, 1999 Stock Plan and 1998
Long-term Incentive Plan.The Matrix Semiconductor, Inc. 2005
Stock Incentive Plan, 1999 Stock Plan and the Rhombus, Inc. 1998 Long-term
Incentive Plan (“Matrix Stock Plans”), acquired through SanDisk’s acquisition of
Matrix Semiconductor, Inc. (“Matrix”), were terminated on
January 13, 2006, and no further option grants were made under these
plans after that date.  However, award grants that were outstanding
under these plans on January 13, 2006 will continue to be governed by
their existing terms and may be exercised for shares of the Company’s common
stock at any time prior to the expiration of the ten-year option term or any
earlier termination of those options in connection with the optionee’s cessation
of service with the Company.  Awards granted under these plans
generally vest as follows: 1/48 of the shares will vest proportionately each
month over the next 48 months of continued service or 1/60 of the shares will
vest proportionately each month over the next 60 months of continued
service.





Adoption
of SFAS 123(R)





Effective
January 2, 2006, the Company adopted the fair value recognition
provisions of Statement of Financial Accounting Standards No. 123(R)
(“SFAS 123(R)”), Share-Based Payment, using
the modified-prospective transition method, and therefore, has not restated its
financial statements for prior periods.  For awards expected to vest,
compensation cost includes the following: (a) compensation cost, based on
the grant-date estimated fair value and expense attribution method under
Statement of Financial Accounting Standards No. 123 (“SFAS 123”), Accounting for Stock-Based
Compensation, related to any share-based awards granted through, but not
yet vested as of January 1, 2006, and (b) compensation cost for
any share-based awards granted on or subsequent to January 2, 2006,
based on the grant-date fair value estimated in accordance with the provisions
of SFAS 123(R).  The Company recognizes compensation expense for
the fair values of these awards, which have graded vesting, on a straight-line
basis over the requisite service period of each of these awards, net of
estimated forfeitures.  Prior to the implementation of SFAS 123(R),
the Company accounted for stock awards and ESPP shares under the provisions of
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees.





The
Company estimates the fair value of stock options granted using the
Black-Scholes-Merton option-pricing formula and a single-option award
approach.  The Company’s expected term represents the period that the
Company’s share-based awards are expected to be outstanding and was determined
based on historical experience regarding similar awards, giving consideration to
the contractual terms of the share-based awards.  The Company’s
expected volatility is based on the implied volatility of its traded options in
accordance with the guidance provided by the United States Securities and
Exchange Commission’s Staff Accounting Bulletin No. 107 to place exclusive
reliance on implied volatilities to estimate the Company’s stock volatility over
the expected term of its awards.  The Company has historically not
paid dividends and has no foreseeable plans to issue dividends.  The
risk-free interest rate is based on the yield from U.S. Treasury zero-coupon
bonds with an equivalent term.


F-29
 Table of Contents
 Notes
to Consolidated Financial Statements








Valuation
Assumptions.  The fair value of the Company’s stock options
granted to employees, officers and non-employee board members and Employee Stock
Purchase Plans (“ESPP”) shares granted to employees for the years ended December
28, 2008, December 30, 2007 and December 31, 2006 was
estimated using the following weighted average assumptions:





December
      28,
                              2008
                            
                            December
      30,
                              2007
                            
                            December
      31,
                              2006Option
      Plan SharesDividend
      yield
                            None
                            
                            None
                            
                            NoneExpected
      volatility
                            0.52
                            
                            0.44
                            
                            0.52Risk-free
      interest rate
                            2.50%
                            
                            4.44%
                            
                            4.63%Expected
      lives
                            3.5
      years
                            
                            3.4
      years
                            
                            3.7
      yearsEstimated
      annual forfeiture rate
                            8.31%
                            
                            7.59%
                            
                            7.74%Weighted
      average fair value at grant date
                            $8.40
                            
                            $15.84
                            
                            $25.44Employee
      Stock Purchase Plan SharesDividend
      yield
                            None
                            
                            None
                            
                            NoneExpected
      volatility
                            0.60
                            
                            0.43
                            
                            0.52Risk-free
      interest rate
                            1.97%
                            
                            5.08%
                            
                            4.96%Expected
      lives
                            1⁄2
      year
                            
                            1⁄2
      year
                            
                            1⁄2
      yearWeighted
      average fair value at exercise date
                            $6.00
                            
                            $12.75
                            
                            $16.73




Stock Options and
SARs.A summary of stock options and stock appreciation rights
(“SARs”) activity under all of the Company’s share-based compensation plans as
of December 28, 2008 and changes during the fiscal year ended
December 28, 2008 is presented below:





Shares
              
              
              Weighted
      Average Exercise Price
              
              
              Weighted
      Average Remaining Contractual Term (Years)
              
              
              Aggregate
      Intrinsic Value(In
      thousands, except exercise price and contractual term)Options
      outstanding at January 1, 2006
              
              
              20,316
              
              
              $
              21.57
              
              
              
              
              
              $
              260,187Granted
              
              
              6,021
              
              
              
              58.41Exercised
              
              
              (4,861
              )
              
              
              17.91
              
              
              
              
              
              
              205,618Forfeited
              
              
              (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
              
              
              
              392,469Granted
              
              
              5,848
              
              
              
              43.65Exercised
              
              
              (4,678
              )
              
              
              20.24
              
              
              
              
              
              
              
              124,816Forfeited
              
              
              (1,728
              )
              
              
              45.99Expired
              
              
              (277
              )
              
              
              56.03Options
      and SARs outstanding at December 30, 2007
              
              
              25,557
              
              
              
              35.59
              
              
              
              5.8
              
              
              
              165,185Granted
              
              
              3,616
              
              
              
              21.29Exercised
              
              
              (895
              )
              
              
              7.77
              
              
              
              
              
              
              
              11,751Forfeited
              
              
              (1,927
              )
              
              
              42.47Expired
              
              
              (1,294
              )
              
              
              43.35Options
      and SARs outstanding at December 28, 2008
              
              
              25,057
              
              
              
              33.59
              
              
              
              4.9
              
              
              
              5,284Options
      and SARs vested and expected to vest after December 28, 2008, net of
      forfeitures
              
              
              23,892
              
              
              
              33.56
              
              
              
              4.8
              
              
              
              5,274Options
      and SARs exercisable at December 28, 2008
              
              
              16,500
              
              
              
              31.88
              
              
              
              4.5
              
              
              
              5,212





At
December 28, 2008, the total compensation cost related to options and
SARs granted to employees under the Company’s share-based compensation plans but
not yet recognized was approximately $118.4 million, net of estimated
forfeitures.  This cost will be amortized on a straight-line basis
over a weighted average period of approximately
3.1 years.  Options and SARs valuation assumptions related to
Matrix and msystems acquisitions are discussed in Note 15, “Business
Acquisitions.”




F-30
 Table of Contents
 Notes
to Consolidated Financial Statements


Restricted Stock
Units.Restricted stock units (“RSUs”), are converted into
shares of the Company’s common stock upon vesting on a one-for-one
basis.  Typically, vesting of RSUs is subject to the employee’s
continuing service to the Company.  The cost of these awards is
determined using the fair value of the Company’s common stock on the date of the
grant, and compensation is recognized on a straight-line basis over the
requisite vesting period.





A summary
of the changes in RSUs outstanding under the Company’s share-based compensation
plan during the fiscal year ended December 28, 2008 is presented below
(in thousands, except for weighted average grant date fair
value):





Shares
              
              
              Weighted
      Average Grant Date Fair Value
              
              
              Aggregate
      Intrinsic ValueNon-vested
      share units at January 1, 2006
              
              
              105
              
              
              $
              42.19
              
              
              $
              3,489Granted
              
              
              516
              
              
              
              57.69Vested
              
              
              (97
              )
              
              
              52.21
              
              
              
              4,865Forfeited
              
              
              (65
              )
              
              
              63.85Restricted
      stock units assumed through acquisition
              
              
              139
              
              
              
              72.83Non-vested
      share units at December 31, 2006
              
              
              598
              
              
              
              58.71
              
              
              
              25,740Granted
              
              
              132
              
              
              
              44.86Vested
              
              
              (184
              )
              
              
              56.21
              
              
              
              8,136Forfeited
              
              
              (47
              )
              
              
              67.10Non-vested
      share units at December 30, 2007
              
              
              499
              
              
              
              55.20
              
              
              
              16,735Granted
              
              
              1,338
              
              
              
              18.79Vested
              
              
              (173
              )
              
              
              54.41
              
              
              
              4,149Forfeited
              
              
              (141
              )
              
              
              32.22Non-vested
      share units at December 28, 2008
              
              
              1,523
              
              
              
              25.38
              
              
              
              13,983





As of
December 28, 2008, the Company had $26.4 million of total unrecognized
compensation expense, net of estimated forfeitures, related to RSUs, which will
be recognized over a weighted average estimated remaining life of
2.8 years.





Employee Stock
Purchase Plan.At December 28, 2008, there was
$0.5 million of total unrecognized compensation cost related to ESPP that
is expected to be recognized over a period of approximately
0.1 years.





Share-Based
Compensation Expense.The Company recorded $97.8 million,
$133.0 million and $100.6 million of share-based compensation expense
for the fiscal years ended December 28, 2008, December 30, 2007 and
December 31, 2006, respectively, that included the following:




December 28,
                  2008
              
              
              December 30,
                  2007
              
              
              December 31,
                  2006(In
      thousands)Share-based
      compensation expense by caption:Cost
      of product revenues
              
              $
              10,775
              
              
              $
              14,743
              
              
              $
              7,991Research
      and development
              
              
              38,854
              
              
              
              49,194
              
              
              
              40,999Sales
      and marketing
              
              
              20,067
              
              
              
              31,722
              
              
              
              21,617General
      and administrative
              
              
              28,103
              
              
              
              37,351
              
              
              
              30,034Total
      share-based compensation expense
              
              $
              97,799
              
              
              $
              133,010
              
              
              $
              100,641Share-based
      compensation expense by type of award:Stock
      options and SARs
              
              $
              77,015
              
              
              $
              111,360
              
              
              $
              85,862Restricted
      stock units
              
              
              14,753
              
              
              
              16,674
              
              
              
              11,181Employee
      stock purchase plans
              
              
              6,031
              
              
              
              4,976
              
              
              
              3,598Total
      share-based compensation expense
              
              $
              97,799
              
              
              $
              133,010
              
              
              $
              100,641





Share-based
compensation of $3.4 million and $3.7 million related to manufacturing
personnel was capitalized into inventory as of December 28, 2008 and
December 30, 2007, respectively.


F-31
 Table of Contents
 Notes
to Consolidated Financial Statements


Note 10:  Restructuring
Plans




Fiscal
2008 Restructuring Plans




Second Quarter of
Fiscal 2008 Restructuring Plan.  In the second quarter ended
June 28, 2008, the Company initiated restructuring actions in an effort to
better align its cost structure with its anticipated revenue stream and to
improve the Company's results of operations and cash flows (“Second Quarter of
Fiscal 2008 Restructuring Plan”).  The cost of $4.1 million was
for severance and benefits related to the involuntary termination of
approximately 131 employees in all functions, primarily in the U.S. and
Israel.






The
following table sets forth the activity in the accrued restructuring balances
related to the Second Quarter of Fiscal 2008 Restructuring Plan
(in millions):




Severance
      and Benefits
                    
                    
                    Contract
      Termination Fees and Other Charges
                    
                    
                    TotalRestructuring
      provision
                    
                    $
                    4.1
                    
                    
                    $
                    ─
                    
                    
                    $
                    4.1Cash
      paid
                    
                    
                    (3.1
                    )
                    
                    
                    ─
                    
                    
                    
                    (3.1
                    )Accrual
      balance at December 28,
      2008
                    
                    $
                    1.0
                    
                    
                    $
                    ─
                    
                    
                    $
                    1.0





The
remaining restructuring accrual balance is reflected in Other Current Accrued
Liabilities in the Consolidated Balance Sheets and is expected to be utilized in
fiscal year 2009.




Fourth Quarter of
Fiscal 2008 Restructuring Plan and Other.  In the fourth
quarter ended December 28, 2008, the Company initiated additional restructuring
actions in an effort to better align its cost structure with business operation
levels (“Fourth Quarter of Fiscal 2008 Restructuring Plan and
Other”).  Of the total costs accrued of $31.4 million,
$10.4 million was related to severance and benefits for the involuntary
termination of approximately 428 employees in all functions, primarily in the
U.S., Israel and Spain.  Contract Termination Fees and Other Charges
of $21.0 million included restructuring charges for marketing contract
termination costs, technology license impairments, and fixed asset impairments
related to outsourcing certain manufacturing activities.  In addition
to the restructuring charge, contract termination fees and other charges include
an accrual for unrelated litigation settlements.






The
following table sets forth the activity in the accrued restructuring balances
related to Fourth Quarter of Fiscal 2008 Restructuring Plan and Other
(in millions):




Severance
      and Benefits
              
              
              Contract
      Termination Fees and Other Charges
              
              
              TotalRestructuring
      and other provisions
              
              $
              10.4
              
              
              $
              21.0
              
              
              $
              31.4Cash
      paid
              
              
              (4.1
              )
              
              
              (2.4
              )
              
              
              (6.5
              )Non-cash
      utilization
              
              ─
              
              
              
              (4.6
              )
              
              
              (4.6
              )Accrual
      balance at December 28, 2008
              
              $
              6.3
              
              
              $
              14.0
              
              
              $
              20.3





The
Company anticipates that the remaining restructuring accrual balance of
$20.3 million will be substantially paid out or utilized in fiscal year
2009.  The remaining restructuring accrual balance is reflected in
Other Current Accrued Liabilities in the Consolidated Balance
Sheets.


F-32
 Table of Contents
 Notes
to Consolidated Financial Statements




Fiscal
2007 Restructuring Plan




In the
first quarter of fiscal year 2007, the Company initiated a restructuring plan to
better align its organizational workforce and close redundant facilities in
order to reduce the Company’s cost structure.  The Company incurred a
total cost of $6.7 million, of which $6.0 million was related to
involuntary termination of 149 employees in all functions in the U.S. and
Israel.  Substantially all of the fiscal year 2007 restructuring plan
was paid out in cash during fiscal year 2007.  The Company anticipates
that the remaining accrued restructuring balance of $0.7 million will be
substantially paid out in cash through the first quarter of fiscal year 2010, in
connection with long-term facility leases.  The remaining
restructuring accrual balance is reflected in Other Current Accrued Liabilities
and Non-current Liabilities in the Consolidated Balance Sheets.
  F-33
 Table of Contents
 Notes
to Consolidated Financial Statements


Note 11:  Income Taxes




The
provision for income taxes consists of the following (in
thousands):


Fiscal
      Years EndedDecember 28,
                  2008
              
              
              December 30,
                  2007
              
              
              December 31,
                  2006Current:Federal
              
              $
              (245,361
              )
              
              $
              108,636
              
              
              $
              174,320State
              
              
              7,246
              
              
              
              19,958
              
              
              
              27,788Foreign
              
              
              46,925
              
              
              
              81,442
              
              
              
              63,841(191,190
              )
              
              
              210,036
              
              
              
              265,949Deferred:Federal
              
              
              323,365
              
              
              
              (22,670
              )
              
              
              (22,623
              )State
              
              
              46,762
              
              
              
              (654
              )
              
              
              (9,585
              )Foreign
              
              
              (25,195
              )
              
              
              (11,864
              )
              
              
              (3,548
              )344,932
              
              
              
              (35,188
              )
              
              
              (35,756
              )Provision
      for income taxes
              
              $
              153,742
              
              
              $
              174,848
              
              
              $
              230,193





Deferred
federal income taxes includes taxes withheld on royalties and interest received
of $79.4 million for the fiscal year ended December 28,
2008.  Current foreign income taxes includes taxes withheld on
royalties received of $66.5 million and $59.2 million for the fiscal
years ended December 30, 2007 and December 31, 2006,
respectively.





Income
(loss) before provision for income taxes consisted of the following (in
thousands):




Fiscal
      Years EndedDecember 28,
                  2008
              
              
              December 30,
                  2007
              
              
              December 31,
                  2006United
      States
              
              $
              (1,858,680
              )
              
              $
              454,147
              
              
              $
              193,845International
              
              
              (44,354
              )
              
              
              (55,731
              )
              
              
              236,863Total
              
              $
              (1,903,034
              )
              
              $
              398,416
              
              
              $
              430,708





The
Company’s provision for income taxes differs from the amount computed by
applying the federal statutory rates to income (loss) before taxes as
follows:




Fiscal
      Years EndedDecember 28,
                  2008
              
              
              December 30,
                  2007
              
              
              December 31,
                  2006U.S.
      federal statutory rate
              
              
              35.0
              %
              
              
              35.0
              %
              
              
              35.0
              %State
      taxes, net of federal benefit
              
              
              0.4
              
              
              
              3.7
              
              
              
              3.1Non-deductible
      share-based compensation expense
              
              
              (0.7
              )
              
              
              5.0
              
              
              
              2.9Impairment
      of goodwill
              
              
              (18.3
              )
              
              
              —
              
              
              
              —Valuation
      allowance
              
              
              (24.1
              )
              
              
              —
              
              
              
              —Write-off
      of acquired in-process technology
              
              
              —
              
              
              
              —
              
              
              
              18.3Tax-exempt
      interest income
              
              
              1.1
              
              
              
              (5.7
              )
              
              
              (2.7
              )Foreign
      earnings at other than U.S. rates
              
              
              (1.0
              )
              
              
              (4.0
              )
              
              
              (2.9
              )Foreign
      losses not benefited
              
              
              —
              
              
              
              7.8
              
              
              
              0.6Other
              
              
              (0.5
              )
              
              
              2.1
              
              
              
              (0.8
              )Effective income
      tax rates
              
              
              (8.1
              )%
              
              
              43.9
              %
              
              
              53.5
              %


F-34
 Table of Contents
 Notes
to Consolidated Financial Statements





Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax return reporting
purposes.  Significant components of the Company’s net deferred tax
assets as of December 28, 2008 and December 30, 2007 were as follows
(in thousands):




December 28,
                    2008
                
                
                December 30,
                    2007Deferred
      tax assets:Deferred
      revenue recognized for tax purposes
                
                $
                35,908
                
                
                $
                48,932Accruals
      and reserves not currently deductible
                
                
                149,582
                
                
                
                170,279Depreciation
      and amortization not currently deductible
                
                
                60,406
                
                
                
                53,176Deductible
      original issue discount
                
                
                98,615
                
                
                
                119,358Deductible
      share-based compensation
                
                
                50,465
                
                
                
                37,959Unrealized
      loss on investments
                
                
                52,138
                
                
                
                24,879Unrealized
      foreign exchange loss
                
                
                58,131
                
                
                ─Net
      operating loss carryforwards
                
                
                52,553
                
                
                
                33,444Tax
      credit carryforward
                
                
                149,785
                
                
                
                15,287Other
                
                
                17,073
                
                
                
                7,621Gross
      deferred tax assets
                
                
                724,656
                
                
                
                510,935Valuation
      allowance
                
                
                (529,366
                )
                
                
                (67,354
                )Deferred
      tax assets, net of valuation allowance
                
                
                195,290
                
                
                
                443,581Deferred
      tax liabilities:Acquired
      intangible assets
                
                
                (15,816
                )
                
                
                (42,477
                )Unrealized
      gain on investments
                
                
                (72,302
                )
                
                
                (23,553
                )Unrealized
      foreign exchange gain
                
                
                (78,031
                )
                
                ─U.S.
      taxes provided on unremitted earnings of foreign
    subsidiaries
                
                
                (17,619
                )
                
                
                (62,647
                )Total
      deferred tax liabilities
                
                
                (183,768
                )
                
                
                (128,677
                )Net
      deferred tax assets
                
                $
                11,522
                
                
                $
                314,904




The
Company has incurred a cumulative loss in recent years and determined in fiscal
year 2008, based on all available evidence, that there was substantial
uncertainty as to the realizability of the deferred tax assets in future
periods.  A valuation allowance of $529.4 million and
$67.4 million was provided on gross deferred tax assets at
December 28, 2008 and December 30, 2007, respectively, based upon
available evidence that it is not more likely than not that certain deferred tax
assets will be realized.  The valuation allowance increased
$462.0 million in fiscal year 2008 from fiscal year 2007, due to the
establishment of the valuation allowance on certain U.S. deferred tax assets,
including tax credits, net operating losses and book/tax timing differences and
certain foreign deferred tax assets.  The future release of the
valuation allowance will benefit the provision for income taxes.  The
fiscal year 2008 taxable loss in the U.S. can be carried back to prior years and
a tax refund receivable of $241.7 million has been recorded due to federal
and certain state net operating loss carryback claims.





The
Emergency Economic Stabilization Act of 2008 enacted October 3, 2008
retroactively extended the research credit carryforward for the fiscal year
2008.  As a result, the generated credit of $2.7 million will be
carried forward and is subject to a valuation allowance.





The
Company has federal, state before federal benefit, and foreign net operating
loss carryforwards of approximately $87.6 million, $104.5 million and
$175.0 million, respectively.  Some net operating losses will
begin to expire in fiscal year 2011, if not utilized.  The Company
also has federal and state research credit carryforwards of approximately
$12.2 million and $18.0 million before federal benefit,
respectively.  In addition, the Company has foreign tax credits of
$124.7 million and alternative minimum tax credits of $1.1
million.  Some credit carryforwards will begin to expire in fiscal
year 2013, if not utilized.  Some of these carryforwards are subject
to annual limitations, including Section 382 of the Internal Revenue Code of
1986, as amended, for U.S. tax purposes and similar state
provisions.





F-35
 Table of Contents
 Notes
to Consolidated Financial Statements


No
provision has been made for U.S. income taxes or foreign withholding taxes on
approximately $94.8 million of cumulative unremitted earnings of certain
foreign subsidiaries as of December 28, 2008, since the Company intends to
indefinitely reinvest these earnings outside the U.S.  If these
earnings were distributed to the U.S., the Company would be subject to
additional U.S. income taxes and foreign withholding taxes (subject to
adjustment for foreign tax credits).  As of December 28, 2008,
the unrecognized deferred tax liability for these earnings was approximately
$26.8 million.





The tax
benefit (charge) associated with the exercise of stock options was applied to
capital in excess of par value in the amount of ($3.9) million,
$18.4 million and $61.5 million in fiscal years 2008, 2007 and 2006,
respectively.  The tax benefit associated with the exercise of stock
options credited to goodwill in fiscal years 2008, 2007 and 2006 was zero,
$0.6 million and $4.6 million, respectively.





The
Company adopted FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109,on
January 1, 2007.  As a result of the adoption, the Company
recognized an increase of approximately $1.0 million in the liability for
unrecognized tax benefits, which was accounted for as a reduction to the
January 1, 2007 balance of retained earnings.  A reconciliation
of the beginning and ending amount of unrecognized tax benefits is as follows
(in thousands):





Balance
      at January 1, 2007
                
                $
                38,629Additions
      based on tax positions related to current year
                
                
                30,983Additions
      for tax positions of prior years
                
                
                3,051Reductions
      for tax positions of prior years
                
                
                (2,161
                )Reductions
      due to expiration of statute of limitations
                
                
                (308
                )Balance
      at December 31, 2007
                
                
                70,194Additions
      based on tax positions related to current year
                
                
                26,342Additions
      for tax positions of prior years
                
                
                44,247Reductions
      for tax positions of prior years
                
                
                (13,501
                )Reductions
      due to expiration of statute of limitations
                
                
                (2,845
                )Balance
      at December 28, 2008
                
                $
                124,437





The total
amount of unrecognized tax positions that would impact the effective tax rate is
approximately $94.2 million at December 28, 2008.  The Company
recognizes interest and penalties related to unrecognized tax benefits in income
tax expense.  The liability related to unrecognized tax benefits
included accrued interest and penalties of approximately $24.3 million,
$9.7 million and $5.0 million at December 28, 2008, December 30,
2007 and December 31, 2006, respectively.  Tax expense for the
years ended December 28, 2008 and December 30, 2007 included interest and
penalties of $12.3 million and $3.0 million, respectively.  Tax
expense for the year ended December 31, 2006 included a net benefit for
interest and penalties of $0.8 million.





It is
reasonably possible that the unrecognized tax benefits could decrease by
approximately $11.7 million within the next 12 months as a result of the
expiration of statutes of limitation.  The Company is currently under
audit by several tax authorities.  Because timing of the resolution
and/or closure of these audits is highly uncertain it is not possible to
estimate other changes to the amount of unrecognized tax benefits for positions
existing at December 28, 2008.





The
Company is subject to U.S. federal income tax as well as income taxes in many
state and foreign jurisdictions.  The federal statute of limitations
on assessment remains open for the tax years 2005 through 2007, and the statutes
of limitation in state jurisdictions remain open in general from tax years 2002
through 2007.  The major foreign jurisdictions remain open for
examination in general for tax years 2002 through 2007.





F-36
 Table of Contents
 Notes
to Consolidated Financial Statements




Note 12:  Net Income (Loss) per Share


The
following table sets forth the computation of basic and diluted net income
(loss) per share (in thousands, except per share amounts):




Fiscal
      Years EndedDecember 28,
                    2008
                
                
                December 30,
                    2007
                
                
                December 31,
                    2006Numerator:Numerator
      for basic net income (loss) per share:Net
      income (loss)
                
                $
                (2,056,776
                )
                
                $
                218,357
                
                
                $
                198,896Denominator
      for basic net income (loss) per share:Weighted
      average common shares outstanding
                
                
                225,292
                
                
                
                227,744
                
                
                
                198,929Basic
      net income (loss) per share
                
                $
                (9.13
                )
                
                $
                0.96
                
                
                $
                1.00Numerator
      for diluted net income (loss) per share:Net
      income (loss)
                
                $
                (2,056,776
                )
                
                $
                218,357
                
                
                $
                198,896Interest
      on the 1% Convertible Notes due 2035, net of tax
                
                
                —
                
                
                
                469
                
                
                
                58Net
      income (loss) for diluted net income (loss) per share
                
                $
                (2,056,776
                )
                
                $
                218,826
                
                
                $
                198,954Denominator
      for diluted net income (loss) per share:Weighted
      average common shares
                
                
                225,292
                
                
                
                227,744
                
                
                
                198,929Incremental
      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)
                
                
                —
                
                
                
                6,101
                
                
                
                8,284Effect
      of dilutive 1% Convertible Notes due 2035
                
                
                —
                
                
                
                2,012
                
                
                
                238Shares
      used in computing diluted net income (loss) per share
                
                
                225,292
                
                
                
                235,857
                
                
                
                207,451Diluted
      net income (loss) per share
                
                $
                (9.13
                )
                
                $
                0.93
                
                
                $
                0.96Anti-dilutive
      shares excluded from net income (loss) per share
    calculation
                
                
                54,844
                
                
                
                40,133
                
                
                
                33,381





Basic
earnings per share exclude any dilutive effects of stock options, SARs, RSUs,
warrants and convertible securities.  Fiscal years 2007 and 2006
diluted earnings per share include the dilutive effects of stock options, SARs,
RSUs, warrants and the 1% Convertible Notes due 2035.  Certain common
stock issuable under stock options, SARs, warrants and the 1% Senior Convertible
Notes due 2013 have been omitted from the diluted net income (loss) per share
calculation because their inclusion is considered anti-dilutive.





F-37
 Table of Contents
 Notes
to Consolidated Financial Statements




Note 13:  Commitments, Contingencies and
Guarantees




FlashVision.In
June 2008, the Company agreed to wind-down its 49.9% ownership interest in
FlashVision Ltd. (“FlashVision”), a business venture with Toshiba which owns
50.1%.  In this venture, the Company and Toshiba collaborated in the
development and manufacture of 200-millimeter NAND flash memory
products.  However, the Company and Toshiba have determined that
production of NAND flash memory products utilizing 200-millimeter wafers is no
longer cost effective relative to current and projected market prices for NAND
flash memory.





As part
of the ongoing wind-down of FlashVision, Toshiba agreed to purchase certain
assets of FlashVision and has retired the existing master lease agreement
between FlashVision and a consortium of financial institutions, thereby
releasing the Company from its contingent indemnification
obligation.  Due to the wind-down qualifying as a reconsideration
event under FIN 46R,
the Company re-evaluated whether FlashVision is a variable interest entity and
concluded that FlashVision is no longer a variable interest entity within the
scope of FIN 46R.  In fiscal year 2008, the Company received
distributions of $102.5 million relating to its investment in
FlashVision.  At December 28, 2008, the Company had an investment in
FlashVision of $64.0 million denominated in Japanese yen, offset by
$43.3 million of cumulative translation adjustments recorded in accumulated
OCI.  For discussion on impairment of the FlashVision investment, see
Note 4, “Balance Sheet Information - Notes Receivable and Investments in the
Flash Ventures with Toshiba.”





Flash
Partners.The Company has a 49.9% ownership interest in Flash
Partners Ltd. (“Flash Partners”), a business venture with Toshiba which owns
50.1%, formed in fiscal year 2004.  In the venture, the Company and
Toshiba have collaborated in the development and manufacture of NAND flash
memory products.  These NAND flash memory products are manufactured by
Toshiba at the 300-millimeter wafer fabrication facility (“Fab 3”) located in
Yokkaichi, Japan, using the semiconductor manufacturing equipment owned or
leased by Flash Partners.  Flash Partners purchases wafers from
Toshiba at cost and then resells those wafers to the Company and Toshiba at cost
plus a markup.  The Company accounts for its 49.9% ownership position
in Flash Partners under the equity method of accounting.  The Company
is committed to purchase its provided three-month forecast of Flash Partner’s
NAND wafer supply, which generally equals 50% of the venture’s
output.  The Company is not able to estimate its total wafer purchase
commitment obligation beyond its rolling three-month purchase commitment because
the price is determined by reference to the future cost of producing the
semiconductor wafers.  In addition, the Company is committed to fund
49.9% of Flash Partners’ costs to the extent that Flash Partners’ revenues from
wafer sales to the Company and Toshiba are insufficient to cover these
costs.





As of
December 28, 2008, the Company had notes receivable from Flash Partners of
76.3 billion Japanese yen, or approximately $843 million, based upon
the exchange rate of 90.41 Japanese yen to one U.S. dollar at December 28,
2008.  These notes are secured by the equipment purchased by Flash
Partners using the note proceeds.  The Company has additional
guarantee obligations to Flash Partners, see “Off-Balance Sheet
Liabilities.”  At December 28, 2008, the Company had an equity
investment in Flash Partners of $202.5 million denominated in Japanese yen,
offset by $48.5 million of cumulative translation gains recorded in
accumulated OCI.  In fiscal year 2008, the Company recorded a
$20.0 million  impairment of its equity investment in Flash
Partners.  For discussion on impairment of the Flash Partners
investment, see Note 4, “Balance Sheet Information - Notes Receivable and
Investments in the Flash Ventures with Toshiba,” regarding impairment of equity
method investments in fiscal year 2008.




F-38
 Table of Contents
 Notes
to Consolidated Financial Statements




Flash
Alliance.The Company has a 49.9% ownership interest in Flash
Alliance Ltd. (“Flash Alliance”), a business venture with Toshiba which owns
50.1%, formed in fiscal year 2006.  In the venture, the Company and
Toshiba have collaborated in the development and manufacture of NAND flash
memory products.  These NAND flash memory products are manufactured by
Toshiba at its 300 millimeter wafer fabrication facility (“Fab 4”) located in
Yokkaichi, Japan, using the semiconductor manufacturing equipment owned or
leased by Flash Alliance.  Flash Alliance purchases wafers from
Toshiba at cost and then resells those wafers to the Company and Toshiba at cost
plus a markup.  The Company accounts for its 49.9% ownership position
in Flash Alliance under the equity method of accounting.  The Company
is committed to purchase its provided three-month forecast of Flash Alliance’s
NAND wafer supply, which generally equals 50% of the venture’s
output.  The Company is not able to estimate its total wafer purchase
commitment obligation beyond its rolling three-month purchase commitment because
the price is determined by reference to the future cost of producing the
semiconductor wafers.  In addition, the Company is committed to fund
49.9% of Flash Alliance’s costs to the extent that Flash Alliance’s revenues
from wafer sales to the Company and Toshiba are insufficient to cover these
costs.





As of
December 28, 2008, the Company had notes receivable from Flash Alliance of
25.0 billion Japanese yen, or approximately $277 million, based upon
the exchange rate at December 28, 2008.  These notes are secured by
the equipment purchased by Flash Alliance using the note
proceeds.  The Company has additional guarantee obligations to Flash
Alliance, see “Off-Balance Sheet Liabilities.”  At December 28, 2008,
the Company had an equity investment in Flash Alliance of $215.9 million
denominated in Japanese yen, offset by $49.7 million of cumulative
translation adjustments recorded in accumulated OCI.  In fiscal year
2008, the Company recorded an impairment of $63.0 million to the equity
investment in Flash Alliance.  For discussion on impairment of the
Flash Alliance investment, see Note 4, “Balance Sheet Information - Notes
Receivable and Investments in the Flash Ventures with Toshiba,” regarding
impairment of equity method investments in fiscal year 2008.





Flash
Ventures.As a part of the Flash Partners and Flash Alliance
(hereinafter referred to as “Flash Ventures”) agreements, the Company is
required to fund direct and common research and development expenses related to
the development of advanced NAND flash memory technologies.  As of
December 28, 2008 and December 30, 2007, the Company had accrued liabilities
related to these expenses of $4.0 million and $8.0 million,
respectively.  In addition, in fiscal year 2008, the Company recorded
charges of $121 million in cost of product revenues for adverse purchase
commitments associated with under-utilization of Flash Ventures capacity for the
90-day period subsequent to December 28, 2008 related to the Company’s
non-cancellable orders to Flash Ventures.





The
Company has guarantee obligations to Flash Ventures, see “Off-Balance Sheet
Liabilities.”





Toshiba
Foundry.The Company has the ability to purchase additional
capacity under a foundry arrangement with Toshiba.





TwinSys.  The
Company had a 50.1% beneficial ownership in TwinSys Data Storage Limited
Partnership (“TwinSys”), a business venture with Toshiba, consisting of (i)
49.9% ownership in TwinSys and (ii) 0.2% interest held by TwinSys Ltd., in which
the Company has a 51% ownership interest.  The Company and Toshiba
terminated the operations of TwinSys as of
March 31, 2007.




F-39
 Table of Contents
 Notes
to Consolidated Financial Statements




Business Ventures
and Foundry Arrangement with Toshiba.Purchase orders placed
under Flash Ventures and the foundry arrangement with Toshiba for up to three
months are binding and cannot be canceled.





Other Silicon
Sources.The Company’s contracts with its other sources of
silicon wafers generally require the Company to provide purchase order
commitments based on nine month rolling forecasts.  The purchase
orders placed under these arrangements relating to the first three months of the
nine month forecast are generally binding and cannot be
canceled.  These outstanding purchase commitments for other sources of
silicon wafers are included as part of the total “Noncancelable production
purchase commitments” in the “Contractual Obligations” table below.





Subcontractors.In
the normal course of business, the Company’s subcontractors periodically procure
production materials based on the forecast the Company provides to
them.  The Company’s agreements with these subcontractors require that
the Company reimburse them for materials that are purchased on the Company’s
behalf in accordance with such forecast.  Accordingly, the Company may
be committed to certain costs over and above its open noncancelable purchase
orders with these subcontractors.  These commitments for production
materials to subcontractors are included as part of the total “Noncancelable
production purchase commitments” in the “Contractual Obligations” table
below.


Off-Balance
Sheet Liabilities





The
following table details the Company’s portion of the remaining guarantee
obligations under each of Flash Ventures’ master lease facilities in both
Japanese yen and the U.S. dollar equivalent based upon the exchange rate at
December 28, 2008.





Master
      Lease Agreements by Execution Date
                
                Lease
      Amounts
                
                Expiration(Yen
      in billions)
                
                
                (Dollars
      in thousands)Flash
      PartnersDecember 2004
                
                ¥
                12.1
                
                
                $
                133,810
                
                2010December 2005
                
                
                9.7
                
                
                
                106,931
                
                2011June
      2006
                
                
                10.1
                
                
                
                111,726
                
                2011September 2006
                
                
                33.4
                
                
                
                369,670
                
                2011March
      2007
                
                
                23.0
                
                
                
                254,447
                
                2012February
      2008
                
                
                10.5
                
                
                
                116,679
                
                2013¥
                98.8
                
                
                $
                1,093,263Flash
      AllianceNovember
      2007
                
                ¥
                43.7
                
                
                $
                483,274
                
                2013June
      2008
                
                
                46.9
                
                
                
                518,440
                
                2013¥
                90.6
                
                
                $
                1,001,714Total
      guarantee obligations
                
                ¥
                189.4
                
                
                $
                2,094,977





The
following table details the breakdown of the Company’s remaining guarantee
obligations between the principal amortization and the purchase option exercise
price at the term of the master lease agreements, in annual installments as of
December 28, 2008 in U.S. dollars based upon the exchange rate at December 28,
2008.





Annual
      Installments
              
              Payment
      of Principal Amortization
              
              
              Purchase
      Option Exercise Price at Final Lease Terms
              
              
              Guarantee
      Amount(In thousands)Year
      1
              
              $
              498,399
              
              
              $
              ─
              
              
              $
              498,399Year
      2
              
              
              437,210
              
              
              
              66,521
              
              
              
              503,731Year
      3
              
              
              322,052
              
              
              
              220,850
              
              
              
              542,902Year
      4
              
              
              169,712
              
              
              
              144,341
              
              
              
              314,053Year
      5
              
              
              47,305
              
              
              
              188,587
              
              
              
              235,892Total
      guarantee obligations
              
              $
              1,474,678
              
              
              $
              620,299
              
              
              $
              2,094,977





FlashVision.  FlashVision
had an equipment lease arrangement of approximately 15.0 billion Japanese
yen, or approximately $143 million based upon the exchange rate at May 30,
2008, of which 6.2 billion Japanese yen, or approximately $59 million
based upon the exchange rate at May 30, 2008, was retired by Toshiba on May 30,
2008 thereby releasing the Company of its indemnification agreement with
Toshiba.


F-40
 Table of Contents
 Notes
to Consolidated Financial Statements


Flash
Partners.Flash Partners sells and leases back from a
consortium of financial institutions (“lessors”) a portion of its tools and has
entered into six equipment master lease agreements totaling 300.0 billion
Japanese yen, or approximately $3.32 billion based upon the exchange rate
at December 28, 2008, of which 197.7 billion Japanese yen, or approximately
$2.19 billion based upon the exchange rate at December 28, 2008, was
outstanding at December 28, 2008.  The Company and Toshiba have each
guaranteed 50%, on a several basis, of Flash Partners’ obligations under the
master lease agreements.  In addition, these master lease agreements
are secured by the underlying equipment.  As of December 28, 2008, the
amount of the Company’s guarantee obligation of the Flash Partners master lease
agreements, which reflects future payments and any lease adjustments, was
98.8 billion Japanese yen, or approximately $1.09 billion based upon
the exchange rate at December 28, 2008.  Certain lease payments
are due quarterly and certain lease payments are due semi-annually, and are
scheduled to be completed in stages through fiscal year 2013.  At each
lease payment date, Flash Partners has the option of purchasing the tools from
the lessors.  Flash Partners is obligated to insure the equipment,
maintain the equipment in accordance with the manufacturers’ recommendations and
comply with other customary terms to protect the leased assets.  The
fair value of the Company’s guarantee obligation of Flash Partners’ master lease
agreements was not material at inception of each master lease.





The
master lease agreements contain customary covenants for Japanese lease
facilities.  In addition to containing customary events of default
related to Flash Partners that could result in an acceleration of Flash
Partners’ obligations, the master lease agreements contain an acceleration
clause for certain events of default related to the Company as guarantor,
including, among other things, the Company’s failure to maintain a minimum
shareholders’ equity of at least $1.51 billion, and its failure to maintain
a minimum corporate rating of BB- from Standard & Poors (“S&P”) or
Moody’s Corporation (“Moody’s”), or a minimum corporate rating of BB+ from
Rating & Investment Information, Inc. (“R&I”).  As of
December 28, 2008, Flash Partners was in compliance with all of its master
lease covenants.  While the Company’s S&P credit rating was B, two
levels below the required minimum corporate rating threshold from S&P, the
Company’s R&I credit rating was BBB-, one level above the required minimum
corporate rating threshold from R&I.  If R&I were to downgrade
the Company’s credit rating below the minimum corporate rating threshold, Flash
Partners would become non-compliant under its master equipment lease agreements
and would be required to negotiate a resolution to the non-compliance to avoid
acceleration of the obligations under such agreements.  Such
resolution could include, among other things, supplementary security to be
supplied by the Company, as guarantor, or increased interest rates or waiver
fees, should the lessors decide they need additional collateral or financial
consideration under the circumstances.  If a resolution were
unsuccessful, the Company could be required to pay a portion or the entire
outstanding lease obligations covered by its guarantee under such Flash Partners
master lease agreements.





F-41
 Table of Contents
 Notes
to Consolidated Financial Statements


Flash
Alliance.Flash Alliance sells and leases back from a
consortium of financial institutions (“lessors”) a portion of its tools and has
entered into two equipment master lease agreements totaling 200.0 billion
Japanese yen, or approximately $2.21 billion based upon the exchange rate
at December 28, 2008, of which 181.1 billion Japanese yen, or approximately
$2.00 billion based upon the exchange rate at December 28, 2008, was
outstanding as of December 28, 2008.  The Company and Toshiba have
each guaranteed 50%, on a several basis, of Flash Alliance’s obligation under
the master lease agreements.  In addition, these master lease
agreements are secured by the underlying equipment.  As of December
28, 2008, the amount of the Company’s guarantee obligation of the Flash Alliance
master lease agreements was 90.6 billion Japanese yen, or approximately
$1.0 billion based upon the exchange rate at December 28,
2008.  Remaining master lease payments are due semi-annually and are
scheduled to be completed in fiscal year 2013.  At each lease payment
date, Flash Alliance has the option of purchasing the tools from the
lessors.  Flash Alliance is obligated to insure the equipment,
maintain the equipment in accordance with the manufacturers’ recommendations and
comply with other customary terms to protect the leased assets.  The
fair value of the Company’s guarantee obligation of Flash Alliance’s master
lease agreements was not material at inception of each master
lease.





The
master lease agreements contain customary covenants for Japanese lease
facilities.  In addition to containing customary events of default
related to Flash Alliance that could result in an acceleration of Flash
Alliance’s obligations, the master lease agreements contain an acceleration
clause for certain events of default related to the Company as guarantor,
including, among other things, the Company’s failure to maintain a minimum
shareholders’ equity of at least $1.51 billion, and its failure to maintain
a minimum corporate rating of BB- from S&P or Moody’s or a minimum corporate
rating of BB+ from R&I.  As of December 28, 2008, Flash
Alliance was in compliance with all of its master lease
covenants.  While the Company’s S&P credit rating was B, two
levels below the required minimum corporate rating threshold from S&P, the
Company’s R&I credit rating was BBB-, one level above the required minimum
corporate rating threshold from R&I.  If R&I were to downgrade
the Company’s credit rating below the minimum corporate rating threshold, Flash
Alliance would become non-compliant under its master equipment lease agreements
and would be required to negotiate a resolution to the non-compliance to avoid
acceleration of the obligations under such agreements.  Such
resolution could include, among other things, supplementary security to be
supplied by the Company, as guarantor, or increased interest rates or waiver
fees, should the lessors decide they need additional collateral or financial
consideration under the circumstances.  If a resolution were
unsuccessful, the Company could be required to pay a portion or the entire
outstanding lease obligations covered by its guarantee under such Flash Alliance
master lease agreements.





F-42
 Table of Contents
 Notes
to Consolidated Financial Statements


Guarantees





Indemnification
Agreements.The Company has agreed to indemnify suppliers and
customers for alleged patent infringement.  The scope of such
indemnity varies, but may, in some instances, include indemnification for
damages and expenses, including attorneys’ fees.  The Company may
periodically engage in litigation as a result of these indemnification
obligations.  The Company’s insurance policies exclude coverage for
third-party claims for patent infringement.  Although the liability is
not remote, the nature of the patent infringement indemnification obligations
prevents the Company from making a reasonable estimate of the maximum potential
amount it could be required to pay to its suppliers and
customers.  Historically, the Company has not made any significant
indemnification payments under any such agreements.  As of
December 28, 2008, no amount had been accrued in the accompanying
Consolidated Financial Statements with respect to these indemnification
guarantees.





As
permitted under Delaware law and the Company’s certificate of incorporation and
bylaws, the Company has agreements, or has assumed agreements in connection with
its acquisitions, whereby it indemnifies certain of its officers, employees, and
each of its directors for certain events or occurrences while the officer,
employee or director is, or was, serving at the Company’s or the acquired
company’s request in such capacity.  The term of the indemnification
period is for the officer’s, employee’s or director’s lifetime.  The
maximum potential amount of future payments the Company could be required to
make under these indemnification agreements is generally unlimited; however, the
Company has a Director and Officer insurance policy that may reduce its exposure
and enable it to recover all or a portion of any future amounts
paid.  As a result of its insurance policy coverage, the Company
believes the estimated fair value of these indemnification agreements is
minimal.  The Company has no liabilities recorded for these agreements
as of December 28, 2008 or December 30, 2007, as these liabilities are
not reasonably estimable even though liabilities under these agreements are not
remote.





The
Company and Toshiba have agreed to mutually contribute to, and indemnify each
other and Flash Ventures for environmental remediation costs or liability
resulting from Flash Ventures’ manufacturing operations in certain
circumstances.  The Company and Toshiba have also entered into a
Patent Indemnification Agreement under which in many cases the Company will
share in the expenses associated with the defense and cost of settlement
associated with such claims.  This agreement provides limited
protection for the Company against third party claims that NAND flash memory
products manufactured and sold by Flash Ventures infringes third party
patents.  The Company has not made any indemnification payments under
any such agreements and as of December 28, 2008, no amounts have been
accrued in the accompanying Consolidated Financial Statements with respect to
these indemnification guarantees.





Contractual
Obligations and Off-Balance Sheet Arrangements





The
following tables summarize the Company’s contractual cash obligations,
commitments and off-balance sheet arrangements at December 28, 2008, and the
effect such obligations are expected to have on its liquidity and cash flows in
future periods (in thousands).





Contractual
Obligations.


Total
                  
                  
                  1
      Year or Less
                      (
      Fiscal 2009)
                  
                  2
      - 3 Years
                      (Fiscal
      2010
                      and
      2011)
                  
                  4
      –5 Years
                      (Fiscal
      2012
                      and
      2013)
                  
                  More
      than 5 Years (Beyond
                      Fiscal
      2013)Operating
      leases
                  
                  $
                  34,075
                  
                  
                  $
                  9,078
                  
                  $
                  14,232
                  
                  $
                  5,744
                  
                  $
                  5,021Flash
      Partners reimbursement for certain fixed costs including
      depreciation
                  
                  
                  1,907,890
                  (3)
                  
                  
                  636,549
                  
                  
                  964,626
                  
                  
                  259,182
                  
                  
                  47,533Flash
      Alliance reimbursement for certain fixed costs including
      depreciation
                  
                  
                  2,491,220
                  (3)
                  
                  
                  1,071,652
                  
                  
                  907,794
                  
                  
                  493,151
                  
                  
                  18,623Toshiba
      research and development
                  
                  
                  12,134
                  (3)
                  
                  
                  12,134
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —Capital
      equipment purchase commitments
                  
                  
                  15,180
                  
                  
                  
                  15,085
                  
                  
                  95
                  
                  
                  —
                  
                  
                  —Convertible
      notes principal and interest (1)
                  
                  
                  1,294,920
                  
                  
                  
                  12,250
                  
                  
                  24,500
                  
                  
                  24,500
                  
                  
                  1,233,670Operating
      expense commitments
                  
                  
                  78,685
                  
                  
                  
                  65,854
                  
                  
                  9,791
                  
                  
                  3,040
                  
                  
                  —Noncancelable
      production purchase commitments (2)
                  
                  
                  326,728
                  (3)
                  
                  
                  326,728
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —Total
      contractual cash obligations
                  
                  $
                  6,160,832
                  
                  
                  $
                  2,149,330
                  
                  $
                  1,921,038
                  
                  $
                  785,617
                  
                  $
                  1,304,847





Off-Balance
Sheet Arrangements.


As
      of
                        December 28,
                        2008Guarantee
      of Flash Partners equipment leases (4)
                    $
                    1,093,263Guarantee
      of Flash Alliance equipment leases (4)
                    
                    1,001,714





_________________


(1)
            In
      May 2006, the Company issued and sold $1.15 billion in aggregate
      principal amount of 1% Senior Convertible 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 until
      calendar year 2013.  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.





(2)
            Includes
      Toshiba foundries, Flash Ventures, related party vendors and other silicon
      source vendor purchase commitments.





(3)
            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 28, 2008.





(4)
            The
      Company’s guarantee obligation, net of cumulative lease payments, is
      189.4 billion Japanese yen, or approximately $2.09 billion based
      upon the exchange rate at December 28,
2008.


F-43
 Table of Contents
 Notes
to Consolidated Financial Statements


The
Company has excluded $148.4 million of unrecognized tax benefits from the
contractual obligation table above due to the uncertainty with respect to the
timing of associated future cash flows at December 28, 2008.  The
Company is unable to make reasonable reliable estimates of the period of cash
settlement with the respective taxing authorities.





The
Company leases many of its office facilities and operating equipment for various
terms under long-term, noncancelable operating lease agreements.  The
leases expire at various dates from fiscal year 2009 through fiscal year
2016.  Future minimum lease payments at December 28, 2008 are
presented below (in thousands):





Fiscal
      Year:2009
                
                $
                9,9632010
                
                
                8,7252011
                
                
                6,5292012
                
                
                4,8662013
                
                
                3,1332014
      and thereafter
                
                
                5,02138,237Sublease
      income to be received in the future under noncancelable
      subleases
                
                
                (4,162
                )Net
      operating leases
                
                $
                34,075





Rent
expense for the years ended December 28, 2008, December 30, 2007 and
December 31, 2006 was $8.2 million, $7.7 million and $7.8
million, respectively.












F-44
 Table of Contents
 Notes
to Consolidated Financial Statements


Note 14:  Related Parties and Strategic
Investments




Toshiba.The
Company and Toshiba have collaborated in the development and manufacture of NAND
flash memory products.  These NAND flash memory products are
manufactured by Toshiba at Toshiba’s Yokkaichi, Japan operations using the
semiconductor manufacturing equipment owned or leased by FlashVision, Flash
Partners and Flash Alliance.  See also Note 13, “Commitments,
Contingencies and Guarantees.”  The Company purchased NAND flash memory
wafers from FlashVision, Flash Partners, Flash Alliance and Toshiba, made
payments for shared research and development expenses, made loans to
FlashVision, Flash Partners and Flash Alliance and made investments in
FlashVision, Flash Partners and Flash Alliance totaling approximately
$2,038.6 million, $1,294.5 million and $658.4 million in the
years ended December 28, 2008, December 30, 2007 and December 31,
2006, respectively.  The purchases of NAND flash memory wafers are
ultimately reflected as a component of the Company’s cost of product
revenues.  During the fiscal year ended December 28, 2008,
the Company had sales to Toshiba (excluding TwinSys as described in Note 13,
“Commitments, Contingencies and Guarantees”) of $5.1 million, compared to
$26.7 million in the prior year.  At December 28, 2008
and December 30, 2007, the Company had accounts payable balances due
to Toshiba of zero and $0.2 million, respectively, and accounts receivable
balances from Toshiba of $2.2 million and $4.2 million,
respectively.  At December 28, 2008 and December 30, 2007,
the Company had accrued current liabilities due to Toshiba for shared research
and development expenses of $4.0 million and $8.0 million,
respectively.




Flash
Ventures with Toshiba.The Company owns 49.9% of each
of the flash ventures with Toshiba (FlashVision, Flash Partners and Flash
Alliance) and accounts for its ownership position under the equity method of
accounting.  The Company’s obligations with respect to Flash Partners
and Flash Alliance master lease agreements, take-or-pay supply arrangements and
research and development cost sharing are described in Note 13, “Commitments,
Contingencies and Guarantees.”  Flash Partners and Flash Alliance are
variable interest entities as defined under FIN 46R; however the Company is
not the primary beneficiary of either Flash Partners or Flash Alliance because
it absorbs less than a majority of the expected gains and losses of each
entity.  At December 28, 2008 and December 30, 2007, the Company had
accounts payable balances due to FlashVision, Flash Partners and Flash Alliance
of $370.4 million and $131.3 million, respectively.  For
activity related to the wind-down of FlashVision, see Note 13, “Commitments,
Contingencies and Guarantees.”
  The
Company’s maximum reasonably estimable loss exposure (excluding lost profits) as
a result of its involvement with FlashVision, Flash Partners and Flash Alliance
was $3.7 billion and $2.2 billion, as of December 28, 2008 and
December 30, 2007, respectively.  These amounts are comprised of
the Company’s investments, notes receivable and guarantee
obligations.  At December 28, 2008 and December 30, 2007,
the Company’s consolidated retained earnings (accumulated deficit) included
approximately $5.1 million and $2.8 million, respectively, of
undistributed earnings of FlashVision, Flash Partners and Flash
Alliance.
  The
following summarizes the aggregated financial information for FlashVision, Flash
Partners and Flash Alliance as of December 28, 2008 and December 30, 2007 (in
thousands).




December 28,
                  2008
              
              
              December 30,
                  2007(Unaudited)Current
      assets
              
              $
              1,103,911
              
              
              $
              870,018Property,
      plant and equipment and other assets
              
              
              4,159,457
              
              
              
              3,331,584Total
      assets
              
              $
              5,263,368
              
              
              $
              4,201,602Current
      liabilities
              
              $
              1,931,300
              
              
              $
              1,958,322Long-term
      liabilities
              
              
              2,240,800
              
              
              
              1,280,471




The
following summarizes the aggregated financial information for FlashVision, Flash
Partners and Flash Alliance for the fiscal years ended December 28, 2008,
December 30, 2007 and December 31, 2006, respectively (in
thousands).  FlashVision’s, Flash Partners’ and Flash Alliance’s
year-ends are March 31, with quarters ending on March 31,
June 30, September 30 and December 31.


Twelve
      Months EndedDecember 28,
                    2008
                
                
                December 30,
                    2007
                
                
                December 31,
                    2006(Unaudited)Net
      sales (1)
                
                $
                3,945,321
                
                
                $
                2,435,114
                
                
                $
                1,462,024Gross
      profit
                
                
                21,263
                
                
                
                13,587
                
                
                
                8,894Net
      income
                
                
                7,222
                
                
                
                927
                
                
                
                1,730







(1)
            Net
      sales represent sales to both the Company and
  Toshiba.


F-45
 Table of Contents
 Notes
to Consolidated Financial Statements


Tower
Semiconductor.As of December 28, 2008, the Company owned
15.9 million Tower shares or approximately 10.0% of the outstanding shares
of Tower Semiconductor Ltd. (“Tower”), one of its suppliers of wafers for its
controller components.  The Company also holds a convertible note, an
equipment loan receivable, and warrants to purchase Tower ordinary
shares.  In the first quarter of fiscal year 2008, the Company’s Chief
Executive Officer resigned as a member of the Tower Board of
Directors.  In fiscal year 2008, the Company recognized impairment
charges of $18.9 million as a result of the other-than-temporary decline in
its investment in Tower ordinary shares which reduced the investment value to
$2.1 million as of December 28, 2008.  In addition, the Company
holds a Tower convertible debenture with a market value of
$2.9 million.  As of December 28, 2008, the Company also had an
outstanding loan of $3.0 million to Tower for expansion of Tower’s 0.13
micron logic wafer capacity.  The loan to Tower is secured by the
equipment purchased.  The Company purchased controller wafers and
related non-recurring engineering of approximately $25.9 million,
$65.8 million and $41.0 million in the fiscal years ended December 28,
2008, December 30, 2007 and December 31, 2006,
respectively.  The purchases of controller wafers are ultimately
reflected as a component of the Company’s cost of product
revenues.  At December 28, 2008 and December 30, 2007, the Company had
amounts receivable from Tower of $0.4 million and amounts payable to Tower
of $6.1 million, respectively.





Flextronics.On
January 10, 2008, Michael Marks, who serves on the Company’s Board of Directors,
resigned from Flextronics International, Ltd., (“Flextronics”), where he had
held the position of chairman of the Board of Directors.  The activity
from December 31, 2007 to January 10, 2008 between Flextronics and the Company
was immaterial.  For the fiscal years ended December 30, 2007 and
December 31, 2006, the Company recorded revenues from Flextronics and its
affiliates of $75.5 million and $106.6 million, respectively, and at
December 30, 2007, the Company had receivables from Flextronics and its
affiliates of $0.6 million.  In addition, the Company purchased
from Flextronics and its affiliates $72.6 million and $53.5 million of
services for card assembly and testing in the fiscal years ended
December 30, 2007 and December 31, 2006, respectively, which are
ultimately reflected as a component of the Company’s cost of product
revenues.  At December 30, 2007, the Company had amounts payable
to Flextronics and its affiliates of approximately $10.3 million for these
services.





Solid State
Storage Solutions LLC.  During the second quarter of fiscal
year 2007, the Company formed a venture with third parties that will license
intellectual property.  This venture qualifies as a variable interest
entity under FIN 46R.  The Company is considered the primary
beneficiary of this venture, and in accordance with FIN 46R, the Company
consolidates this venture in its financial statements.  The venture
was financed with $10.2 million of initial aggregate capital contributions
from the partners.  In July 2007, Solid State Storage Solutions
LLC invested $10.0 million for the acquisition of intellectual property of
which $3.2 million and $1.8 million was amortized in fiscal years 2008
and 2007, respectively.  The venture has an obligation of up to an
additional $32.5 million related to the acquisition of intellectual
property should the venture be profitable.


F-46
 Table of Contents
 Notes
to Consolidated Financial Statements




Note 15:  Business
Acquisitions




msystems
Ltd. On
November 19, 2006, the Company completed the acquisition of msystems
in an all stock transaction.  This combination joined together two
flash memory companies with complementary products, customers and
channels.  The transaction was accounted for using the purchase method
of accounting in accordance with Statement of Financial Accounting Standards
No. 141 (“SFAS 141”), Business
Combinations.  The purchase price was comprised of the
following (in thousands):





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
      purchase price
                
                $
                1,495,738





As a
result of the acquisition, the Company issued approximately 29.4 million
shares of SanDisk common stock based on an exchange ratio of 0.76368 shares of
the Company’s common stock for each outstanding share of msystems common stock
as of November 19, 2006.  The average market price per share
of SanDisk common stock of $46.48 was based on the average of the closing prices
for a range of trading days around the announcement date
(July 30, 2006) of the proposed transaction.





Pursuant
to the terms of the merger agreement, each msystems stock option and stock
appreciation right outstanding and unexercised as of November 19, 2006
was converted into a stock option and stock appreciation right (“SARs”), to
purchase the Company’s common stock.  Based on msystems’ stock options
outstanding at November 19, 2006, the Company assumed msystems’
options and SARs to purchase approximately 5.4 million shares of the
Company’s common stock.  The fair value of options and SARs assumed
was estimated using a valuation model with the following
assumptions:





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






Direct
transaction costs of approximately $15 million included investment banking,
legal and accounting fees, and other external costs directly related to the
acquisition.  As of December 28, 2008, all costs for
accounting, legal and other professional services had been paid.





Acquisition-Related
Restructuring.  During the fourth quarter of fiscal year 2006,
the Company established its plans to integrate the msystems operations,
which included the involuntary termination of approximately 100 employees and
the exiting of duplicative facilities, and recorded $1.6 million for
acquisition-related restructuring activities, of which $0.3 million related
to excess lease obligations and $1.3 million related to
personnel.  These acquisition-related restructuring liabilities were
included in the purchase price allocation of the cost to acquire
msystems.  As of December 28, 2008, there was no remaining
acquisition-related restructuring accrual that had not been paid or
utilized.





In-process
Technology.As part of the msystems purchase agreement, a
certain amount of the purchase price was allocated to acquired in-process
technology, which was determined through established valuation techniques in the
high-technology industry and written-off in the fourth quarter of fiscal year
2006 because technological feasibility had not been established and no
alternative future uses existed.  The value was determined by
estimating the net cash flows and discounting forecasted net cash flows to their
present values.  The Company wrote-off the acquired in-process
technology of $186.0 million in the fourth quarter of fiscal year
2006.  As of December 28, 2008, it was estimated that these
in-process projects would be completed at an estimated total cost of
$3.5 million.  The net cash flows from the identified projects
were based on estimates of revenues, costs of revenues, research and development
expenses, including costs to complete the projects, selling, marketing and
administrative expenses, and income taxes from the projects.  The
Company believes the assumptions used in the valuations were reasonable at the
time of the acquisition.  The estimated net revenues and gross margins
were based on management’s projections of the projects and were in line with
industry averages.  Estimated total net revenues from the projects
were expected to grow through fiscal year 2009 and decline thereafter as other
new products are expected to become available.  Estimated operating
expenses included research and development expenses and selling, marketing and
administrative expenses based upon historical and expected direct expense level
and general industry metrics.  Estimated research and development
expenses included costs to bring the projects to technological feasibility and
costs associated with ongoing maintenance after a product is released, estimated
at 2% of the expected net revenues for the in-process technologies.





The
effective tax rate used in the analysis of the in-process technologies reflected
a historical industry-specific average for the United States federal income tax
rates.  A discount rate (the rate utilized to discount the net cash
flows to their present values) of 19% was used in computing the present value of
net cash flows for the projects.  The percentage of completion was
determined using costs incurred by msystems prior to the acquisition date
compared to the estimated remaining research and development to be completed to
bring the projects to technological feasibility.







F-47
 Table of Contents
 Notes
to Consolidated Financial Statements


Matrix
Semiconductor, Inc.On January 13, 2006,
the Company completed the acquisition of Matrix, a designer and developer of
three-dimensional (“3D”) integrated circuits.  Matrix® 3D
Memory is used for one-time programmable storage applications that complement
the Company’s existing flash storage memory products.  The Company
acquired 100% of the outstanding shares of Matrix for a total purchase price of
$296.4 million.  The purchase price was comprised of the
following (in thousands):





Fair
      value of SanDisk common stock issued
                  
                  $
                  242,303Estimated
      fair value of options assumed
                  
                  
                  33,169Cash
      consideration
                  
                  
                  20,000Direct
      transaction costs
                  
                  
                  907Total
      purchase price
                  
                  $
                  296,379





As a
result of the acquisition, the Company issued approximately 3.7 million
shares of SanDisk common stock and assumed equity instruments to issue
567,704 shares of common stock.  The assumed stock options were
valued using the Black-Scholes-Merton valuation model with the following
assumptions: stock price of $65.09; a weighted average volatility rate of 52.8%;
a risk-free interest rate of 4.3%; a dividend yield of zero and a weighted
average expected remaining term of 1.4 years.  The fair value of
unvested assumed stock options, which was valued at the consummation
date, is being recognized as compensation expense, net of forfeitures, over
the remaining vesting period.





Acquisition-Related
Restructuring.  During the first quarter of fiscal year 2006,
the Company established its plans to integrate the Matrix operations, which
included exiting duplicative facilities and recording $17.5 million for
acquisition-related restructuring activities, of which $17.4 million
related to excess lease obligations.  The lease obligations extend
through the end of the lease term in fiscal year 2016.  These
acquisition-related restructuring liabilities were included in the purchase
price allocation of the cost to acquire Matrix.  As of
December 28, 2008, the outstanding accrual balance was
$12.7 million related to these long-term lease obligations.





In-process
Technology.As part of the Matrix purchase agreement, a
certain amount of the purchase price was allocated to acquired in-process
technology, which was determined through established valuation techniques in the
high-technology computer industry and written-off in the first quarter of fiscal
year 2006 because technological feasibility had not been established and no
alternative future uses existed.  The value was determined by
estimating the net cash flows and discounting forecasted net cash flows to their
present values.  The Company wrote-off the acquired in-process
technology of $39.6 million in the first quarter of fiscal year
2006.  As of December 28, 2008, all in-process projects were
completed.




F-48
 Table of Contents
 Notes
to Consolidated Financial Statements




The net
cash flows from the identified projects were based on estimates of revenues,
costs of revenues, research and development expenses, including costs to
complete the projects, selling, marketing and administrative expenses, and
income taxes from the projects.  The Company believes the assumptions
used in the valuations were reasonable at the time of the
acquisition.  The estimated net revenues and gross margins were based
on management’s projections of the projects and were in line with industry
averages.  Estimated total net revenues from the projects were
expected to grow through fiscal year 2009 and decline thereafter as other new
products are expected to become available.  Estimated operating
expenses included research and development expenses and selling, marketing and
administrative expenses based upon historical and expected direct expense level
and general industry metrics.  Estimated research and development
expenses included costs to bring the projects to technological feasibility and
costs associated with ongoing maintenance after a product is
released.  These activities range from 0% to 5% of Matrix’s portion of
the Company’s net revenues for the in-process technologies.





The
effective tax rate used in the analysis of the in-process technologies reflected
a historical industry-specific average for the United States federal income tax
rates.  Discount rates (the rates utilized to discount the net cash
flows to their present values) ranging from 12.5% to 15.5% were used in
computing the present value of net cash flows for the projects.  The
percentage of completion was determined using costs incurred by Matrix prior to
the acquisition date compared to the estimated remaining research and
development to be completed to bring the projects to technological
feasibility.





Pro Forma
Results.
The following unaudited pro forma financial information for the twelve months
ended December 31, 2006 presents the combined results of the Company,
Matrix and msystems, as if the acquisitions had occurred at the beginning of the
period presented (in thousands, except per share
amounts).  Certain adjustments have been made to the combined results
of operations, including amortization of acquisition-related intangible
assets; however, charges for acquired in-process technology were excluded as
these items were non-recurring.





Twelve
      months endedDecember 31,
                    2006Net
      revenues
                
                $
                4,030,645Net
      income
                
                $
                340,097Net
      income per share:Basic
                
                $
                1.49Diluted
                
                $
                1.41





The pro
forma financial information does not necessarily reflect the results of
operations that would have occurred had the Company, Matrix and msystems
constituted a consolidated entity during such period.


F-49
 Table of Contents
 Notes
to Consolidated Financial Statements


Note 16:  Stockholders’ Rights
Plan




On
September 15, 2003, the Company amended its existing stockholder rights
plan to terminate the rights issued under that rights plan, and the Company
adopted a new rights plan.  Under the new rights plan, rights were
distributed as a dividend at the rate of one right for each share of common
stock of the Company held by stockholders of record as of the close of business
on September 25, 2003.  In November 2006, the Company
extended the term of the rights plan, such that the rights will expire on
April 28, 2017 unless redeemed or exchanged.  Under the new
rights agreement and after giving effect to the Company’s stock dividend
effected on February 18, 2004, each right will, under the circumstances
described below, entitle the registered holder to buy one two-hundredths of a
share of Series A Junior Participating Preferred Stock for
$225.00.  The rights will become exercisable only if a person or group
acquires beneficial ownership of 15% or more of the Company’s common stock or
commences a tender offer or exchange offer upon consummation of which such
person or group would beneficially own 15% or more of the Company’s common
stock.





F-50
 Table of Contents
 Notes
to Consolidated Financial Statements


Note 17:  Litigation




The flash
memory industry is characterized by significant litigation seeking to enforce
patent and other intellectual property rights.  The Company's patent
and other intellectual property rights are primarily responsible for generating
license and royalty revenue.  The Company seeks to protect its
intellectual property through patents, copyrights, trademarks, trade secret
laws, confidentiality agreements and other methods, and has been, and likely
will, continue to enforce such rights as appropriate through litigation and
related proceedings.  The Company expects that its competitors and
others who hold intellectual property rights related to its industry will pursue
similar strategies against it in litigation and related
proceedings.  From time-to-time, it has been and may continue to be
necessary to initiate or defend litigation against third
parties.  These and other parties could bring suit against the
Company.  In each case listed below where the Company is the
defendant, the Company intends to vigorously defend the action.  At
this time, the Company does not believe it is reasonably possible that losses
related to the litigation described below have occurred beyond the amounts, if
any, that have been accrued.





On
October 15, 2004, the Company filed a complaint for patent infringement and
declaratory judgment of non-infringement and patent invalidity against
STMicroelectronics N.V. and STMicroelectronics, Inc. (collectively, “ST”) in the
United States District Court for the Northern District of California, captioned
SanDisk Corporation v. STMicroelectronics, Inc., et al., Civil Case No. C 04
04379 JF.  The complaint alleges that ST’s products infringe one of
the Company’s U.S. patents, U.S. Patent No. 5,172,338 (the “’338 patent”), and
also alleges that several of ST’s patents are invalid and not
infringed.  On June 18, 2007, the Company filed an amended complaint,
removing several of the Company’s declaratory judgment claims.  At a
case management conference conducted on June 29, 2007, the parties agreed that
the remaining declaratory judgment claims would be dismissed pursuant to a
settlement agreement in two matters being litigated in the Eastern District of
Texas (Civil Case No. 4:05CV44 and Civil Case No. 4:05CV45, discussed
below).  The parties also agreed that the ’338 patent and a second
Company patent, presently at issue in Civil Case No. C0505021 JF (discussed
below), will be litigated together in this case.  ST filed an answer
and counterclaims on September 6, 2007.  ST’s counterclaims
included assertions of antitrust violations.  On October 19, 2007, the
Company filed a motion to dismiss ST’s antitrust counterclaims.  On
December 20, 2007, the Court entered a stipulated order staying all
procedural deadlines until the Court resolves the Company’s motion to
dismiss.   At a hearing held on January 25, 2008, the Court
converted the Company’s motion to dismiss into a motion for summary
judgment.  On June 17, 2008, the Court issued a stipulated order
rescheduling the hearing on the Company’s motion for summary judgment for
September 12, 2008.  On October 17, 2008, the Court issued an
order granting in part and denying in part the Company’s motion for summary
judgment on ST’s antitrust counterclaims.  The Court has not yet
established new procedural deadlines in this matter.





F-51
 Table of Contents
 Notes
to Consolidated Financial Statements


On
October 14, 2005, STMicroelectronics, Inc. (“STMicro”) filed a complaint against
the Company and the Company’s CEO, Dr. Eli Harari, in the Superior Court of the
State of California for the County of Alameda, captioned STMicroelectronics,
Inc. v. Harari, Case No. HG 05237216 (the “Harari Matter”).  The
complaint alleges that STMicro, as the successor to Wafer Scale Integration,
Inc.’s (“WSI”) legal rights, has an ownership interest in several Company
patents that were issued from applications filed by Dr. Harari, a former WSI
employee.  The complaint seeks the assignment or co-ownership of
certain inventions and patents conceived of by Dr. Harari, including some of the
patents asserted by the Company in its litigations against STMicro, as well as
damages in an unspecified amount.  On November 15, 2005,
Dr. Harari and the Company removed the case to the U.S. District Court for
the Northern District of California, where it was assigned case number
C05-04691.  On December 13, 2005, STMicro filed a motion to
remand the case back to the Superior Court of Alameda County.  The
case was remanded to the Superior Court of Alameda County on July 18, 2006,
after briefing and oral argument on a motion by STMicro for reconsideration of
an earlier order denying STMicro’s request for remand.  Due to the
remand, the District Court did not rule upon a summary judgment motion
previously filed by the Company.  In the Superior Court of Alameda
County, the Company filed a Motion to Transfer Venue to Santa Clara County on
August 10, 2006, which was denied on September 12, 2006.  On
October 6, 2006, the Company filed a Petition for Writ of Mandate with the First
District Court of Appeal, which asked that the Superior Court’s
September 12, 2006 Order be vacated, and the case transferred to Santa
Clara County.  On October 20, 2006, the Court of Appeal requested
briefing on the Company’s petition for a writ of mandate and stayed the action
during the pendency of the writ proceedings.  On January 17, 2007, the
Court of Appeal issued an alternative writ directing the Superior Court to issue
a new order granting the Company’s venue transfer motion or to show cause why a
writ of mandate should not issue compelling such an order.  On January
23, 2007, the Superior Court of Alameda transferred the case to Santa Clara
County as a result of the writ proceeding at the Court of Appeal.  The
Company also filed a special motion to strike STMicro’s unfair competition
claim, which the Superior Court denied on September 11,
2006.  The Company appealed the denial of that motion, and the
proceedings at the Superior Court were stayed during the pendency of the
appeal.  On August 7, 2007, the First District Court of Appeal
affirmed the Superior Court’s decision, and the Supreme Court subsequently
denied the Company’s petition for review.  On February 7, 2008, the
Company and Dr. Harari moved for judgment on the pleadings on the ground that
the federal courts have exclusive jurisdiction over the claims in the
case.  The Superior Court denied this motion and litigation then
proceeded at the Superior Court until May 7, 2008, when the Company and Dr.
Harari again removed the case to the U.S. District Court for the Northern
District of California.  The District Court consolidated the case and
the previously-removed action under case number C05-04691.  STMicro
filed a motion to remand which was granted on August 26, 2008.  The
case was remanded to the Superior Court for the County of Santa Clara, Case No.
1-07-CV-080123, and trial has been set for September 8, 2009.  On
January 30, 2009, the Company and Dr. Harari filed a motion for summary judgment
on the grounds that STMicro’s claims are time-barred.  The motion for
summary judgment is scheduled to be heard on April 27, 2009.





On
December 6, 2005, the Company filed a complaint for patent infringement in
the United States District Court for the Northern District of California against
ST (Case No. C0505021 JF).  In the suit, the Company seeks damages and
injunctions against ST from making, selling, importing or using flash memory
chips or products that infringe the Company’s U.S. Patent No. 5,991,517 (the
“’517 patent”).  As discussed above, the ’517 patent will be litigated
together with the ’338 patent in Civil Case No. C 04 04379JF.





On
September 11, 2006, Mr. Rabbi, a shareholder of msystems Ltd. (“msystems”), a
company subsequently acquired by the Company in or about November 2006, filed a
derivative action in Israel and a motion to permit him to file the derivative
action against msystems and four directors of msystems arguing that options were
allegedly allocated to officers and employees of msystems in violation of
applicable law.  Mr. Rabbi claimed that the aforementioned actions
allegedly caused damage to msystems.  On January 25, 2007, SanDisk IL
Ltd. (“SDIL”), successor in interest to msystems, filed a motion to dismiss the
motion to seek leave to file the derivative action and the derivative action on
the grounds, inter alia, that Mr. Rabbi ceased to be a shareholder of msystems
after the merger between msystems and the Company.  On March 12, 2008,
the court granted SDIL’s motion and dismissed the motion to seek leave to file
the derivative action and consequently, the derivative action itself was
dismissed.  On May 15, 2008, Mr. Rabbi filed an appeal with the
Supreme Court of Israel, the hearing of which is set for March 19,
2009.





F-52
 Table of Contents
 Notes
to Consolidated Financial Statements


On
February 16, 2007, Texas MP3 Technologies, Ltd. (“Texas MP3”) filed suit against
the Company, Samsung Electronics Co., Ltd., Samsung Electronics America, Inc.
and Apple Inc., Case No. 2:07-CV-52, in the Eastern District of Texas, Marshall
Division, alleging infringement of U.S. Patent 7,065,417 (the “’417
patent”).  On June 19, 2007, the Company filed an answer and
counterclaim:  (a) denying infringement; (b) seeking a declaratory
judgment that the ’417 patent is invalid, unenforceable and not infringed by the
Company.  On July 31, 2007, Texas MP3 filed an amended complaint
against the Company and the other parties named in the original complaint,
alleging infringement of the ’417 patent.  On August 1, 2007,
defendant Apple, Inc. filed a motion to stay the litigation pending completion
of an inter-partes reexamination of the ’417 patent by the U.S. Patent and
Trademark Office.  That motion was denied.  On August 10,
2007, the Company filed an answer to the amended complaint and a counterclaim:
(a) denying infringement; (b) seeking a declaratory judgment that the ’417
patent is invalid, unenforceable and not infringed by the
Company.  Texas MP3 and the Company have reached a settlement,
effective January 16, 2009.  As a result of the settlement the Court
dismissed all claims against the Company with prejudice on January 23,
2009.





On or
about May 11, 2007, the Company received written notice from Alcatel-Lucent,
S.A. (“Lucent”), alleging that the Company’s digital music players require a
license to U.S. Patent No. 5,341,457 (the “’457 patent”) and U.S. Patent No. RE
39,080 (the “’080 patent”).  On July 13, 2007, the Company filed a
complaint for a declaratory judgment of non-infringement and patent invalidity
against Lucent Technologies Inc. and Lucent in the United States District Court
for the Northern District of California, captioned SanDisk Corporation v. Lucent
Technologies Inc., et al., Civil Case No. C 07 03618.  The complaint
sought a declaratory judgment that the Company does not infringe the two patents
asserted by Lucent against the Company’s digital music players.  The
complaint further sought a judicial determination and declaration that Lucent’s
patents are invalid.  Defendants answered and asserted a counterclaim
of infringement in connection with the ’080 patent.  Defendants also
moved to dismiss the case without prejudice and/or stay the case pending their
appeal of a judgment involving the same patents in suit entered by the United
States District Court for the Southern District of California.  The
Company moved for summary judgment on its claims for declaratory relief and
moved to dismiss defendant Lucent’s counterclaim for infringement of the ’080
patent as a matter of law.  The Court granted Defendants’ motion to
stay and dismissed all other motions without prejudice.  In November
2008, this case was settled with Lucent stipulating to non-infringement by the
Company and dismissing its counterclaim with prejudice.





On August
10, 2007, Lonestar Invention, L.P. (“Lonestar”) filed suit against the Company
in the Eastern District of Texas, Civil Action No.
6:07-CV-00374-LED.  The complaint alleges that a memory controller
used in the Company’s flash memory devices infringes U.S. Patent No.
5,208,725.  Lonestar sought a permanent injunction, actual damages,
treble damages for willful infringement, and costs and attorney
fees.  The Company answered Lonestar’s complaint, denying the
allegations.  Pursuant to a settlement agreement reached, the lawsuit
was dismissed on November 14, 2008.  Lonestar’s claims were dismissed
with prejudice with respect to the particular products accused of
infringement.  SanDisk’s counterclaims were dismissed without
prejudice.





On
September 11, 2007, the Company and the Company’s CEO, Dr. Eli Harari,
received grand jury subpoenas issued from the United States District Court for
the Northern District of California indicating a Department of Justice
investigation into possible antitrust violations in the NAND flash memory
industry.  The Company also received a notice from the Canadian
Competition Bureau (“Bureau”) that the Bureau has commenced an industry-wide
investigation with respect to alleged anti-competitive activity regarding the
conduct of companies engaged in the supply of NAND flash memory chips to Canada
and requesting that the Company preserve any records relevant to such
investigation.  The Company is cooperating in these
investigations.





F-53
 Table of Contents
 Notes
to Consolidated Financial Statements


On
September 11, 2007, Premier International Associates LLC (“Premier”) filed
suit against the Company and 19 other named defendants, including Microsoft
Corporation, Verizon Communications Inc. and AT&T Inc., in the United States
District Court for the Eastern District of Texas (Marshall
Division).  The suit, Case No. 2-07-CV-396, alleges infringement of
Premier's U.S. Patents 6,243,725 (the “’725”) and 6,763,345 (the “’345”) by
certain of the Company’s portable digital music players, and seeks an injunction
and damages in an unspecified amount.  On December 10, 2007, an
amended complaint was filed.  On February 5, 2008, the Company filed
an answer to the amended complaint and counterclaims: (a) denying infringement;
(b) seeking a declaratory judgment that the ’725 and ’345 patents are invalid,
unenforceable and not infringed by the Company.  On February 5, 2008,
the Company, along with the other defendants in the action, filed a motion to
stay the litigation pending completion of reexaminations of the ’725 and ’345
patents by the U.S. Patent and Trademark Office.  This motion was
granted and on June 4, 2008, the action is currently stayed.





On
October 24, 2007, the Company filed a complaint under Section 337 of the Tariff
Act of 1930 (as amended) (Inv. No. 337-TA-619) titled, “In the matter of flash
memory controllers, drives, memory cards, and media players and products
containing same” in the ITC (hereinafter, “the 619 Investigation”), naming the
following companies as respondents:  Phison Electronics Corp.
(“Phison”); Silicon Motion Technology Corp., Silicon Motion, Inc. (Taiwan),
Silicon Motion, Inc. (California), and Silicon Motion International, Inc.
(collectively, “Silicon Motion”); USBest Technology, Inc. dba Afa Technologies,
Inc. (“USBest”); Skymedi Corp. (“Skymedi”); Chipsbrand Microelectronics (HK)
Co., Ltd., Chipsbank Technology (Shenzhen) Co., Ltd., and Chipsbank
Microelectronics Co., Ltd., (collectively, “Chipsbank”); Zotek Electronic Co.,
Ltd., dba Zodata Technology Ltd. (collectively, “Zotek”); Infotech Logistic LLC
(“Infotech”); Power Quotient International Co., Ltd., and PQI Corp.
(collectively, “PQI”); Power Quotient International (HK) Co., Ltd.; Syscom
Development Co. Ltd.; PNY Technologies, Inc. (“PNY”); Kingston Technology Co.,
Inc., Kingston Technology Corp., Payton Technology Corp., and MemoSun, Inc.
(collectively, “Kingston”); Buffalo, Inc., Melco Holdings, Inc., and Buffalo
Technology (USA), Inc. (collectively, “Buffalo”); Verbatim Corp. (“Verbatim”);
Transcend Information Inc. (Taiwan), Transcend Information Inc. (California),
and Transcend Information Maryland, Inc., (collectively, “Transcend”); Imation
Corp., Imation Enterprises Corp., and Memorex Products, Inc. (collectively,
“Imation”); Add-On Computer Peripherals, Inc. and Add-On Computer Peripherals,
LLC (collectively, “Add-On Computer Peripherals”); Add-On Technology Co.; A-Data
Technology Co., Ltd., and A-Data Technology (USA) Co., Ltd., (collectively,
“A-DATA”); Apacer Technology Inc. and Apacer Memory America, Inc. (collectively,
“Apacer”); Acer, Inc. (“Acer”); Behavior Tech Computer Corp. and Behavior Tech
Computer (USA) Corp. (collectively, “Behavior”); Emprex Technologies
Corp.(“Emprex”); Corsair Memory, Inc. (“Corsair”); Dane-Elec Memory S.A., and
Dane-Elec Corp. USA, (collectively, “Dane-Elec”); Deantusaiocht Dane-Elec TEO;
EDGE Tech Corp. (“EDGE”); Interactive Media Corp, (“Interactive”); Kaser Corp.
(“Kaser”); LG Electronics, Inc., and LG Electronics U.S.A., Inc., (collectively,
“LG”); TSR Silicon Resources Inc. (“TSR”); and Welldone Co.
(“Welldone”).  In the complaint, the Company asserts that respondents’
accused flash memory controllers, drives, memory cards, and media players
infringe the following: U.S. Patent No. 5,719,808 (the “’808 patent”); U.S.
Patent No. 6,763,424 (the “’424 patent”); U.S. Patent No. 6,426,893 (the “’893
patent”); U.S. Patent No. 6,947,332 (the “’332 patent”); and U.S. Patent No.
7,137,011 (the “’011 patent”).  The Company seeks an order excluding
the accused products from entry into the United States as well as a permanent
cease and desist order against the respondents.  Since filing its
complaint, the Company has terminated the investigation as to the’808 patent,
the ’893 patent, and the ’332 patent.  After filing its complaint, the
Company reached settlement agreements with Add-On Computer Peripherals, EDGE,
Infotech, Interactive, Kaser, PNY, TSR, Verbatim, Chipsbank, USBest and
Welldone.  The investigation has been terminated as to these
respondents in light of these settlement agreements.  Three of the
remaining respondents – Buffalo, Corsair, and A-Data – were terminated from the
investigation after entering consent orders.  The investigation has
also been terminated as to Add-On Tech. Co., Behavior, Emprex, and Zotek after
these respondents were found in default.  The investigation has also
been terminated as to Acer, Payton, Silicon Motion Tech. Corp., and Silicon
Motion, Int’l Inc.  The Company also terminated PQI from the
investigation as to the ’011 patent.  On July 15, 2008, the ALJ issued
a Markman ruling regarding the ’011 patent, the ’893 patent, the ’332 patent,
and the ’424 patent. Beginning October 27, 2008, the ALJ held an evidentiary
hearing.  At the hearing, the respondents denied infringement and
raised several affirmative defenses including, among others, lack of domestic
industry, invalidity, unenforceability, patent misuse, license, patent
exhaustion, intervening rights, and laches.  After the hearing, the
parties filed a series of post-hearing briefs.  On February 9, 2009,
the ALJ extended the target date for conclusion of the investigation to August
10, 2009.  The ALJ is expected to issue an initial determination on
the merits by April 10, 2009.





F-54
 Table of Contents
 Notes
to Consolidated Financial Statements


On
October 24, 2007, the Company filed a complaint for patent infringement in the
United States District Court for the Western District of Wisconsin against the
following defendants: Phison, Silicon Motion, Synergistic Sales, Inc.
(“Synergistic”), USBest, Skymedi, Chipsbank, Infotech, Zotek, PQI, PNY,
Kingston, Buffalo, Verbatim, Transcend, Imation, Add-On Computer Peripherals,
A-DATA, Apacer, Behavior, Corsair, Dane-Elec, EDGE, Interactive, LG, TSR and
Welldone.  In this action, Case No. 07-C-0607-C, the Company asserts
that the defendants infringe the ’808 patent, the ’424 patent, the ’893 patent,
the ’332 patent and the ’011 patent.  The Company seeks damages and
injunctive relief.  In light of the above mentioned settlement
agreements, the Company dismissed its claims against Add-On Computer
Peripherals, EDGE, Infotech, Interactive, PNY, TSR and Welldone.  The
Company also voluntarily dismissed its claims against Acer and Synergistic
without prejudice.  The Company also voluntarily dismissed its claims
against Corsair in light of its agreement to sell flash memory products only
under license or consent from the Company.   On November 21,
2007, defendant Kingston filed a motion to stay this action.  Several
defendants joined in Kingston’s motion.  On December 19, 2007,
the Court issued an order staying the case in its entirety until the 619
Investigation becomes final.  On January 14, 2008, the Court issued an
order clarifying that the entire case is stayed for all parties.





On
October 24, 2007, the Company filed a complaint for patent infringement in the
United States District Court for the Western District of Wisconsin against the
following defendants: Phison, Silicon Motion, Synergistic, USBest, Skymedi,
Zotek, Infotech, PQI, PNY, Kingston, Buffalo, Verbatim, Transcend, Imation,
A-DATA, Apacer, Behavior, and Dane-Elec.  In this action, Case No.
07-C-0605-C, the Company asserts that the defendants infringe U.S. Patent No.
6,149,316 (the “’316 patent”) and U.S. Patent No. 6,757,842 (the “’842
patent”).  The Company seeks damages and injunctive
relief.  In light of above mentioned settlement agreements, the
Company dismissed its claims against Infotech and PNY.  The Company
also voluntarily dismissed its claims against Acer and Synergistic without
prejudice.  On November 21, 2007, defendant Kingston filed a motion to
consolidate and stay this action.  Several defendants joined in
Kingston’s motion.  On December 17, 2007, the Company filed an
opposition to Kingston’s motion.  That same day, several defendants
filed another motion to stay this action.  On January 7, 2008, the
Company opposed the defendants’ second motion to stay.  On January 22,
2008, defendants Phison, Skymedi and Behavior filed motions to dismiss the
Company’s complaint for lack of personal jurisdiction.  That same day,
defendants Phison, Silicon Motion, USBest, Skymedi, PQI, Kingston, Buffalo,
Verbatim, Transcend, A-DATA, Apacer, and Dane-Elec answered the Company’s
complaint denying infringement and raising several affirmative
defenses.  These defenses included, among others, lack of personal
jurisdiction, improper venue, lack of standing, invalidity, unenforceability,
express license, implied license, patent exhaustion, waiver, latches, and
estoppel.  On January 24, 2008, Silicon Motion filed a motion to
dismiss the Company’s complaint for lack of personal jurisdiction.  On
January 25, 2008, Dane-Elec also filed a motion to dismiss the Company’s
complaint for lack of personal jurisdiction.  On January 28, 2008, the
Court issued an order staying the case in its entirety with respect to all
parties until the proceeding in the 619 Investigation become
final.  In its order, the Court also consolidated this action (Case
Nos. 07-C-0605-C) with the action discussed in the preceding paragraph
(07-C-0607-C).





Between
August 31, 2007 and December 14, 2007, the Company (along with a number of
other manufacturers of flash memory products) was sued in the Northern District
of California, in eight purported class action complaints.  On
February 7, 2008, all of the civil complaints were consolidated into two
complaints, one on behalf of direct purchasers and one on behalf of indirect
purchasers, in the Northern District of California in a purported class action
captioned In re Flash Memory Antitrust Litigation, Civil Case No.
C07-0086.  Plaintiffs allege the Company and a number of other
manufacturers of flash memory products conspired to fix, raise, maintain, and
stabilize the price of NAND flash memory in violation of state and federal
laws.  The lawsuits purport to be on behalf of purchasers of flash
memory between January 1, 1999 through the present.  The lawsuits seek
an injunction, damages, restitution, fees, costs, and disgorgement of
profits.  On April 8, 2008, the Company, along with co-defendants,
filed motions to dismiss the direct purchaser and indirect purchaser
complaints.  Also on April 8, 2008, the Company, along with
co-defendants, filed a motion for a protective order to stay
discovery.  On April 22, 2008, direct and indirect purchaser
plaintiffs filed oppositions to the motions to dismiss.  The
Company’s, along with co-defendants’, reply to the oppositions was filed May 13,
2008.  The Court took the motions to dismiss and the motion for a
protective order under submission on June 3, 2008, and has yet to issue its
ruling.





F-55
 Table of Contents
 Notes
to Consolidated Financial Statements


On
November 6, 2007, Gil Mosek, a former employee of SanDisk IL Ltd. (“SDIL”),
filed a lawsuit against SDIL, Dov Moran and Amir Ban in the Tel-Aviv District
Court, claiming that he and Amir Ban, another former employee of SDIL, reached
an agreement according to which a jointly-held company should have been
established together with SDIL. According to Mr. Mosek, SDIL knew about the
agreement, approved it and breached it, while deciding not to establish the
jointly-held company.  On January 1, 2008, SDIL filed a statement of
defense. Simultaneously, SDIL filed a request to dismiss the lawsuit, claiming
that Mr. Mosek signed a waiver in favor of SDIL, according to which he has no
claim against SDIL.  On February 12, 2008, Mr. Mosek filed a request to
allow him to present certain documents, which contain confidential information
of SDIL.  On February 26, 2008, SDIL opposed this request, claiming that
SDIL’s documents are the sole property of SDIL and Mr. Mosek has no right to
hold and to use them.  On March 6, 2008, the court decided that
Mr. Mosek has to pay a fee according to the estimated amount of the claim.
 On April 3, 2008, Mr. Mosek filed a request to amend the claim by setting
the claim on an amount of NIS 3,000,000.  On April 9, 2008, SDIL filed its
response to this request, according to which it has no objection to the
amendment, subject to the issuance of an order for costs.  On April 10,
2008, the Court accepted Mr. Mosek’s request.  According to the settlement
agreement, reached between the SDIL and Amir Ban in January 2008, Amir Ban shall
indemnify and hold SDIL harmless with regard to the claim filed by Mosek, as
described in this section above.  At a pre-trial hearing held on
February 9, 2009, the Court indicated that Mr. Mosek should transfer his claim
to the Tel-Aviv Labor Court due to the District Court’s lack of
jurisdiction.  Mr. Mosek asked for the Court's permission to divide
the lawsuit into two parts so the action against Amir Ban may be transferred to
the Labor Court whereas the claim against SDIL would remain in the District
Court.  The District Court has not yet ruled as to whether the portion
of the claim against Amir Ban should be transferred to the Labor Court together
with the claim against SDIL.


In
April 2006, the Company's subsidiary SanDisk IL Ltd. (“SDIL”) terminated its
supply and license agreement (the “Agreement”) with Samsung.  As a
result of this termination, the Company’s subsidiary no longer was entitled to
purchase products on favorable pricing terms from Samsung, Samsung no longer had
a life-of-patent license to the Company’s subsidiary’s patents, and no further
patent licensing payments would be due.  Samsung contested the
termination and SDIL commenced an arbitration proceeding seeking a declaration
that its termination was valid.  Samsung asserted various defenses and
counterclaims in the arbitration.  A hearing was held in
December 2007, and the arbitration panel issued an award on May 16, 2008
declaring that SDIL’s termination of the agreement was valid and effective, and
dismissing all Samsung’s counterclaims (the “Award”).  On July 24,
2008, in an action captioned Samsung Electronics Co., Ltd. v. SanDisk IL f/k/a
M-Systems Ltd., No. 08 Civ. 6596 (AKH), Samsung filed a petition to vacate the
award in the District Court for the Southern District of New York (“Samsung's
Petition”).  On September 18, 2008, in an action captioned
SanDisk IL, Ltd. f/k/a msystems Ltd., No. 08 Civ. 8069 (AKH), SDIL petitioned to
confirm the award pursuant to the dispute resolution provisions of the Agreement
and Section 207 of the Federal Arbitration Act, 9 U.S.C. § 207.  On
September 22, 2008, Samsung withdrew its petition for vacatur and asked the
Court to immediately enter judgment against itself with respect to SDIL's
petition to confirm.  On September 24, 2008, the Court entered
judgment in favor of SDIL on SDIL's petition to confirm the award.  On
October 7, 2008, SDIL filed a motion for attorneys’ fees and expenses incurred
in connection with Samsung's withdrawn petition to vacate the
award.  On October 20, 2008, after Samsung offered to pay in full the
expenses claimed by SDIL, the motion for attorneys’ fees and expenses was denied
by the District Court.





On
September 14, 2008, Daniel Harkabi and Gidon Elazar, former employees and
founders of MDRM, Inc., filed a breach of contract action in the U.S. District
Court for the Southern District of New York seeking earn-out payments of
approximately $3.8 million in connection with SanDisk’s acquisition of
MDRM, Inc. in fiscal year 2004.  A mediation was held in June 2007, as
required by the acquisition agreement, but was unsuccessful.  The
Company filed its answer on November 14, 2008 and discovery is
proceeding.





F-56
 Table of Contents
 Notes
to Consolidated Financial Statements


On
September 17, 2008, a purported shareholder class action, captioned McBride
v. Federman, et al., Case No. 1-08-CV-122921, was filed in the Superior Court of
California in Santa Clara County.  The lawsuit was brought by a
purported shareholder of the Company and names as defendants the Company and its
directors, Irwin Federman, Steven J. Gomo, Dr. Eli Harari, Eddy W. Hartenstein,
Catherine P. Lego, Michael E. Marks, and Dr. James D. Meindl.  The
complaint alleges breach of fiduciary duty by the Company and its directors in
rejecting Samsung Electronics Co., Ltd.'s non-binding proposal to acquire all of
the outstanding common stock of the Company for $26.00 per share.  On
September 29, 2008, plaintiff served his first request for production of
documents on the Company.  On October 17, 2008, the Company and its
directors filed a demurrer seeking dismissal of the lawsuit, and plaintiff
served his first requests for production of documents on the Company's
directors.  On November 4, 2008, the parties filed a stipulation to
dismiss the litigation without prejudice, with each party to bear its own
costs.  On November 11, 2008, the Court dismissed the case without
prejudice.





On
October 1, 2008, NorthPeak Wireless LLC (“NorthPeak”) filed suit against the
Company and 30 other named defendants including Dell, Inc., Fujitsu Computer
Systems Corp., Gateway, Inc., Hewlett-Packard Company and Toshiba America, Inc.,
in the United States District Court for the Northern District of Alabama,
Northeastern Division.  The suit, Case No. CV-08-J-1813, alleges
infringement of U.S. Patents 4,977,577 and 5,978,058 by certain of the Company’s
discontinued wireless electronic products.  On January 21, 2009, the
Court granted a motion by the defendants to transfer the case to the United
States District Court for the Northern District of California, where it is now
Case No. 3:09-CV-01813.


F-57
 Table of Contents
 Notes
to Consolidated Financial Statements


Note 18:  CondensedConsolidating Financial
Statements




As part
of the acquisition of msystems Ltd. (hereinafter referred to as “SanDisk IL
Ltd.,” “SDIL,” or “Other Guarantor Subsidiary”) in November 2006, the Company
entered into a supplemental indenture whereby the Company became an additional
obligor and guarantor of the assumed $75 million 1% Convertible Notes due
2035 issued by M-Systems Finance, Inc. (the “Subsidiary Issuer” or “mfinco”) and
guaranteed by SDIL.  The Company’s (the “Parent Company”) guarantee is
full and unconditional, and joint and several with SDIL.  Both SDIL
and mfinco are wholly-owned subsidiaries of the Company.  The
following Condensed Consolidating Financial Statements present separate
information for mfinco as the subsidiary issuer, the Company and SDIL as
guarantors, and the Company’s other combined non-guarantor subsidiaries, and
should be read in conjunction with the Consolidated Financial Statements of the
Company.





These
Condensed Consolidating Financial Statements have been prepared using the equity
method of accounting.  Earnings of subsidiaries are reflected in the
Company’s investment in subsidiaries account.  The elimination entries
eliminate investments in subsidiaries, related stockholders’ equity and other
intercompany balances and transactions.  Amounts of operating and
financing cash flows related to combined non-guarantor subsidiaries and
consolidating adjustments for the fiscal year ended December 30, 2007 have been
revised to properly reflect certain reclassifications.  The
reclassifications did not have any effect on the net change in cash and cash
equivalents for the Combined Non-guarantor Subsidiaries, the Consolidating
Adjustments or the Total Company columns of the Condensed Consolidating
Statements of Cash Flows for the fiscal year ended December 30,
2007.





Condensed
      Consolidating Statements of Operations
                    For
      the fiscal year ended December 28, 2008Parent
                      Company
      (1)
                  
                  
                  Subsidiary
      Issuer (1)
                  
                  
                  Other
      Guarantor Subsidiary (1)
                  
                  
                  Combined
      Non-Guarantor Subsidiaries (2)
                  
                  
                  Consolidating
                      Adjustments
                  
                  
                  Total
                      Company(In thousands)Total
      revenues
                  
                  $
                  1,825,252
                  
                  
                  $
                  —
                  
                  
                  $
                  222,089
                  
                  
                  $
                  5,125,483
                  
                  
                  $
                  (3,821,472
                  )
                  
                  $
                  3,351,352Total
      cost of revenues
                  
                  
                  1,841,644
                  
                  
                  
                  —
                  
                  
                  
                  132,897
                  
                  
                  
                  4,918,089
                  
                  
                  
                  (3,604,365
                  )
                  
                  
                  3,288,265Gross
      profit (loss)
                  
                  
                  (16,392
                  )
                  
                  
                  —
                  
                  
                  
                  89,192
                  
                  
                  
                  207,394
                  
                  
                  
                  (217,107
                  )
                  
                  
                  63,087Total
      operating expenses
                  
                  
                  710,534
                  
                  
                  
                  —
                  
                  
                  
                  133,642
                  
                  
                  
                  390,523
                  
                  
                  
                  801,868
                  
                  
                  
                  2,036,567Operating
      income (loss)
                  
                  
                  (726,926
                  )
                  
                  
                  —
                  
                  
                  
                  (44,450
                  )
                  
                  
                  (183,129
                  )
                  
                  
                  (1,018,975
                  )
                  
                  
                  (1,973,480
                  )Total
      other income (expense)
                  
                  
                  19,571
                  
                  
                  
                  (1
                  )
                  
                  
                  8,510
                  
                  
                  
                  47,970
                  
                  
                  
                  (5,604
                  )
                  
                  
                  70,446Income
      (loss) before provision for income taxes
                  
                  
                  (707,355
                  )
                  
                  
                  (1
                  )
                  
                  
                  (35,940
                  )
                  
                  
                  (135,159
                  )
                  
                  
                  (1,024,579
                  )
                  
                  
                  (1,903,034
                  )Provision
      for income taxes
                  
                  
                  131,864
                  
                  
                  
                  —
                  
                  
                  
                  7,169
                  
                  
                  
                  14,709
                  
                  
                  
                  —
                  
                  
                  
                  153,742Equity
      in net income (loss) of consolidated subsidiaries
                  
                  
                  (157,340
                  )
                  
                  
                  —
                  
                  
                  
                  18,407
                  
                  
                  
                  40,189
                  
                  
                  
                  98,744
                  
                  
                  
                  —Net
      income (loss)
                  
                  $
                  (996,559
                  )
                  
                  $
                  (1
                  )
                  
                  $
                  (24,702
                  )
                  
                  $
                  (109,679
                  )
                  
                  $
                  (925,835
                  )
                  
                  $
                  (2,056,776
                  )







(1)
            This
      represents legal entity results which exclude any subsidiaries required to
      be consolidated under GAAP.




(2)
            This
      represents all other legal
subsidiaries.










F-58
 Table of Contents
 Notes
to Consolidated Financial Statements





Condensed
      Consolidating Statements of Operations
                      For
      the fiscal year ended December 30, 2007Parent
                        Company
      (1)
                    
                    
                    Subsidiary
      Issuer (1)
                    
                    
                    Other
      Guarantor Subsidiary (1)
                    
                    
                    Combined
      Non-Guarantor Subsidiaries (2)
                    
                    
                    Consolidating
                        Adjustments
                    
                    
                    Total
                        Company(In thousands)Total
      revenues
                    
                    $
                    2,193,435
                    
                    
                    $
                    —
                    
                    
                    $
                    311,441
                    
                    
                    $
                    4,993,166
                    
                    
                    $
                    (3,601,676
                    )
                    
                    $
                    3,896,366Total
      cost of revenues
                    
                    
                    1,253,220
                    
                    
                    
                    —
                    
                    
                    
                    299,885
                    
                    
                    
                    4,601,636
                    
                    
                    
                    (3,461,094
                    )
                    
                    
                    2,693,647Gross
      profit (loss)
                    
                    
                    940,215
                    
                    
                    
                    —
                    
                    
                    
                    11,556
                    
                    
                    
                    391,530
                    
                    
                    
                    (140,582
                    )
                    
                    
                    1,202,719Total
      operating expenses
                    
                    
                    513,827
                    
                    
                    
                    —
                    
                    
                    
                    147,678
                    
                    
                    
                    401,464
                    
                    
                    
                    (136,764
                    )
                    
                    
                    926,205Operating
      income (loss)
                    
                    
                    426,388
                    
                    
                    
                    —
                    
                    
                    
                    (136,122
                    )
                    
                    
                    (9,934
                    )
                    
                    
                    (3,818
                    )
                    
                    
                    276,514Total
      other income (expense)
                    
                    
                    106,491
                    
                    
                    
                    1
                    
                    
                    
                    23,324
                    
                    
                    
                    (12,215
                    )
                    
                    
                    4,301
                    
                    
                    
                    121,902Income
      (loss) before provision for income taxes
                    
                    
                    532,879
                    
                    
                    
                    1
                    
                    
                    
                    (112,798
                    )
                    
                    
                    (22,149
                    )
                    
                    
                    483
                    
                    
                    
                    398,416Provision
      for income taxes
                    
                    
                    163,422
                    
                    
                    
                    —
                    
                    
                    
                    7,539
                    
                    
                    
                    3,895
                    
                    
                    
                    (8
                    )
                    
                    
                    174,848Minority
      interest
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    5,211
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    5,211Equity
      in net income (loss) of consolidated subsidiaries
                    
                    
                    9,005
                    
                    
                    
                    —
                    
                    
                    
                    (2,816
                    )
                    
                    
                    3,836
                    
                    
                    
                    (10,025
                    )
                    
                    
                    —Net
      income (loss)
                    
                    $
                    378,462
                    
                    
                    $
                    1
                    
                    
                    $
                    (128,364
                    )
                    
                    $
                    (22,208
                    )
                    
                    $
                    (9,534
                    )
                    
                    $
                    218,357







Condensed
      Consolidating Statements of Operations
                    For
      the fiscal year ended December 31, 2006Parent
                      Company
      (1)
                  
                  
                  Subsidiary
      Issuer (1)
                  
                  
                  Other
      Guarantor Subsidiary (1)
                  
                  
                  Combined
      Non-Guarantor Subsidiaries (2)
                  
                  
                  Consolidating
                      Adjustments
                  
                  
                  Total
                      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
      profit (loss)
                  
                  
                  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
                  
                  
                  
                  3,282
                  
                  
                  
                  44,925
                  
                  
                  
                  (40,253
                  )
                  
                  
                  104,374Income
      (loss) before provision (benefit) for income taxes
                  
                  
                  450,655
                  
                  
                  
                  5
                  
                  
                  
                  (204,805
                  )
                  
                  
                  221,241
                  
                  
                  
                  (36,388
                  )
                  
                  
                  430,708Provision
      (benefit) for income taxes
                  
                  
                  229,376
                  
                  
                  
                  —
                  
                  
                  
                  (1,485
                  )
                  
                  
                  2,302
                  
                  
                  
                  —
                  
                  
                  
                  230,193Minority
      interest
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1,619
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1,619Equity
      in net income (loss) of consolidated subsidiaries
                  
                  
                  207,438
                  
                  
                  
                  —
                  
                  
                  
                  528
                  
                  
                  
                  26,077
                  
                  
                  
                  (234,043
                  )
                  
                  
                  —Net
      income (loss)
                  
                  $
                  428,717
                  
                  
                  $
                  5
                  
                  
                  $
                  (204,411
                  )
                  
                  $
                  245,016
                  
                  
                  $
                  (270,431
                  )
                  
                  $
                  198,896







(1)
            This
      represents legal entity results which exclude any subsidiaries required to
      be consolidated under GAAP.




(2)
            This
      represents all other legal
subsidiaries.







F-59
 Table of Contents
 Notes
to Consolidated Financial Statements





Condensed
      Consolidating Balance Sheets
                    As
      of December 28, 2008Parent
      Company (1)
                  
                  
                  Subsidiary
      Issuer (1)
                  
                  
                  Other
      Guarantor Subsidiary (1)
                  
                  
                  Combined
      Non-Guarantor Subsidiaries (2)
                  
                  
                  Consolidating
      Adjustments
                  
                  
                  Total
      Company(In thousands)ASSETSCurrent
      assets:Cash
      and cash equivalents
                  
                  $
                  376,052
                  
                  
                  $
                  66
                  
                  
                  $
                  51,806
                  
                  
                  $
                  534,137
                  
                  
                  $
                  —
                  
                  
                  $
                  962,061Short-term
      investments
                  
                  
                  443,632
                  
                  
                  
                  —
                  
                  
                  
                  33,664
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  477,296Accounts
      receivable, net
                  
                  
                  76,733
                  
                  
                  
                  —
                  
                  
                  
                  1,862
                  
                  
                  
                  43,497
                  
                  
                  
                  —
                  
                  
                  
                  122,092Inventory
                  
                  
                  87,612
                  
                  
                  
                  —
                  
                  
                  
                  1,573
                  
                  
                  
                  511,740
                  
                  
                  
                  (2,674
                  )
                  
                  
                  598,251Other
      current assets
                  
                  
                  1,155,377
                  
                  
                  
                  —
                  
                  
                  
                  209,861
                  
                  
                  
                  1,424,708
                  
                  
                  
                  (2,246,301
                  )
                  
                  
                  543,645Total
      current assets
                  
                  
                  2,139,406
                  
                  
                  
                  66
                  
                  
                  
                  298,766
                  
                  
                  
                  2,514,082
                  
                  
                  
                  (2,248,975
                  )
                  
                  
                  2,703,345Property
      and equipment, net
                  
                  
                  205,022
                  
                  
                  
                  —
                  
                  
                  
                  33,478
                  
                  
                  
                  158,487
                  
                  
                  
                  —
                  
                  
                  
                  396,987Other
      non-current assets
                  
                  
                  2,784,030
                  
                  
                  
                  73,710
                  
                  
                  
                  69,797
                  
                  
                  
                  1,564,731
                  
                  
                  
                  (1,665,664
                  )
                  
                  
                  2,826,604Total
      assets
                  
                  $
                  5,128,458
                  
                  
                  $
                  73,776
                  
                  
                  $
                  402,041
                  
                  
                  $
                  4,237,300
                  
                  
                  $
                  (3,914,639
                  )
                  
                  $
                  5,926,936LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
                  
                  $
                  81,014
                  
                  
                  $
                  —
                  
                  
                  $
                  3,379
                  
                  
                  $
                  526,809
                  
                  
                  $
                  (211
                  )
                  
                  $
                  610,991Other
      current accrued liabilities
                  
                  
                  1,105,212
                  
                  
                  
                  2,166
                  
                  
                  
                  21,567
                  
                  
                  
                  1,841,278
                  
                  
                  
                  (2,318,205
                  )
                  
                  
                  652,018Total
      current liabilities
                  
                  
                  1,186,226
                  
                  
                  
                  2,166
                  
                  
                  
                  24,946
                  
                  
                  
                  2,368,087
                  
                  
                  
                  (2,318,416
                  )
                  
                  
                  1,263,009Convertible
      long-term debt
                  
                  
                  1,150,000
                  
                  
                  
                  75,000
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1,225,000Non-current
      liabilities
                  
                  
                  178,486
                  
                  
                  
                  —
                  
                  
                  
                  17,963
                  
                  
                  
                  75,964
                  
                  
                  
                  (8,436
                  )
                  
                  
                  263,977Total
      liabilities
                  
                  
                  2,514,712
                  
                  
                  
                  77,166
                  
                  
                  
                  42,909
                  
                  
                  
                  2,444,051
                  
                  
                  
                  (2,326,852
                  )
                  
                  
                  2,751,986Minority
      interest
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  151
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  151Total
      stockholders' equity
                  
                  
                  2,613,746
                  
                  
                  
                  (3,390
                  )
                  
                  
                  358,981
                  
                  
                  
                  1,793,249
                  
                  
                  
                  (1,587,787
                  )
                  
                  
                  3,174,799Total
      liabilities and stockholders' equity
                  
                  $
                  5,128,458
                  
                  
                  $
                  73,776
                  
                  
                  $
                  402,041
                  
                  
                  $
                  4,237,300
                  
                  
                  $
                  (3,914,639
                  )
                  
                  $
                  5,926,936







(1)
            This
      represents legal entity results which exclude any subsidiaries required to
      be consolidated under GAAP.




(2)
            This
      represents all other legal
subsidiaries.







F-60
 Table of Contents
 Notes
to Consolidated Financial Statements








Condensed
      Consolidating Balance Sheets
                    As
      of December 30, 2007Parent
      Company (1)
                  
                  
                  Subsidiary
      Issuer (1)
                  
                  
                  Other
      Guarantor Subsidiary (1)
                  
                  
                  Combined
      Non-Guarantor Subsidiaries (2)
                  
                  
                  Consolidating
      Adjustments
                  
                  
                  Total
      Company(In thousands)ASSETSCurrent
      assets:Cash
      and cash equivalents
                  
                  $
                  389,337
                  
                  
                  $
                  215
                  
                  
                  $
                  90,639
                  
                  
                  $
                  353,558
                  
                  
                  $
                  —
                  
                  
                  $
                  833,749Short-term
      investments
                  
                  
                  1,001,641
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1,001,641Accounts
      receivable, net
                  
                  
                  215,049
                  
                  
                  
                  —
                  
                  
                  
                  32,497
                  
                  
                  
                  223,624
                  
                  
                  
                  (8,187
                  )
                  
                  
                  462,983Inventory
                  
                  
                  104,626
                  
                  
                  
                  —
                  
                  
                  
                  30,238
                  
                  
                  
                  423,850
                  
                  
                  
                  (3,637
                  )
                  
                  
                  555,077Other
      current assets
                  
                  
                  759,872
                  
                  
                  
                  —
                  
                  
                  
                  221,932
                  
                  
                  
                  823,387
                  
                  
                  
                  (1,358,984
                  )
                  
                  
                  446,207Total
      current assets
                  
                  
                  2,470,525
                  
                  
                  
                  215
                  
                  
                  
                  375,306
                  
                  
                  
                  1,824,419
                  
                  
                  
                  (1,370,808
                  )
                  
                  
                  3,299,657Property
      and equipment, net
                  
                  
                  222,038
                  
                  
                  
                  —
                  
                  
                  
                  34,975
                  
                  
                  
                  165,882
                  
                  
                  
                  —
                  
                  
                  
                  422,895Other
      non-current assets
                  
                  
                  2,684,232
                  
                  
                  
                  71,998
                  
                  
                  
                  925,424
                  
                  
                  
                  1,350,985
                  
                  
                  
                  (1,520,372
                  )
                  
                  
                  3,512,267Total
      assets
                  
                  $
                  5,376,795
                  
                  
                  $
                  72,213
                  
                  
                  $
                  1,335,705
                  
                  
                  $
                  3,341,286
                  
                  
                  $
                  (2,891,180
                  )
                  
                  $
                  7,234,819LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
                  
                  $
                  48,386
                  
                  
                  $
                  —
                  
                  
                  $
                  34,462
                  
                  
                  $
                  362,138
                  
                  
                  $
                  (832
                  )
                  
                  $
                  444,154Other
      current accrued liabilities
                  
                  
                  587,129
                  
                  
                  
                  601
                  
                  
                  
                  66,353
                  
                  
                  
                  1,253,114
                  
                  
                  
                  (1,437,468
                  )
                  
                  
                  469,729Total
      current liabilities
                  
                  
                  635,515
                  
                  
                  
                  601
                  
                  
                  
                  100,815
                  
                  
                  
                  1,615,252
                  
                  
                  
                  (1,438,300
                  )
                  
                  
                  913,883Convertible
      long-term debt
                  
                  
                  1,150,000
                  
                  
                  
                  75,000
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1,225,000Non-current
      liabilities
                  
                  
                  67,895
                  
                  
                  
                  —
                  
                  
                  
                  11,428
                  
                  
                  
                  60,839
                  
                  
                  
                  (4,910
                  )
                  
                  
                  135,252Total
      liabilities
                  
                  
                  1,853,410
                  
                  
                  
                  75,601
                  
                  
                  
                  112,243
                  
                  
                  
                  1,676,091
                  
                  
                  
                  (1,443,210
                  )
                  
                  
                  2,274,135Minority
      interest
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1,067
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1,067Total
      stockholders' equity
                  
                  
                  3,523,385
                  
                  
                  
                  (3,388
                  )
                  
                  
                  1,222,395
                  
                  
                  
                  1,665,195
                  
                  
                  
                  (1,447,970
                  )
                  
                  
                  4,959,617Total
      liabilities and stockholders' equity
                  
                  $
                  5,376,795
                  
                  
                  $
                  72,213
                  
                  
                  $
                  1,335,705
                  
                  
                  $
                  3,341,286
                  
                  
                  $
                  (2,891,180
                  )
                  
                  $
                  7,234,819







(1)
            This
      represents legal entity results which exclude any subsidiaries required to
      be consolidated under GAAP.




(2)
            This
      represents all other legal
subsidiaries.




F-61
 Table of Contents
 Notes
to Consolidated Financial Statements





Condensed
      Consolidating Statements of Cash Flows
                    For
      the fiscal year ended December 28, 2008Parent
      Company (1)
                  
                  
                  Subsidiary
      Issuer (1)
                  
                  
                  Other
      Guarantor Subsidiary (1)
                  
                  
                  Combined
      Non-Guarantor Subsidiaries (2)
                  
                  
                  Consolidating
                      Adjustments
                  
                  
                  Total
      Company(In
      thousands)Net
      cash provided by (used in) operating activities
                  
                  $
                  (459,599
                  )
                  
                  $
                  (149
                  )
                  
                  $
                  36,301
                  
                  
                  $
                  510,255
                  
                  
                  $
                  —
                  
                  
                  $
                  86,808Net
      cash provided by (used in) investing activities
                  
                  
                  424,352
                  
                  
                  
                  —
                  
                  
                  
                  (75,134
                  )
                  
                  
                  (319,891
                  )
                  
                  
                  —
                  
                  
                  
                  29,327Net
      cash provided by (used in) financing activities
                  
                  
                  21,639
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (9,785
                  )
                  
                  
                  —
                  
                  
                  
                  11,854Effect
      of changes in foreign currency exchange rates on cash
                  
                  
                  323
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  323Net
      increase (decrease) in cash and cash equivalents
                  
                  
                  (13,285
                  )
                  
                  
                  (149
                  )
                  
                  
                  (38,833
                  )
                  
                  
                  180,579
                  
                  
                  
                  —
                  
                  
                  
                  128,312Cash
      and cash equivalents at beginning of period
                  
                  
                  389,337
                  
                  
                  
                  215
                  
                  
                  
                  90,639
                  
                  
                  
                  353,558
                  
                  
                  
                  —
                  
                  
                  
                  833,749Cash
      and cash equivalents at end of period
                  
                  $
                  376,052
                  
                  
                  $
                  66
                  
                  
                  $
                  51,806
                  
                  
                  $
                  534,137
                  
                  
                  $
                  —
                  
                  
                  $
                  962,061








Condensed
      Consolidating Statements of Cash Flows
                    For
      the fiscal year ended December 30, 2007Parent
      Company (1)
                  
                  
                  Subsidiary
      Issuer (1)
                  
                  
                  Other
      Guarantor Subsidiary (1)
                  
                  
                  Combined
      Non-Guarantor Subsidiaries (2)
                  
                  
                  Consolidating
                      Adjustments
                  
                  
                  Total
      Company(In
      thousands)Net
      cash provided by (used in) operating activities
                  
                  $
                  389,524
                  
                  
                  $
                  167
                  
                  
                  $
                  2,211
                  
                  
                  $
                  264,074
                  
                  
                  $
                  (3,049
                  )
                  
                  $
                  652,927Net
      cash provided by (used in) investing activities
                  
                  
                  (983,835
                  )
                  
                  
                  —
                  
                  
                  
                  26,087
                  
                  
                  
                  (260,610
                  )
                  
                  
                  —
                  
                  
                  
                  (1,218,358
                  )Net
      cash provided by (used in) financing activities
                  
                  
                  (180,921
                  )
                  
                  
                  —
                  
                  
                  
                  (9,880
                  )
                  
                  
                  9,803
                  
                  
                  
                  —
                  
                  
                  
                  (180,998
                  )Effect
      of changes in foreign currency exchange rates on cash
                  
                  
                  (904
                  )
                  
                  
                  —
                  
                  
                  
                  382
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (522
                  )Net
      increase (decrease) in cash and cash equivalents
                  
                  
                  (776,136
                  )
                  
                  
                  167
                  
                  
                  
                  18,800
                  
                  
                  
                  13,267
                  
                  
                  
                  (3,049
                  )
                  
                  
                  (746,951
                  )Cash
      and cash equivalents at beginning of period
                  
                  
                  1,165,473
                  
                  
                  
                  48
                  
                  
                  
                  71,839
                  
                  
                  
                  340,291
                  
                  
                  
                  3,049
                  
                  
                  
                  1,580,700Cash
      and cash equivalents at end of period
                  
                  $
                  389,337
                  
                  
                  $
                  215
                  
                  
                  $
                  90,639
                  
                  
                  $
                  353,558
                  
                  
                  $
                  —
                  
                  
                  $
                  833,749







(1)
            This
      represents legal entity results which exclude any subsidiaries required to
      be consolidated under GAAP.




(2)
            This
      represents all other legal
subsidiaries.












F-62
 Table of Contents
 Notes
to Consolidated Financial Statements







Condensed
      Consolidating Statements of Cash Flows
                            For
      the fiscal year ended December 31, 2006Parent
      Company (1)
                          
                          
                          Subsidiary
      Issuer (1)
                          
                          
                          Other
      Guarantor Subsidiary (1)
                          
                          
                          Combined
      Non-Guarantor Subsidiaries (2)
                          
                          
                          Consolidating
                              Adjustments
                          
                          
                          Total
      Company(In
      thousands)Net
      cash provided by (used in) operating activities
                          
                          $
                          458,012
                          
                          
                          $
                          —
                          
                          
                          $
                          (15,214
                          )
                          
                          $
                          330,074
                          
                          
                          $
                          (174,809
                          )
                          
                          $
                          598,063Net
      cash provided by (used in) investing activities
                          
                          
                          (1,039,970
                          )
                          
                          
                          48
                          
                          
                          
                          73,927
                          
                          
                          
                          (12,066
                          )
                          
                          
                          —
                          
                          
                          
                          (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
                          
                          
                          
                          48
                          
                          
                          
                          55,738
                          
                          
                          
                          316,302
                          
                          
                          
                          (174,809
                          )
                          
                          
                          818,642Cash
      and cash equivalents at beginning of period
                          
                          
                          544,110
                          
                          
                          
                          —
                          
                          
                          
                          16,101
                          
                          
                          
                          23,989
                          
                          
                          
                          177,858
                          
                          
                          
                          762,058Cash
      and cash equivalents at end of period
                          
                          $
                          1,165,473
                          
                          
                          $
                          48
                          
                          
                          $
                          71,839
                          
                          
                          $
                          340,291
                          
                          
                          $
                          3,049
                          
                          
                          $
                          1,580,700







(1)
            This
      represents legal entity results which exclude any subsidiaries required to
      be consolidated under GAAP.




(2)
            This
      represents all other legal
subsidiaries.







F-63
 Table of Contents
 Notes
to Consolidated Financial Statements




Note 19:  Supplementary Financial Data
(Unaudited)


Fiscal
      Quarters EndedMarch 30,
                      2008
                  
                  
                  June
      29,
                      2008
                  
                  
                  September 28,
                      2008
                  
                  
                  December 28,
                      2008(In
      thousands, except per share data)2008RevenuesProduct
                  
                  $
                  724,051
                  
                  
                  $
                  687,508
                  
                  
                  $
                  689,556
                  
                  
                  $
                  742,128License
      and royalty
                  
                  
                  125,916
                  
                  
                  
                  128,503
                  
                  
                  
                  131,941
                  
                  
                  
                  121,749Total
      revenues
                  
                  
                  849,967
                  
                  
                  
                  816,011
                  
                  
                  
                  821,497
                  
                  
                  
                  863,877Gross
      profit (loss) (1)
                  
                  
                  258,781
                  
                  
                  
                  150,871
                  
                  
                  
                  (5,917
                  )
                  
                  
                  (340,648
                  )Operating
      income (loss) (1)
                  
                  
                  4,912
                  
                  
                  
                  (101,232
                  )
                  
                  
                  (250,193
                  )
                  
                  
                  (1,626,967
                  )Net
      income (loss)
                  
                  $
                  17,880
                  
                  
                  $
                  (67,877
                  )
                  
                  $
                  (155,194
                  )
                  
                  $
                  (1,851,585
                  )Net
      income (loss) per shareBasic
      (2)
                  
                  $
                  0.08
                  
                  
                  $
                  (0.30
                  )
                  
                  $
                  (0.69
                  )
                  
                  $
                  (8.19
                  )Diluted
      (2)
                  
                  $
                  0.08
                  
                  
                  $
                  (0.30
                  )
                  
                  $
                  (0.69
                  )
                  
                  $
                  (8.19
                  )





Fiscal
      Quarters EndedApril 1,
                      2007
                  
                  
                  July 1,
                      2007
                  
                  
                  September 30,
                      2007
                  
                  
                  December 30,
                      2007(In
      thousands, except per share data)2007RevenuesProduct
                  
                  $
                  689,357
                  
                  
                  $
                  719,991
                  
                  
                  $
                  918,810
                  
                  
                  $
                  1,117,967License
      and royalty
                  
                  
                  96,729
                  
                  
                  
                  107,041
                  
                  
                  
                  118,613
                  
                  
                  
                  127,858Total
      revenues
                  
                  
                  786,086
                  
                  
                  
                  827,032
                  
                  
                  
                  1,037,423
                  
                  
                  
                  1,245,825Gross
      profit (1)
                  
                  
                  194,936
                  
                  
                  
                  223,713
                  
                  
                  
                  342,320
                  
                  
                  
                  441,750Operating
      income (loss) (1)
                  
                  
                  (19,517
                  )
                  
                  
                  13,584
                  
                  
                  
                  109,151
                  
                  
                  
                  173,296Net
      income (loss)
                  
                  $
                  (575
                  )
                  
                  $
                  28,484
                  
                  
                  $
                  84,638
                  
                  
                  $
                  105,810Net
      income (loss) per shareBasic
      (2)
                  
                  $
                  (0.00
                  )
                  
                  $
                  0.12
                  
                  
                  $
                  0.37
                  
                  
                  $
                  0.47Diluted
      (2)
                  
                  $
                  (0.00
                  )
                  
                  $
                  0.12
                  
                  
                  $
                  0.36
                  
                  
                  $
                  0.45







(1)
            Includes
      the following charges related to share-based compensation, amortization of
      acquisition-related intangible assets, impairment of goodwill, impairment
      of acquisition-related intangible assets, impairment of equity investment
      of FlashVision, Flash Partners and Flash Alliance, restructuring and
      other, and business interruption proceeds of $21.8 million received
      in fiscal year 2007, related to a power outage in fiscal year 2006 at
      FlashVision and Flash
Partners.




Fiscal
      Quarters EndedMarch 30,
                        2008
                    
                    
                    June
      29,
                        2008
                    
                    
                    September 28,
                        2008
                    
                    
                    December 28,
                        2008(In
      thousands)Share-based
      compensation
                    
                    $
                    23,226
                    
                    
                    $
                    25,108
                    
                    
                    $
                    25,551
                    
                    
                    $
                    23,914Impairment
      of goodwill
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    845,453Impairment
      of acquisition-related intangible assets
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    175,785Amortization
      of acquisition-related intangible assets
                    
                    
                    19,057
                    
                    
                    
                    19,135
                    
                    
                    
                    19,348
                    
                    
                    
                    14,041Impairment
      of equity investment of FlashVision, Flash Partners and Flash
      Alliance
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    93,400Restructuring
      and other
                    
                    
                    —
                    
                    
                    
                    4,085
                    
                    
                    
                    —
                    
                    
                    
                    31,382Total
                    
                    $
                    42,283
                    
                    
                    $
                    48,328
                    
                    
                    $
                    44,899
                    
                    
                    $
                    1,183,975





Fiscal
      Quarters EndedApril 1,
                      2007
                  
                  
                  July 1,
                      2007
                  
                  
                  September 30,
                      2007
                  
                  
                  December 30,
                      2007(In
      thousands)Share-based
      compensation
                  
                  $
                  31,219
                  
                  
                  $
                  36,970
                  
                  
                  $
                  34,127
                  
                  
                  $
                  30,693Amortization
      of acquisition-related intangible assets
                  
                  
                  30,162
                  
                  
                  
                  21,633
                  
                  
                  
                  19,182
                  
                  
                  
                  19,140Business
      interruption proceeds
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (16,812
                  )
                  
                  
                  (4,962
                  )Total
                  
                  $
                  61,381
                  
                  
                  $
                  58,603
                  
                  
                  $
                  36,497
                  
                  
                  $
                  44,871





(2)
            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-64
 Table of Contents
 Notes
to Consolidated Financial Statements


Note 20:  Subsequent
Events


On
January 29, 2009, the Company entered into definitive agreements with Toshiba,
under which the Company and Toshiba agreed to restructure Flash Partners and
Flash Alliance to provide for the acquisition by Toshiba of certain production
capacity in connection with the production of NAND flash memory products at the
facilities.  The agreements specify the terms and conditions
under which each flash venture has agreed to sell to Toshiba more than 20% of
its current production capacity through the acquisition by Toshiba of certain
owned and leased equipment.  The total value of the restructuring
transaction to the Company is approximately $890 million based upon the exchange
rate as of January 29, 2009.  Approximately one-third of this value
will be in cash paid to the Company and approximately two-thirds of this value
represents a transfer of lease obligations to Toshiba which should reduce the
Company’s outstanding lease obligations and associated lease guarantees by
approximately 28%.  These transactions are expected to occur at
several closings between January 30, 2009 and March 31, 2009, subject
to certain closing conditions and contingencies.





F-65
 Table of Contents


SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized.





SANDISK
CORPORATION





By:  /s/ Judy Bruner


Judy
Bruner


Executive
Vice President, Administration and


Chief
Financial Officer


(On
behalf of the Registrant and as Principal


Financial
and Accounting Officer)




Dated:
February 25, 2009





POWER
OF ATTORNEY





KNOW ALL
PEOPLE BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints each of Eli Harari and Judy Bruner, jointly and
severally, his or her attorneys in fact, each with the power of substitution,
for him or her in any and all capacities, to sign any amendments to this Report
on Form 10-K, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys in fact, or his or her
substitute or substitutes, may do or cause to be done by virtue
thereof.





Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.





Signature
            Title
            DateBy:
            /s/ Eli Harari
              (Dr.
      Eli Harari)
            Chairman
      of the Board and Chief Executive Officer(Principal Executive
      Officer)
            February
      25, 2009By:
            /s/ Judy Bruner
              (Judy
      Bruner)
            Executive
      Vice President, Administration and Chief Financial Officer (Principal
      Financial and Accounting Officer)
            February
      25, 2009By:
            /s/ Irwin Federman
              (Irwin
      Federman)
            Vice
      Chairman of the Board and Lead Independent Director
            February
      20, 2009By:
            /s/ Steven J. Gomo
              (Steven
      J. Gomo)
            Director
            February
      20, 2009By:
            /s/ Eddy W. Hartenstein
              (Eddy
      W. Hartenstein)
            Director
            February
      18, 2009By:
            /s/ Catherine P. Lego
              (Catherine
      P. Lego)
            Director
            February
      20, 2009By:
            /s/ Michael E. Marks
              (Michael
      E. Marks)
            Director
            February
      18, 2009By:
            /s/ James D. Meindl
              (James
      D. Meindl)
            Director
            February
      18, 2009


S-1
 Table of Contents


INDEX
TO EXHIBITS





Exhibit
                Number
            Exhibit
      Title3.1
            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.(4)3.3
            Certificate
      of Amendment of the Restated Certificate of Incorporation of the
      Registrant dated May 11, 2000.(6)3.4
            Certificate
      of Amendment to the Amended Restated Certificate of Incorporation of the
      Registrant dated May 26, 2006.(24)3.5
            Amended
      and Restated Bylaws of the Registrant dated July 25,
      2007.(19)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.(3)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.(11)4.1
            Reference
      is made to Exhibits 3.1, 3.2, 3.3, and 3.4.4.2
            Rights
      Agreement, dated as of September 15, 2003, between the Registrant and
      Computershare Trust Company, Inc.(11)4.3
            Amendment
      No. 1 to Rights Agreement by and between the Registrant and Computershare
      Trust Company, Inc., dated as of
      November 6, 2006.(27)4.4
            SanDisk
      Corporation Form of Indenture (including notes).(20)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.(21)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
            SanDisk
      Corporation 1995 Stock Option Plan, as Amended and Restated
      January 2, 2002.(9), (*)10.4
            SanDisk
      Corporation 1995 Non-Employee Directors Stock Option Plan, as Amended and
      Restated as of January 2, 2004.(10), (*)10.5
            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.(5)10.6
            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.(5)10.7
            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.(26)10.8
            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.(26)10.9
            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.(12)10.10
            New
      Master Agreement, dated as of April 10, 2002, by and between the
      Registrant and Toshiba Corporation.(7), (1)10.11
            Amendment
      to New Master Agreement, dated and effective as of August 13, 2002 by
      and between the Registrant and Toshiba Corporation.(8),
  (1)10.12
            New
      Operating Agreement, dated as of April 10, 2002, by and between the
      Registrant and Toshiba Corporation.(7), (1)10.13
            Indemnification
      and Reimbursement Agreement, dated as of April 10, 2002, by and
      between the Registrant and Toshiba Corporation.(7), (1)10.14
            Amendment
      to Indemnification and Reimbursement Agreement, dated as of May 29,
      2002 by and between the Registrant and Toshiba
    Corporation.(7)10.15
            Amendment
      No. 2 to Indemnification and Reimbursement Agreement, dated as of
      May 29, 2002 by and between the Registrant and Toshiba
      Corporation.(25)10.16
            Form
      of Amended and Restated Change of Control Benefits Agreement entered into
      by and between the Registrant and its named executive officers.(13),
      (*)10.17
            Form
      of Option Agreement Amendment (13), (*)10.18
            Flash
      Partners Master Agreement, dated as of September 10, 2004, by and
      among the Registrant and the other parties thereto.(14),
    (1)10.19
            Flash
      Alliance Master Agreement, dated as of July 7, 2006, by and
      among the Registrant, Toshiba Corporation and SanDisk (Ireland)
      Limited.(23), (+)10.20
            Operating
      Agreement of Flash Partners Ltd., dated as of September 10, 2004, by
      and between SanDisk International Limited and Toshiba Corporation.(14),
      (1)10.21
            Operating
      Agreement of Flash Alliance, Ltd., dated as of July 7, 2006, by
      and between Toshiba Corporation and SanDisk (Ireland) Limited.(23),
      (+)10.22
            Mutual
      Contribution and Environmental Indemnification Agreement, dated as of
      September 10, 2004, by and among the Registrant and the other parties
      thereto.(14), (1)10.23
            Flash
      Alliance Mutual Contribution and Environmental Indemnification Agreement,
      dated as of July 7, 2006, by and between Toshiba Corporation and
      SanDisk (Ireland) Limited.(23), (+)10.24
            Patent
      Indemnification Agreement, dated as of September 10, 2004 by and
      among the Registrant and the other parties thereto.(14),
    (1)10.25
            Patent
      Indemnification Agreement, dated as of July 7, 2006, by and
      among the Registrant and the other parties thereto.(23),
    (+)10.26
            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.(15), (1)10.27
            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.(23), (+)10.28
            Guarantee
      Agreement, dated as of December 24, 2004, by and between the
      Registrant and Mitsui Leasing & Development,
  Ltd.(15)10.29
            Guarantee
      Agreement, dated as of September 22, 2006, by and among the
      Registrant, SMBC Leasing Company, Limited and Toshiba Finance
      Corporation.(23)10.30
            Amended
      and Restated SanDisk Corporation 2005 Incentive Plan.(25),
    (*)10.31
            SanDisk
      Corporation Form of Notice of Grant of Stock Option.(16),
    (*)10.32
            SanDisk
      Corporation Form of Notice of Grant of Non-Employee Director Automatic
      Stock Option (Initial Grant).(16), (*)10.33
            SanDisk
      Corporation Form of Notice of Grant of Non-Employee Director Automatic
      Stock Option (Annual Grant).(16), (*)10.34
            SanDisk
      Corporation Form of Stock Option Agreement.(16), (*)10.35
            SanDisk
      Corporation Form of Automatic Stock Option Agreement.(16),
    (*)10.36
            SanDisk
      Corporation Form of Restricted Stock Unit Issuance Agreement.(17),
      (*)10.37
            SanDisk
      Corporation Form of Restricted Stock Unit Issuance Agreement (Director
      Grant).(16), (*)10.38
            SanDisk
      Corporation Form of Restricted Stock Award Agreement.(16),
    (*)10.39
            SanDisk
      Corporation Form of Restricted Stock Award Agreement (Director
      Grant).(16), (*)10.40
            SanDisk
      Corporation Form of Performance Stock Unit Issuance Agreement.(**),
      (*)10.41
            Guarantee
      Agreement between the Registrant, IBJ Leasing Co., Ltd., Sumisho Lease
      Co., Ltd., and Toshiba Finance Corporation.(18)10.42
            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.(25)10.43
            Basic
      Lease Contract between Flash Partners Yugen Kaisha, IBJ Leasing Co., Ltd.,
      Sumisho Lease Co., Ltd., and Toshiba Finance Corporation.(18),
      (+)10.44
            Basic
      Lease Contract, dated as of June 20, 2006, by and between Flash
      Partners Yugen Kaisha, IBJ Leasing Co., Ltd., Sumisho Lease Co., Ltd. and
      Toshiba Finance Corporation.(25), (+)10.45
            Sublease
      (Building 3), dated as of December 21, 2005 by and between Maxtor
      Corporation and the Registrant.(25)10.46
            Sublease
      (Building 4), dated as of December 21, 2005 by and between Maxtor
      Corporation and the Registrant.(25)10.47
            Sublease
      (Building 5), dated as of December 21, 2005 by and between Maxtor
      Corporation and the Registrant.(28)10.48
            Sublease
      (Building 6), dated as of December 21, 2005 by and between Maxtor
      Corporation and the Registrant.(25)10.49
            Confidential
      Separation Agreement and General Release of Claims.(17)10.50
            3D
      Collaboration Agreement.(22), (1)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(**)32.2
            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.


***
            Furnished
      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 Current Report on Form 8-K/A dated
      April 18, 1997.


4.
            Previously
      filed as an Exhibit to the Registrant’s Form 10-Q for the quarter ended
      June 30, 2000.


5.
            Previously
      filed as an Exhibit to the Registrant’s Schedule 13(d) dated
      January 26, 2001.


6.
            Previously
      filed as an Exhibit to the Registrant’s Registration Statement on Form S-3
      (No. 333-85686).


7.
            Previously
      filed as an Exhibit to the Registrant’s Form 10-Q for the quarter ended
      June 30, 2002.


8.
            Previously
      filed as an Exhibit to the Registrant’s Form 10-Q for the quarter ended
      September 30, 2002.


9.
            Previously
      filed as an Exhibit to the Registrant’s Registration Statement on Form S-8
      (No. 333-85320).


10.
            Previously
      filed as an Exhibit to the Registrant’s Registration Statement on Form S-8
      (No. 333-112139).


11.
            Previously
      filed as an Exhibit to the Registrant’s Registration Statement on Form 8-A
      dated September 25, 2003.


12.
            Previously
      filed as an Exhibit to the Registrant’s 2003 Annual Report on Form
      10-K.


13.
            Previously
      filed as an Exhibit to the Registrant’s Form 8-K dated November 12,
      2008.


14.
            Previously
      filed as an Exhibit to the Registrant’s Form 10-Q for the quarter ended
      September 26, 2004.


15.
            Previously
      filed as an Exhibit to the Registrant’s 2004 Annual Report on Form
      10-K.


16.
            Previously
      filed as an Exhibit to the Registrant’s Current Report on Form 8-K dated
      June 3, 2005.


17.
            Previously
      filed as an Exhibit to the Registrant’s Form 10-Q for the quarter ended
      March 30, 2008.


18.
            Previously
      filed as an Exhibit to the Registrant’s 2005 Annual Report on Form
      10-K.


19.
            Previously
      filed as an Exhibit to the Registrant’s Form 8-K dated July 27,
      2007.


20.
            Previously
      filed as an Exhibit to the Registrant’s Form 8-K dated May
      9, 2006.


21.
            Previously
      filed as an Exhibit to the Registrant’s Form 8-K dated
      May 15, 2006.


22.
            Previously
      filed as an Exhibit to the Registrant’s Form 8-K dated June 17,
      2008.


23.
            Previously
      filed as an Exhibit to the Registrant’s Form 10-Q for the quarter ended
      October 1, 2006


24.
            Previously
      filed as an Exhibit to the Registrant’s Form 8-K dated
      June 1, 2006.


25.
            Previously
      filed as an Exhibit to the Registrant’s Form 10-Q for the quarter ended
      July 2, 2006.


26.
            Previously
      filed as an Exhibit to the Registrant’s Schedule 13(d)/A dated
      October 12, 2006.


27.
            Previously
      filed as an Exhibit to the Registrant’s Form 8-A/A dated
      November 8, 2006.


28.
            Previously
      filed as an Exhibit to the Registrant’s 2006 Annual Report on Form
      10-K.