UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549


FORM
10-Q





þ
            
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934 April 4, 2010
  OR
   ̈
            
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For the
transition period from ________________ to ________________


Commission
file number:  000-26734







SANDISK
CORPORATION


(Exact
name of registrant as specified in its charter)





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





Registrant’s
telephone number, including area code


(408)
801-1000





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 whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).


Yes  ̈
            No  ̈





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 the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.


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





Number of
shares outstanding of the issuer’s common stock $0.001 par value, as of
April 4, 2010: 229,982,746.














SanDisk Corporation


Index





Page No.PART
      I. FINANCIAL INFORMATIONItem
      1.
            Condensed
      Consolidated Financial Statements:Condensed
      Consolidated Balance Sheets as of April 4, 2010 and January 3,
      2010
            3Condensed
      Consolidated Statements of Operations for the three months ended
      April 4, 2010 and March 29, 2009
            4Condensed
      Consolidated Statements of Cash Flows for the three months ended
      April 4, 2010 and March 29, 2009
            5Notes
      to Condensed Consolidated Financial Statements
            6Item
      2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            36Item
      3.
            Quantitative
      and Qualitative Disclosures About Market Risk
            47Item
      4.
            Controls
      and Procedures
            49PART
      II. OTHER INFORMATIONItem
      1.
            Legal
      Proceedings
            50Item
      1A.
            Risk
      Factors
            50Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            70Item
      3.
            Defaults
      Upon Senior Securities
            70Item
      4.
            (Removed
      and Reserved)
            70Item
      5.
            Other
      Information
            70Item
      6.
            Exhibits
            70Signatures
            71Exhibit
      Index
            72








2
 Table of Contents





PART
I. FINANCIAL INFORMATION





Item
      1.
            Condensed
      Consolidated Financial Statements





SANDISK
CORPORATION


CONDENSED
CONSOLIDATED BALANCE SHEETS


(Unaudited)





April 4,
                2010
            
            
            January 3,
                2010(In thousands)ASSETSCurrent
      assetsCash
      and cash equivalents
            
            $
            1,022,511
            
            
            $
            1,100,364Short-term
      marketable securities
            
            
            921,969
            
            
            
            819,002Accounts
      receivable from product revenues, net
            
            
            234,458
            
            
            
            234,407Inventory
            
            
            567,633
            
            
            
            596,493Deferred
      taxes
            
            
            43,613
            
            
            
            66,869Other
      current assets
            
            
            52,184
            
            
            
            97,639Total
      current assets
            
            
            2,842,368
            
            
            
            2,914,774Long-term
      marketable securities
            
            
            1,350,850
            
            
            
            1,097,095Property
      and equipment, net
            
            
            275,935
            
            
            
            300,997Notes
      receivable and investments in flash ventures with Toshiba
            
            
            1,477,061
            
            
            
            1,507,550Deferred
      taxes
            
            
            31,119
            
            
            
            21,210Intangible
      assets, net
            
            
            52,703
            
            
            
            58,076Other
      non-current assets
            
            
            103,569
            
            
            
            102,017Total
      assets
            
            $
            6,133,605
            
            
            $
            6,001,719LIABILITIESCurrent
      liabilitiesAccounts
      payable trade
            
            $
            95,237
            
            
            $
            134,427Accounts
      payable to related parties
            
            
            143,048
            
            
            
            182,091Convertible
      short-term debt
            
            
            —
            
            
            
            75,000Other
      current accrued liabilities
            
            
            275,157
            
            
            
            234,079Deferred
      income on shipments to distributors and retailers and deferred
      revenue
            
            
            226,851
            
            
            
            245,513Total
      current liabilities
            
            
            740,293
            
            
            
            871,110Convertible
      long-term debt
            
            
            948,937
            
            
            
            934,722Non-current
      liabilities
            
            
            289,648
            
            
            
            287,478Total
      liabilities
            
            
            1,978,878
            
            
            
            2,093,310Commitments
      and contingencies (see Note 11)EQUITYStockholders’
      equityPreferred
      stock
            
            
            —
            
            
            
            —Common
      stock
            
            
            230
            
            
            
            229Capital
      in excess of par value
            
            
            4,302,400
            
            
            
            4,268,845Accumulated
      deficit
            
            
            (252,798
            )
            
            
            (487,489
            )Accumulated
      other comprehensive income
            
            
            107,297
            
            
            
            128,713Total
      stockholders’ equity
            
            
            4,157,129
            
            
            
            3,910,298Non-controlling
      interests
            
            
            (2,402
            )
            
            
            (1,889
            )Total
      equity
            
            
            4,154,727
            
            
            
            3,908,409Total
      liabilities and equity
            
            $
            6,133,605
            
            
            $
            6,001,719





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





3
 Table of Contents





SANDISK
CORPORATION


CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS


(Unaudited)





Three
      months endedApril 4,
                2010
            
            
            March 29,
                2009(In thousands,
      except per share amounts)RevenuesProduct
            
            $
            993,195
            
            
            $
            588,099License
      and royalty
            
            
            93,468
            
            
            
            71,372Total
      revenues
            
            
            1,086,663
            
            
            
            659,471Cost
      of product revenues
            
            
            583,353
            
            
            
            657,478Amortization
      of acquisition-related intangible assets
            
            
            3,132
            
            
            
            3,132Total
      cost of product revenues
            
            
            586,485
            
            
            
            660,610Gross
      profit (loss)
            
            
            500,178
            
            
            
            (1,139
            )Operating
      expensesResearch
      and development
            
            
            98,653
            
            
            
            86,936Sales
      and marketing
            
            
            48,501
            
            
            
            37,878General
      and administrative
            
            
            38,724
            
            
            
            38,325Amortization
      of acquisition-related intangible assets
            
            
            292
            
            
            
            292Restructuring
      and other
            
            
            —
            
            
            
            765Total
      operating expenses
            
            
            186,170
            
            
            
            164,196Operating
      income (loss)
            
            
            314,008
            
            
            
            (165,335
            )Interest
      income
            
            
            12,400
            
            
            
            19,368Interest
      (expense) and other income (expense), net
            
            
            (3,414
            )
            
            
            (38,061
            )Total
      other income (expense)
            
            
            8,986
            
            
            
            (18,693
            )Income
      (loss) before income taxes
            
            
            322,994
            
            
            
            (184,028
            )Provision
      for income taxes
            
            
            88,303
            
            
            
            23,967Net
      income (loss)
            
            $
            234,691
            
            
            $
            (207,995
            )Net
      income (loss) per share:Basic
            
            $
            1.02
            
            
            $
            (0.92
            )Diluted
            
            $
            0.99
            
            
            $
            (0.92
            )Shares
      used in computing net income (loss) per share:Basic
            
            
            229,300
            
            
            
            226,529Diluted
            
            
            236,884
            
            
            
            226,529





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





4
 Table of Contents








SANDISK
CORPORATION


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)





Three
      months endedApril 4,
                2010
            
            
            March 29,
                2009(In thousands)Cash
      flows from operating activities:Net
      income (loss)
            
            $
            234,691
            
            
            $
            (207,995
            )Adjustments
      to reconcile net income (loss) to net cash provided by (used in) operating
      activities:Deferred
      and other taxes
            
            
            (60,622
            )
            
            
            8,922Depreciation
            
            
            35,065
            
            
            
            39,125Amortization
            
            
            20,151
            
            
            
            18,344Provision
      for doubtful accounts
            
            
            (1,622
            )
            
            
            2,163Share-based
      compensation expense
            
            
            16,870
            
            
            
            16,330Excess
      tax benefit from share-based compensation
            
            
            (2,167
            )
            
            
            —Impairment,
      restructuring and other
            
            
            (20,323
            )
            
            
            7,133Other
      non-operating
            
            
            9,265
            
            
            
            (4,122
            )Changes
      in operating assets and liabilities:Accounts
      receivable from product revenues
            
            
            (106
            )
            
            
            10,833Inventory
            
            
            26,488
            
            
            
            40,309Other
      assets
            
            
            88,250
            
            
            
            220,383Accounts
      payable trade
            
            
            (38,908
            )
            
            
            (112,452
            )Accounts
      payable to related parties
            
            
            (39,043
            )
            
            
            (70,163
            )Other
      liabilities
            
            
            60,290
            
            
            
            (83,071
            )Total
      adjustments
            
            
            93,588
            
            
            
            93,734Net
      cash provided by (used in) operating activities
            
            
            328,279
            
            
            
            (114,261
            )Cash
      flows from investing activities:Purchases
      of short and long-term marketable securities
            
            
            (611,413
            )
            
            
            (168,938
            )Proceeds
      from sales of short and long-term marketable securities
            
            
            217,277
            
            
            
            421,898Proceeds
      from maturities of short and long-term marketable
    securities
            
            
            43,720
            
            
            
            36,630Acquisition
      of property and equipment
            
            
            (14,928
            )
            
            
            (16,497
            )Proceeds
      from sale of assets
            
            
            17,767
            
            
            
            —Distribution
      from FlashVision Ltd.
            
            
            122
            
            
            
            12,713Notes
      receivable issuance, Flash Partners Ltd. and Flash Alliance
      Ltd.
            
            
            —
            
            
            
            (326,350
            )Notes
      receivable proceeds, Flash Partners Ltd. and Flash Alliance
      Ltd.
            
            
            —
            
            
            
            277,070Purchased
      technology and other assets
            
            
            (1,982
            )
            
            
            1,424Net
      cash provided by (used in) investing activities
            
            
            (349,437
            )
            
            
            237,950Cash
      flows from financing activities:Proceeds
      from employee stock programs
            
            
            17,955
            
            
            
            4,570Repayment
      of debt financing
            
            
            (75,000
            )
            
            
            —Excess
      tax benefit from share-based compensation
            
            
            2,167
            
            
            
            —Net
      cash provided by (used in) financing activities
            
            
            (54,878
            )
            
            
            4,570Effect
      of changes in foreign currency exchange rates on cash
            
            
            (1,817
            )
            
            
            (241
            )Net
      increase (decrease) in cash and cash equivalents
            
            
            (77,853
            )
            
            
            128,018Cash
      and cash equivalents at beginning of the period
            
            
            1,100,364
            
            
            
            962,061Cash
      and cash equivalents at end of the period
            
            $
            1,022,511
            
            
            $
            1,090,079





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








5
 Table of Contents





SANDISK
CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS


(Unaudited)





1.
            Organization
      and Summary of Significant Accounting
Policies





Organization





These
interim Condensed Consolidated Financial Statements are unaudited but reflect,
in the opinion of management, all adjustments, consisting of normal recurring
adjustments and accruals, necessary to present fairly the financial position of
SanDisk Corporation and its subsidiaries (the “Company”) as of April 4,
2010, the Condensed Consolidated Statements of Operations for the three months
ended April 4, 2010 and March 29, 2009, and the Condensed Consolidated
Statements of Cash Flows for the three months ended April 4, 2010 and
March 29, 2009.  Certain information and footnote disclosures
normally included in financial statements prepared in accordance with U.S.
generally accepted accounting principles (“GAAP”) have been omitted in
accordance with the rules and regulations of the Securities and Exchange
Commission (“SEC”).  These Condensed Consolidated Financial Statements
should be read in conjunction with the audited consolidated financial statements
and accompanying notes included in the Company’s most recent Annual Report on
Form 10-K filed on February 25, 2010.  Certain prior period amounts
have been reclassified to conform to the current period presentation including
certain cash flow line items within operating and investing
activities.  The results of operations for the three months ended
April 4, 2010 are not necessarily indicative of the results to be expected
for the entire fiscal year.





Basis of
Presentation.The Company’s fiscal year ends on the Sunday
closest to December 31, and its fiscal quarters consist of 13 weeks and
generally end on the Sunday closest to March 31, June 30, and
September 30, respectively.  The first quarters of fiscal years
2010 and 2009 ended on April 4, 2010 and March 29, 2009,
respectively.  Fiscal year 2010 consists of 52 weeks and fiscal year
2009 consisted of 53 weeks, with the fourth quarter of fiscal year 2009 having
14 weeks, ending on January 3, 2010.  For accounting and disclosure purposes, the exchange
rate at April 4, 2010 of 94.60 was used to convert Japanese yen to U.S.
dollar.





Organization and
Nature of Operations.The Company was incorporated in Delaware
on June 1, 1988.  The Company designs, develops and markets
flash storage products used in a wide variety of consumer electronics
products.  The Company operates in one segment, flash memory storage
products.





Principles of
Consolidation.The Condensed Consolidated Financial Statements
include the accounts of the Company and its majority-owned
subsidiaries.  All intercompany balances and transactions have been
eliminated.  Non-controlling interest represents the minority
shareholders’ proportionate share of the net assets and results of operations of
the Company’s majority-owned subsidiaries.  The Condensed 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 Condensed Consolidated Financial
Statements in conformity with GAAP requires management to make estimates and
assumptions that affect the amounts reported in the Condensed Consolidated
Financial Statements and accompanying notes.  The estimates and
judgments affect the reported amounts of assets, liabilities, revenues, expenses
and related disclosure of contingent liabilities.  On an ongoing
basis, the Company evaluates its estimates, including those related to customer
programs and incentives, intellectual property claims, product returns, bad
debts, inventories, 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 value of assets and liabilities when those values are not
readily apparent from other sources.  Actual results could materially
differ from these estimates.




Revenue
Recognition.  On January 4, 2010, the Company early adopted
prospectively new accounting guidance as issued by the Financial Accounting
Standards Board (“FASB”) related to revenue recognition of multiple element
arrangements and revenue arrangements that include software elements. 
Multiple element arrangements and arrangements that include software have been
immaterial to the Company’s revenue and operating results through April 4,
2010.  If there are multiple elements, the Company allocates revenue to
each element based on their relative selling price in accordance with the
Company’s normal pricing and discounting practices for the specific product or
maintenance when sold separately.  In addition, the Company
analyzes whether tangible products containing software and non-software
components that function together should be excluded from industry-specific
software revenue recognition guidance.  In terms of the timing and pattern
of revenue recognition, the new accounting guidance for revenue recognition is
not expected to have a significant effect on total net revenues in periods after
the initial adoption.










6
 Table of Contents
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS







2.
            Investments
      and Fair Value Measurements




The
Company measures assets and liabilities at fair value based upon exit price,
representing the amount that would be received on the sale of an asset or paid
to transfer a liability, as the case may be, in an orderly transaction between
market participants.  When determining the fair value measurements for
assets and liabilities required or permitted to be recorded at fair value, the
Company considers the principal or most advantageous market in which it would
transact and considers assumptions that market participants would use when
pricing the asset or liability.  The Company’s financial assets are
measured at fair value on a recurring basis.




Fair Value
Hierarchy.The accounting guidance provides a framework for
measuring fair value on either a recurring or nonrecurring basis whereby inputs,
used in valuation techniques, are assigned a hierarchical level.  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).  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 three levels of the fair value hierarchy are
described as follows:




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.




Instruments
that are classified within Level 1 of the fair value hierarchy generally include
money market funds, U.S. Treasury securities and equity
securities.  Level 1 securities represent quoted prices in active
markets, and therefore do not require significant management
judgment.




Instruments
that are classified within Level 2 of the fair value hierarchy primarily include
government agency securities, asset-backed securities, mortgage-backed
securities, commercial paper, U.S. corporate notes and bonds, and municipal
obligations.  The Company’s Level 2 securities are primarily valued
using quoted market prices for similar instruments and nonbinding market prices
that are corroborated by observable market data.  The Company uses
inputs such as actual trade data, benchmark yields, broker/dealer quotes, and
other similar data, which are obtained from independent pricing vendors, quoted
market prices, or other sources to determine the ultimate fair value of our
assets and liabilities.  The inputs and fair value are reviewed for
reasonableness, may be further validated by comparison to publicly available
information, compared to multiple independent valuation sources.







7
 Table of Contents
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





Financial
assets and liabilities measured at fair value on a recurring basis as of
April 4, 2010 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)Money
      market funds
            
            $
            840,370
            
            
            $
            840,370
            
            
            $
            —
            
            
            $
            —Fixed
      income securities
            
            
            2,176,169
            
            
            
            27,001
            
            
            
            2,149,168
            
            
            
            —Equity
      securities
            
            
            100,655
            
            
            
            100,655
            
            
            
            —
            
            
            
            —Derivative
      assets
            
            
            1,412
            
            
            
            —
            
            
            
            1,412
            
            
            
            —Other
            
            
            5,492
            
            
            
            —
            
            
            
            5,492
            
            
            
            —Total
      financial assets
            
            $
            3,124,098
            
            
            $
            968,026
            
            
            $
            2,156,072
            
            
            $
            —Derivative
      liabilities
            
            $
            22,463
            
            
            $
            —
            
            
            $
            22,463
            
            
            $
            —Total
      financial liabilities
            
            $
            22,463
            
            
            $
            —
            
            
            $
            22,463
            
            
            $
            —





Financial
assets and liabilities measured at fair value on a recurring basis as of
January 3, 2010 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)Money
      market funds
            
            $
            869,643
            
            
            $
            869,643
            
            
            $
            —
            
            
            $
            —Fixed
      income securities
            
            
            1,831,360
            
            
            
            61,129
            
            
            
            1,770,231
            
            
            
            —Equity
      securities
            
            
            85,542
            
            
            
            85,542
            
            
            
            —
            
            
            
            —Derivative
      assets
            
            
            4,433
            
            
            
            —
            
            
            
            4,433
            
            
            
            —Other
            
            
            3,395
            
            
            
            —
            
            
            
            3,395
            
            
            
            —Total
      financial assets
            
            $
            2,794,373
            
            
            $
            1,016,314
            
            
            $
            1,778,059
            
            
            $
            —Derivative
      liabilities
            
            $
            23,247
            
            
            $
            —
            
            
            $
            23,247
            
            
            $
            —Total
      financial liabilities
            
            $
            23,247
            
            
            $
            —
            
            
            $
            23,247
            
            
            $
            —








8
 Table of Contents
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS


Assets
and liabilities measured at fair value on a recurring basis as of April 4,
2010, were presented on the Company’s Condensed 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)
            
            $
            840,370
            
            
            $
            840,370
            
            
            $
            —
            
            
            $
            —Short-term
      marketable securities
            
            
            921,969
            
            
            
            48,832
            
            
            
            873,137
            
            
            
            —Long-term
      marketable securities
            
            
            1,350,850
            
            
            
            78,824
            
            
            
            1,272,026
            
            
            
            —Other
      current assets and other non-current assets
            
            
            10,909
            
            
            
            —
            
            
            
            10,909
            
            
            
            —Total
      assets
            
            $
            3,124,098
            
            
            $
            968,026
            
            
            $
            2,156,072
            
            
            $
            —Other
      current accrued liabilities
            
            $
            12,122
            
            
            $
            —
            
            
            $
            12,122
            
            
            $
            —Non-current
      liabilities
            
            
            10,341
            
            
            
            —
            
            
            
            10,341
            
            
            
            —Total
      liabilities
            
            $
            22,463
            
            
            $
            —
            
            
            $
            22,463
            
            
            $
            —


(1)
            Cash
      equivalents exclude cash of $182.1 million included in Cash and cash
      equivalents on the Condensed Consolidated Balance Sheet as of
      April 4, 2010.





Assets
and liabilities measured at fair value on a recurring basis as of January3, 2010, were
presented on the Company’s Consolidated
Balance Sheets as follows (inthousands):





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)
            
            $
            871,173
            
            
            $
            869,643
            
            
            $
            1,530
            
            
            $
            —Short-term
      marketable securities
            
            
            819,002
            
            
            
            74,906
            
            
            
            744,096
            
            
            
            —Long-term
      marketable securities
            
            
            1,097,095
            
            
            
            71,765
            
            
            
            1,025,330
            
            
            
            —Other
      current assets and other non-current assets
            
            
            7,103
            
            
            
            —
            
            
            
            7,103
            
            
            
            —Total
      assets
            
            $
            2,794,373
            
            
            $
            1,016,314
            
            
            $
            1,778,059
            
            
            $
            —Other
      current accrued liabilities
            
            $
            15,453
            
            
            $
            —
            
            
            $
            15,453
            
            
            $
            —Non-current
      liabilities
            
            
            7,794
            
            
            
            —
            
            
            
            7,794
            
            
            
            —Total
      liabilities
            
            $
            23,247
            
            
            $
            —
            
            
            $
            23,247
            
            
            $
            —




(1)
            Cash
      equivalents exclude cash of $229.2million
      included in Cash and cash equivalents on the Consolidated Balance Sheets
      as of January3,
      2010.





As of
April 4, 2010, the Company did not elect the fair value option for any
financial assets and liabilities that were not required to be measured at fair
value.








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Available-for-Sale
Investments.Available-for-sale investments as of
April 4, 2010 were as follows (in thousands):





Amortized
      Cost
            
            
            Gross
                Unrealized
      Gain
            
            
            Gross
                Unrealized
      Loss
            
            
            Fair
      ValueFixed
      income securities:U.S.
      Treasury and government agency securities
            
            $
            32,794
            
            
            $
            72
            
            
            $
            (1
            )
            
            $
            32,865U.S.
      government-sponsored agency securities
            
            
            43,298
            
            
            
            27
            
            
            
            (23
            )
            
            
            43,302Corporate
      notes and bonds
            
            
            377,443
            
            
            
            1,520
            
            
            
            (245
            )
            
            
            378,718Asset-backed
      securities
            
            
            23,798
            
            
            
            159
            
            
            
            —
            
            
            
            23,957Mortgage-backed
      securities
            
            
            7,793
            
            
            
            17
            
            
            
            (4
            )
            
            
            7,806Municipal
      notes and bonds
            
            
            1,676,057
            
            
            
            15,422
            
            
            
            (1,958
            )
            
            
            1,689,5212,161,183
            
            
            
            17,217
            
            
            
            (2,231
            )
            
            
            2,176,169Equity
      investments
            
            
            69,843
            
            
            
            30,812
            
            
            
            —
            
            
            
            100,655Total
      available-for-sale investments
            
            $
            2,231,026
            
            
            $
            48,029
            
            
            $
            (2,231
            )
            
            $
            2,276,824





Available-for-sale
investments as of January 3, 2010 were as follows
(in thousands):





Amortized
      Cost
            
            
            Gross
                Unrealized
      Gain
            
            
            Gross
                Unrealized
      Loss
            
            
            Fair
      ValueFixed
      income securities:U.S.
      Treasury and government agency securities
            
            $
            66,984
            
            
            $
            90
            
            
            $
            (6
            )
            
            $
            67,068U.S.
      government-sponsored agency securities
            
            
            37,211
            
            
            
            20
            
            
            
            (298
            )
            
            
            36,933Corporate
      notes and bonds
            
            
            251,510
            
            
            
            1,103
            
            
            
            (664
            )
            
            
            251,949Asset-backed
      securities
            
            
            27,719
            
            
            
            175
            
            
            
            —
            
            
            
            27,894Mortgage-backed
      securities
            
            
            4,986
            
            
            
            20
            
            
            
            —
            
            
            
            5,006Municipal
      notes and bonds
            
            
            1,422,126
            
            
            
            20,581
            
            
            
            (197
            )
            
            
            1,442,5101,810,536
            
            
            
            21,989
            
            
            
            (1,165
            )
            
            
            1,831,360Equity
      investments
            
            
            70,011
            
            
            
            15,531
            
            
            
            —
            
            
            
            85,542Total
      available-for-sale investments
            
            $
            1,880,547
            
            
            $
            37,520
            
            
            $
            (1,165
            )
            
            $
            1,916,902








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The fair
value and gross unrealized losses on the available-for-sale securities that have
been in an unrealized loss position, aggregated by type of investment
instrument, and the length of time that individual securities have been in a
continuous unrealized loss position as of April 4, 2010, are summarized in
the following table (in thousands).  Available-for-sale
securities that were in an unrealized gain position have been excluded from the
table.





Less
      than 12 months
            
            
            Greater
      than 12 monthsMarket
      Value
            
            
            Gross
                Unrealized
      Loss
            
            
            Market
      Value
            
            
            Gross
                Unrealized
      LossU.S.
      Treasury and government agency securities
            
            $
            3,509
            
            
            $
            (1
            )
            
            $
            —
            
            
            $
            —U.S.
      government-sponsored agency securities
            
            
            27,520
            
            
            
            (23
            )
            
            
            —
            
            
            
            —Corporate
      notes and bonds
            
            
            133,668
            
            
            
            (245
            )
            
            
            —
            
            
            
            —Mortgage-backed
      securities
            
            
            3,924
            
            
            
            (4
            )
            
            
            —
            
            
            
            —Municipal
      notes and bonds
            
            
            420,437
            
            
            
            (1,958
            )
            
            
            —
            
            
            
            —Total
            
            $
            589,058
            
            
            $
            (2,231
            )
            
            $
            —
            
            
            $
            —





The gross
unrealized loss related to U.S. Treasury and government agency securities, U.S.
government-sponsored agency securities, mortgage-backed securities and U.S.
corporate and municipal notes and bonds, was primarily due to changes in
interest rates.  Gross unrealized loss on all available-for-sale fixed
income securities at April 4, 2010 was 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.  For
debt security investments, the Company considered additional factors including
the Company’s intent to sell the investments or whether it is more likely than
not the Company will be required to sell the investments before the recovery of
its amortized cost.




The
following table shows the gross realized gains and (losses) on sales of
available-for-sale securities (in thousands).




Three
      months endedApril 4,
      2010
            
            
            March 29,
      2009Gross
      realized gains
            
            $
            2,989
            
            
            $
            5,758Gross
      realized (losses)
            
            
            (6
            )
            
            
            (560
            )





Fixed
income securities by contractual maturity as of April 4, 2010 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
            
            $
            895,018
            
            
            $
            900,138Due
      after one year through five years
            
            
            1,266,165
            
            
            
            1,276,031Total
            
            $
            2,161,183
            
            
            $
            2,176,169





For
certain of the Company’s financial instruments, including accounts receivable,
short-term marketable securities and accounts payable, the carrying amounts
approximate fair market value due to their short maturities.  For
those financial instruments where the carrying amounts differ from fair market
value, the following table represents the related costs and the estimated fair
values, which are based on quoted market prices
(in thousands).





As
      of April 4, 2010
            
            
            As
      of January 3, 2010Carrying
                Value
            
            
            Estimated
                Fair
      Value
            
            
            Carrying
                Value
            
            
            Estimated
                Fair
      Value1%
      Notes due 2013
            
            $
            948,937
            
            
            $
            1,009,217
            
            
            $
            934,722
            
            
            $
            958,813








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3.
            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.





The
Company recognizes derivative instruments as either assets or liabilities on the
balance sheet at fair value and provides qualitative disclosures about
objectives and strategies for using derivatives, quantitative disclosures about
fair value amounts of gains and losses on derivative instruments, and
disclosures about credit-risk-related contingent features in derivative
agreements.  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”).  The Company
does not offset or net the fair value amounts of derivative instruments and
separately discloses the fair value amounts of the derivative instruments as
either assets or liabilities.





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 no
longer designated because it is no longer probable of occurring or it is 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 or expense
immediately, and was a net loss of ($27) thousand and ($1.0) million
for the three months ended April 4, 2010 and March 29, 2009,
respectively.  As of April 4, 2010, the Company had forward and
options contracts in place that hedged future purchases of approximately
30.4 billion Japanese yen, or approximately $321 million based upon
the exchange rate as of April 4, 2010, and the net unrealized loss on the
effective portion of these cash flow hedges was
($5.4) million.  The forward and option contracts cover a portion
of the Company’s future Japanese yen purchases that are expected to occur during
the remainder of fiscal year 2010.





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 $78.8 million and $71.8 million as of
April 4, 2010 and January 3, 2010, respectively.  The cash
flow hedge designated to mitigate equity risk of these securities had a fair
value of ($4.0) million and $0.7 million as of April 4, 2010 and
January 3, 2010, respectively.





Other
Derivatives.Other derivatives that are non-designated consist
primarily of forward and cross currency swap 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 and cross currency swap
contracts were marked-to-market at April 4, 2010 with realized and
unrealized gains and losses included in other income (expense).  As of
April 4, 2010, the Company had foreign currency forward contracts hedging
exposures in European euros, Japanese yen and British pounds.  Foreign
currency forward contracts were outstanding to buy and (sell) U.S. dollar
equivalent of approximately $231.9 million and ($71.0) million in
foreign currencies, respectively, based upon the exchange rates at April 4,
2010.








12
 Table of Contents
 NOTES
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The
Company has cross currency swap transactions with one counterparty to exchange
Japanese yen for U.S. dollars for a combined notional amount of
($403.3) million which require the Company to maintain a minimum liquidity
of $1.5 billion on, or prior to, June 30, 2010 and $1.0 billion after
June 30, 2010.  Liquidity is defined as the sum of the Company’s cash
and cash equivalents, and short and long-term marketable
securities.  The Company is in compliance with the covenant as of
April 4, 2010.  Should the Company fail to comply with this covenant,
the Company may be required to settle the unrealized gain or loss on the foreign
exchange contracts prior to the original maturity.
 
 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 were
as follows (in thousands):


Derivative
      assets reported inOther
      Current Assets
            
            
            Long-term
      Marketable Securities and Other Non-current AssetsApril 4,
                2010
            
            
            January 3,
                2010
            
            
            April 4,
                2010
            
            
            January 3,
                2010Designated
      Cash Flow HedgesForeign
      exchange contracts
            
            $
            2,004
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —Equity
      market risk contract
            
            
            —
            
            
            
            —
            
            
            
            (4,005
            )
            
            
            7252,004
            
            
            
            —
            
            
            
            (4,005
            )
            
            
            725Foreign
      exchange contracts not designated
            
            
            1,091
            
            
            
            3,708
            
            
            
            2,322
            
            
            
            —Total
      derivatives
            
            $
            3,095
            
            
            $
            3,708
            
            
            $
            (1,683
            )
            
            $
            725





Derivative
      liabilities reported inOther
      Current Accrued Liabilities
            
            
            Non-current
      LiabilitiesApril 4,
                2010
            
            
            January 3,
                2010
            
            
            April 4,
                2010
            
            
            January 3,
                2010Designated
      foreign exchange contracts
            
            $
            7,317
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —Foreign
      exchange contracts not designated
            
            
            4,805
            
            
            
            7,794
            
            
            
            10,341
            
            
            
            15,453Total
      derivatives
            
            $
            12,122
            
            
            $
            7,794
            
            
            $
            10,341
            
            
            $
            15,453











13
 Table of Contents
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Foreign Exchange
and Equity Market Risk Contracts Designated as Cash Flow
Hedges.The impact of the effective portion of designated cash
flow derivative contracts on the results of operations was as follows
(in thousands):





Three
      months endedAmount
      of gain (loss) recognized
                in
      OCI
            
            
            Amount
      of gain (loss) reclassified from OCI to the Condensed
      Consolidated
                Statements
      of OperationsApril 4,
                2010
            
            
            March 29,
                2009
            
            
            April 4,
                2010
            
            
            March 29,
                2009Foreign
      exchange contracts
            
            $
            1,522
            
            
            $
            (14,638
            )
            
            $
            3,201
            
            
            $
            3,610Equity
      market risk contract
            
            
            (4,730
            )
            
            
            (9,826
            )
            
            
            —
            
            
            
            —





Foreign
exchange contracts designated as cash flow hedges relate primarily to wafer
purchases.  Gains and losses associated with foreign exchange
contracts designated as cash flow hedges are expected to be recorded in cost of
product revenues when reclassified out of accumulated OCI.  Gains and
losses from the equity market risk contract are expected to be recorded in other
income (expense) when reclassified 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.





The
impact of the ineffective portion and amount excluded from effectiveness testing
on designated cash flow derivative contracts on the Company’s results of
operations recognized in other income (expense) were as follows
(in thousands):





Three
      months endedApril 4,
      2010
            
            
            March 29,
      2009Foreign
      exchange contracts
            
            $
            (27
            )
            
            $
            (997
            )








Effect of
Non-Designated Derivative Contracts on the Condensed Consolidated Statements of
Operations.The effect of non-designated derivative contracts
on the Company’s results of operations recognized in other income (expense) were
as follows (in thousands):





Three
      months endedApril 4,
      2010
            
            
            March 29,
      2009Gain
      on foreign exchange contracts including forward point
    income
            
            $
            6,720
            
            
            $
            101,125Loss
      from revaluation of foreign currency exposures hedged by foreign exchange
      contracts
            
            
            (8,542
            )
            
            
            (100,181
            )








14
 Table of Contents
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS








4.
            Balance
      Sheet Information







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





April 4,
                2010
            
            
            January 3,
                2010Trade
      accounts receivable
            
            $
            465,255
            
            
            $
            534,549Allowance
      for doubtful accounts
            
            
            (10,228
            )
            
            
            (12,348
            )Price
      protection, promotions and other activities
            
            
            (220,569
            )
            
            
            (287,794
            )Total
      accounts receivable from product revenues, net
            
            $
            234,458
            
            
            $
            234,407





Inventory.Inventories
were as follows (in thousands):





April 4,
                2010
            
            
            January 3,
                2010Raw
      material
            
            $
            344,761
            
            
            $
            329,966Work-in-process
            
            
            52,913
            
            
            
            63,767Finished
      goods
            
            
            169,959
            
            
            
            202,760Total
      inventory
            
            $
            567,633
            
            
            $
            596,493





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





April 4,
                2010
            
            
            January 3,
                2010Royalty
      and other receivables
            
            $
            4,331
            
            
            $
            53,864Prepaid
      expenses
            
            
            13,966
            
            
            
            14,309Prepaid
      income taxes and tax-related receivables
            
            
            30,792
            
            
            
            25,758Other
      current assets
            
            
            3,095
            
            
            
            3,708Total
      other current assets
            
            $
            52,184
            
            
            $
            97,639





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):





April 4,
                2010
            
            
            January 3,
                2010Notes
      receivable, Flash Partners Ltd.
            
            $
            550,212
            
            
            $
            562,946Notes
      receivable, Flash Alliance Ltd.
            
            
            508,457
            
            
            
            520,225Investment
      in Flash Partners Ltd.
            
            
            195,349
            
            
            
            199,106Investment
      in Flash Alliance Ltd.
            
            
            223,043
            
            
            
            225,273Total
      notes receivable and investments in flash ventures with
      Toshiba
            
            $
            1,477,061
            
            
            $
            1,507,550





See
Note 11, “Commitments, Contingencies and Guarantees – FlashVision, Flash
Partners and Flash Alliance,” regarding equity method investments and Note 12,
“Related Parties and Strategic Investments,” for the Company’s maximum loss
exposure related to these variable interest entities.








15
 Table of Contents
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS








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





April 4,
                2010
            
            
            January 3,
                2010Accrued
      payroll and related expenses
            
            $
            79,358
            
            
            $
            118,648Accrued
      restructuring
            
            
            2,563
            
            
            
            2,622Foreign
      currency forward contract payables
            
            
            12,122
            
            
            
            7,794Other
      accrued liabilities
            
            
            181,114
            
            
            
            105,015Total
      other current accrued liabilities
            
            $
            275,157
            
            
            $
            234,079





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





April 4,
                2010
            
            
            January 3,
                2010Deferred
      tax liability
            
            $
            20,449
            
            
            $
            35,470Income
      taxes payable
            
            
            211,431
            
            
            
            206,464Accrued
      restructuring
            
            
            8,945
            
            
            
            9,228Other
      non-current liabilities
            
            
            48,823
            
            
            
            36,316Total
      non-current liabilities
            
            $
            289,648
            
            
            $
            287,478





As of
April 4, 2010 and January 3, 2010, the total current accrued
restructuring liability was primarily comprised of the current portion of excess
facility lease obligations.  The non-current accrued restructuring
balance and activity from the prior year end was primarily related to excess
lease obligations and cash lease obligation payments,
respectively.  The facility lease obligations extend through the end
of the lease term in fiscal year 2016.








16
 Table of Contents
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





5.
            Intangible
      Assets





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





April 4,
      2010Gross
                Carrying
      Amount
            
            
            Accumulated
      Amortization
            
            
            Net
                Carrying
      AmountCore
      technology
            
            $
            179,300
            
            
            $
            (147,490
            )
            
            $
            31,810Developed
      product technology
            
            
            12,900
            
            
            
            (8,354
            )
            
            
            4,546Acquisition-related
      intangible assets
            
            
            192,200
            
            
            
            (155,844
            )
            
            
            36,356Technology
      licenses and patents
            
            
            34,026
            
            
            
            (17,679
            )
            
            
            16,347Total
            
            $
            226,226
            
            
            $
            (173,523
            )
            
            $
            52,703





January 3,
      2010Gross
                Carrying
      Amount
            
            
            Accumulated
      Amortization
            
            
            Net
                Carrying
      AmountCore
      technology
            
            $
            179,300
            
            
            $
            (144,474
            )
            
            $
            34,826Developed
      product technology
            
            
            12,900
            
            
            
            (7,946
            )
            
            
            4,954Acquisition-related
      intangible assets
            
            
            192,200
            
            
            
            (152,420
            )
            
            
            39,780Technology
      licenses and patents
            
            
            34,026
            
            
            
            (15,730
            )
            
            
            18,296Total
            
            $
            226,226
            
            
            $
            (168,150
            )
            
            $
            58,076





The
annual expected amortization expense of intangible assets as of April 4,
2010, is presented below (in thousands):





Estimated
      Amortization ExpensesAcquisition-Related
      Intangible Assets
            
            
            Technology
      Licenses and PatentsFiscal
      Year:2010
      (remaining nine months)
            
            $
            10,271
            
            
            $
            4,5232011
            
            
            13,034
            
            
            
            4,6192012
            
            
            12,529
            
            
            
            3,9712013
            
            
            522
            
            
            
            2,6702014
            
            
            —
            
            
            
            564Total
            
            $
            36,356
            
            
            $
            16,347








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6.
            Warranties





Liability
for warranty expense is included in Other current accrued liabilities and
Non-current liabilities in the accompanying Condensed Consolidated Balance
Sheets and the activity was as follows (in thousands):





Three
      months endedApril 4,
                2010
            
            
            March 29,
                2009Balance,
      beginning of period
            
            $
            25,909
            
            
            $
            36,469Additions
            
            
            21,272
            
            
            
            4,913Usage
            
            
            (16,516
            )
            
            
            (10,088
            )Balance,
      end of period
            
            $
            30,665
            
            
            $
            31,294




The
majority of the Company’s products have a warranty ranging up to ten
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.







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7.
            Financing
      Arrangements





The
following table reflects the carrying value of the Company’s convertible debt as
of April 4, 2010 and January 3, 2010 (in millions):




April 4,
                  2010
              
              
              January 3,
                  20101%
      Notes due 2013
              
              $
              1,150.0
              
              
              $
              1,150.0Less:
      Unamortized interest discount
              
              
              (201.1
              )
              
              
              (215.3
              )Net
      carrying amount of 1% Notes due 2013
              
              
              948.9
              
              
              
              934.71%
      Notes due 2035
              
              
              —
              
              
              
              75.0Total
      convertible debt
              
              
              948.9
              
              
              
              1,009.7Less:
      convertible short-term debt
              
              
              —
              
              
              
              (75.0
              )Convertible
      long-term debt
              
              $
              948.9
              
              
              $
              934.7


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, 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
Company separately accounts for the liability and equity components of the 1%
Notes due 2013.  The principal amount of
the liability component of $753.5 million as of the date of issuance was
recognized at the present value of its cash flows using a discount rate of 7.4%,
the Company’s borrowing rate at the date of the issuance for a similar debt
instrument without the conversion feature.  The carrying value of the
equity component was $241.9 million as of April 4, 2010 and
January 3, 2010.





The
following table presents the amount of interest cost recognized relating to both
the contractual interest coupon and amortization of the discount on the
liability component (in millions):





Three
      months endedApril 4,
                2010
            
            
            March 29,
                2009Contractual
      interest coupon
            
            $
            2.9
            
            
            $
            2.9Amortization
      of bond discount
            
            
            14.2
            
            
            
            13.2Total
      interest cost recognized
            
            $
            17.1
            
            
            $
            16.1





The
effective interest rate on the liability component was 7.4% for the three months
ended April 3, 2010 and March 29, 2009, respectively.The remaining unamortized
interest discount of $201.1 million as of April 4, 2010 will be
amortized over the remaining life of the 1% Notes due 2013, which is
approximately 3.1 years.





Concurrent
with the issuance of the 1% Notes due 2013, the Company sold warrants to acquire
shares of its common stock at an exercise price of $95.03 per
share.  As of April 4, 2010, the warrants had an expected life of
approximately 3.4 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 April 4, 2010, the warrants had not been
exercised and remain outstanding.  In addition, counterparties agreed
to sell to the Company up to approximately 14.0 million shares of its
common stock, which is the number of shares initially issuable upon conversion
of the 1% 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% Notes
due 2013 or the first day that none of the 1% 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 the Company receiving
net shares equivalent to the number of shares issuable by it upon conversion of
the 1% Notes due 2013.  As of April 4, 2010, the Company had not
purchased any shares under this convertible bond hedge agreement.




1% Convertible
Notes Due 2035.On February 11, 2010, the Company notified the
holders of its 1% Convertible Notes due 2035 that it would exercise its option
to redeem the $75 million outstanding on March 15, 2010 for a
redemption price of $1,000 per $1,000 principal amount of the debentures, plus
accrued interest.  On March 15, 2010, the Company completed the
redemption of the 1% Convertible Notes due 2035 through an all-cash transaction
of $75 million plus accrued interest of $0.4 million.  As of
April 4, 2010, the Company had no further obligations related to the 1%
Convertible Notes due 2035.








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8.
            Accumulated
      Other Comprehensive Income





Accumulated
other comprehensive income, net of tax, presented in the accompanying Condensed
Consolidated Balance Sheets consists of the accumulated unrealized gains and
losses on available-for-sale investments, including the Company’s investments in
equity securities, as well as currency translation adjustments relating to local
currency denominated subsidiaries and equity investees, and the accumulated
unrealized gains and losses related to derivative instruments accounted for
under hedge accounting (in thousands).





April 4,
                2010
            
            
            January 3,
                2010Accumulated
      net unrealized gain (loss) on:Available-for-sale
      investments
            
            $
            30,112
            
            
            $
            26,920Foreign
      currency translation
            
            
            80,226
            
            
            
            98,424Hedging
      activities
            
            
            (3,041
            )
            
            
            3,369Total
      accumulated other comprehensive income
            
            $
            107,297
            
            
            $
            128,713





Comprehensive
income (loss) is presented below (in thousands):





Three
      months endedApril 4,
                2010
            
            
            March 29,
                2009Net
      income (loss)
            
            $
            234,691
            
            
            $
            (207,995
            )Non-controlling
      interest
            
            
            (513
            )
            
            
            (494
            )234,178
            
            
            
            (208,489
            )Change
      in accumulated unrealized gain (loss) on:Available-for-sale
      investments
            
            
            3,192
            
            
            
            11,186Foreign
      currency translation
            
            
            (18,198
            )
            
            
            (58,303
            )Hedging
      activities
            
            
            (6,410
            )
            
            
            (28,074
            )Comprehensive
      income (loss)
            
            $
            212,762
            
            
            $
            (283,680
            )





Non-controlling
interest is included in Other income (expense) in the Condensed Consolidated
Statements of Operations.





The
amount of income tax expense allocated to accumulated unrealized gain (loss) on
available-for-sale investments and hedging activities was $1.8 million and
$6.8 million at April 4, 2010 and January 3, 2010,
respectively.





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9.
            Share-Based
      Compensation





Share-Based
Plans.The Company has a share-based compensation program that
provides its Board of Directors with broad discretion in creating equity
incentives for employees, officers, non-employee board members and non-employee
service providers.  This program includes incentive and non-statutory
stock option awards, stock appreciation right awards, restricted stock awards,
performance-based cash bonus awards for Section 16 executive officers and an
automatic grant program for 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.  These awards are
granted under various plans, all of which are stockholder
approved.  Stock option awards generally vest as follows: 25% of the
shares vest on the first anniversary of the vesting commencement date and the
remaining 75% vest proportionately each quarter over the next 3 years of
continued service.  Restricted stock awards generally vest in equal
annual installments over a 2 or 4-year period.  Initial grants under
the automatic grant program vest over a 4-year period and subsequent grants vest
over a 1-year period in accordance with the specific vesting provisions set
forth in that program.  Additionally, the Company has an Employee
Stock Purchase Plan (“ESPP”) that allows employees to purchase shares of common
stock at 85% of the fair market value at the subscription date or the date of
purchase, whichever is lower.





Valuation
Assumptions.The fair value of the Company’s stock options
granted to employees, officers and non-employee board members and ESPP shares
granted to employees for the three months ended April 4, 2010 and
March 29, 2009 was estimated using the following weighted average
assumptions.





Three
      months endedApril 4,
                2010
            
            
            March 29,
                2009Option
      Plan SharesDividend
      yield
            
            None
            
            
            NoneExpected
      volatility
            
            0.51
            
            
            0.87Risk
      free interest rate
            
            1.55%
            
            
            1.39%Expected
      lives
            
            3.7
      years
            
            
            3.6
      yearsEstimated
      annual forfeiture rate
            
            7.32%
            
            
            9.07%Weighted
      average fair value at grant date
            
            $11.02
            
            
            $4.92Employee
      Stock Purchase Plan SharesDividend
      yield
            
            None
            
            
            NoneExpected
      volatility
            
            0.59
            
            
            0.81Risk
      free interest rate
            
            0.18%
            
            
            0.39%Expected
      lives
            
            1⁄2
      year
            
            
            1⁄2
      yearWeighted
      average fair value at exercise date
            
            $8.58
            
            
            $4.21





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Share-Based
Compensation Plan Activities





Stock Options and
SARs.A summary of stock option and stock appreciation right
(“SARs”) activity under all of the Company’s share-based compensation plans as
of April 4, 2010 and changes during the three months ended April 4,
2010 is presented below (in thousands, except exercise price and
contractual term).





Shares
            
            
            Weighted
      Average Exercise Price
            
            
            Weighted
      Average Remaining Contractual Term (Years)
            
            
            Aggregate
      Intrinsic ValueOptions
      and SARs outstanding at January 3, 2010
            
            
            24,896
            
            
            $
            29.87
            
            
            
            4.4
            
            
            $
            180,834Granted
            
            
            2,229
            
            
            
            28.31Exercised
            
            
            (706
            )
            
            
            16.92
            
            
            
            
            
            
            
            10,336Forfeited
            
            
            (124
            )
            
            
            25.17Expired
            
            
            (299
            )
            
            
            47.44Options
      and SARs outstanding at April 4, 2010
            
            
            25,996
            
            
            
            29.91
            
            
            
            4.4
            
            
            
            260,156Options
      and SARs vested and expected to vest after April 4, 2010, net of
      forfeitures
            
            
            24,493
            
            
            
            30.30
            
            
            
            4.3
            
            
            
            240,106Options
      and SARs exercisable at April 4, 2010
            
            
            17,834
            
            
            
            33.28
            
            
            
            3.8
            
            
            
            147,351





At
April 4, 2010, 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 $71.8 million, net of estimated
forfeitures.  This cost will be amortized on a straight-line basis
over a weighted average period of approximately 2.7 years.





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 three months ended April 4, 2010 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 3, 2010
            
            
            844
            
            
            $
            24.69
            
            
            $
            24,476Granted
            
            
            999
            
            
            
            28.23Vested
            
            
            (195
            )
            
            
            42.32
            
            
            
            5,582Forfeited
            
            
            (12
            )
            
            
            18.59Non-vested
      share units at April 4, 2010
            
            
            1,636
            
            
            
            24.80
            
            
            
            47,086





As of
April 4, 2010, the Company had approximately $30.7 million of
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 April 4, 2010, there was approximately
$2.2 million of total unrecognized compensation cost related to ESPP that
is expected to be recognized over a period of approximately
4 months.








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Share-Based
Compensation Expense.The following tables
set forth the detail allocation of the share-based compensation expense for the
three months ended April 4, 2010 and March 29, 2009, respectively
(in thousands).





Three
      months endedApril 4,
                2010
            
            
            March 29,
                2009Share-based
      compensation expense by caption:Cost
      of product revenues
            
            $
            2,458
            
            
            $
            2,374Research
      and development
            
            
            6,802
            
            
            
            6,152Sales
      and marketing
            
            
            2,188
            
            
            
            2,349General
      and administrative
            
            
            5,422
            
            
            
            5,455Total
      share-based compensation expense
            
            $
            16,870
            
            
            $
            16,330Share-based
      compensation expense by type of award:Stock
      options and SARs
            
            $
            11,513
            
            
            $
            13,881RSUs
            
            
            3,666
            
            
            
            2,860ESPP
            
            
            1,691
            
            
            
            (411
            )Total
      share-based compensation expense
            
            $
            16,870
            
            
            $
            16,330





Share-based
compensation expense of $1.1 million and $2.4 million related to
manufacturing personnel was capitalized into inventory as of April 4, 2010
and March 29, 2009, respectively.








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10.
            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).





Three
      months endedApril 4,
                2010
            
            
            March 29,
                2009Numerator
      for basic net income (loss) per share:Net
      income (loss)
            
            $
            234,691
            
            
            $
            (207,995
            )Denominator
      for basic net income (loss) per share:Weighted
      average common shares outstanding
            
            
            229,300
            
            
            
            226,529Basic
      net income (loss) per share
            
            $
            1.02
            
            
            $
            (0.92
            )





Numerator
      for diluted net income (loss) per share:Net
      income (loss)
            
            $
            234,691
            
            
            $
            (207,995
            )Interest
      on the 1% Notes due 2035, net of tax
            
            
            98
            
            
            
            —Net
      income (loss) for diluted net income (loss) per share
            
            $
            234,789
            
            
            $
            (207,995
            )Denominator
      for diluted net income (loss) per share:Weighted
      average common shares
            
            
            229,300
            
            
            
            226,529Incremental
      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)
            
            
            6,014
            
            
            
            —Effect
      of dilutive 1% Notes due 2035
            
            
            1,570
            
            
            
            —Shares
      used in computing diluted net income (loss) per share
            
            
            236,884
            
            
            
            226,529Diluted
      net income (loss) per share
            
            $
            0.99
            
            
            $
            (0.92
            )





Anti-dilutive
      shares excluded from net income (loss) per share
    calculation
            
            
            40,041
            
            
            
            54,042





Basic
earnings per share exclude any dilutive effects of stock options, SARs, RSUs,
warrants and convertible securities.  Certain common stock issuable
under stock options, SARs, RSUs, warrants and the convertible notes were omitted
from the diluted earnings per share calculation because their inclusion is
considered anti-dilutive.








24
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11.
            Commitments,
      Contingencies and Guarantees





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 a 300-millimeter wafer fabrication facility 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 Partners’ 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
April 4, 2010, the Company had notes receivable from Flash Partners of
$550.2 million, denominated in Japanese yen.  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 April 4, 2010
and January 3, 2010, the Company had an equity investment in Flash Partners
of $195.4 million and $199.1 million, respectively, denominated in
Japanese yen, offset by $39.5 million and $43.9 million, respectively,
of cumulative translation adjustments recorded in accumulated OCI.  In
the three months ended April 4, 2010, the Company recorded a
$0.6 million basis adjustment to its equity in earnings from Flash Partners
related to the difference between the basis in the Company’s equity investment
compared to the historical basis of the assets recorded by Flash
Partners.





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 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
April 4, 2010, the Company had notes receivable from Flash Alliance of
$508.5 million, denominated in Japanese yen.  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 April 4, 2010
and January 3, 2010, the Company had an equity investment in Flash Alliance
of $223.0 million and $225.3 million, respectively, denominated in
Japanese yen, offset by $40.1 million and $45.3 million, respectively,
of cumulative translation adjustments recorded in accumulated OCI.  In
the three months ended April 4, 2010, the Company recorded
$2.9 million of basis adjustment to its equity earnings from Flash Alliance
related to the difference between the basis in the Company’s equity investment
compared to the historical basis of the assets recorded by Flash
Alliance.








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FlashVision.In
the first quarter of fiscal year 2010, the wind-down of the Company’s 49.9%
ownership interest in FlashVision Ltd. (“FlashVision”), a business venture with
Toshiba which owns 50.1% was completed.  The Company recorded a gain
of $4.1 million related to the completion of this wind-down in Other income
(expense).





Flash
Ventures.  The Company participates in common research and
development activities with Toshiba but is not committed to any minimum funding
level.





The
Company and Toshiba restructured Flash Partners and Flash Alliance (hereinafter
collectively referred to as “Flash Ventures”) in the first quarter of fiscal
year 2009 by selling more than 20% of Flash Ventures’ capacity to
Toshiba.  The restructuring resulted in the Company receiving value of
79.3 billion Japanese yen of which 26.1 billion Japanese yen, or
$277.1 million, was received in cash, reducing outstanding notes receivable
from Flash Ventures and 53.2 billion Japanese yen reflected the transfer of
off-balance sheet equipment lease guarantee obligations from the Company to
Toshiba.  The restructuring was completed in a series of closings
through March 31, 2009.  The Company received the cash and
transferred 53.2 billion Japanese yen of off-balance sheet equipment lease
guarantee obligations in the first half of fiscal year
2009.  Transaction costs of $10.9 million related to the sale and
transfer of equipment and lease obligations were expensed in the first quarter
of fiscal year 2009.





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.





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.  These outstanding purchase
commitments are included as part of the total “Noncancelable production purchase
commitments” in the “Contractual Obligations” table below.





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.





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.








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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 U.S. dollar equivalent based upon the exchange rate at
April 4, 2010.





Master Lease Agreements by Execution
      Date
            
            Lease
      Amounts
            
            
            Expiration(Yen
      in billions)
            
            
            (Dollars
      in thousands)Flash
      PartnersDecember 2004
            
            ¥
            5.4
            
            
            $
            57,663
            
            
            
            2010December 2005
            
            
            3.3
            
            
            
            34,816
            
            
            
            2011June
      2006
            
            
            5.3
            
            
            
            55,527
            
            
            
            2011September 2006
            
            
            17.1
            
            
            
            181,266
            
            
            
            2011March 2007
            
            
            8.8
            
            
            
            92,903
            
            
            
            2012February
      2008
            
            
            3.7
            
            
            
            38,931
            
            
            
            201343.6
            
            
            
            461,106Flash
      AllianceNovember
      2007
            
            
            18.5
            
            
            
            196,158
            
            
            
            2013June
      2008
            
            
            25.9
            
            
            
            273,429
            
            
            
            201344.4
            
            
            
            469,587Total
      guarantee obligations
            
            ¥
            88.0
            
            
            $
            930,693





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
April 4, 2010 in U.S. dollars based upon the exchange rate at April 4,
2010 (in thousands).





Annual Installments
            
            Payment
      of Principal Amortization
            
            
            Purchase
      Option Exercise Price at Final Lease Terms
            
            
            Guarantee
      AmountYear
      1
            
            $
            262,497
            
            
            $
            69,442
            
            
            $
            331,939Year
      2
            
            
            163,639
            
            
            
            158,591
            
            
            
            322,230Year
      3
            
            
            77,943
            
            
            
            102,050
            
            
            
            179,993Year
      4
            
            
            14,263
            
            
            
            82,268
            
            
            
            96,531Total
      guarantee obligations
            
            $
            518,342
            
            
            $
            412,351
            
            
            $
            930,693








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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 $3.17 billion based upon the exchange rate
at April 4, 2010, of which 87.2 billion Japanese yen, or approximately
$922 million based upon the exchange rate at April 4, 2010, was
outstanding at April 4, 2010.  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 April 4, 2010,
the amount of the Company’s guarantee obligation of the Flash Partners’ master
lease agreements, which reflects future payments and any lease adjustments, was
43.6 billion Japanese yen, or approximately $461 million based upon
the exchange rate at April 4, 2010.  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.





On
April 26, 2010, Flash Partners refinanced one of its maturing equipment
leases totaling 8.65 billion Japanese yen, or approximately
$91 million based upon the exchange rate at April 4,
2010.  The Company and Toshiba have each guaranteed 50%, on a several
basis, of Flash Partners’ obligations under the refinanced lease
agreement.  This refinanced equipment lease, due in fiscal year 2014,
is to be paid by Flash Partners in quarterly installments, with interest based
on the 3-month Euro-Yen Tokyo InterBank Offer Rate (“TIBOR”).





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
April 4, 2010, Flash Partners was in compliance with all of its master
lease covenants.  As of April 4, 2010, the Company’s R&I credit
rating was BBB-, two notches above the required minimum corporate rating
threshold from R&I and the S&P credit rating was B, two levels below the
required minimum corporate rating threshold from S&P; however, as of May 10,
2010, the Company’s S&P credit rating was raised to BB-, which is the
required minimum corporate rating threshold from S&P.  If both
S&P and 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
non-compliance event were to occur and if the Company failed to reach a
resolution, 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.





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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 $2.11 billion based upon the exchange rate
at April 4, 2010, of which 88.8 billion Japanese yen, or approximately
$939 million based upon the exchange rate at April 4, 2010, was
outstanding as of April 4, 2010.  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
April 4, 2010, the amount of the Company’s guarantee obligation of the
Flash Alliance’s master lease agreements was 44.4 billion Japanese yen, or
approximately $470 million based upon the exchange rate at April 4,
2010.  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 April 4, 2010, Flash Alliance
was in compliance with all of its master lease covenants.  As of April
4, 2010, the Company’s R&I credit rating was BBB-, two notches above the
required minimum corporate rating threshold from R&I and the S&P credit
rating was B, two levels below the required minimum corporate rating threshold
from S&P; however, as of May 10, 2010, the Company’s S&P credit rating
was raised to BB-, which is the required minimum corporate rating threshold from
S&P.  If both S&P and 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 non-compliance event were to occur and if the
Company failed to reach a resolution, 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.








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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
April 4, 2010, no amounts had been accrued in the accompanying Condensed
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 April 4, 2010 or January 3, 2010, 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 April 4, 2010, no amounts have been accrued
in the accompanying Condensed Consolidated Financial Statements with respect to
these indemnification guarantees.








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Contractual Obligations
and Off-Balance Sheet Arrangements





The
following tables summarize the Company’s contractual cash obligations,
commitments and off-balance sheet arrangements at April 4, 2010, 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
                (9
      months)
            
            
            2
      - 3 Years
                (Fiscal
      2011
                and
      2012)
            
            
            4
      –5 Years
                (Fiscal
      2013
                and
      2014)
            
            
            More
      than 5 Years (Beyond
                Fiscal
      2014)Facility
      and other operating leases
            $
            29,895
            
            
            
            $
            6,476
            
            
            $
            15,802
            
            
            $
            4,809
            
            
            $
            2,808Flash
      Partners reimbursement for certain fixed costs including
      depreciation
            
            1,085,619
            (3
            )(4)
            
            
            327,944
            
            
            
            545,180
            
            
            
            157,357
            
            
            
            55,138Flash
      Alliance reimbursement for certain fixed costs including
      depreciation
            
            1,704,678
            (3
            )(4)
            
            
            475,156
            
            
            
            807,478
            
            
            
            321,015
            
            
            
            101,029Toshiba
      research and development
            
            92,051
            (3
            )
            
            
            67,791
            
            
            
            24,260
            
            
            
            ―
            
            
            
            ―Capital
      equipment purchase commitments
            
            23,555
            
            
            
            
            22,605
            
            
            
            950
            
            
            
            ―
            
            
            
            ―Convertible
      notes principal and interest (1)
            
            1,185,880
            
            
            
            
            8,625
            
            
            
            23,000
            
            
            
            1,154,255
            
            
            
            ―Operating
      expense commitments
            
            30,634
            
            
            
            
            29,407
            
            
            
            1,227
            
            
            
            ―
            
            
            
            ―Noncancelable
      production purchase commitments (2)
            
            292,342
            (3
            )
            
            
            287,342
            
            
            
            5,000
            
            
            
            ―
            
            
            
            ―Total
      contractual cash obligations
            $
            4,444,654
            
            
            
            $
            1,225,346
            
            
            $
            1,422,897
            
            
            $
            1,637,436
            
            
            $
            158,975





Off-Balance
Sheet Arrangements.


As
      of
                April 4,
      2010Guarantee
      of Flash Ventures equipment leases (5)
            
            $
            930,693


_________________


(1)
            In
      May 2006, the Company issued and sold $1.15 billion in aggregate
      principal amount of 1% Notes due 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.





(2)
            Includes
      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 April 4,
2010.





(4)
            Excludes
      amounts related to the master lease agreements’ purchase option exercise
      price at final lease term.





(5)
            The
      Company’s guarantee obligation, net of cumulative lease payments, is
      88.0 billion Japanese yen, or approximately $931 million based
      upon the exchange rate at April 4,
2010.








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The
Company has excluded $213.5 million of unrecognized tax benefits (which
includes penalties and interest) from the contractual obligation table above due
to the uncertainty with respect to the timing of associated future cash flows at
April 4, 2010.  The Company is unable to make reasonably 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 2010 through fiscal year
2016.  Future minimum lease payments at April 4, 2010 are
presented below (in thousands).





Fiscal
      Year:2010
      (remaining 9 months)
            
            $
            6,8072011
            
            
            8,2242012
            
            
            8,5312013
            
            
            4,2112014
            
            
            2,3642015
      and thereafter
            
            
            2,80832,945Sublease
      income to be received in the future under noncancelable
      subleases
            
            
            (3,050
            )Net
      operating leases
            
            $
            29,895





Rent
expense for the three months ended April 4, 2010 and March 29, 2009
was $2.0 million and $1.9 million, respectively.














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12.
            Related
      Parties and Strategic Investments





Flash Ventures
with Toshiba.The Company owns 49.9% of each of the flash
ventures with Toshiba (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 Ventures master lease agreements,
take-or-pay supply arrangements and research and development cost sharing are
described in Note 11, “Commitments, Contingencies and
Guarantees.”  Flash Ventures are variable interest
entities.  On January 4, 2010, the Company adopted new accounting
guidance as issued by the FASB related to the consolidation of variable interest
entities.  The adoption of the new guidance did not change the
Company’s original conclusions related to the consolidation of its variable
interest entities.  Under the new guidance, the Company evaluated
whether it is the primary beneficiary of the Flash Ventures for all periods
presented and determined that it is not the primary beneficiary of either Flash
Partners or Flash Alliance because it does not have a controlling financial
interest in either entity.  The Company purchased NAND flash
memory wafers from Flash Ventures and made loans to Flash Alliance totaling
approximately $513.4 million and $569.8 million in the three months
ended April 4, 2010 and March 29, 2009, respectively.  The
Company received loan repayments from Flash Ventures of $277.1 million in
the three months ended March 29, 2009.  At April 4, 2010 and
January 3, 2010, the Company had accounts payable balances due to Flash
Ventures of $143.0 million and $182.1 million,
respectively.





The
Company’s maximum reasonably estimable loss exposure (excluding lost profits),
based upon the exchange rate at each respective balance sheet date, as a result
of its involvement with Flash Ventures is presented below
(in thousands).





April 4,
                2010
            
            
            January 3,
                2010Notes
      receivable
            
            $
            1,058,669
            
            
            $
            1,083,172Equity
      investments
            
            
            418,392
            
            
            
            424,378Operating
      lease guarantees
            
            
            930,693
            
            
            
            1,069,763Maximum
      loss exposure
            
            $
            2,407,754
            
            
            $
            2,577,313





Solid State
Storage Solutions LLC.  During the second quarter of fiscal
year 2007, the Company formed a venture with third parties that licenses
intellectual property, Solid State Storage Solutions LLC (“S4”).  S4
qualifies as a variable interest entity.  The Company is considered
the primary beneficiary of S4 and the Company consolidates S4 in its Condensed
Consolidated Financial Statements for all periods presented.  Due to
the adoption of new accounting guidance by the FASB related to consolidation of
variable interest entities in the first quarter of fiscal year 2010, the Company
considered multiple factors in determining it was still the primary beneficiary,
including its overall involvement with the venture, contributions and
participation in operating activities.  S4’s assets and liabilities were
not material to the Company’s Condensed Consolidated Balance Sheet as of
April 4, 2010 and January 3, 2010, respectively.




Sale of SIM
Business Net Assets.In February 2010, the
Company sold its SIM business net assets for $17.8 million, which resulted
in a gain of $13.2 million recorded in “Other income (expense).”  The
sale proceeds are included in “Proceeds from sale of assets” in investing
activities on the Condensed Consolidated Statements of Cash Flows.  The
operating results of the SIM business assets were immaterial for all periods
presented.













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13.
            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 secrets,
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.  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.





msystems
Shareholder Derivative Claim in Israel.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.  On March 10, 2010, the Supreme Court
dismissed the appeal and this matter is now concluded.





Patent
Infringement Litigation Initiated by SanDisk.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 Electronics Corp. (“Phison”); Silicon Motion
Technology Corp., Silicon Motion, Inc. (Taiwan), Silicon Motion, Inc.
(California), and Silicon Motion International, Inc. (collectively, “Silicon
Motion”); Synergistic Sales, Inc. (“Synergistic”); USBest Technology, Inc. dba
Afa Technologies, Inc. (“USBest”); Skymedi Corp. (“Skymedi”); Chipsbank
Microelectronics (HK) Co., Ltd., Chipsbank Technology (Shenzhen) Co., Ltd., and
Chipsbank Microelectronics Co., Ltd., (collectively, “Chipsbank”); Infotech
Logistic LLC (“Infotech”); Zotek Electronic Co., Ltd., dba Zodata Technology
Ltd. (collectively, “Zotek”); Power Quotient International Co., Ltd., and PQI
Corp., (collectively, “PQI”); 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.; Behavior Tech Computer Corp.
and Behavior Tech Computer (USA) Corp. (collectively, “Behavior”); Corsair
Memory, Inc. (“Corsair”); Dane-Elec Memory S.A., and Dane-Elec Corp. USA,
(collectively, “Dane-Elec”) EDGE Tech Corp. (“EDGE”); Interactive Media Corp,
(“Interactive”); LG Electronics, Inc., and LG Electronics U.S.A., Inc.,
(collectively, “LG”); TSR Silicon Resources Inc. (“TSR”); and Welldone Co.
(“Welldone”).  In this action, Case No. 07-C-0607-C (“the ’607
Action”), the Company initially asserted that the defendants infringed 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 has since entered into a stipulation dismissing
the ’332 patent.  That same day, the Company filed a second complaint
for patent infringement in the same court 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 ’605 Action”), the Company asserted that the defendants
infringed 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 both actions.  In light of settlement agreements,
the Company dismissed its claims against Phison, Silicon Motion, Skymedi,
Verbatim, Corsair, Add-On Computer Peripherals, EDGE, Infotech, Interactive,
PNY, TSR and Welldone.  The Company’s claims against Chipsbank, Acer,
Behavior, Dane-Elec, LG, PQI, USBest, Transcend, A-DATA, Apacer, and Synergistic
have been dismissed without prejudice.  The Court consolidated the
’605 and ’607 Actions and stayed these actions during the pendency of related
proceedings before the U.S. International Trade Commission, which are now
closed.  On November 13, 2009, the Court lifted the stay except as to
the ’424 patent.  On December 14, 2009, the Court advised the parties
that the consolidated actions will be tried in February 2011 with summary
judgment motions due six months before trial.  Several of the
remaining defendants have answered the Company’s complaints by denying
infringement and raising several affirmative defenses and related
counterclaims.  These defenses and related counterclaims include,
among others, lack of standing, unclean hands, non-infringement, invalidity,
unenforceability for alleged patent misuse, express license, implied license,
patent exhaustion, waiver, laches, and estoppel.





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Federal Civil
Antitrust Class Actions.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 and 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 from January 1, 1999 through the
present.  The lawsuits seek an injunction, damages, restitution, fees,
costs, and disgorgement of profits.  On May 20, 2009, the Court denied
defendants' motion to dismiss the consolidated direct purchaser complaint and
denied (with limited exceptions for certain state law claims) defendants' motion
to dismiss the consolidated indirect purchaser complaint.  On April
15, 2010, the Court denied the indirect purchaser plaintiffs’ class
certification motion, denied plaintiffs’ motion for leave to amend the
Consolidated Amended Complaint to substitute certain class representatives, and
dismissed the claims on behalf of South Dakota purchasers with
prejudice.  Indirect purchaser plaintiffs have moved for leave to file
a motion for reconsideration of that decision.  The direct purchaser
plaintiffs’ class certification motion and related motion to substitute
plaintiffs remain under submission.





Spansion
Bankruptcy.Spansion, LLC (“Spansion”) and SanDisk IL Ltd.
f/k/a M-Systems Flash Disk Pioneers Ltd. (“SanDisk IL”) are parties to the SSP
Driver Software License Agreement (the “SSP License”) and the ORNAND Driver
Software License Agreement (the “ORNAND License” and, collectively with the New
Collaboration Agreement, the “Agreements”).  As set forth in the
Agreements, Spansion was required to make quarterly royalty and support fee
payments for use of SanDisk IL’s patented technology.  On March 1,
2009, Spansion filed for protection under chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court for the District of
Delaware (the “Bankruptcy Court”).  On May 22, 2009, SanDisk IL filed
a proof of claim asserting a prepetition unsecured claim against Spansion in the
amount of $11,338,260.  Subsequently, the parties entered into
Amendment to the New Collaboration Agreement (the “Amendment”) dated as of
January 31, 2010, pursuant to which Spansion (a) assumed the SSP License and New
Collaboration Agreement, (b) rejected the ORNAND License, (c) agreed to pay
SanDisk IL $1,157,065 in order to cure arrearages under the Agreements, and (d)
agreed the allowance of a general unsecured, prepetition claim of $6,166,123 in
connection with the rejection of the ORNAND License, comprised of $1,166,123 for
prepetition arrearages and $5,000,000 for rejection damages.  On
February 23, 2010, SanDisk IL entered into an agreement to assign its remaining
ORNAND License claim to Hain Capital Holdings, LLC for $3,830,703.91, equal to
62.125% of the ORNAND claim amount of $6,166,123.00.  On April 16,
2010, the Bankruptcy Court approved and confirmed Spansion’s reorganization
plan.





Patent
Declaratory Judgment Litigation Initiated by SanDisk.On June
19, 2009, the Company filed a complaint against LSI Corporation (“LSI”) in the
Northern District of California seeking a declaration of non-infringement,
declaration of invalidity and/or unenforceability as to eight LSI patents
relating to digital audio and video technology, and seeking remedies under
various California State laws for misrepresentations made by LSI to the
Company’s customers.  The suit, Case No. C09 02737, was filed in
response to threats made by LSI against the Company and certain customers of the
Company.  LSI has counterclaimed for infringement of the eight LSI
patents in suit and has accused most of SanDisk’s digital audio and video
players of infringement.  On March 17, 2010, the parties agreed to
settlement and on March 18, 2010, all claims were dismissed with prejudice,
concluding the matter.





Patent
Infringement Litigation Initiated by SanDisk.On May 4, 2010,
the Company filed a complaint for patent infringement in the United States
District Court for the Western District of Wisconsin against Kingston and
Imation.  In this action, Case No. 3:10-cv-00243, the Company asserts
U.S. Patent No. 7,397,713; U.S. Patent No. 7,492,660; U.S. Patent No. 7,657,702;
U.S. Patent No. 7,532,511; U.S. Patent No. 7,646,666; U.S. Patent No. 7,646,667;
and U.S. Patent No. 6,968,421.  The Company seeks damages and
injunctive relief.  The defendants have not yet responded to the
complaint.





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Item
      2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations





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 significant
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 under “Risk Factors”
in Part II, 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 or other 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” refer collectively to SanDisk Corporation, a Delaware
corporation, and its subsidiaries.





Overview




We
are the global leader in flash memory cards. Our mission is to provide
simple, reliable and affordable storage for use in portable
devices.  We sell our products globally through broad retail and
original equipment manufacturer, or OEM, distribution channels.




We
design, develop and manufacture data storage products and solutions in a variety
of form factors using our flash memory, proprietary controller and firmware
technologies.  We purchase the vast majority of our NAND flash memory
supply requirements through our significant flash venture relationships with
Toshiba which provide us with leading-edge, low-cost memory
wafers.  Our removable card products are used in a wide range of
consumer electronics devices such as mobile phones, digital cameras, gaming
devices and laptop computers.  Our embedded flash products are used in
mobile phones, navigation devices, gaming systems, imaging devices and computing
platforms.  For computing platforms, we provide high-speed,
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.




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 a variety of end products.  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
results are primarily driven by worldwide demand for flash storage devices,
which in turn primarily depends on end-user demand for consumer 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 this price elasticity, we must reduce our cost per
gigabyte at a rate similar to the change in selling price per
gigabyte, while in the same time, increasing the average capacity
and/or the number of units of our products enough to offset price
declines.  We continually seek to achieve these cost reductions
through technology improvements, primarily by increasing the amount of memory
stored in a given area of silicon.




Our
industry is characterized by rapid technology transitions.  Since our
inception, we have been able to scale NAND technology through fourteen
generations over approximately twenty years.  However, the pace at
which NAND technology is transitioning to new generations is expected to slow
due to inherent physical technology limitations.  We currently expect
to be able to continue to scale our NAND technology through a few additional
generations, but beyond that there is no certainty that further technology
scaling can be achieved cost effectively with the current NAND flash technology
and architecture.  We also continue to invest in future alternative
technologies, particularly our 3D Read/Write technology, which we believe may be
a viable alternative to NAND when NAND can no longer scale at a sufficient rate,
or at all.  However, even when NAND flash can no longer be further
scaled, we expect NAND and potential alternative technologies to coexist for an
extended period of time.





In
March 2010, we completed the redemption of the 1% Convertible Notes due
2035 through an all-cash transaction of $75 million plus accrued interest
of $0.4 million.





36
 Table of Contents





Results
of Operations.


Three
      months endedApril 4,
                2010
            
            
            %
      of
                Revenues
            
            
            March 29,
                2009
            
            
            %
      of
                Revenues(In millions,
      except percentages)Product
      revenues
            
            $
            993.2
            
            
            
            91.4
            %
            
            $
            588.1
            
            
            
            89.2
            %License
      and royalty revenues
            
            
            93.5
            
            
            
            8.6
            %
            
            
            71.4
            
            
            
            10.8
            %Total
      revenues
            
            
            1,086.7
            
            
            
            100.0
            %
            
            
            659.5
            
            
            
            100.0
            %Cost
      of product revenues
            
            
            583.4
            
            
            
            53.7
            %
            
            
            657.5
            
            
            
            99.7
            %Amortization
      of acquisition-related intangible assets
            
            
            3.1
            
            
            
            0.3
            %
            
            
            3.1
            
            
            
            0.5
            %Total
      cost of product revenues
            
            
            586.5
            
            
            
            54.0
            %
            
            
            660.6
            
            
            
            100.2
            %Gross
      profit (loss)
            
            
            500.2
            
            
            
            46.0
            %
            
            
            (1.1
            )
            
            
            (0.2
            %)Operating
      expensesResearch
      and development
            
            
            98.7
            
            
            
            9.0
            %
            
            
            86.9
            
            
            
            13.2
            %Sales
      and marketing
            
            
            48.5
            
            
            
            4.5
            %
            
            
            37.9
            
            
            
            5.7
            %General
      and administrative
            
            
            38.7
            
            
            
            3.6
            %
            
            
            38.3
            
            
            
            5.8
            %Amortization
      of acquisition-related intangible assets
            
            
            0.3
            
            
            
            0.0
            %
            
            
            0.3
            
            
            
            0.1
            %Restructuring
      and other
            
            
            —
            
            
            
            —
            
            
            
            0.8
            
            
            
            0.1
            %Total
      operating expenses
            
            
            186.2
            
            
            
            17.1
            %
            
            
            164.2
            
            
            
            24.9
            %Operating
      income (loss)
            
            
            314.0
            
            
            
            28.9
            %
            
            
            (165.3
            )
            
            
            (25.1
            %)Other
      income (expense), net
            
            
            9.0
            
            
            
            0.8
            %
            
            
            (18.7
            )
            
            
            (2.8
            %)Income
      (loss) before taxes
            
            
            323.0
            
            
            
            29.7
            %
            
            
            (184.0
            )
            
            
            (27.9
            %)Provision
      for income taxes
            
            
            88.3
            
            
            
            8.1
            %
            
            
            24.0
            
            
            
            3.6
            %Net
      income (loss)
            
            $
            234.7
            
            
            
            21.6
            %
            
            $
            (208.0
            )
            
            
            (31.5
            %)





Product
Revenues.


Three
      months endedApril 4,
                2010
            
            
            March 29,
                2009
            
            
            Percent
                Change(In millions,
      except percentages)Retail
            
            $
            370.5
            
            
            $
            346.6
            
            
            
            6.9
            %OEM
            
            
            622.7
            
            
            
            241.5
            
            
            
            157.8
            %Product
      revenues
            
            $
            993.2
            
            
            $
            588.1
            
            
            
            68.9
            %





The
increase in our product revenues for the three months ended April 4, 2010
compared to the three months ended March 29, 2009 reflected significant
growth from both existing and new OEM customers primarily in the mobile market,
as well as modest growth in retail sales.  Average selling price per
gigabyte was the same as the prior year, primarily reflecting an improved
balance between supply and demand.  Memory units sold were up 62% and
total gigabytes sold were up 71% for the three months ended April 4, 2010
compared to the three months ended March 29, 2009.





OEM
revenue in the three months ended April 4, 2010 grew 158% compared to the
three months ended March 29, 2009, due to increased sales of cards,
embedded solutions, non-branded products, wafers and components, primarily to
the mobile market and to new channels that we added in the second half of fiscal
2009.  Retail product revenue increased in the three months ended
April 4, 2010 compared to the prior year due primarily to improved consumer
spending in Asia.  We expect OEM revenue to continue to grow faster
than retail revenue and to represent more than half of our revenues in fiscal
year 2010.





Our ten
largest customers represented approximately 44% of our total revenues in both
the three months ended April 4, 2010 and March 29, 2009.  No
customer exceeded 10% of our total revenues during either of these
periods.








37
 Table of Contents








Geographical
Product Revenues.


Three
      months endedApril 4,
                2010
            
            
            %
      of Product Revenues
            
            
            March 29,
                2009
            
            
            %
      of Product Revenues
            
            
            Percent
                Change(In millions,
      except percentages)United
      States
            
            $
            165.7
            
            
            
            16.7
            %
            
            $
            214.0
            
            
            
            36.4
            %
            
            
            (22.6
            %)Europe,
      Middle East and Africa
            
            
            161.9
            
            
            
            16.3
            %
            
            
            151.0
            
            
            
            25.6
            %
            
            
            7.3
            %Asia-Pacific
            
            
            642.8
            
            
            
            64.7
            %
            
            
            210.9
            
            
            
            35.9
            %
            
            
            204.8
            %Other
      foreign countries
            
            
            22.8
            
            
            
            2.3
            %
            
            
            12.2
            
            
            
            2.1
            %
            
            
            85.7
            %Product
      revenues
            
            $
            993.2
            
            
            
            100.0
            %
            
            $
            588.1
            
            
            
            100.0
            %
            
            
            68.9
            %





Product
revenues in Asia-Pacific, which includes Japan, increased for the three months
ended April 4, 2010 as compared to the three months ended March 29,
2009, due primarily to growth in our OEM channel sales for the mobile market,
increased sales of non-branded products, wafers and components, and growth in
retail sales due to increased consumer demand and our geographic expansion
efforts.  The decrease in product revenues for the United States in
the three months ended April 4, 2010 compared to the three months ended
March 29, 2009 was primarily due to a shift to OEM products shipped to
Asia-Pacific and to a lesser degree, a decrease in retail
revenue.  The increase in product revenues for Europe, Middle East and
Africa in the three months ended April 4, 2010 as compared to the three
months ended March 29, 2009 was a result of increased OEM sales primarily
for the mobile market, partially offset by reduced retail revenue due to weak
consumer spending.





License
and Royalty Revenues.


Three
      months endedApril 4,
                2010
            
            
            March 29,
                2009
            
            
            Percent
                Change(In millions,
      except percentages)License
      and royalty revenues
            
            $
            93.5
            
            
            $
            71.4
            
            
            
            31.0
            %





The
increase in our license and royalty revenues for the three months ended
April 4, 2010 compared to the three months ended March 29, 2009 was
primarily due to higher flash memory revenues reported by our licensees,
partially offset by lower royalty rates in a renewed license agreement with one
of our key licensees.  In addition, first quarter of fiscal year 2009
royalty revenues were reduced by an adjustment identified by a
licensee.





Gross
Profit and Margin.


Three
      months endedApril 4,
                2010
            
            
            March 29,
                2009
            
            
            Percent
                Change(In millions,
      except percentages)Product
      gross profit (loss)
            
            $
            406.7
            
            
            $
            (72.5
            )
            
            
            661.0
            %Product
      gross margin (as a percent of product revenues)
            
            
            40.9
            %
            
            
            (12.3
            %)Total
      gross margin (as a percent of total revenues)
            
            
            46.0
            %
            
            
            (0.2
            %)





Product
gross profit (loss) and gross margin for the three months ended April 4,
2010, was substantially higher than the comparable period in fiscal year 2009
due to the average selling price per gigabyte not declining from the prior year
and a full year of manufacturing cost improvements, driven by technology
transitions and increased usage of three bits per cell memory.  Our
industry has been historically characterized by price and cost declines and our
experience of no price declines from the first quarter of fiscal year 2009 to
the first quarter of fiscal year 2010 is not necessarily indicative of a new or
future trend.  Product gross margin for the three months ended
March 29, 2009 was negative due to aggressive industry price declines
exceeding cost declines, adverse effects of the fluctuation of the Japanese yen
to the U.S. dollar and charges of $62.8 million for adverse purchase
commitments associated with under-utilization of Flash Partners Ltd., or Flash
Partners, and Flash Alliance Ltd., or Flash Alliance, (hereinafter collectively
referred to as “Flash Ventures”) capacity.





38
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Research
and Development.


Three
      months endedApril 4,
                2010
            
            
            March 29,
                2009
            
            
            Percent
                Change(In millions,
      except percentages)Research
      and development
            
            $
            98.7
            
            
            $
            86.9
            
            
            
            13.6
            %Percent
      of revenue
            
            
            9.0
            %
            
            
            13.2
            %





Our
research and development expense increase for the three months ended
April 4, 2010 compared to the three months ended March 29, 2009 was
due primarily to higher employee-related costs of $11.3 million related to
increased headcount, increased incentive compensation expense and higher
share-based compensation expense.





Sales
and Marketing.


Three
      months endedApril 4,
                2010
            
            
            March 29,
                2009
            
            
            Percent
                Change(In millions,
      except percentages)Sales
      and marketing
            
            $
            48.5
            
            
            $
            37.9
            
            
            
            28.0
            %Percent
      of revenue
            
            
            4.5
            %
            
            
            5.7
            %





Our sales
and marketing expense increase for the three months ended April 4, 2010
versus the comparable period in fiscal year 2009, was primarily due to increased
branding and merchandising costs of $7.0 million and employee-related costs
of $3.8 million, primarily due to increased incentive compensation
expense.





General
and Administrative.


Three
      months endedApril 4,
                2010
            
            
            March 29,
                2009
            
            
            Percent
                Change(In millions,
      except percentages)General
      and administrative
            
            $
            38.7
            
            
            $
            38.3
            
            
            
            1.0
            %Percent
      of revenue
            
            
            3.6
            %
            
            
            5.8
            %





Our
overall general and administrative expense for the three months ended
April 4, 2010 was relatively constant compared to the comparable period in
fiscal year 2009.  Our general and administrative expense for the
three months ended April 4, 2010 over the comparable period included higher
employee-related costs of $4.3 million, primarily due to increased
incentive compensation expense, offset by lower bad debt expense of
($3.8) million.





Amortization
of Acquisition-Related Intangible Assets.


Three
      months endedApril 4,
                2010
            
            
            March 29,
                2009
            
            
            Percent
                Change(In millions,
      except percentages)Amortization
      of acquisition-related intangible assets
            
            $
            0.3
            
            
            $
            0.3
            
            
            
            0.0
            %Percent
      of revenue
            
            
            0.0
            %
            
            
            0.1
            %





Amortization
of acquisition-related intangible assets relate to the intangible assets
acquired from Matrix Semiconductor, Inc. and MusicGremlin, Inc., which will be
amortized through fiscal year 2014.





39
 Table of Contents








Restructuring
and Other.


Three
      months endedApril 4,
                2010
            
            
            March 29,
                2009
            
            
            Percent
                Change(In millions,
      except percentages)Restructuring
      and other
            
            $
            —
            
            
            $
            0.8
            
            
            
            (100.0
            %)Percent
      of revenue
            
            
            —
            
            
            
            0.1
            %





For the
three months ended April 4, 2010, we recorded no charge related to employee
severance costs under our restructuring plans compared to $0.8 million
recorded for the same period in fiscal year 2009.





Other
Income (Expense).


Three
      months endedApril 4,
                2010
            
            
            March 29,
                2009
            
            
            Percent
                Change(In millions,
      except percentages)Interest
      income
            
            $
            12.4
            
            
            $
            19.4
            
            
            
            (36.1
            %)Interest
      expense
            
            
            (18.0
            )
            
            
            (17.0
            )
            
            
            5.9
            %Income
      (loss) in equity investments
            
            
            —
            
            
            
            (0.8
            )
            
            
            (100.0
            %)Other
      income (expense)
            
            
            14.6
            
            
            
            (20.3
            )
            
            
            (172.1
            %)Total
      other income (expense), net
            
            $
            9.0
            
            
            $
            (18.7
            )
            
            
            148.1
            %





The
increase in “Total other income (expense), net” for the three months ended
April 4, 2010 compared to the same period in fiscal year 2009 was primarily
due to non-recurring gains on the sale of assets and investments in the first
quarter of fiscal year 2010 versus one-time charges taken in the first quarter
of fiscal year 2009, reflected in “Other income (expense),” and a decrease in
interest income due to lower interest rates.  In February 2010, we
sold our SIM business net assets which resulted in a gain of $13.2 million
recorded in “Other income (expense).”  “Other income (expense)” was
negative for the three months ended March 29, 2009 due to bank charges and
fees of ($10.9) million related to the restructuring of the Flash Ventures
master equipment leases and impairment of our equity investment in FlashVision
Ltd. of ($7.9) million.





Provision
for Income Taxes.


Three
      months endedApril 4,
                2010
            
            
            March 29,
                2009
            
            
            Percent
                Change(In millions,
      except percentages)Provision
      for income taxes
            
            $
            88.3
            
            
            $
            24.0
            
            
            
            268.4
            %Effective
      tax rate
            
            
            (27.3
            %)
            
            
            (13.0
            %)





The
provision for income taxes for the three months ended April 4, 2010
increased from the same period in fiscal year 2009 primarily due to increased
federal taxes based upon higher U.S. income.  Due to our valuation
allowance for U.S. deferred tax assets, the tax provision for the three months
ended March 29, 2009 primarily reflected taxes on our income generating
foreign jurisdictions, and withholding taxes on license and royalty income from
certain foreign licensees.  The tax provision for the three months
ended April 4, 2010 also includes U.S. taxes net of changes in the
valuation allowance of the U.S. deferred tax assets.  As of
April 4, 2010, due to recent net cumulative losses, a valuation allowance
remains on certain U.S. deferred tax assets that are not more-likely-than-not to
be realized.





Unrecognized
tax benefits were $184.8 million and $179.8 million as of
April 4, 2010 and January 3, 2010,
respectively.  Unrecognized tax benefits that would impact the
effective tax rate in the future are approximately $103.7 million at
April 4, 2010.  Income tax expense in the first quarter of fiscal
year 2010 included interest and penalties of $1.5 million.





In
October 2009, the Internal Revenue Service commenced an examination of our
federal income tax returns for fiscal years 2005 through 2008.  We do
not expect a resolution to be reached during the next twelve
months.  In addition, we are currently under audit by various state
and international tax authorities and cannot reasonably estimate that the
outcome of these examinations will not have a material effect on our financial
position, results of operations or liquidity.





40
 Table of Contents





Non-GAAP
Financial Measures





Reconciliation
of Net Income (Loss).





Three
      months endedApril 4,
                2010
            
            
            March 29,
                2009(In thousands
      except per share amounts)Net
      income (loss)
            
            $
            234,691
            
            
            $
            (207,995
            )Share-based
      compensation
            
            
            16,870
            
            
            
            16,330Amortization
      of acquisition-related intangible assets
            
            
            3,424
            
            
            
            3,424Convertible
      debt interest
            
            
            13,921
            
            
            
            12,926Income
      tax adjustments
            
            
            (43,864
            )
            
            
            66,852Non-GAAP
      net income (loss)
            
            $
            225,042
            
            
            $
            (108,463
            )Diluted
      net income (loss) per share:
            
            $
            0.99
            
            
            $
            (0.92
            )Share-based
      compensation
            
            
            0.07
            
            
            
            0.07Amortization
      of acquisition-related intangible assets
            
            
            0.01
            
            
            
            0.02Convertible
      debt interest
            
            
            0.06
            
            
            
            0.06Income
      tax adjustments
            
            
            (0.18
            )
            
            
            0.29Non-GAAP
      diluted net income (loss) per share:
            
            $
            0.95
            
            
            $
            (0.48
            )Shares
      used in computing diluted net income (loss) per share:GAAP
            
            
            236,884
            
            
            
            226,529Non-GAAP
            
            
            236,245
            
            
            
            226,529





We
believe that providing this additional information is useful in enabling the
investor to better assess and understand operating performance, especially when
comparing results with previous periods or forecasting performance for future
periods, primarily because management typically monitors the business excluding
these items.  We also use these non-GAAP measures to establish
operational goals and for measuring performance for compensation
purposes.  However, analysis of results on a non-GAAP basis should be
used as a complement to, and in conjunction with, and not as a replacement for,
data presented in accordance with GAAP.





We
believe that the presentation of non-GAAP measures, including net income (loss)
and non-GAAP net income (loss) per diluted share, provides important
supplemental information to management and investors about financial and
business trends relating to our results of operations.  We believe
that the use of these non-GAAP financial measures also provides consistency and
comparability with our past financial reports.





We have
historically used these non-GAAP measures when evaluating operating performance
because we believe that the inclusion or exclusion of the items described below
provides an additional measure of our core operating results and facilitates
comparisons of our core operating performance against prior periods and our
business model objectives.  We have chosen to provide this information
to investors to enable them to perform additional analyses of past, present and
future operating performance and as a supplemental means to evaluate our ongoing
core operations.  Externally, we believe that these non-GAAP measures
continue to be useful to investors in their assessment of our operating
performance and their valuation of the company.





Internally,
these non-GAAP measures are significant measures used by us for purposes
of:


- evaluating
  the core operating performance of the company;
- establishing
  internal budgets;
- setting
  and determining variable compensation levels;
- calculating
  return on investment for development programs and growth
  initiatives;
- comparing
  performance with internal forecasts and targeted business models;
- strategic
  planning; and
- benchmarking
  performance externally against our competitors.




41
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We
exclude the following items from our non-GAAP measures:





Share-based Compensation
Expense.These expenses consist primarily of expenses for employee
stock options, employee restricted stock units and the employee stock purchase
plan.  Although share-based compensation is an important aspect of the
compensation of our employees and executives, we exclude share-based
compensation expenses from our non-GAAP measures primarily because they are
non-cash expenses that we do not believe are reflective of ongoing operating
results.  Further, we believe that it is useful to exclude share-based
compensation expense for investors to better understand the long-term
performance of our core business and to facilitate comparison of our results to
those of peer companies.





Amortization of Acquisition-related
Intangible Assets.  We incur amortization of intangible assets in
connection with acquisitions.  Since we do not acquire businesses on a
predictable cycle, we exclude these items in order to provide investors and
others with a consistent basis for comparison across accounting
periods.





Convertible Debt
Interest.  This is the non-cash economic interest expense
relating to the implied value of the equity conversion component of the
convertible debt.  The value of the equity conversion component is
treated as a debt discount and amortized to interest expense over the life of
the note using the effective interest rate method.  We exclude this
non-cash interest expense as it does not represent the semi-annual cash interest
payments made to our note holders.





Income Tax
Adjustments.  This amount is used to present each of the
amounts described above on an after-tax basis, considering jurisdictional tax
rates, consistent with the presentation of non-GAAP net income.  It
also represents the amount of tax expense or benefit that we would record,
considering jurisdictional tax rates, if we did not have any valuation allowance
on our net deferred tax assets.





From
time-to-time in the future, there may be other items that we may exclude if we
believe that doing so is consistent with the goal of providing useful
information to investors and management.





Limitations of
Relying on Non-GAAP Financial Measures.  We have incurred and
will incur in the future, many of the costs excluded from the non-GAAP measures,
including share-based compensation expense, impairment of goodwill and
acquisition-related intangible assets, amortization of acquisition-related
intangible assets and other acquisition-related costs, convertible debt interest
expense and income tax adjustments.  These measures should be
considered in addition to results prepared in accordance with GAAP, but should
not be considered a substitute for, or superior to, GAAP
results.  These non-GAAP measures may be different than the non-GAAP
measures used by other companies.





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Liquidity
and Capital Resources.





Our cash
flows were as follows:


Three
      months endedApril 4,
                2010
            
            
            March 29,
                2009
            
            
            Percent
                Change(In millions,
      except percentages)Net
      cash provided by (used in) operating activities
            
            $
            328.3
            
            
            $
            (114.3
            )
            
            
            387.3
            %Net
      cash provided by (used in) investing activities
            
            
            (349.5
            )
            
            
            238.0
            
            
            
            (246.9
            %)Net
      cash provided by (used in) financing activities
            
            
            (54.9
            )
            
            
            4.6
            
            
            
            (1300.8
            %)Effect
      of changes in foreign currency exchange rates on cash
            
            
            (1.8
            )
            
            
            (0.3
            )
            
            
            (653.9
            %)Net
      increase (decrease) in cash and cash equivalents
            
            $
            (77.9
            )
            
            $
            128.0
            
            
            
            (160.8
            %)





Operating
Activities.Cash provided by operations was
$328.3 million for the first three months of fiscal year 2010 as compared
to cash used in operations of ($114.3) million for the first three months
of fiscal year 2009.  The increase in cash provided by operations in
the first three months of fiscal year 2010 compared to the first three months of
fiscal year 2009 resulted primarily from net income of $234.7 million,
which includes certain non-cash items, compared with a net loss of
($208.0) million, which includes certain non-cash charges, in the
comparable period of the prior year.  Cash flow from accounts
receivable decreased, as reflected by higher accounts receivable levels in
fiscal year 2010 compared with the prior year, due to increased revenue in the
first quarter of fiscal year 2010.  Cash flow from other assets
decreased compared to the prior year primarily due to a tax refund received in
the first quarter of fiscal year 2009.  Accounts payable trade and
accounts payable from related parties decreased primarily due to the reduction
of gross inventory and the timing of Flash Ventures payments as compared to the
prior year, resulting in a decrease in cash provided.  Cashflow from
other liabilities in the first quarter of fiscal year 2010 increased as compared
to the prior year as a result of increased deferred revenue primarily from
licensee payments received in advance of revenue recognition.





Investing
Activities.Cash used for investing activities for the first
quarter of fiscal year 2010 was ($349.4) million as compared to cash
provided by investing activities of $238.0 million in the first quarter of
fiscal year 2009.  The higher usage of cash in investing activities
was primarily related to increased purchases of short and long-term marketable
securities and lower proceeds from sale and maturities of short and long-term
marketable securities, offset by a reduction in the net loans made to Flash
Ventures and a reduced investment in property and equipment.  In the
first quarter of fiscal year 2010, we received proceeds of $17.8 million
related to the sale of our SIM business net assets.  In the first
quarter of fiscal year 2009, we loaned ($326.4) million to Flash Ventures
for equipment purchases and received $277.1 million on the collection of
outstanding notes receivable from Flash Ventures for the restructuring of a
portion of our production capacity, for a net loan of
($49.3) million.





Financing
Activities.Net cash used in financing activities for the
first quarter of fiscal year 2010 was ($54.9) million, as compared to net
cash provided by financing activities of $4.6 million in the first quarter
of fiscal year 2009, primarily due to the redemption of our $75 million
convertible notes, offset by higher cash from employee stock
programs.





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Liquid
Assets.At April 4, 2010, we had cash, cash equivalents
and short-term marketable securities of $1.94 billion.  We had
$1.35 billion of long-term marketable securities which we believe are also
liquid assets, but are classified as long-term marketable securities due to the
remaining contractual maturity of the investment being greater than one
year.





Short-Term
Liquidity.As of April 4, 2010, our working capital
balance was $2.10 billion.  We expect cash usage related to our
loans to Flash Ventures as well as our investments in property and equipment in
the remaining nine months of fiscal year 2010 to be approximately $300 million
to $400 million.





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 April 4, 2010, Flash Ventures was in
compliance with all of its master lease covenants.  As of April 4,
2010, our R&I credit rating was BBB-, two notches above the required minimum
corporate rating threshold from R&I and our S&P credit rating was
B, two levels below the required minimum corporate rating threshold from
S&P; however, as of May 10, 2010, our S&P credit rating was raised to
BB-, which is the required minimum corporate rating threshold from
S&P.





If both
S&P and 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 up to the entire $930.7 million outstanding lease
obligations covered by our guarantee under such Flash Ventures master lease
agreements, based upon the exchange rate at April 4, 2010, which would
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 expect to participate with
Toshiba in their next new wafer fabrication facility in Yokkaichi, Japan;
however, the extent and timing of our participation has not yet been
determined.  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 or new fabrication facilities; 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.





Financing
Arrangements.At April 4, 2010, we had outstanding
$1.15 billion aggregate principal amount of 1% Senior Convertible Notes due
2013, or 1% Notes due 2013.





Concurrent
with the issuance of the 1% Notes due 2013, we sold warrants to acquire shares
of our common stock at an exercise price of $95.03 per share.  As of
April 4, 2010, the warrants had an expected life of approximately
3.4 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
April 4, 2010, the warrants had not been exercised and remain
outstanding.  In addition, concurrent with the issuance of the 1%
Notes due 2013, we entered into a convertible bond hedge transaction in which
counterparties agreed to sell to us up to approximately 14.0 million shares
of our common stock, which is the number of shares initially issuable upon
conversion of the 1% Notes 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% Notes
due 2013 or the first day that none of the 1% 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% Notes due 2013.  As of April 4, 2010, we had not purchased any
shares under this convertible bond hedge agreement.





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Flash Partners
and Flash Alliance Ventures with Toshiba.We are a 49.9% owner
in both Flash Partners and Flash Alliance, 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 resell 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 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 12, “Related Parties and Strategic
Investments,” of the Notes to Condensed Consolidated Financial Statements of
this Form 10-Q.





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 do not have a controlling financial interest in each
venture.  Accordingly, we account for our investments under the equity
method and do not consolidate.





We
participate in other common research and development activities with Toshiba but
are not committed to any minimum funding level.





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 June 2008.  These master lease
obligations are denominated in Japanese yen and are
noncancelable.  Our total master lease obligation guarantee as of
April 4, 2010 was 88.0 billion Japanese yen, or approximately
$930.7 million based upon the exchange rate at April 4,
2010.





On
April 26, 2010, Flash Partners refinanced one of its maturing equipment
leases totaling 8.65 billion Japanese yen, or approximately
$91 million based upon the exchange rate at April 4,
2010.  We and Toshiba have each guaranteed 50%, on a several basis, of
Flash Partners’ obligations under the refinanced lease
agreement.  This refinanced equipment lease, due in fiscal year 2014,
is to be paid by Flash Partners in quarterly installments, with interest based
on the 3-month Euro-Yen Tokyo InterBank Offer Rate (“TIBOR”).





In our
fiscal year 2009, we and Toshiba restructured Flash Ventures by selling more
than 20% of Flash Ventures’ capacity to Toshiba.  The restructuring
resulted in us receiving value of 79.3 billion Japanese yen of which
26.1 billion Japanese yen, or $277 million, was received in cash,
reducing outstanding notes receivable from Flash Ventures and 53.2 billion
Japanese yen of value reflected the transfer of off-balance sheet equipment
lease guarantee obligations from us to Toshiba.  The restructuring was
completed in a series of closings beginning in January 2009 extended
through March 31, 2009.  In the first quarter of fiscal year
2009, transaction costs of $10.9 million related to the sale and transfer
of equipment and lease obligations were expensed.





From
time-to-time, we and Toshiba mutually approve the purchase of equipment for the
Flash Ventures in order to convert to new process technologies or add wafer
capacity.  Flash Partners has previously reached full wafer
capacity.  Flash Alliance’s production output ramped in 2008 to more
than 50% of its estimated full wafer capacity.  During the remainder
of fiscal year 2010, we expect our portion of capital investments in Flash
Ventures for new process technologies and additional wafer capacity to be
between $600 million to $800 million, which we expect will be funded
through additional loans to Flash Ventures, working capital contributions from
Flash Ventures and equipment operating leases that will be guaranteed by us and
Toshiba.





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Contractual
Obligations and Off-Balance Sheet Arrangements





Our
contractual obligations and off-balance sheet arrangements at April 4,
2010, 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 11, “Commitments, Contingencies and Guarantees,” of the
Notes to Condensed Consolidated Financial Statements of this Form
10-Q.





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 and the Israeli new
shekel, and we have revenue denominated in the European euro and the British
pound.  We do not enter into derivatives for speculative or trading
purposes.  We use foreign currency forward and cross currency swap
contracts to mitigate transaction gains and losses generated by certain monetary
assets and liabilities denominated in currencies other than the U.S.
dollar.  We use 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.  These foreign currency exchange
exposures may change over time as our business and business practices evolve,
and they could harm our financial results and cash flows.  See
Note 3, “Derivatives and Hedging Activities,” of the Notes to Condensed
Consolidated Financial Statements of this Form 10-Q.





For a
discussion of foreign operating risks and foreign currency risks, see Part II,
Item 1A, “Risk Factors.”




Critical
Accounting Policies





Our
discussion and analysis of our financial condition and results of operations is
based upon our Condensed Consolidated Financial Statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States.  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, investments, income taxes, warranty
obligations, share-based compensation, contingencies 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.





There
were no significant changes to our critical accounting policies during the
fiscal quarter ended April 4, 2010.  For information about
critical accounting policies, see the discussion of critical accounting policies
in our most recent Annual Report on Form 10-K for the fiscal year ended January
3, 2010 filed on February 25, 2010.








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Item
      3.
            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.  As of April 4,
2010, a hypothetical 50 basis point increase in interest rates would result in
an approximate $14.7 million decline (less than 0.68%) of 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 European euro, the British pound,
and the Japanese yen.  Our flash memory costs, which represent the
largest portion of our cost of product revenues, are denominated in the Japanese
yen.  We also have some cost of product revenues denominated in
Chinese renminbi.  The majority of our operating expenses are
denominated in the U.S. dollar; however, we have expenses denominated in the
Israeli new shekel 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
Flash Ventures, which are denominated in Japanese yen.





We enter
into foreign currency forward and cross currency swap 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 assets or other 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
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 other comprehensive income and subsequently recognized in cost of
product revenues in the same period the hedged cost of product revenues is
recognized.





At
April 4, 2010, we had foreign currency forward contracts and cross currency
swap contracts in place that amounted to a net sale in U.S. dollar equivalent of
approximately $242 million in foreign currencies to hedge our foreign
currency denominated monetary net asset position.  The maturities of
these contracts were 27 months or less.





At
April 4, 2010, we had foreign currency forward and option contracts in
place that amounted to a net purchase in U.S. dollar equivalent of approximately
$321.4 million to partially hedge our expected future wafer purchases in
Japanese yen. The maturities of these contracts were 9 months or
less.





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The
notional amount and unrealized gain or loss of our outstanding cross currency
swap and foreign currency forward contracts that are non-designated (balance
sheet hedges) as of April 4, 2010 is shown in the table below
(in thousands).  In addition, this table 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
                April 4,
      2010
            
            
            Change
      in Fair Value Due to 10% Adverse Rate MovementBalance
      sheet hedgesCross
      currency swap contracts entered
            
            $
            (403,277
            )
            
            $
            (9,385
            )
            
            $
            (41,897
            )Forward
      contracts sold
            
            
            (70,983
            )
            
            
            783
            
            
            
            (7,333
            )Forward
      contracts purchased
            
            
            231,944
            
            
            
            (3,130
            )
            
            
            25,676Total
      net outstanding contracts
            
            $
            (242,316
            )
            
            $
            (11,732
            )
            
            $
            (23,554
            )





The
notional amount and fair value of our outstanding forward and option contracts
that are designated as cash flow hedges as of April 4, 2010 is shown in the
table below (in thousands).  In addition, this table 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
            
            
            Fair
      Value as of
                April 4,
      2010
            
            
            Change
      in Fair Value Due to 10% Adverse Rate MovementCash
      flow hedgesForward
      contracts purchased
            
            $
            59,220
            
            
            $
            (2,257
            )
            
            $
            (5,347
            )Option
      contracts purchased
            
            
            262,186
            
            
            
            (3,056
            )
            
            
            (19,599
            )Total
      cash flow hedge contracts purchased
            
            $
            321,406
            
            
            $
            (5,313
            )
            
            $
            (24,946
            )





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 April 4,
2010, 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 $2.2 million.





All of
the potential changes noted above are based on sensitivity analysis performed on
our financial position at April 4, 2010.  Actual results may
differ materially.








48
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Item
      4.
            Controls and
  Procedures





Evaluation of
Disclosure Controls and Procedures.Our management has
evaluated, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, the effectiveness of our
disclosure controls and procedures as of April 4, 2010.  Based on
their evaluation as of April 4, 2010, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934, as amended) were effective at the reasonable assurance level to ensure
that the information required to be disclosed by us in this Quarterly Report on
Form 10-Q was (i) recorded, processed, summarized and reported within the
time periods specified in the SEC’s rules and regulations and (ii) accumulated
and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, to allow timely decisions regarding required
disclosure.





There
were no changes in our internal control over financial reporting (as defined in
Exchange Act Rule 13a-15(f)) during the three months ended April 4, 2010 that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.














49
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PART
II.  OTHER INFORMATION


Item
      1.
            Legal
Proceedings





For a
discussion of legal proceedings, see Note 13, “Litigation,” in the Notes to
Condensed Consolidated Financial Statements of this Form 10-Q.




Item
      1A.
            Risk Factors





The
following description of the risk factors associated with our business includes
any material changes to and supersedes the description of the risk factors
associated with our business previously disclosed in Part 1, Item 1A of our
Annual Report on Form 10-K for the fiscal year ended January 3,
2010.





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, resulting in lower average selling prices and lower or
  negative product gross margins;
          expansion
  of supply from existing competitors and ourselves creating excess market
  supply, causing our average selling prices to decline faster than our
  costs;
          unpredictable
  or changing demand for our products, particularly for certain form factors or
  capacities;
          excess
  captive memory output or capacity which could result in write-downs for excess
  inventory, the application of lower of cost or market charges, fixed costs
  associated with under-utilized capacity, or other consequences;
          inability
  to maintain or grow sales through our new channels to which we are selling
  non-branded products, wafers and components or potential loss of branded
  product sales as a result;
          insufficient
  non-memory materials or capacity from our suppliers and contract manufacturers
  to meet demand or increases in the cost of non-memory materials or
  capacity;
          price
  increases, which could result in lower unit and gigabyte demand, potentially
  leading to reduced revenues and/or excess inventory;
          less
  than anticipated demand, including general economic weakness in our
  markets;
          insufficient
  supply from captive flash memory sources and inability to obtain non-captive
  flash memory supply in the time frame necessary to meet demand;
          increased
  purchases of non-captive flash memory, which typically costs more than captive
  flash memory and may be of less consistent quality;
          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 adequately invest in future technologies and products while controlling
  operating expenses;
          our
  license and royalty revenues may fluctuate or decline significantly in the
  future due to license agreement renewals, non-renewals or if licensees fail to
  perform on a portion or all of their contractual obligations;
          inability
  to develop or unexpected difficulties or delays in developing, manufacturing
  with acceptable yields, or ramping, new technologies such as 32-nanometer or
  next generation process technology, 3-bits per cell NAND memory architecture,
  3-Dimensional, or 3D, Read/Write, or other advanced, alternative
  technologies;
          insufficient
  assembly and test capacity from our Shanghai facility or our contract
  manufacturers or disruptions in operations at any of these
  facilities;
          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 and strength 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; and
          the
  other factors described under “Risk Factors” and elsewhere in this
  report.  50
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 Competitive pricing
pressures and excess supply have resulted in lower average selling prices and
negative product gross margins in the past and, if we do not experience adequate
price elasticity, our revenues may decline.For more than a
year through 2008, the NAND flash memory industry was characterized by supply
exceeding demand, which led to significant declines in average selling
prices.  Price declines exceeded our cost declines in fiscal years
2008, 2007 and 2006.  Significant price declines resulted in negative
product gross margins in fiscal year 2008 and the first quarter of fiscal year
2009.  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 taken 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 fail to keep pace with the
rate of price declines, our product gross margins and operating results will be
negatively impacted, which could lead 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 and the first half of 2009,
price declines outpaced unit and megabyte growth resulting in reduced revenue as
compared to prior comparable periods.  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 harm our revenue and
margins.
 
 We require an
adequate level of product gross margins to continue to invest in our
business.While product gross margins improved in fiscal year
2009 and the first quarter of fiscal 2010, our ability to sustain sufficient
product gross margin and profitability on a quarterly or annual basis in the
future depends in part on industry and our supply/demand balance, our ability to
reduce cost per gigabyte at an equal or higher rate than price decline per
gigabyte, 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.  For example, we experienced negative product gross margins
for fiscal year 2008 and the first quarter of fiscal year 2009 due to sustained
aggressive industry price declines as well as inventory charges primarily due to
lower of cost or market write downs.  If we fail to maintain adequate
product gross margins and profitability, our business and financial condition
would be harmed and we may have to reduce, curtail or terminate certain business
activities.
 
 Sales to a small
number of customers represent a significant portion of our revenues, and if we
were to lose one of our major licensees or customers, or experience any material
reduction in orders from any of our customers, our revenues and operating
results would suffer.Our ten largest
customers or licensees represented approximately 44% of our total revenues in
both the three months ended April 4, 2010 and March 29,
2009.  All customers were individually less than 10% of our total
revenues in the three months ended April 4, 2010 and March 29, 2009,
respectively.The
composition of our major customer base has changed over time, including shifts
between OEM and retail-based customers, and we expect fluctuations to continue
as our markets and strategies evolve, which could make our revenues less
predictable from period-to-period.  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.  Our non-compliance with
the contractual terms of significant customer contracts may harm the business
covered under these contracts and our financial
results.  Additionally, our license and royalty revenues may decline
significantly in the future as our existing license agreements and 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.
 
 Our revenues depend
in part on the success of products sold by our OEM
customers.A significant portion of our sales are to
OEMs.  Most of our OEM customers bundle or embed our flash memory
products with their products, such as mobile phones, global positioning system,
or GPS, devices and computers.  We also sell wafers and components to
some of our OEM customers, as well as non-branded products which are re-branded
and distributed by certain OEM customers.  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 not use our products, our results of
operations and financial condition could be harmed.  In 2009, we added
OEMs to whom we are selling non-branded products, wafers and
components.  The sales to these OEMs could be more variable than the
sales to our historical customer base, and these OEMs may be more inclined to
switch to an alternative supplier based on short-term price
fluctuations.  Sales to these OEMs could also cause a decline in our
branded product sales.  In addition, we are selling certain customized
products and if the intended customer does not purchase these products as
scheduled, we may incur excess inventory or rework costs.
 
 51
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 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 an economic
downturn, decline in consumer confidence, or other factors, we could continue to
experience reduced sales as well as substantial product returns or price
protection 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,
Circuit City Stores, Inc. and Ritz Camera Centers, Inc., filed for bankruptcy
protection in 2008 and 2009, respectively.  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 charges.
 
 Price increases
could reduce our overall product revenues and harm our financial
position.In the first half of fiscal year 2009, we increased
prices in order to improve profitability.  Price increases can result
in reduced growth in gigabyte demand or even an absolute reduction in gigabyte
demand.  For example, in the second quarter of fiscal year 2009, our
average selling price per gigabyte increased 12% and our gigabytes sold
decreased 7%, both on a sequential basis.  If we continue to raise
prices in order to improve our profit margins, our product revenues may be
harmed and we may have excess inventory.
 
 The future growth of
our business depends on the development and performance of new markets and
products for NAND-based flash memory.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, universal serial bus, or 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 revenue and future growth is
also significantly dependent on international markets, and we may face
difficulties entering or maintaining sales in some 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.
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 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 supply exceeds
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 harmed.  For example, we recorded
charges of $121 million and $63 million in fiscal year 2008 and the
first quarter of fiscal year 2009, respectively, for adverse purchase
commitments associated with under utilization of Flash Ventures’ capacity for
the 90-day period in which we had non-cancelable production plans utilizing less
than our share of Flash Ventures’ full capacity.
 
 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 by Flash Alliance at
the end of fiscal year 2007 and the ramp of production in fiscal year 2008
increased our captive supply and resulted in excess inventory.  While
we restructured and reduced our total capacity at Flash Ventures in the first
quarter of fiscal year 2009, our obligation to purchase 50% of the supply or pay
50% of the costs 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, or under-utilization charges 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 flash-based SSDs that are designed to replace hard disk
drives in devices such as notebook and desktop computers, 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 SSD market to
become sizeable, the cost of flash memory must decline significantly from
current levels so that the price point for the end consumer is
compelling.  This requires the use of multi-level cell, or MLC,
technology in our SSDs.  There can be no assurance that our MLC-based
SSDs will be able to meet the specifications required to gain customer
qualification and acceptance.  Other new products, such as
slotMusicTM,
slotRadioTM and
our pre-loaded flash memory cards, may not gain market acceptance, and we may
not be successful in penetrating the new markets that we target.  Sony
Corporation’s, or Sony’s, decision to transition its future devices from the
Memory Stick®
format to the SDTM
format could negatively impact our market share or margins since there are a
greater number of competitors selling SD products.
  53
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 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 and
developing a new standard, referred to as Universal Flash Storage, or UFS, for
flash memory cards used in mobile phones.  Intel Corporation, or
Intel, and Micron Technology, Inc., or 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 and 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.
 
 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.
 
 Future alternative
non-volatile storage technologies or other disruptive technologies could make
NAND flash memory obsolete, and we may not have access to those new technologies
on a cost-effective basis, or at all, which could harm our results of operations
and financial condition.  The pace at which NAND technology is
transitioning to new generations is expected to slow due to inherent physical
technology limitations.  We currently expect to be able to continue to
scale our NAND technology through a few additional generations, but beyond that
there is no certainty that further technology scaling can be achieved cost
effectively with the current NAND flash technology and
architecture.  We also continue to invest in future alternative
technologies, particularly our 3D Read/Write technology, which we believe may be
a viable alternative to NAND when NAND can no longer scale at a sufficient rate
or at all.  However, even when NAND flash can no longer be further
scaled, we expect NAND and potential alternative technologies to coexist for an
extended period of time.  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.
 
 Others
are developing alternative non-volatile technologies such as ReRAM, Memristor,
vertical or stacked NAND, charge-trap flash, and other
technologies.  Successful broad-based commercialization of one or more
of these technologies could reduce the future revenue and profitability of NAND
flash technology and could supplant the alternative 3D Read/Write technology
that we are developing.  In addition, we generate license and royalty
revenues from NAND technology and we own intellectual property for 3D Read/Write
technology, and if NAND is replaced by a technology other than 3D Read/Write,
our ability to generate license and royalty revenues would be
reduced.
 
 Alternative
storage solutions such as cloud storage, enabled by 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.
 
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 We face competition
from numerous manufacturers and marketers of products using flash memory, as
well as from manufacturers of new and alternative technologies, and if we cannot
compete effectively, our results of operations and financial condition will
suffer.Our competitors include many large companies that may
have greater advanced wafer manufacturing capacity, substantially greater
financial, technical, marketing and other resources and more diversified
businesses than we do, which may allow 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 Semiconductor, Inc., or Hynix, Intel Corporation, or Intel, Micron
Technology, Inc., or Micron, Samsung Electronics Co., Ltd., or Samsung, and
Toshiba Corporation, or Toshiba.  These 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.  Our cost reduction activities are
dependent in part on the purchase of new specialized manufacturing equipment,
and if this equipment is not generally available or is allocated to our
competitors, our ability to reduce costs could be limited.
 
 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 Technology Co., Ltd., or A-DATA, Buffalo, Inc., Chips and
More GmbH, Dane-Elec Memory, Eastman Kodak Company, Elecom Co., Ltd., FUJIFILM
Corporation, Gemalto N.V., Hagiwara Sys-Com Co., Ltd., Hama GmbH & Co. KG,
Hynix, Imation Corporation, or Imation, and its division Memorex Products, Inc.,
or Memorex, I-O Data Device, Inc., Kingmax Digital, Inc., Kingston Technology
Company, Inc., or Kingston, Lexar Media, Inc., or Lexar, a subsidiary of Micron,
Netac Technology Co., Ltd., Panasonic Corporation, PNY Technologies, Inc., or
PNY, Power Quotient International Co., Ltd, RITEK Corporation, Samsung, Sony,
STMicroelectronics N.V., Toshiba, Transcend Information, Inc., or Transcend, and
Verbatim Americas LLC, or 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 Inc., ARCHOS Technology, Coby Electronics
Corporation, Creative Technology Ltd., Koninklijke Philips Electronics N.V.,
Microsoft Corporation, or Microsoft, 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 Technology LLC, Samsung, Western Digital
Corporation, and others, who have established relationships with computer
manufacturers.  We also face competition from third-party solid-state
drive solutions providers such as A-DATA, Kingston, Phison Electronics
Corporation, STEC, Inc. and Transcend.
 
 We sell
flash memory in the form of white label cards, wafers or components to certain
companies who sell flash products that may ultimately compete with SanDisk
branded products in the retail or OEM channels.  This could harm the
SanDisk branded market share and reduce our sales and profits.
 
 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 we are unable to
scale our technology on an equivalent basis, could provide an advantage to these
competitors.
 
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 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 of products;
          product
  performance, availability and differentiation;
          success
  in developing new applications and new market segments;
          sufficient
  availability of cost-efficient supply;
          efficiency
  of production;
          ownership
  and monetization of intellectual property rights;
          timing
  of new product announcements or introductions;
          the
  development of industry standards and formats;
          the
  number and nature of competitors in a given market; and
          general
  market and economic conditions.
 There can
be no assurance that we will be able to compete successfully in the
future.
 
 Our financial
performance depends significantly on worldwide economic conditions and the
related impact on levels of consumer spending, which have deteriorated in many
countries and regions, including the U.S., and may not recover in the
foreseeable future.Demand for our products is adversely
affected by negative macroeconomic factors affecting consumer
spending.  The tightening of consumer credit, low level of consumer
liquidity, and volatility in credit and equity markets have weakened consumer
confidence and decreased consumer spending.  These and other economic
factors have reduced demand growth 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 license and
royalty revenues may fluctuate or decline significantly in the future due to
license agreement renewals or if licensees fail to perform on a portion or all
of their contractual obligations.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.  For example, in the
first quarter of fiscal year 2010, our license and royalty revenues decreased
sequentially primarily due to a new license agreement with an existing licensee,
effective in the third quarter of fiscal 2009, which reflects a lower effective
royalty rate as compared to the previous license agreement.  To the
extent that we are unable to renew license agreements under similar terms or at
all, our financial results would be harmed by the reduced license and royalty
revenue and we may incur significant patent litigation costs to enforce our
patents against these licensees.  If our licensees fail to perform on
a portion or all of their contractual obligations, we may incur costs to enforce
the terms of our licenses and there can be no assurance that our enforcement and
collection efforts will be effective.  In addition, we may be subject
to disputes, claims or other disagreements on the timing, amount or collection
of royalties or license payments under our existing license
agreements.
 
 Under certain
conditions, a portion or the entire outstanding lease obligations related to
Flash Ventures’ master equipment lease agreements could be accelerated, which
would harm our business, results of operations, 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 stockholders’ 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 April 4, 2010, Flash Ventures were in
compliance with all of their master lease covenants.  As of April 4,
2010, our R&I credit rating was BBB-, two notches above the required minimum
corporate rating threshold from R&I and our S&P credit rating was
B, two levels below the required minimum corporate rating threshold from
S&P; however, as of May 10, 2010, our S&P credit rating was raised to
BB-, which is the required minimum corporate rating threshold from
S&P.
 
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  If both
S&P and 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.  If an
event of default occurs and if we failed to reach a resolution, we may be
required to pay a portion or the entire outstanding lease obligations up to
$930.7 million, based upon the exchange rate at April 4, 2010,
covered by our guarantee under the Flash Ventures master lease agreements, which
would significantly reduce our cash position and may force us to seek additional
financing, which may or may not be available.
 
 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 has recently experienced significant excess supply, reduced
demand, high inventory levels, and accelerated declines in selling
prices.  If we again experience oversupply of NAND-based flash
products, 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 depend on Flash
Ventures and 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, or we do not place orders with sufficient lead time to
receive non-captive supply, we may not have sufficient supply to meet demand and
our operating results could be harmed.
 
 We expect
to participate with Toshiba in their next new wafer fabrication facility in
Yokkaichi, Japan; however, the extent and timing of our participation has not
been determined.  Furthermore, there can be no assurance that an
agreement will be reached with terms favorable to us, if at all.  If
we are unable to obtain additional captive wafer memory, we may be required to
purchase more non-captive memory, which typically costs more than captive flash
memory and may be of less consistent quality, thus harming our results of
operations and profitability.
 
 Currently,
our controller wafers are manufactured by third party foundries.  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 market share, 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.
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 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 and manufacturing process technology
and production delays may be caused by equipment malfunctions, fabrication
facility accidents or human error.  Yield problems may not be
identified during the production process or improved until an actual product is
manufactured and can be tested.  We have, from time-to-time,
experienced yields that have adversely affected our business and results of
operations.  On more than one occasion, we have experienced adverse
yields 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
32-nanometer 2-bits per cell and 3-bits per cell NAND technology wafers does not
increase as expected, 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.
 
 We depend on our
captive assembly and test manufacturing facility in China and 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 and we now utilize this factory to satisfy a
significant portion of our assembly and test requirements, to produce products
with leading-edge technologies such as multi-stack die packages and to provide
order fulfillment to certain locations.  Any delays or interruptions
in the production ramp or ability to ship product, or issues with manufacturing
yields 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,
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 subcontractors.  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 subcontractors.  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 process technologies and/or 3-bits per
cell and 4-bits per cell NAND technologies, is highly complex and requires new
controllers, new test procedures, potentially new equipment and modifications to
numerous aspects of any manufacturing processes, as well as extensive
qualification of the new products by our OEM customers and us.  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.  In addition, we could
face design, manufacturing and equipment challenges when transitioning to the
next generation of technologies beyond NAND.  Any material delay in a
development or qualification schedule could delay deliveries and harm our
operating results.  We have periodically 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.
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 Our products may
contain errors or defects, which could result in the rejection of our products,
product recalls, damage to our reputation, lost revenues, diverted development
resources and increased service costs and warranty claims and
litigation.Our products are complex, must meet stringent user
requirements, may contain errors or defects and the majority of our products
have a warranty ranging up to ten years.  Generally, our OEM customers
have more stringent requirements than other customers and increases in OEM
product revenue could require additional cost to test products or increase
service costs and warranty claims.  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, indemnification of our customer’s product recall costs, 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.
 
 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
directly or indirectly 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 harm our business, financial condition and results
of operations.  In addition, we may increase our inventory 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 if 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.  In addition, longer than anticipated lead times for advanced
semiconductor manufacturing equipment or higher than expected equipment costs
could negatively impact our ability to meet our supply requirements or to reduce
future production costs.  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.
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 We rely on our
suppliers and contract manufacturers, some of which are the sole source of
supply for our non-memory components, and capacity limitations or the absence of
a back-up supplier exposes our supply chain to unanticipated disruptions or
potential additional costs.We do not have long-term supply
agreements with most of these vendors.  From time-to-time, certain
materials may become difficult or more expensive to obtain which could impact
our ability to meet demand and could harm our profitability.  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 in a timely manner, or at all.
 
 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, at
all.  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.  For example, our test and assembly
facility in Shanghai, China, on which we have significant dependence, may not be
adequately insured against all potential losses.  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 harm our financial results and cash
flows.  Our most significant exposure is related to our purchases of
NAND flash memory from Flash Ventures, which are denominated in Japanese
yen.  For example, in 2009, the Japanese yen significantly appreciated
relative to the U.S. dollar and this increased our cost 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.
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 We enter
into foreign exchange forward and cross currency swap contracts to reduce the
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.  There
can be no assurance that this hedging program will be economically beneficial to
us.  Further, the ability to enter into foreign exchange contracts
with financial institutions is based upon our available credit from such
institutions and compliance with covenants and/or other
restrictions.  Operating losses, third party downgrades of our credit
rating or 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.
 
 We may need to raise
additional financing, which could be difficult to obtain, and which if not
obtained in satisfactory amounts may prevent us from funding Flash 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 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.
 
 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 will be involved in similar disputes in the future.
 
 We cannot
assure you that:
 any of
  our existing patents will continue to be held valid, if
  challenged;
          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.
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   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 technology
infringed.
 
 For
example, 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, or ITC, against
certain companies that manufacture, sell and import USB flash drives,
CompactFlash®cards, multimedia cards, MP3/media players and/or other removable flash
storage products.  In this ITC action, an Initial Determination was
issued in April 2009 and a Final Determination was issued in October 2009
finding non-infringement of certain accused flash memory
products.  There can be no assurance that we will be successful in
future patent infringement actions or that the validity of the asserted patents
will be preserved or that we will not face counterclaims of the nature described
above.
 
 We and certain of
our officers 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
numerous 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.  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.
 
 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.
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 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 patentinfringement may
countersue us for infringing their patents.If we are held to
infringe the intellectual property or related rights 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 ableto 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.
 
 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 investigations.  These liabilities could be
substantial and may include, among other things, the costs of defending lawsuits
against these individuals; the cost of defending 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, including the examples set
forth above, see Part II, Item 1, “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.
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 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.
 
 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 are
derived from our international operations, and all of our products are produced
overseas in China, Japan 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.  In addition, customs
regulations in China are complex and subject to frequent changes, and in the
event of a customs compliance issue, our ability to import and export from our
factory in Shanghai could be adversely affected, which could harm our results of
operations and financial condition.
 
 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
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 Our stock price and
convertible notes price have been, and may continue to be, volatile, which could
result in investors losing all or part of their investments.The market prices of
our stock and convertible notes have 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 harm 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.
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 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.  Our employees continue to hold a number of equity
incentive awards that are underwater, and as a result, a significant portion of
our equity compensation has little or no retention value.  In 2009 and
2010, we instituted forced shutdown days and reduced certain employee benefits
to reduce costs.  These actions or any further reduction in
compensation may make it more difficult for us to hire or retain 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 demand.  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 experienced significant violence and political
unrest.  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 or H1N1 flu.  If a natural disaster or epidemic were to
occur in one or more of these areas, we could incur a significant work or
production stoppage.  The impact of these potential events is
magnified by the fact that we do not have insurance for most natural disasters,
including earthquakes.  The impact of a natural disaster could harm
our business and results of operations.
 
 Disruptions in
global transportation could impair our ability to deliver or receive product on
a timely basis or at all, causing harm to our financial
results.  Our raw materials, work-in-process and finished
product are primarily distributed via air.  If there are significant
disruptions in air travel, we may not be able to deliver our product or receive
materials to continue to manufacture.  For example, the volcanic eruption
in Iceland in April 2010, halted air traffic for several days over Europe
and disrupted other travel routes that pass through Europe, which resulted in
delayed delivery of our products to certain European countries.  In
addition, a natural disaster that affects air travel in Asia could disrupt our
ability to receive raw materials to, or ship finished product from, our Shanghai
facility or our Asia-based contract manufacturers.  As a result, our
business and results of operations may be harmed.
 
 We rely on
information systems to run our business and any prolonged down time could
materially impact our business operations and/or financial
results.We rely on an enterprise resource planning system, as
well as multiple other systems, databases, and data centers to operate and
manage our business.  Any information system problems, programming
errors or unanticipated system or data center interruptions could impact our
continued ability to successfully operate our business and could harm our
financial results or our ability to accurately report our financial results on a
timely basis.
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 Anti-takeover
provisions in our charter documents, stockholder rights plan and in Delaware law
could discourage or delay a change in control and, as a result, negatively
impact our stockholders.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, defined broadly as a beneficial owner of 15% or more of that
corporation’s voting stock, 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.
 
 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.  For example, we are currently under a federal income tax audit
by the Internal Revenue Service, or IRS, for fiscal years 2005 through
2008.  While we regularly assess the likely outcomes of these audits
in order to determine the appropriateness of our tax provision, examinations are
inherently uncertain and an unfavorable outcome could occur.  An
unanticipated unfavorable outcome in any specific period could harm our results
of operations for that period or future periods.  The financial cost
and our attention and time devoted to defending income tax positions may divert
resources from our business operations, which could harm our business and
profitability.  The IRS audit may also impact the timing and/or amount
of our refund claim.  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.
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 In the event we are
unable to satisfy regulatory requirements relating to internal controls, or if
our internal control over financial reporting is not effective, our business
could suffer.In connection with our certification process
under Section 404 of the 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 or
significant deficiency.  A material weakness or significant 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 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 human
error, intentional misconduct or fraud.
 
 Our debt obligation
may adversely affect us.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 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.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 April 4, 2010, we had guarantee
obligations for Flash Ventures’ master lease agreements of approximately
$930.7 million.  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 may have adverse
consequences.The 1% Senior Convertible Notes due 2013, or 1%
Notes due 2013, are subject to net share settlement, which means that we will
satisfy our conversion obligation to holders by paying a combination of cash and
shares of our common stock in settlement thereof, in an amount of cash equal to
the principal amount of the 1% Notes due 2013 plus an amount of shares of our
common stock, if any, equal to the excess of the daily conversion values over
the cash amount of the 1% Notes due 2013 being converted.
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 Our
failure to convert the 1% 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.  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% Notes due 2013.  While 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.
 
 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% Notes due 2013.  We used approximately $67.3 million of
the net proceeds of funds received from the 1% 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% 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% 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% 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.
  
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Item
      2.
            Unregistered Sales of Equity
      Securities and Use of Proceeds





None.





Item
      3.
            Defaults upon Senior
      Securities





None.





Item
      4.
            (Removed andReserved)





Item
      5.
            Other
      Information





None.





Item
      6.
            Exhibits





The
information required by this item is set forth on the exhibit index which
follows the signature page of this report.














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SIGNATURES








Pursuant
to the requirements 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


(Registrant)





Dated:
      May 12, 2010
            By:
      /s/ Judy
      BrunerJudy
      Bruner
              Executive
      Vice President, Administration and
              Chief
      Financial Officer
              (On
      behalf of the Registrant and as Principal
              Financial
      and Accounting Officer)











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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.(3)3.3
            Certificate
      of Amendment of the Restated Certificate of Incorporation of the
      Registrant dated May 11, 2000.(4)3.4
            Certificate
      of Amendment to the Amended and Restated Certificate of Incorporation of
      the Registrant dated May 26, 2006.(5)3.5
            Amended
      and Restated Bylaws of SanDisk Corporation dated August 4,
      2009.(6)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.(7)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.(8)3.8
            Certificate
      of Amendment to the Amended and Restated Certificate of Incorporation of
      the Registrant dated May 27, 2009.(9)4.1
            Reference
      is made to Exhibits 3.1, 3.2, 3.3, 3.4 and 3.8. (2), (3), (4), (5),
      (9)4.2
            Rights
      Agreement, dated as of September 15, 2003, between the Registrant and
      Computershare Trust Company, Inc.(8)4.3
            Amendment
      No. 1 to Rights Agreement by and between the Registrant and Computershare
      Trust Company, Inc., dated as of November 6, 2006.(10)4.4
            SanDisk
      Corporation Form of Indenture (including notes).(11)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.(12)12.1
            Computation
      of Ratio of Earnings to Fixed Charges.(*)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.(**)








*
            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 Form 10-Q for the quarter ended
      June 30, 2000.4.
            Previously
      filed as an Exhibit to the Registrant’s Registration Statement on Form S-3
      (No. 333-85686).5.
            Previously
      filed as an Exhibit to the Registrant’s Form 8-K dated June 1,
      2006.6.
            Previously
      filed as an Exhibit to the Registrant’s Form 8-K dated August 4,
      2009.7.
            Previously
      filed as an Exhibit to the Registrant’s Current Report on Form 8-K/A dated
      April 18, 1997.8.
            Previously
      filed as an Exhibit to the Registrant’s Registration Statement on Form 8-A
      dated September 25, 2003.9.
            Previously
      filed as an Exhibit to the Registrant’s Current Report on Form 8-K filed
      with the SEC on May 28, 2009.10.
            Previously
      filed as an Exhibit to the Registrant’s Form 8-A/A dated November 8,
      2006.11.
            Previously
      filed as an Exhibit to the Registrant’s Form 8-K dated May 9,
      2006.12.
            Previously
      filed as an Exhibit to the Registrant’s Form 8-K dated May 15,
      2006.















72