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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
 For the quarterly period ended July 2, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 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)
 (408) 801-1000
  þ o
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
  o þ




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##### 



SanDisk Corporation
 Index
 Page No.PART I. FINANCIAL INFORMATIONItem 1.      Condensed Consolidated Financial Statements:Condensed Consolidated Balance Sheets as of July 2, 2006 and January 1, 2006
    
    
    3Condensed Consolidated Statements of Income for the three and six months ended July
2, 2006 and July 3, 2005
    
    
    4Condensed Consolidated Statements of Cash Flows for the six months ended July 2,
2006 and July 3, 2005
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.      Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    30Item 3.      Quantitative and Qualitative Disclosures About Market Risk
    
    
    40Item 4.      Controls and Procedures
    
    
    40PART II. OTHER INFORMATIONItem 1.      Legal Proceedings
    
    
    41Item 1A.   Risk Factors
    
    
    42Item 2.      Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    59Item 3.      Defaults upon Senior Securities
    
    
    59Item 4.      Submission of Matters to a Vote of Security Holders
    
    
    59Item 5.      Other Information
    
    
    59Item 6.      Exhibits
    
    
    60Signatures
    
    
    61Exhibit Index
    
    
    62EXHIBIT 10.1EXHIBIT 10.2EXHIBIT 10.3EXHIBIT 10.4EXHIBIT 10.5EXHIBIT 10.6EXHIBIT 10.7EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




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PART I. FINANCIAL INFORMATION
 
 Item 1. Condensed Consolidated Financial Statements (in thousands)
 SANDISK CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 July 2, 2006
    
    
    January 1, 2006*(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    1,318,479
    
    
    $
    762,058Short-term investments
    
    
    960,995
    
    
    
    935,639Investment in foundries
    
    
    18,990
    
    
    
    18,338Accounts receivable, net
    
    
    311,921
    
    
    
    329,014Inventories
    
    
    378,196
    
    
    
    331,584Deferred taxes
    
    
    107,283
    
    
    
    95,518Other current assets
    
    
    121,164
    
    
    
    103,584Total current assets
    
    
    3,217,028
    
    
    
    2,575,735Long-term investments
    
    
    405,714
    
    
    
    Property and equipment, net
    
    
    254,695
    
    
    
    211,092Notes receivable and investments in flash ventures
    
    
    499,024
    
    
    
    265,074Deferred tax asset
    
    
    143,630
    
    
    
    Goodwill
    
    
    167,248
    
    
    
    5,415Intangibles, net
    
    
    97,232
    
    
    
    4,608Other non-current assets
    
    
    56,038
    
    
    
    58,263Total assets
    
    $
    4,840,609
    
    
    $
    3,120,187LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    110,864
    
    
    $
    231,208Accounts payable to related parties
    
    
    86,153
    
    
    
    74,121Other accrued liabilities
    
    
    139,947
    
    
    
    115,525Deferred income on shipments to distributors and
retailers and deferred revenue
    
    
    143,678
    
    
    
    150,283Total current liabilities
    
    
    480,642
    
    
    
    571,137Convertible senior notes
    
    
    1,150,000
    
    
    
    Deferred revenue and other non-current liabilities
    
    
    40,850
    
    
    
    25,259Total liabilities
    
    
    1,671,492
    
    
    
    596,396Commitments and contingenciesStockholders equity:Preferred stock
    
    
    
    
    
    
    Common stock
    
    
    196
    
    
    
    188Capital in excess of par value
    
    
    2,120,567
    
    
    
    1,621,819Retained earnings
    
    
    1,037,380
    
    
    
    906,624Accumulated other comprehensive income
    
    
    10,974
    
    
    
    2,635Deferred compensation
    
    
    
    
    
    
    (7,475
    )Total stockholders equity
    
    
    3,169,117
    
    
    
    2,523,791Total liabilities and stockholders equity
    
    $
    4,840,609
    
    
    $
    3,120,187
 
 *
    
    Information derived from the audited Consolidated Financial Statements.The accompanying notes are an integral part of these condensed consolidated financial
statements. 3




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SANDISK CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 (Unaudited)
 Three months ended
    
    
    Six months endedJuly 2, 2006
    
    
    July 3, 2005
    
    
    July 2, 2006
    
    
    July 3, 2005(In thousands, except per share amounts)Revenues:Product
    
    $
    636,675
    
    
    $
    453,762
    
    
    $
    1,174,403
    
    
    $
    853,441License and royalty
    
    
    82,510
    
    
    
    61,134
    
    
    
    168,042
    
    
    
    112,430Total revenues
    
    
    719,185
    
    
    
    514,896
    
    
    
    1,342,445
    
    
    
    965,871Cost of product revenues
    
    
    430,177
    
    
    
    300,797
    
    
    
    815,044
    
    
    
    551,985Gross profit
    
    
    289,008
    
    
    
    214,099
    
    
    
    527,401
    
    
    
    413,886Operating expenses:Research and development
    
    
    73,785
    
    
    
    61,404
    
    
    
    137,547
    
    
    
    107,351Sales and marketing
    
    
    45,067
    
    
    
    27,034
    
    
    
    88,442
    
    
    
    51,631General and administrative
    
    
    37,182
    
    
    
    19,617
    
    
    
    67,198
    
    
    
    35,341Write-off of acquired in-process technology
    
    
    
    
    
    
    
    
    
    
    39,600
    
    
    
    Amortization of acquisition-related intangible assets
    
    
    4,432
    
    
    
    
    
    
    
    8,147
    
    
    
    Total operating expenses
    
    
    160,466
    
    
    
    108,055
    
    
    
    340,934
    
    
    
    194,323Operating income
    
    
    128,542
    
    
    
    106,044
    
    
    
    186,467
    
    
    
    219,563Equity in income (loss) of business ventures
    
    
    193
    
    
    
    (360
    )
    
    
    362
    
    
    
    (55
    )Interest income
    
    
    22,670
    
    
    
    9,710
    
    
    
    38,527
    
    
    
    17,694Gain (loss) on investment in foundries
    
    
    764
    
    
    
    (5,224
    )
    
    
    2,253
    
    
    
    (9,253
    )Interest expense and other income (expense), net
    
    
    (1,614
    )
    
    
    1,728
    
    
    
    (665
    )
    
    
    2,229Total other income
    
    
    22,013
    
    
    
    5,854
    
    
    
    40,477
    
    
    
    10,615Income before taxes
    
    
    150,555
    
    
    
    111,898
    
    
    
    226,944
    
    
    
    230,178Provision for income taxes
    
    
    54,914
    
    
    
    41,402
    
    
    
    96,188
    
    
    
    85,166Net income
    
    $
    95,641
    
    
    $
    70,496
    
    
    $
    130,756
    
    
    $
    145,012Net income per share:Basic
    
    $
    0.49
    
    
    $
    0.39
    
    
    $
    0.67
    
    
    $
    0.80Diluted
    
    $
    0.47
    
    
    $
    0.37
    
    
    $
    0.65
    
    
    $
    0.76Shares used in computing net income per share:Basic
    
    
    195,527
    
    
    
    181,469
    
    
    
    194,302
    
    
    
    181,050Diluted
    
    
    202,980
    
    
    
    190,256
    
    
    
    202,522
    
    
    
    190,127
 The accompanying notes are an integral part of these condensed consolidated financial statements.
 4




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SANDISK CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Six months endedJuly 2, 2006
    
    
    July 3, 2005(In thousands)Cash flows from operating activities:Net income
    
    $
    130,756
    
    
    $
    145,012Adjustments to reconcile net income to net cash provided by operating activities:Deferred taxes
    
    
    (17,395
    )
    
    
    1,076(Gain) loss on investment in foundries
    
    
    (1,195
    )
    
    
    9,253Depreciation and amortization
    
    
    57,666
    
    
    
    29,413Provision for doubtful accounts
    
    
    1,001
    
    
    
    (163
    )Stock-based compensation expense
    
    
    44,688
    
    
    
    1,069Tax benefit
from share-based compensation
    
    
    (61,023
    )
    
    
    Write-off of acquired in-process technology
    
    
    39,600
    
    
    
    Other non-cash charges
    
    
    (4,744
    )
    
    
    2,274Changes in operating assets and liabilities:Accounts receivable
    
    
    23,048
    
    
    
    (47,800
    )Inventories
    
    
    (39,976
    )
    
    
    (33,171
    )Other assets
    
    
    (8,743
    )
    
    
    (15,241
    )Accounts payable trade
    
    
    (123,758
    )
    
    
    30,132Accounts payable, related party
    
    
    13,065
    
    
    
    15,947Other liabilities
    
    
    58,798
    
    
    
    55,676Net cash provided by operating activities
    
    
    111,788
    
    
    
    193,477Cash flows from investing activities:Purchases of short-term investments
    
    
    (805,300
    )
    
    
    (295,582
    )Proceeds from sale of short-term investments
    
    
    375,446
    
    
    
    281,608Investment in Flash Partners
    
    
    (127,919
    )
    
    
    Acquisition of property and equipment, net
    
    
    (89,722
    )
    
    
    (56,218
    )Notes receivable from FlashVision
    
    
    
    
    
    
    (22,222
    )Notes receivable from Flash Partners
    
    
    (95,445
    )
    
    
    Cash acquired in business combination with Matrix, net of acquisition costs
    
    
    9,432
    
    
    
    Net cash (used in) investing activities
    
    
    (733,508
    )
    
    
    (92,414
    )Cash flows from financing activities:Proceeds from issuance of convertible senior notes, net of issuance costs
    
    
    1,125,500
    
    
    
    Purchase of convertible bond hedge
    
    
    (386,090
    )
    
    
    Proceeds from issuance of warrants
    
    
    308,672
    
    
    
    Proceeds from employee stock programs
    
    
    68,850
    
    
    
    15,853Tax benefit
from share-based compensation
    
    
    61,023
    
    
    
    Net cash provided by financing activities
    
    
    1,177,955
    
    
    
    15,853Effect of changes in foreign currency exchange rates on cash
    
    
    186
    
    
    
    378Net increase in cash and cash equivalents
    
    
    556,421
    
    
    
    117,294Cash and cash equivalents at beginning of the year
    
    
    762,058
    
    
    
    463,795Cash and cash equivalents at end of the six months ended July 2, 2006
    
    $
    1,318,479
    
    
    $
    581,089Supplemental disclosures of cash flow information:Issuance of stock for acquisition
    
    $
    260,908
    
    
    $
    
 The accompanying notes are an integral part of these condensed consolidated financial
statements.
 5




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SANDISK CORPORATION
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 1. Organization and Summary of Significant Accounting Policies
   Organization and Nature of Operations.
 Principles of Consolidation.
 Use of Estimates.
 Short and Long-Term Investments.
 Recent Accounting Pronouncements. Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 Accounting for Income Taxes
 6




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 2. Stock-Based Compensation
 Stock-Based Benefit Plans
 2005 Incentive Plan
 1995 Stock Option Plan and 1995 Non-Employee Directors Stock Option Plan.
 2005 Employee Stock Purchase Plan.
 Adoption of SFAS 123(R)
 Share-Based Payment
 7




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
    Stock Options
  Three months ended
    
    Six months endedJuly 2, 2006
    
    July 3, 2005
    
    July 2, 2006
    
    July 3, 2005Dividend yield
    
    None
    
    None
    
    None
    
    NoneExpected volatility
    
    
    0.51 - 0.55
    
    
    
    0.52
    
    
    
    0.51 - 0.55
    
    
    
    0.53Risk-free interest rate
    
    
    4.89% - 5.08
    %
    
    
    3.87
    %
    
    
    4.35% - 5.08
    %
    
    
    3.89
    %Expected lives
    
    3.6 years
    
    4.7 years
    
    3.7 years
    
    4.7 yearsWeighted average fair value at grant date
    
    $
    28.14
    
    
    $
    12.14
    
    
    $
    27.50
    
    
    $
    11.83
  WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Price
    
    
    Term (Years)
    
    
    Value(In thousands, except exercise price and contractual term)Options outstanding at January 1, 2006
    
    
    20,316
    
    
    $
    21.57Granted
    
    
    4,964
    
    
    
    56.79Exercised
    
    
    (3,869
    )
    
    
    16.96Forfeited
    
    
    (508
    )
    
    
    37.06Expired
    
    
    (4
    )
    
    
    47.57Options outstanding at July 2, 2006
    
    
    20,899
    
    
    
    30.41
    
    
    
    6.7
    
    
    $
    477,850Options vested and expected to vest after July 2, 2006
    
    
    19,650
    
    
    
    29.50
    
    
    
    6.7
    
    
    
    463,761Options exercisable at July 2, 2006
    
    
    8,506
    
    
    $
    16.64
    
    
    
    5.9
    
    
    $
    292,802
  8




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
  Restricted Stock
   WeightedAverage Grant
    
    
    AggregateDate
    
    
    IntrinsicShares
    
    
    Fair Value
    
    
    ValueNon-vested share units at January 1, 2006
    
    
    105,188
    
    
    $
    42.19Granted
    
    
    601,007
    
    
    
    62.11Vested
    
    
    (17,040
    )
    
    
    31.54Forfeited
    
    
    (14,114
    )
    
    
    59.04Non-vested share units at July 2, 2006
    
    
    675,041
    
    
    $
    59.14
    
    
    $
    34,413,590
  Employee Stock Purchase Plans (ESPP)
  Three months ended
    
    Six months endedJuly 2, 2006
    
    July 3, 2005
    
    July 2, 2006
    
    July 3, 2005Dividend yield
    
    None
    
    None
    
    None
    
    NoneExpected volatility
    
    
    0.54
    
    
    
    0.42
    
    
    
    0.51
    
    
    
    0.45Risk-free interest rate
    
    
    4.69
    %
    
    
    2.77
    %
    
    
    4.53
    %
    
    
    2.60
    %Expected lives
    
    1/2 year
    
    1/2 year
    
    1/2 year
    
    1/2 yearWeighted average fair value at exercise date
    
    $
    20.45
    
    
    $
    6.74
    
    
    $
    18.50
    
    
    $
    6.89
  9




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 Stock Compensation Expense
  Three months ended
    
    
    Six months endedJuly 2, 2006
    
    
    July 2, 2006(In thousands)Share-based compensation expense by caption:Cost of sales
    
    $
    2,478
    
    
    $
    2,478Research and development
    
    
    10,421
    
    
    
    19,206Sales and marketing
    
    
    5,125
    
    
    
    9,165General and administrative
    
    
    7,846
    
    
    
    13,807Total
    
    $
    25,870
    
    
    $
    44,656Share-based compensation expense by type of award:Stock options
    
    $
    21,694
    
    
    $
    37,748Restricted stock
    
    
    3,202
    
    
    
    5,239ESPP
    
    
    974
    
    
    
    1,669Total
    
    $
    25,870
    
    
    $
    44,656
  Accounting for Stock-Based Compensation
 Three months ended
    
    
    Six months endedJuly 3, 2005
    
    
    July 3, 2005(In thousands, except per share amounts)Net income, as reported
    
    $
    70,496
    
    
    $
    145,012Fair value method expense, net of related tax
    
    
    (10,396
    )
    
    
    (20,707
    )Pro forma net income
    
    $
    60,100
    
    
    $
    124,305Earnings per share as reported:Basic
    
    $
    0.39
    
    
    $
    0.80Diluted
    
    $
    0.37
    
    
    $
    0.76Pro forma earnings per share:Basic
    
    $
    0.33
    
    
    $
    0.69Diluted
    
    $
    0.32
    
    
    $
    0.65
  10




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 3. Warranty
  Three months ended
    
    
    Six months endedJuly 2, 2006
    
    
    July 3, 2005
    
    
    July 2, 2006
    
    
    July 3, 2005Balance, beginning of period
    
    $
    8,423
    
    
    $
    10,332
    
    
    $
    11,258
    
    
    $
    11,380Additions (reductions) to costs of product revenue
    
    
    4,599
    
    
    
    3,909
    
    
    
    1,992
    
    
    
    4,488Usage
    
    
    (3,361
    )
    
    
    (2,516
    )
    
    
    (3,589
    )
    
    
    (4,143
    )Balance, end of period
    
    $
    9,661
    
    
    $
    11,725
    
    
    $
    9,661
    
    
    $
    11,725
  11




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 4. Balance Sheet Detail
 Inventories
  July 2, 2006
    
    
    January 1, 2006Raw material
    
    $
    117,638
    
    
    $
    99,006Work-in-process
    
    
    72,020
    
    
    
    61,900Finished goods
    
    
    188,538
    
    
    
    170,678Total inventories
    
    $
    378,196
    
    
    $
    331,584
  Notes Receivables and Investments in Flash Ventures
  July 2, 2006
    
    
    January 1, 2006Notes receivable, FlashVision
    
    $
    63,750
    
    
    $
    61,927Notes receivable, Flash Partners
    
    
    96,061
    
    
    
    Investment in FlashVision
    
    
    164,888
    
    
    
    161,080Investment in Flash Partners
    
    
    174,325
    
    
    
    42,067Total notes receivable and investments in flash ventures
    
    $
    499,024
    
    
    $
    265,074
 Other Non-current Assets
  July 2, 2006
    
    
    January 1, 2006Investment in foundries
    
    $
    16,364
    
    
    $
    11,013Deposits
    
    
    6,437
    
    
    
    4,709Other non-current assets
    
    
    33,237
    
    
    
    42,541Total other non-current assets
    
    $
    56,038
    
    
    $
    58,263
 Other Accrued Liabilities
  July 2, 2006
    
    
    January 1, 2006Accrued payroll and related expenses
    
    $
    45,035
    
    
    $
    55,614Income taxes payable
    
    
    12,994
    
    
    
    2,165Research and development liability, related party
    
    
    5,984
    
    
    
    4,200Other accrued liabilities
    
    
    75,934
    
    
    
    53,546Total other accrued liabilities
    
    $
    139,947
    
    
    $
    115,525
 12




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 5. Goodwill and Other Intangible Assets
 Goodwill
  Balance at January 1, 2006
    
    $
    5,415Goodwill adjustment
    
    
    25Goodwill acquired (Note 11)
    
    
    161,808Balance at July 2, 2006
    
    $
    167,248
 Goodwill
and Other Intangible Assets
 Other Intangible Assets
  July 2, 2006
    
    
    January 1, 2006Gross
    
    
    
    
    
    
    Net
    
    
    Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    Carrying
    
    
    Carrying
    
    
    Accumulated
    
    
    CarryingAmount
    
    
    Amortization
    
    
    Amount
    
    
    Amount
    
    
    Amortization
    
    
    AmountCore technology
    
    $
    76,300
    
    
    $
    (4,996
    )
    
    $
    71,304
    
    
    $
    
    
    
    $
    
    
    
    $
    Developed product
technology
    
    
    12,900
    
    
    
    (1,538
    )
    
    
    11,362
    
    
    
    1,500
    
    
    
    (542
    )
    
    
    958Customer relationships
    
    
    14,100
    
    
    
    (2,154
    )
    
    
    11,946
    
    
    
    
    
    
    
    
    
    
    
    Acquisition-related
intangible assets
    
    
    103,300
    
    
    
    (8,688
    )
    
    
    94,612
    
    
    
    1,500
    
    
    
    (542
    )
    
    
    958Technology licenses
    
    
    7,389
    
    
    
    (4,769
    )
    
    
    2,620
    
    
    
    7,389
    
    
    
    (3,739
    )
    
    
    3,650Total
    
    $
    110,689
    
    
    $
    (13,457
    )
    
    $
    97,232
    
    
    $
    8,889
    
    
    $
    (4,281
    )
    
    $
    4,608
   Estimated Amortization ExpensesAcquisition-Related Intangible
    
    
    TechnologyAssets
    
    
    License(In thousands)Fiscal periods:2006 (remaining six months)
    
    $
    8,864
    
    
    $
    1,0912007
    
    
    17,687
    
    
    
    9032008
    
    
    17,229
    
    
    
    6262009
    
    
    12,724
    
    
    
    2010
    
    
    12,529
    
    
    
    2011 and thereafter
    
    
    25,579
    
    
    
    Total
    
    $
    94,612
    
    
    $
    2,620
 13




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 6. Accumulated Other Comprehensive Income
  July 2, 2006
    
    
    January 1, 2006(In thousands)Accumulated net unrealized gain (loss) on:Available-for-sale short-term investments
    
    $
    (2,908
    )
    
    $
    (4,233
    )Available-for-sale investments in foundries
    
    
    1,832
    
    
    
    (383
    )Foreign currency translation
    
    
    12,050
    
    
    
    7,251Total accumulated other comprehensive income
    
    $
    10,974
    
    
    $
    2,635
  Three months ended
    
    
    Six months endedJuly 2, 2006
    
    
    July 3, 2005
    
    
    July 2, 2006
    
    
    July 3, 2005(In thousands)Net income
    
    $
    95,641
    
    
    $
    70,496
    
    
    $
    130,756
    
    
    $
    145,012Unrealized income on
available-for-sale investment
in foundries
    
    
    238
    
    
    
    1,675
    
    
    
    2,215
    
    
    
    1,213Unrealized income (loss) on
available-for-sale short-term
investments
    
    
    (412
    )
    
    
    965
    
    
    
    1,325
    
    
    
    (1,018
    )Currency translation gain (loss)
    
    
    6,164
    
    
    
    (4,224
    )
    
    
    4,799
    
    
    
    (8,032
    )Comprehensive net income
    
    $
    101,631
    
    
    $
    68,912
    
    
    $
    139,095
    
    
    $
    137,175
 14




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 7. Net Income per Share
  Three months ended
    
    
    Six months endedJuly 2, 2006
    
    
    July 3, 2005
    
    
    July 2, 2006
    
    
    July 3, 2005Numerator for basic net income per share:Net income, as reported
    
    $
    95,641
    
    
    $
    70,496
    
    
    $
    130,756
    
    
    $
    145,012Denominator for basic net income per share:Weighted average common shares outstanding
    
    
    195,527
    
    
    
    181,469
    
    
    
    194,302
    
    
    
    181,050Basic net income per share
    
    $
    0.49
    
    
    $
    0.39
    
    
    $
    0.67
    
    
    $
    0.80Numerator for diluted net income per share:Net income, as reported
    
    $
    95,641
    
    
    $
    70,496
    
    
    $
    130,756
    
    
    $
    145,012Denominator for basic net income per share:Weighted average common shares outstanding
    
    
    195,527
    
    
    
    181,469
    
    
    
    194,302
    
    
    
    181,050Effect of dilutive options and restricted stock
    
    
    7,453
    
    
    
    8,787
    
    
    
    8,220
    
    
    
    9,077Shares used in computing diluted net income
per share
    
    
    202,980
    
    
    
    190,256
    
    
    
    202,522
    
    
    
    190,127Diluted net income per share
    
    $
    0.47
    
    
    $
    0.37
    
    
    $
    0.65
    
    
    $
    0.76
  15




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 8. Financing Arrangements
  July 2, 2006
    
    January 1, 2006(In millions)1%
Convertible Senior Notes due 2013
    
    $
    1,150.0
    
    
    $

    
    
      
    
    Convertible Bond Hedge. Counterparties agreed to sell to the Company up to approximately 14.0 million
shares of the Companys common stock, which is the number of shares initially issuable upon conversion
of the 1% Notes in full, at a price of $82.36 per share. The convertible bond hedge
transaction will be settled in net shares and will terminate upon the earlier of the
maturity date of the 1% Notes or the first day none of the 1% Notes remain outstanding due to
conversion or otherwise. Settlement of the convertible bond hedge in
net shares, based on the number of shares issued upon conversion of the 1% Notes, on the
expiration date would result in the Company receiving net shares equivalent to the number of
shares issuable by the Company upon conversion of the 1% Notes. Should there be an early
unwind of the convertible bond hedge transaction, the number of net shares potentially
received by the Company will depend upon 1) the then existing overall market conditions, 2)
the Companys stock price, 3) the volatility of the Companys stock, and 4) the amount of
time remaining before expiration of the convertible bond hedge. The convertible bond hedge transaction cost
of $386.1 million has been accounted for as an equity transaction in accordance with
Emerging Issues Task Force No. 00-19, or EITF 00-19, Accounting for Derivative Financial
Statements Indexed to, and Potentially Settled
 16




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 in, a Companys Own Stock. The Company recorded a tax benefit of approximately $145.6 million
in stockholders equity from the deferred tax assets related to the convertible bond hedge.
    
    Sold Warrants.The Company received $308.7 million from the same counterparties
from the sale of  warrants to purchase up to approximately 14.0 million shares of the Companys common
stock at an exercise price of $95.03 per share. The warrants have an expected life of 7.25
years and expire in August 2013. At expiration, the Company may, at its option,
elect to settle the warrants on a net share basis. As of July 2, 2006, the warrants had not
been exercised and remained outstanding. The value of the warrants has been classified as
equity because they meet all the equity classification criteria of EITF 00-19.
 17




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 9. Commitments, Contingencies and Guarantees
 Commitments
 FlashVision.
  Flash Partners
   18




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 Flash Alliance.
   Toshiba Foundry.
 Business Ventures and Foundry Arrangement with Toshiba.
 Other Silicon Sources.
 Subcontractors.
 19




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 Off Balance Sheet Liabilities
  Lease
Amounts(1)
    
    
    ExpirationMaster Lease Agreement
    
    (Yen
in billions)
    
    
    (Dollars in millions)FlashVisionJune 2006
    
    ¥
    7.5
    
    
    $
    65.6
    
    
    
    2009Flash PartnersDecember 2004
    
    
    21.6
    
    
    
    188.5
    
    
    
    2010December 2005
    
    
    16.7
    
    
    
    145.6
    
    
    
    2011June 2006
    
    
    16.0
    
    
    
    139.7
    
    
    
    2011Total Flash Partners
    
    
    54.3
    
    
    
    473.8Total indemnification or guarantee obligation
    
    ¥
    61.8
    
    
    $
    539.4
 
 (1)
    
    The maximum amount of the Companys contingent indemnification or guarantee
obligation, net of payments and any lease adjustments. FlashVision.
 Flash Partners.
 20




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 Guarantees
 Indemnification Agreements.
   21




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 Contractual Obligations and Off Balance Sheet Arrangements
 Contractual Obligations.
 More than 5Less than
    
    
    2 - 3 Years
    
    
    3 5 Years
    
    
    Years1 Year
    
    
    (Fiscal 2007
    
    
    (Fiscal 2009
    
    
    (BeyondTotal
    
    
    (6 months 2006)
    
    
    and 2008)
    
    
    and 2010)
    
    
    Fiscal 2010)Operating leases
    
    $
    41,325
    
    
    $
    2,646
    
    
    $
    10,932
    
    
    $
    10,578
    
    
    $
    17,169FlashVision, fabrication capacity
expansion costs, and reimbursement for
certain other costs including
depreciation
    
    
    263,538
    (4)
    
    
    49,290
    
    
    
    142,063
    
    
    
    69,420
    
    
    
    2,765Flash Partners fabrication capacity
expansion and start-up costs, and
reimbursement for certain other costs
including depreciation (1)
    
    
    2,559,206

(4)
    
    
    102,836
    
    
    
    1,521,447
    
    
    
    616,263
    
    
    
    318,660Toshiba research and development
    
    
    93,762
    (4)
    
    
    18,762
    
    
    
    75,000
    
    
    
    
    
    
    
    Capital equipment purchases commitments
    
    
    38,811
    
    
    
    38,811
    
    
    
    
    
    
    
    
    
    
    
    1% Convertible Senior Notes principal
and interest (2)
    
    
    1,229,016
    
    
    
    5,750
    
    
    
    23,000
    
    
    
    23,000
    
    
    
    1,177,266Operating expense commitments
    
    
    80,291
    
    
    
    80,291
    
    
    
    
    
    
    
    
    
    
    
    Noncancelable production purchase
commitments (3)
    
    
    528,436
    (4)
    
    
    528,436
    
    
    
    
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    4,834,385
    
    
    $
    826,822
    
    
    $
    1,772,442
    
    
    $
    719,261
    
    
    $
    1,515,860
 Off Balance Sheet Arrangements.As ofJuly 2, 2006Indemnification of FlashVision foundry equipment lease (5)
    
    $
    65,555Guarantee of Flash Partners lease(6)
    
    $
    473,827
 
 (1)
    
    In July 2006, the Company and Toshiba agreed to accelerate the expansion of Fab 3
to 110,000 wafers per month and agreed to an additional investment in Fab 3 of approximately
$350 million.(2)
    
    In May 2006, the Company issued and sold $1.15 billion in aggregate principal
amount of 1% Convertible Senior Notes due May 15, 2013. The Company will pay cash interest
at an annual rate of 1%, payable semi-annually on May 15
and November 15 of each year, beginning November 15, 2006.(3)
    
    Includes Toshiba foundries, FlashVision, Flash Partners, related parties vendors
and other silicon sources vendors purchase commitments.(4)
    
    Includes amounts denominated in Japanese yen which are subject to fluctuation in
exchange rates prior to payment and have been translated using the exchange rate at July 2,
2006.(5)
    
    The Companys contingent indemnification obligation is 7.5 billion Japanese yen,
or approximately $66 million based upon the exchange rate at July 2, 2006.(6)
    
    The Companys guarantee obligation, net of cumulative lease payments, is 54.3
billion Japanese yen, or approximately $474 million based upon the exchange rate at July 2,
2006. 22




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 Foreign Currency Exchange Contracts
  23




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 10. Related Parties and Strategic Investments
 Toshiba.
 Tower
Semiconductor.
 Flextronics.
 U3, LLC.
 24




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 11. Business Acquisition
 Matrix Semiconductor. ®
  Cash
    
    $
    9,432Accounts receivable
    
    
    6,956Inventory
    
    
    4,010Property and equipment, net
    
    
    1,919Other assets
    
    
    1,786Total assets acquired
    
    
    24,103Accounts payable
    
    
    (2,302
    )Other liabilities
    
    
    (23,081
    )Total liabilities assumed
    
    
    (25,383
    )Net tangible liabilities acquired
    
    $
    (1,280
    )
  Net tangible liabilities acquired
    
    $
    (1,280
    )Acquired in-process technology
    
    
    39,600Acquisition-related restructuring
    
    
    (17,543
    )Deferred income tax liability
    
    
    (38,379
    )Deferred income tax asset
    
    
    35,810Goodwill
    
    
    161,808Other intangible assets:Core technology
    
    
    76,300Developed product technology
    
    
    11,400Customer relationships
    
    
    14,100281,816Assumed unvested equity instrument to be expensed
    
    
    14,563Purchase price
    
    $
    296,379
  25




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 Acquisition-Related Restructuring
 In-process
 Technology.
   Pro Forma Results.
 Three monthsended
    

Six
months endedJuly 3, 2005
    
    July 2, 2006
    
    July 3, 2005(In thousands, except per share amounts)Net revenues
    
    $
    516,584
    
    
    $
    1,343,287
    
    
    $
    972,409Net income
    
    $
    58,594
    
    
    $
    160,048
    
    
    $
    123,365Net income per shareBasic
    
    $
    0.32
    
    
    $
    0.82
    
    
    $
    0.67Diluted
    
    $
    0.30
    
    
    $
    0.79
    
    
    $
    0.63
  26




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 12. Income Taxes
   27




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 13. Litigation
       28




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 14. Subsequent Events
 tokurei yugen kaisha
    29




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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 and elsewhere in this report.
Our business, financial condition or results of operations could be materially adversely affected
by any of these factors. We undertake no obligation to revise or update any forward-looking
statements to reflect any event or circumstance that arises after the date of this report, except
as required by law. References in this report to SanDisk ® , we, our, and us
refer collectively to SanDisk Corporation, a Delaware corporation, and its subsidiaries.
 Overview
   ®
   30




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Share Based
Payments
 31




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Results of Operations
 Three months ended
    
    
    Six months ended% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofJuly 2, 2006
    
    
    Revenue
    
    
    July 3, 2005
    
    
    Revenue
    
    
    July 2, 2006
    
    
    Revenue
    
    
    July 3, 2005
    
    
    Revenue(In millions, except percentages)Product revenues
    
    $
    636.7
    
    
    
    88.5
    %
    
    $
    453.8
    
    
    
    88.1
    %
    
    $
    1,174.4
    
    
    
    87.5
    %
    
    $
    853.5
    
    
    
    88.4
    %License and royalty revenues
    
    
    82.5
    
    
    
    11.5
    %
    
    
    61.1
    
    
    
    11.9
    %
    
    
    168.0
    
    
    
    12.5
    %
    
    
    112.4
    
    
    
    11.6
    %Total revenues
    
    
    719.2
    
    
    
    100.0
    %
    
    
    514.9
    
    
    
    100.0
    %
    
    
    1,342.4
    
    
    
    100.0
    %
    
    
    965.9
    
    
    
    100.0
    %Cost of product revenues
    
    
    430.2
    
    
    
    59.8
    %
    
    
    300.8
    
    
    
    58.4
    %
    
    
    815.0
    
    
    
    60.7
    %
    
    
    552.0
    
    
    
    57.1
    %Gross margins
    
    
    289.0
    
    
    
    40.2
    %
    
    
    214.1
    
    
    
    41.6
    %
    
    
    527.4
    
    
    
    39.3
    %
    
    
    413.9
    
    
    
    42.9
    %Operating expenses
Research and development
    
    
    73.8
    
    
    
    10.3
    %
    
    
    61.4
    
    
    
    11.9
    %
    
    
    137.5
    
    
    
    10.2
    %
    
    
    107.4
    
    
    
    11.1
    %Sales and marketing
    
    
    45.1
    
    
    
    6.3
    %
    
    
    27.0
    
    
    
    5.2
    %
    
    
    88.4
    
    
    
    6.6
    %
    
    
    51.6
    
    
    
    5.4
    %General and administrative
    
    
    37.2
    
    
    
    5.2
    %
    
    
    19.6
    
    
    
    3.9
    %
    
    
    67.2
    
    
    
    5.0
    %
    
    
    35.3
    
    
    
    3.7
    %Write-off of acquired
in-process technology
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39.6
    
    
    
    3.0
    %
    
    
    
    
    
    
    Amortization of acquisition
related intangible assets
    
    
    4.4
    
    
    
    0.5
    %
    
    
    
    
    
    
    0.0
    %
    
    
    8.2
    
    
    
    0.6
    %
    
    
    
    
    
    
    Total operating expenses
    
    
    160.5
    
    
    
    22.3
    %
    
    
    108.0
    
    
    
    21.0
    %
    
    
    340.9
    
    
    
    25.4
    %
    
    
    194.3
    
    
    
    20.2
    %Operating income
    
    
    128.5
    
    
    
    17.9
    %
    
    
    106.1
    
    
    
    20.6
    %
    
    
    186.5
    
    
    
    13.9
    %
    
    
    219.6
    
    
    
    22.7
    %Non-operating income, net
    
    
    22.0
    
    
    
    3.0
    %
    
    
    5.8
    
    
    
    1.1
    %
    
    
    40.5
    
    
    
    3.0
    %
    
    
    10.6
    
    
    
    1.1
    %Income before taxes
    
    
    150.5
    
    
    
    20.9
    %
    
    
    111.9
    
    
    
    21.7
    %
    
    
    227.0
    
    
    
    16.9
    %
    
    
    230.2
    
    
    
    23.8
    %Provision for income taxes
    
    
    54.9
    
    
    
    7.6
    %
    
    
    41.4
    
    
    
    8.0
    %
    
    
    96.2
    
    
    
    7.2
    %
    
    
    85.2
    
    
    
    8.8
    %Net income
    
    $
    95.6
    
    
    
    13.3
    %
    
    $
    70.5
    
    
    
    13.7
    %
    
    $
    130.8
    
    
    
    9.7
    %
    
    $
    145.0
    
    
    
    15.0
    %
 Product Revenues
 Three months ended
    
    
    Six months endedPercent
    
    
    
    
    
    
    
    
    
    
    PercentJuly 2, 2006
    
    
    July 3, 2005
    
    
    Change
    
    
    July 2, 2006
    
    
    July 3, 2005
    
    
    Change(In millions, except percentages)Retail
    
    $
    446.2
    
    
    $
    376.5
    
    
    
    19
    %
    
    $
    818.2
    
    
    $
    693.1
    
    
    
    18
    %OEM
    
    
    190.5
    
    
    
    77.3
    
    
    
    146
    %
    
    
    356.2
    
    
    
    160.4
    
    
    
    122
    %Product revenues
    
    $
    636.7
    
    
    $
    453.8
    
    
    
    40
    %
    
    $
    1,174.4
    
    
    $
    853.5
    
    
    
    38
    %
 ® ®
  32




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Geographical Product Revenues
 Three months ended
    
    
    Six months endedJuly 2, 2006
    
    
    July 3, 2005
    
    
    
    
    
    
    July 2, 2006
    
    
    July 3, 2005Pct of
    
    
    
    
    
    
    Pct of
    
    
    Percent
    
    
    
    
    
    Pct of
    
    
    
    

    Pct of
    

    
    
    PercentRevenue
    
    
    Revenue
    
    
    Revenue
    
    
    Revenue
    
    
    Change
    
    
    Revenue
    
    Revenue
    
    Revenue
    
    Revenue
    
    
    
    Change(In millions, except percentages)North America
    
    $
    276.2
    
    
    
    43
    %
    
    $
    235.5
    
    
    
    52
    %
    
    
    17
    %
    
    $
    493.4
    
    
    
    42
    %
    

    $
    438.4
    
    51
    %
    
    
    13
    %EMEA
    
    
    153.3
    
    
    
    24
    %
    
    
    122.0
    
    
    
    27
    %
    
    
    26
    %
    
    
    293.6
    
    
    
    25
    %
    
    
    233.2
    
    27
    %
    
    
    26
    %Other foreign countries
    
    
    207.2
    
    
    
    33
    %
    
    
    96.3
    
    
    
    21
    %
    
    
    115
    %
    
    
    387.4
    
    
    
    33
    %
    
    
    181.9
    
    22
    %
    
    
    113
    %$
    636.7
    
    
    
    100
    %
    
    $
    453.8
    
    
    
    100
    %
    
    
    40
    %
    
    $
    1,174.4
    
    
    
    100
    %
    

    $
    853.5
    
    100
    %
    
    
    38
    %
  License and Royalty Revenues
 Three months ended
    
    Six months endedPercent
    
    
    
    
    
    
    
    
    
    PercentJuly 2, 2006
    
    July 3, 2005
    
    Change
    
    July 2, 2006
    
    July 3, 2005
    
    Change(In millions, except percentages)License and royalty revenues
    
    $
    82.5
    
    
    $
    61.1
    
    
    
    35
    %
    
    $
    168.0
    
    
    $
    112.4
    
    
    
    49
    %
  Gross Margin
 Three months ended
    
    Six months endedPercent
    
    
    
    
    
    
    
    
    
    PercentJuly 2, 2006
    
    July 3, 2005
    
    Change
    
    July 2, 2006
    
    July 3, 2005
    
    Change(In millions, except percentages)Product gross margin
    
    $
    206.5
    
    
    $
    153.0
    
    
    
    35
    %
    
    $
    359.4
    
    
    $
    301.5
    
    
    
    19
    %Product gross margin (as a percent of product
revenues)
    
    
    32.4
    %
    
    
    33.7
    %
    
    
    
    
    
    
    30.6
    %
    
    
    35.3
    %Total gross margin (as a percent of total revenues)
    
    
    40.2
    %
    
    
    41.6
    %
    
    
    
    
    
    
    39.3
    %
    
    
    42.9
    %
  Research and Development
 Three months ended
    
    Six months endedPercent
    
    
    
    
    
    
    
    
    
    PercentJuly 2, 2006
    
    July 3, 2005
    
    Change
    
    July 2, 2006
    
    July 3, 2005
    
    Change(In millions, except percentages)Research and development
    
    $
    73.8
    
    
    $
    61.4
    
    
    
    20
    %
    
    $
    137.5
    
    
    $
    107.4
    
    
    
    28
    %Percent of revenue
    
    
    10.3
    %
    
    
    11.9
    %
    
    
    
    
    
    
    10.2
    %
    
    
    11.1
    %
  33




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Sales and Marketing
 Three months ended
    
    Six months endedPercent
    
    
    
    
    
    
    
    
    
    PercentJuly 2, 2006
    
    July 3, 2005
    
    Change
    
    July 2, 2006
    
    July 3, 2005
    
    Change(In millions, except percentages)Sales and marketing
    
    $
    45.1
    
    
    $
    27.0
    
    
    
    67
    %
    
    $
    88.4
    
    
    $
    51.6
    
    
    
    71
    %Percent of revenue
    
    
    6.3
    %
    
    
    5.2
    %
    
    
    
    
    
    
    6.6
    %
    
    
    5.3
    %
  General and Administrative
 Three months ended
    
    Six months endedPercent
    
    
    
    
    
    
    
    
    
    PercentJuly 2, 2006
    
    July 3, 2005
    
    Change
    
    July 2, 2006
    
    July 3, 2005
    
    Change(In millions, except percentages)General and administrative
    
    $
    37.2
    
    
    $
    19.6
    
    
    
    90
    %
    
    $
    67.2
    
    
    $
    35.3
    
    
    
    90
    %Percent of revenue
    
    
    5.2
    %
    
    
    3.8
    %
    
    
    
    
    
    
    5.0
    %
    
    
    3.7
    %
  Write-off of Acquired In-process Technology
 Three months ended
    
    Six months endedPercent
    
    
    
    
    
    
    
    
    
    PercentJuly 2, 2006
    
    July 3, 2005
    
    Change
    
    July 2, 2006
    
    July 3, 2005
    
    Change(In millions, except percentages)Write-off of acquired in-process technology
    
    $
    
    
    
    $
    
    
    
    
    n/a
    
    
    $
    39.6
    
    
    $
    
    
    
    
    n/aPercent of revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.9
    %
    
    
    
  Amortization of Acquisition Related Intangible Assets
 Three months ended
    
    Six months endedPercent
    
    
    
    
    
    
    
    
    
    PercentJuly 2, 2006
    
    July 3, 2005
    
    Change
    
    July 2, 2006
    
    July 3, 2005
    
    Change(In millions, except percentages)Amortization
of acquisition
related intangible
assets
    
    $
    4.4
    
    
    $
    
    
    
    
    n/a
    
    
    $
    8.2
    
    
    $
    
    
    
    
    n/aPercent of revenue
    
    
    0.6
    %
    
    
    
    
    
    
    
    
    
    
    0.6
    %
    
    
    
  34




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Non-Operating Income (Loss), net
 Three months ended
    
    
    Six months endedPercent
    
    
    
    
    
    
    
    
    
    
    PercentJuly 2, 2006
    
    
    July 3, 2005
    
    
    Change
    
    
    July 2, 2006
    
    
    July 3, 2005
    
    
    Change(In millions, except percentages)Equity in income (loss) of business ventures
    
    $
    0.2
    
    
    $
    (0.3
    )
    
    
    167
    %
    
    $
    0.4
    
    
    $
    (0.1
    )
    
    
    500
    %Interest income
    
    
    22.7
    
    
    
    9.7
    
    
    
    134
    %
    
    
    38.5
    
    
    
    17.7
    
    
    
    118
    %Gain (loss) in investment in foundries
    
    
    0.8
    
    
    
    (5.2
    )
    
    
    115
    %
    
    
    2.3
    
    
    
    (9.3
    )
    
    
    125
    %Interest expense and other income (loss), net
    
    
    (1.7
    )
    
    
    1.7
    
    
    
    (200
    )%
    
    
    (0.7
    )
    
    
    2.3
    
    
    
    (130
    )%Total non-operating income (loss), net
    
    $
    22.0
    
    
    $
    5.9
    
    
    
    273
    %
    
    $
    40.5
    
    
    $
    10.6
    
    
    
    282
    %
  Provision for Income Taxes
 Three months ended
    
    Six months endedJuly 2, 2006
    
    July 3, 2005
    
    July 2, 2006
    
    July 3, 2005Provision for income taxes
    
    
    36.5
    %
    
    
    37.0
    
    
    
    42.4
    %
    
    
    37.0
    %
   35




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Liquidity and Capital Resources
 Cash Flows.
   Liquid Assets.
 Short-Term Liquidity.
 Long-Term Requirements.
 Financing Arrangements.
  
    
    Convertible Bond Hedge. Counterparties agreed to sell
to us up to approximately 14.0 million shares of
our common stock, which is the number of shares initially issuable upon conversion of the 1% Notes in
full, at a price of $82.36 per share. The convertible bond hedge transaction will be
settled in net shares and will terminate upon the earlier of the
maturity date of the 1% Notes or the first
day none of the 1% Notes remain outstanding due to conversion or otherwise. Settlement
of the convertible bond hedge in net
 36




---



##### Table of Contents



shares on the expiration date would result in us
receiving net shares equivalent to the number of shares issuable by us upon conversion of
the 1% Notes. Should there be an early unwind of the convertible bond hedge transaction,
the number of
net shares potentially received by us will depend upon 1) the then existing overall market
conditions, 2) our stock price, 3) the volatility of our stock, and 4) the amount of time
remaining before expiration of the convertible bond hedge. The convertible bond hedge transaction cost of
$386.1 million has been accounted for as an equity transaction in accordance with Emerging
Issues Task Force No. 00-19, or EITF 00-19, Accounting for Derivative Financial Statements
Indexed to, and Potentially Settled in, a Companys Own Stock. We recorded a tax benefit of
approximately $145.6 million in stockholders equity from the deferred tax assets related to
the convertible bond hedge.
    
    Sold Warrants.We received $308.7 million from the same counterparties from the
sale of warrants to purchase up to approximately 14.0 million shares of our common stock at an
exercise price of $95.03 per share. The warrants have an expected life of 7.25 years and
expire in August 2013. At expiration, we may, at option, elect to settle the
warrants on a net share basis. As of July 2, 2006, the warrants had not been exercised and
remained outstanding. The value of the warrants has been classified as equity because
they meet all the equity classification criteria of EITF 00-19.
 Contingent Obligations.
 Toshiba Ventures.
    37




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38




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Contractual Obligations and Off Balance Sheet Arrangements
  Critical Accounting Policies
     Equity-Based Compensation  Employee Incentive Plans and Employee Stock Purchase Plans Share-Based
Payments Accounting for Stock Issued to Employees, Accounting For Stock-Based Compensation
 Transition and Disclosure Accounting For Stock-Based Compensation
  39




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Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
   40




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PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
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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 Item 1A of our annual report on Form 10-K for the fiscal year ended January
1, 2006 and our most recent quarterly report on Form 10-Q .
 Our operating results may fluctuate significantly, which may adversely affect our operations
and our stock price.
 
    
    decline in the average selling prices, net of promotions, for our products due to
strategic price reductions initiated by us or our competitors, excess supply and competitive
pricing pressures;
    
    addition of new competitors, expansion of supply from existing competitors and ourselves
creating excess market supply, which could cause our average selling prices to decline
faster than our costs decline;
    
    timing, volume and cost of wafer production from the FlashVision, Flash Partners and
Flash Alliance ventures as impacted by fab start-up delays and costs, technology
transitions, yields or production interruptions due to natural disasters, power outages,
equipment failure or other factors;
    
    unpredictable or changing demand for our products, particularly demand for certain types
or capacities of our products or demand for our products in certain markets or geographies;
    
    excess supply from captive sources due to ramping output faster than the growth in
demand;
    
    insufficient supply from captive and non-captive sources or insufficient capacity from
our test and assembly sub-contractors to meet demand;
    
    continued development of new markets and products for NAND flash memory and acceptance of
our products in these markets;
    
    our license and royalty revenues may decline significantly in the future as our existing
license agreements and key patents expire;
    
    timing of sell-through by our distributors and retail customers;
    
    increased purchases of flash memory products from our non-captive sources, which
typically cost more than products from our captive sources;
    
    difficulty in forecasting and managing inventory levels; particularly due to
noncancelable contractual obligations to purchase materials such as flash memory and
controllers, and the need to build finished product in advance of customer purchase orders;
    
    errors or defects in our products caused by, among other things, errors or defects in the
memory or controller components, including memory and non-memory components we procure from
third-party suppliers;
    
    disruption in the manufacturing operations of captive, non-captive and other suppliers,
including for sole sourced controller wafers;
    
    write-downs of our investments in fabrication capacity, equity investments and other assets;
    
    expensing of share-based compensation;
    
    adverse changes in product and customer mix;
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
    
    risks related to our proposed acquisition of msystems; and
    
    the factors listed elsewhere under Risk Factors.
 Sales to a small number of customers represent a significant portion of our revenues and, if
we were to lose one of our major licensees or customers or experience any material reduction in
orders from any of our customers, our revenues and operating results would suffer.
 Our business depends significantly upon sales of products in the highly competitive consumer
market, a significant portion of which are made to retailers and through distributors, and if our
distributors, and, retailers are not successful in this market, we could experience substantial
product returns, which would negatively impact our business, financial condition and results of
operations.
 Our average selling prices, net of promotions, may decline due to excess supply, competitive
pricing pressures and strategic price reductions initiated by us or our competitors.
 Our revenue depends in part on the success of products sold by our OEM customers.
 The continued growth of our business depends on the development of new markets and products
for NAND flash memory and continued elasticity in our existing markets.
 43




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We continually seek to develop new applications, products, technologies and standards, which
may not be widely adopted by
consumers or, if adopted, may reduce demand by consumers for our older products.
 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.
   micro 
 44




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
    
    price, quality and on-time delivery to our customers;
    
    product performance, availability and differentiation;
    
    success in developing new applications and new market segments;
    
    sufficient availability of supply;
    
    efficiency of production;
    
    timing of new product announcements or introductions by us, our customers and our competitors;
    
    the ability of our competitors to incorporate standards or develop formats which we do not offer;
    
    the number and nature of our competitors in a given market;
    
    successful protection of intellectual property rights; and
    
    general market and economic conditions.
  The semiconductor industry is subject to significant downturns that have harmed our business,
financial condition and results of operations in the past and may do so in the future.
 Our business and the markets we address are subject to significant fluctuations in supply and
demand and our commitments to our ventures with Toshiba may result in losses.
 45




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We depend on third-party foundries for silicon supply and any shortage or disruption in our
supply from these sources will reduce our revenues, earnings and gross margins.
 Our actual manufacturing yields may be lower than our expectations resulting in increased
costs and product shortages.
 We depend on our third-party subcontractors and our business could be harmed if our
subcontractors do not perform as planned.
 In transitioning to new processes, products and silicon sources, we face production and market
acceptance risks that have caused, and may in the future cause significant product delays that
could harm our business.
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Our products may contain errors or defects, which could result in the rejection of our
products, product recalls, damage to our reputation, lost revenues, diverted development resources
and increased service costs and warranty claims and litigation.
  We and Toshiba plan to continue to expand the wafer fabrication capacity of the Flash Partners
business venture as well as start a new venture, Flash Alliance, and as we do so, we will make
substantial capital investments and incur substantial start-up and tool relocation costs, which
could adversely impact our operating results.
 There is no assurance that Flash Partners 300-millimeter NAND flash memory facility will
perform as expected, in particular as we transition to new lithography feature sizes.
 We have a contingent indemnification obligation for certain liabilities Toshiba incurs as a
result of Toshibas guarantee of the FlashVision equipment lease arrangement and have environmental
and intellectual property indemnification as well as guarantee obligations with respect to Flash
Partners.
 47




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Seasonality in our business may result in our inability to accurately forecast our product
purchase requirements.
 From time-to-time, we overestimate our requirements and build excess inventory, and
underestimate our requirements and have a shortage of supply, both of which harm our financial
results.
   We are sole sourced for a number of our critical components and the absence of a back-up
supplier exposes our supply chain to unanticipated disruptions.
 48




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We are exposed to foreign currency risks.
 Terrorist attacks, war, threats of war and government responses thereto may negatively impact
our operations, revenues, costs and stock price.
 Natural disasters or epidemics in the countries in which we or our suppliers or subcontractors
operate could negatively impact our operations.
 We may be unable to protect our intellectual property rights, which would harm our business,
financial condition and results of operations.
 
    
    any of our existing patents will not be invalidated;
    
    patents will be issued for any of our pending applications;
    
    any claims allowed from existing or pending patents will have sufficient scope or strength;
    
    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.
   49




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We may be unable to license intellectual property to or from third parties as needed, or renew
existing licenses, which could expose us to liability for damages, increase our costs or limit or
prohibit us from selling products.
 We are currently and may in the future be involved in litigation, including litigation
regarding our intellectual property rights or those of third parties, which may be costly, may
divert the efforts of our key personnel and could result in adverse court rulings which could
materially harm our business.
    Because of our international business and operations, we must comply with numerous
international laws and regulations, and we are vulnerable to political instability, currency
fluctuations and other risks related to international operations.
  50




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
    
    the need to comply with foreign government regulation;
    
    general geopolitical risks such as political and economic instability, potential
hostilities and changes in diplomatic and trade relationships;
    
    natural disasters affecting the countries in which we conduct our business, particularly
Japan, such as the earthquakes experienced in Taiwan in 1999, in Japan in 2004, 2003 and
previous years, and in China in previous years;
    
    reduced sales to our customers or interruption to our manufacturing processes in the
Pacific Rim that may arise from regional issues in Asia;
    
    imposition of regulatory requirements, tariffs, import and export restrictions and other barriers and restrictions;
    
    imposition of additional duties, charges and/or fees related to customs entries for our products, which are all
manufactured offshore;
    
    inability to successfully manage our foreign exchange exposures;
    
    longer payment cycles and greater difficulty in accounts receivable collection;
    
    adverse tax rules and regulations;
    
    weak protection of our intellectual property rights; and
    
    delays in product shipments due to local customs restrictions.
 Tower Semiconductors Financial Situation is Challenging.
  Our stock price has been, and may continue to be, volatile, which could result in investors
losing all or part of their
 51




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investments.
 We may make acquisitions that are dilutive to existing stockholders, result in
unanticipated accounting charges or otherwise adversely affect our results of operations,
and result in difficulties in assimilating and integrating the operations, personnel,
technologies, products and information systems of acquired companies or businesses.
   Our success depends on key personnel, including our executive officers, the loss of who could
disrupt our business.
 To manage our growth, we may need to improve our systems, controls and procedures and relocate
portions of our business to new or larger facilities.
 52




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We may raise additional financing, which could be difficult to obtain, and which if not
obtained in satisfactory amounts may prevent us from funding the ventures with Toshiba, increasing
our wafer supply, developing or enhancing our products, taking advantage of future opportunities,
growing our business or responding to competitive pressures or unanticipated industry changes, any
of which could harm our business.
 Anti-takeover provisions in our charter documents, stockholder rights plan and in Delaware law
could discourage or delay a change in control and, as a result, negatively impact our stockholders.
 Unanticipated changes in our tax provisions or exposure to additional income tax liabilities
could affect our profitability.
 Changes in securities laws and regulations have increased our costs; further, in the event we
are unable to satisfy regulatory requirements relating to internal control, or if our internal
control over financial reporting is not effective, our business could suffer.
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We may experience significant fluctuations in our stock price, which may, in turn, significantly
affect the trading price of our convertible notes.
 We have significant financial obligations related to our ventures with Toshiba which could
impact our ability to comply with our obligations under the notes.
 Our debt service obligations may adversely affect our cash flow.
  
    
    increase our vulnerability to general adverse economic and industry conditions;
    
    limit our ability to obtain additional financing;
    
    require the dedication of a substantial portion of any cash flow from operations to the
payment of principal of, and interest on, our indebtedness, thereby reducing the
availability of such cash flow to fund our growth strategy, working capital, capital
expenditures and other general corporate purposes;
    
    limit our flexibility in planning for, or reacting to, changes in our business and our industry; and
 54




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
    
    place us at a competitive disadvantage relative to our competitors with less debt.
 The 1% Notes  rank junior in right of payment to any future secured debt and the
liabilities of our subsidiaries.
  The net share settlement feature of the1% Notes may have adverse consequences.
  We may be unable to repurchase 1% Notes upon the occurrence of a designated event; a
designated event may adversely affect us or the 1% Notes.
  The convertible note hedge transactions and the warrant option transactions may affect the
value of the notes and our common stock.
 55




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
    
    have entered into various over-the-counter cash-settled derivative transactions with
respect to our common stock, concurrently with, and shortly after, the pricing of the
notes; and
    
    may enter into, or may unwind, various over-the-counter derivatives and/or purchase
or sell our common stock in secondary market transactions following the pricing of the
notes, including during any observation period related to a conversion of notes.
   There are numerous risks associated with our recent entry into an agreement to acquire
msystems.
 All conditions to the merger may not be completed and the merger may not be consummated.
 Completion of the merger may result in the dilution of our per share operating results.
 Although we expect that the merger will result in benefits to us, those benefits may not occur
because of integration and other challenges.
 
    
    incorporating msystems technology and products into our business and future product lines;
    
    continuing to effectively sell msystems products through msystems OEM distribution channels;
 56




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
    
    integrating msystems sales force into our worldwide product sales and distribution network;
    
    demonstrating to msystems customers that the merger will not result in adverse changes in
customer service standards or product support;
    
    coordinating research and development activities to enhance introduction of new products and technologies;
    
    integrating msystems internal control over financial reporting with our internal control over financial reporting;
    
    migrating both companies to a common enterprise resource planning information system to
integrate all operations, sales and administrative activities for the combined companies in
a timely and cost effective way;
    
    integrating msystems international operations with ours;
    
    potentially incurring impairment charges to write down the carrying amount of intangible
assets generated as a result of the merger;
    
    potentially having to reevaluate the accounting classification for our FlashVision, Flash
Partners and Flash Alliance ventures with Toshiba in order to consolidate the financial
results of these ventures, which could have an adverse effect on our consolidated financial
position and results of operations;
    
    persuading the employees of both companies that the companies business cultures are compatible;
    
    maintaining employee morale and retaining key employees; and
    
    ensuring there are no delays in releasing new products to market.
   The acquisition may result in a loss of customers.
 Third parties may terminate or alter existing contracts or relationships with msystems or us.
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General uncertainty related to the merger could harm the combined company.
  There are risks related to msystems prior option grant practices.
  58




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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  Votes For
    
    Votes WithheldIrwin Federman
    
    
    164,084,462
    
    
    
    2,557,323Dr. Eli Harari
    
    
    164,037,397
    
    
    
    2,604,388Steven J. Gomo
    
    
    165,539,770
    
    
    
    1,102,015Eddy W. Hartenstein
    
    
    165,535,073
    
    
    
    1,106,712Catherine P. Lego
    
    
    165,552,475
    
    
    
    1,089,310Michael E. Marks
    
    
    162,432,540
    
    
    
    4,209,245Dr. James D. Meindl
    
    
    161,752,610
    
    
    
    4,889,175
  Shares
    
    Shares
    
    SharesVoted For
    
    Voted Against
    
    Abstaining
    
    Not VotedApprove
amendments to the
SanDisk Corporation
2005 Incentive Plan.
    
    
    79,360,033
    
    
    
    53,393,198
    
    
    
    260,715
    
    
    
    34,441,551Approve an
amendment to the
SanDisk
Corporations
Certificate of
Incorporation,
increasing the
authorized Common
Stock from
400,000,000 shares
to 800,000,000
shares
    
    
    144,047,864
    
    
    
    22,456,040
    
    
    
    137,881
    
    
    
    813,712Ratify the
appointment of
Ernst & Young LLP
as the Companys
independent
registered public
accounting firm for
the fiscal year
ending December 31,
2006
    
    
    164,555,483
    
    
    
    1,991,648
    
    
    
    94,654
    
    
    
    813,712
 
 Item 5.Other Information
  59




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Item 6. Exhibits
 ExhibitNumber
    
    Exhibit Title2.1
    
    Agreement and Plan of Merger, dated as of October 20, 2005, by and among SanDisk Corporation, Mike
Acquisition Company LLC, Matrix Semiconductor, Inc. and Bruce Dunlevie as the stockholder
representative for the stockholders of Matrix Semiconductor, Inc.(1)3.1
    
    Restated Certificate of Incorporation of the Registrant.(2)3.2
    
    Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant dated
December 9, 1999.(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
    
    Restated Bylaws of the Registrant, as amended to date.(6)3.6
    
    Certificate of Designations for the Series A Junior Participating Preferred Stock, as filed with
the Delaware Secretary of State on July 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)4.1
    
    Reference is made to Exhibits 3.1,
3.2 and 3.3.(2), (3), (4)4.2
    
    Rights Agreement, dated as of September 15, 2003, between the Registrant and Computershare Trust
Company, Inc.(8)10.1
    
    Guarantee Agreement, dated as of June 20, 2006, by and between the Registrant, IBJ Leasing Co.,
Ltd., Sumisho Lease Co., Ltd. and Toshiba Finance Corporation.(*)10.2
    
    Basic Lease Contract, dated as of June 20, 2006, by and between Flash Partners Yuken Kaisha,
IBJ Leasing Co., Ltd., Sumisho Lease Co., Ltd. and Toshiba Finance Corporation.(*), (+)10.3
    
    Sublease (Building 3), dated
as of December 21, 2005 by and between Maxtor Corporation and the
Registrant. (*)10.4
    
    Sublease (Building 4), dated
as of December 21, 2005 by and between Maxtor Corporation and the
Registrant. (*)10.5
    
    Sublease (Building 6), dated
as of December 21, 2005 by and between Maxtor Corporation and the
Registrant. (*)10.6
    
    Amendment  No. 2 to Indemnification
and Reimbursement Agreement, dated as of May 29, 2006, by and between
the Registrant and Toshiba Corporation. (*)10.7
    
    Amended and Restated SanDisk Corporation 2005 Incentive
Plan.(*)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.+ Confidential treatment has been requested with respect to certain portions hereof.(1)
    
    Previously filed as an Exhibit to the Registrants Current Report on Form 8-K filed with
the SEC on January 20, 2006.(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 Current Report on Form 8-K filed with
the SEC on June 1, 2006.(6)
    
    Previously filed as an Exhibit to the Registrants Current Report on Form 8-K filed with
the SEC on April 10, 2006.(7)
    
    Previously filed as an Exhibit to the Registrants
Current Report on Form 8-K/A filed with the SEC on May 16,
1997.(8)
    
    Previously filed as an Exhibit to the Registrants Registration Statement on Form 8-A
dated September 25, 2003. 60




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##### Table of Contents



SIGNATURES
  SANDISK CORPORATION
(Registrant)Dated: August 10, 2006
    By:
    /s/  JUDY BRUNERJudy BrunerExecutive Vice President, Administration and

Chief Financial Officer

(On behalf of the Registrant and as Principal

Financial and Accounting Officer) 61




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##### Table of Contents



ExhibitNumber
    
    Exhibit Title2.1
    
    Agreement and Plan of Merger, dated as of October 20, 2005, by and among SanDisk Corporation, MikeAcquisition Company LLC, Matrix Semiconductor, Inc. and Bruce Dunlevie as the stockholderrepresentative for the stockholders of Matrix Semiconductor, Inc.(1)3.1
    
    Restated Certificate of Incorporation of the Registrant.(2)3.2
    
    Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant datedDecember 9, 1999.(3)3.3
    
    Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant dated May11, 2000.(4)3.4
    
    Certificate of Amendment to the Amended and Restated Certificate of Incorporation of theRegistrant dated May 26, 2006.(5)3.5
    
    Restated Bylaws of the Registrant, as amended to date.(6)3.6
    
    Certificate of Designations for the Series A Junior Participating Preferred Stock, as filed withthe Delaware Secretary of State on July 24, 1997.(7)3.7
    
    Amendment to Certificate of Designations for the Series A Junior Participating Preferred Stock, asfiled with the Delaware Secretary of State on September 24, 2003.(8)4.1
    
    Reference is made to Exhibits 3.1,
3.2 and 3.3.(2), (3), (4)4.2
    
    Rights Agreement, dated as of September 15, 2003, between the Registrant and Computershare TrustCompany, Inc.(8)10.1
    
    Guarantee Agreement, dated as of June 20, 2006, by and between the Registrant, IBJ Leasing Co.,Ltd., Sumisho Lease Co., Ltd. and Toshiba Finance Corporation.(*)10.2
    
    Basic Lease Contract, dated as of June 20, 2006, by and between Flash Partners Yuken Kaisha,IBJ Leasing Co., Ltd., Sumisho Lease Co., Ltd. and Toshiba Finance Corporation.(*), (+)10.3
    
    Sublease (Building 3), dated
as of December 21, 2005 by and between Maxtor Corporation and the Registrant.(*)10.4
    
    Sublease (Building 4), dated
as of December 21, 2005 by and between Maxtor Corporation and the Registrant.(*)10.5
    
    Sublease (Building 6), dated
as of December 21, 2005 by and between Maxtor Corporation and the Registrant.(*)10.6
    
    Amendment No. 2 to Indemnification
and Reimbursement Agreement, dated as of May 29, 2006, by and between
the Registrant and Toshiba Corporation.(*)10.7
    
    Amended and Restated SanDisk Corporation 2005 Incentive
Plan.(*)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 pursuantto 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 pursuantto Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *Filed herewith.+ Confidential treatment has been requested with respect to certain portions hereof.(1)
    
    Previously filed as an Exhibit to the Registrants Current Report on Form 8-K filed with
the SEC on January 20, 2006.(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 Current Report on Form 8-K filed with
the SEC on June 1, 2006.(6)
    
    Previously filed as an Exhibit to the Registrants Current Report on Form 8-K filed with
the SEC on April 10, 2006.(7)
    
    Previously filed as an Exhibit to the Registrants Current Report on Form 8-K/A filed with the SEC on May 16, 1997.(8)
    
    Previously filed as an Exhibit to the Registrants Registration Statement on Form 8-A
dated September 25, 2003. 62