##### Table of Contents



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 October 1, 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 October 1, 2006 and January 1, 2006
    
    
    3Condensed Consolidated Statements of Income for the three and nine months ended
October 1, 2006 and October 2, 2005
    
    
    4Condensed Consolidated Statements of Cash Flows for the nine months ended October 1,
2006 and October 2, 2005
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    34Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    44Item 4.
    
    Controls and Procedures
    
    
    44PART II. OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    45Item 1A.
    
    Risk Factors
    
    
    49Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    67Item 3.
    
    Defaults upon Senior Securities
    
    
    67Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    67Item 5.
    
    Other Information
    
    
    67Item 6.
    
    Exhibits
    
    
    68Signatures
    
    
    70Exhibit Index
    
    
    71EXHIBIT 10.1EXHIBIT 10.2EXHIBIT 10.3EXHIBIT 10.4EXHIBIT 10.5EXHIBIT 10.6EXHIBIT 10.8EXHIBIT 10.9EXHIBIT 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
 October 1, 2006
    
    
    January 1, 2006*(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    1,474,155
    
    
    $
    762,058Short-term investments
    
    
    1,077,257
    
    
    
    935,639Accounts receivable, net
    
    
    304,934
    
    
    
    329,014Inventories
    
    
    396,220
    
    
    
    331,584Deferred taxes
    
    
    99,610
    
    
    
    95,518Other current assets
    
    
    80,814
    
    
    
    121,922Total current assets
    
    
    3,432,990
    
    
    
    2,575,735Long-term investments
    
    
    419,916
    
    
    
    Property and equipment, net
    
    
    256,437
    
    
    
    211,092Notes receivable and investments in flash ventures
    
    
    480,868
    
    
    
    265,074Deferred tax asset
    
    
    150,114
    
    
    
    Goodwill
    
    
    160,681
    
    
    
    5,415Intangibles, net
    
    
    92,299
    
    
    
    4,608Other non-current assets
    
    
    57,450
    
    
    
    58,263Total assets
    
    $
    5,050,755
    
    
    $
    3,120,187LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    147,009
    
    
    $
    231,208Accounts payable to related parties
    
    
    100,852
    
    
    
    74,121Other accrued liabilities
    
    
    169,714
    
    
    
    115,525Deferred income on shipments to distributors
and retailers and deferred revenue
    
    
    133,079
    
    
    
    150,283Total current liabilities
    
    
    550,654
    
    
    
    571,137Convertible senior notes
    
    
    1,150,000
    
    
    
    Deferred revenue and other non-current liabilities
    
    
    36,729
    
    
    
    25,259Total liabilities
    
    
    1,737,383
    
    
    
    596,396Commitments and contingenciesStockholders equity:Preferred stock
    
    
    
    
    
    
    Common stock
    
    
    197
    
    
    
    188Capital in excess of par value
    
    
    2,166,309
    
    
    
    1,621,819Retained earnings
    
    
    1,140,661
    
    
    
    906,624Accumulated other comprehensive income
    
    
    6,205
    
    
    
    2,635Deferred compensation
    
    
    
    
    
    
    (7,475
    )Total stockholders equity
    
    
    3,313,372
    
    
    
    2,523,791Total liabilities and stockholders equity
    
    $
    5,050,755
    
    
    $
    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
    
    
    Nine months endedOctober 1, 2006
    
    
    October 2, 2005
    
    
    October 1, 2006
    
    
    October 2, 2005(In thousands, except per share amounts)Revenues:Product
    
    $
    673,189
    
    
    $
    529,735
    
    
    $
    1,847,592
    
    
    $
    1,383,176License and royalty
    
    
    78,196
    
    
    
    59,896
    
    
    
    246,238
    
    
    
    172,326Total revenues
    
    
    751,385
    
    
    
    589,631
    
    
    
    2,093,830
    
    
    
    1,555,502Cost of product revenues
    
    
    455,345
    
    
    
    332,847
    
    
    
    1,270,389
    
    
    
    884,832Gross profit
    
    
    296,040
    
    
    
    256,784
    
    
    
    823,441
    
    
    
    670,670Operating expenses:Research and development
    
    
    78,073
    
    
    
    43,420
    
    
    
    215,620
    
    
    
    150,771Sales and marketing
    
    
    44,961
    
    
    
    31,610
    
    
    
    133,403
    
    
    
    83,241General and administrative
    
    
    40,247
    
    
    
    23,186
    
    
    
    107,445
    
    
    
    58,527Write-off of acquired in-process technology
    
    
    
    
    
    
    
    
    
    
    39,600
    
    
    
    Amortization of acquisition-related intangible assets
    
    
    4,432
    
    
    
    
    
    
    
    12,579
    
    
    
    Total operating expenses
    
    
    167,713
    
    
    
    98,216
    
    
    
    508,647
    
    
    
    292,539Operating income
    
    
    128,327
    
    
    
    158,568
    
    
    
    314,794
    
    
    
    378,131Equity in income (loss) of business ventures
    
    
    389
    
    
    
    14
    
    
    
    751
    
    
    
    (41
    )Interest income
    
    
    29,943
    
    
    
    11,128
    
    
    
    68,462
    
    
    
    28,822Gain (loss) on investment in foundries
    
    
    1,600
    
    
    
    468
    
    
    
    3,854
    
    
    
    (8,785
    )Interest expense and other income (expense), net
    
    
    291
    
    
    
    389
    
    
    
    (367
    )
    
    
    2,618Total other income
    
    
    32,223
    
    
    
    11,999
    
    
    
    72,700
    
    
    
    22,614Income before taxes
    
    
    160,550
    
    
    
    170,567
    
    
    
    387,494
    
    
    
    400,745Provision for income taxes
    
    
    57,269
    
    
    
    63,109
    
    
    
    153,457
    
    
    
    148,275Net income
    
    $
    103,281
    
    
    $
    107,458
    
    
    $
    234,037
    
    
    $
    252,470Net income per share:Basic
    
    $
    0.53
    
    
    $
    0.59
    
    
    $
    1.20
    
    
    $
    1.39Diluted
    
    $
    0.51
    
    
    $
    0.55
    
    
    $
    1.15
    
    
    $
    1.32Shares used in computing net income per share:Basic
    
    
    196,317
    
    
    
    183,047
    
    
    
    194,974
    
    
    
    181,716Diluted
    
    
    202,747
    
    
    
    194,321
    
    
    
    202,660
    
    
    
    191,527
 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)
 Nine months endedOctober 1, 2006
    
    
    October 2, 2005(In thousands)Cash flows from operating activities:Net income
    
    $
    234,037
    
    
    $
    252,470Adjustments to reconcile net income to net cash provided by operating
activities:Deferred taxes
    
    
    (24,021
    )
    
    
    (194
    )(Gain) loss on investment in foundries
    
    
    (1,364
    )
    
    
    8,752Depreciation and amortization
    
    
    89,709
    
    
    
    46,906Provision for doubtful accounts
    
    
    2,760
    
    
    
    (111
    )Share-based compensation expense
    
    
    69,848
    
    
    
    1,591Tax benefit from share-based compensation
    
    
    (64,080
    )
    
    
    Write-off of acquired in-process technology
    
    
    39,600
    
    
    
    Other non-cash charges
    
    
    3,201
    
    
    
    9,468Changes in operating assets and liabilities:Accounts receivable
    
    
    28,276
    
    
    
    (16,573
    )Inventories
    
    
    (57,765
    )
    
    
    (90,456
    )Other assets
    
    
    47,108
    
    
    
    32,737Accounts payable trade
    
    
    (88,363
    )
    
    
    61,342Accounts payable, related parties
    
    
    28,380
    
    
    
    16,355Other liabilities
    
    
    95,837
    
    
    
    79,697Net cash provided by operating activities
    
    
    403,163
    
    
    
    401,984Cash flows from investing activities:Purchases of short and long-term investments
    
    
    (1,438,195
    )
    
    
    (491,282
    )Proceeds from sale and maturities of short and long-term investments
    
    
    881,772
    
    
    
    455,758Investment in Flash Partners and Flash Alliance
    
    
    (132,209
    )
    
    
    Acquisition of property and equipment, net
    
    
    (123,443
    )
    
    
    (80,500
    )Notes receivable from FlashVision
    
    
    8,524
    
    
    
    (34,249
    )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
    
    
    (889,564
    )
    
    
    (150,273
    )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
    
    
    86,108
    
    
    
    48,243Tax benefit from share-based compensation
    
    
    64,080
    
    
    
    Net cash provided by financing activities
    
    
    1,198,270
    
    
    
    48,243Effect of changes in foreign currency exchange rates on cash
    
    
    228
    
    
    
    863Net increase in cash and cash equivalents
    
    
    712,097
    
    
    
    300,817Cash and cash equivalents at beginning of the year
    
    
    762,058
    
    
    
    463,795Cash and
cash equivalents at end of the nine months ended October 1, 2006
    
    $
    1,474,155
    
    
    $
    764,612Supplemental 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. Share-Based Compensation
 Share-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
    
    Nine months endedOctober 1, 2006
    
    October 2, 2005
    
    October 1, 2006
    
    October 2, 2005Dividend yield
    
    None
    
    None
    
    None
    
    NoneExpected volatility
    
    
    0.50
    
    
    
    0.47
    
    
    
    0.53
    
    
    
    0.53Risk-free interest rate
    
    
    4.85
    %
    
    
    4.02
    %
    
    
    4.63
    %
    
    
    3.90
    %Expected lives
    
    3.3 years
    
    4.2 years
    
    3.8 years
    
    4.6 yearsWeighted average fair value at grant date
    
    $
    20.34
    
    
    $
    16.70
    
    
    $
    26.70
    
    
    $
    12.33
  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
    
    
    5,536
    
    
    
    56.20Exercised
    
    
    (4,414
    )
    
    
    17.41Forfeited
    
    
    (682
    )
    
    
    40.83Expired
    
    
    (7
    )
    
    
    48.09Options outstanding at October 1, 2006
    
    
    20,749
    
    
    
    31.06
    
    
    
    6.5
    
    
    $
    502,031Options vested and expected to vest after
October 1, 2006
    
    
    19,640
    
    
    
    30.22
    
    
    
    6.5
    
    
    $
    489,475Options exercisable at October 1, 2006
    
    
    9,059
    
    
    $
    17.39
    
    
    
    5.8
    
    
    $
    328,108
 8




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
  Restricted Stock
   WeightedAverage Grant
    
    
    AggregateShares
    
    
    Date Fair Value
    
    
    Intrinsic ValueNon-vested share units at January 1, 2006
    
    
    105,188
    
    
    $
    42.19Granted
    
    
    646,632
    
    
    
    61.15Vested
    
    
    (81,547
    )
    
    
    51.31Forfeited
    
    
    (27,411
    )
    
    
    70.71Non-vested share units at October 1, 2006
    
    
    642,862
    
    
    $
    58.49
    
    
    $
    34,418,831
  Employee Stock Purchase Plans (ESPP)
  Three months ended
    
    Nine months endedOctober 1, 2006
    
    October 2, 2005
    
    October 1, 2006
    
    October 2, 2005Dividend
yield
    
    None
    
    None
    
    None
    
    NoneExpected volatility
    
    
    0.51
    
    
    
    0.37
    
    
    
    0.52
    
    
    
    0.40Risk-free interest rate
    
    
    5.18
    %
    
    
    3.73
    %
    
    
    4.96
    %
    
    
    3.16
    %Expected lives
    
    1/2 year
    
    1/2 year
    
    1/2 year
    
    1/2 yearWeighted average fair value at exercise date
    
    $
    13.73
    
    
    $
    8.78
    
    
    $
    16.73
    
    
    $
    7.58
  9




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 Share-Based Compensation Expense
  Three months ended
    
    
    Nine months endedOctober 1, 2006
    
    
    October 1, 2006(In thousands)Share-based compensation expense by caption:Cost of product sales
    
    $
    2,621
    
    
    $
    5,098Research and development
    
    
    10,269
    
    
    
    29,476Sales and marketing
    
    
    4,623
    
    
    
    13,788General and administrative
    
    
    7,679
    
    
    
    21,486Total share-based compensation expense
    
    $
    25,192
    
    
    $
    69,848Share-based compensation expense by type of award:Stock options
    
    $
    21,262
    
    
    $
    59,010Restricted stock
    
    
    2,888
    
    
    
    8,127ESPP
    
    
    1,042
    
    
    
    2,711Total share-based compensation expense
    
    $
    25,192
    
    
    $
    69,848
  Accounting for Stock-Based Compensation
 Three months ended
    
    
    Nine months endedOctober 2, 2005
    
    
    October 2, 2005(In thousands, except per share amounts)Net income, as reported
    
    $
    107,458
    
    
    $
    252,470Fair value method expense, net of related tax
    
    
    (10,268
    )
    
    
    (30,975
    )Pro forma net income
    
    $
    97,190
    
    
    $
    221,495Earnings per share as reported:Basic
    
    $
    0.59
    
    
    $
    1.39Diluted
    
    $
    0.55
    
    
    $
    1.32Pro forma earnings per share:Basic
    
    $
    0.53
    
    
    $
    1.22Diluted
    
    $
    0.50
    
    
    $
    1.16
  10




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 3. Warranty
  Three months ended
    
    
    Nine months endedOctober 1, 2006
    
    
    October 2, 2005
    
    
    October 1, 2006
    
    
    October 2, 2005Balance, beginning of period
    
    $
    9,661
    
    
    $
    11,725
    
    
    $
    11,258
    
    
    $
    11,380Additions (reductions) to costs of product revenue
    
    
    1,836
    
    
    
    (534
    )
    
    
    627
    
    
    
    3,954Usage
    
    
    (924
    )
    
    
    (521
    )
    
    
    (1,312
    )
    
    
    (4,664
    )Balance, end of period
    
    $
    10,573
    
    
    $
    10,670
    
    
    $
    10,573
    
    
    $
    10,670
  11




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 4. Balance Sheet Detail
 Inventories
  October 1, 2006
    
    
    January 1, 2006Raw material
    
    $
    158,776
    
    
    $
    99,006Work-in-process
    
    
    87,067
    
    
    
    61,900Finished goods
    
    
    150,377
    
    
    
    170,678Total inventories
    
    $
    396,220
    
    
    $
    331,584
  Notes Receivables and Investments in Flash Ventures
  October 1, 2006
    
    
    January 1, 2006Notes receivable, FlashVision
    
    $
    53,385
    
    
    $
    61,927Notes receivable, Flash Partners
    
    
    93,212
    
    
    
    Investment in FlashVision
    
    
    160,557
    
    
    
    161,080Investment in Flash Partners
    
    
    169,411
    
    
    
    42,067Investment in Flash Alliance
    
    
    4,303
    
    
    
    Total notes receivable and investments in flash ventures
    
    $
    480,868
    
    
    $
    265,074
 Other Non-current Assets
  October 1, 2006
    
    
    January 1, 2006Investment in foundries
    
    $
    15,323
    
    
    $
    11,013Deposits
    
    
    6,457
    
    
    
    4,709Other non-current assets
    
    
    35,670
    
    
    
    42,541Total other non-current assets
    
    $
    57,450
    
    
    $
    58,263
 Other Accrued Liabilities
  October 1, 2006
    
    
    January 1, 2006Accrued payroll and related expenses
    
    $
    54,127
    
    
    $
    55,614Income taxes payable
    
    
    36,497
    
    
    
    2,165Research and development liability, related party
    
    
    5,850
    
    
    
    4,200Other accrued liabilities
    
    
    73,240
    
    
    
    53,546Total other accrued liabilities
    
    $
    169,714
    
    
    $
    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
    
    
    36Goodwill acquired (Note 11)
    
    
    155,230Balance at October 1, 2006
    
    $
    160,681
 Goodwill
and Other Intangible Assets
 Other Intangible Assets
  October 1, 2006
    
    
    January 1, 2006Gross Carrying
    
    
    Accumulated
    
    
    Net Carrying
    
    
    Gross Carrying
    
    
    Accumulated
    
    
    Net CarryingAmount
    
    
    Amortization
    
    
    Amount
    
    
    Amount
    
    
    Amortization
    
    
    AmountCore technology
    
    $
    76,300
    
    
    $
    (7,721
    )
    
    $
    68,579
    
    
    $
    
    
    
    $
    
    
    
    $
    Developed product
technology
    
    
    12,900
    
    
    
    (2,070
    )
    
    
    10,830
    
    
    
    1,500
    
    
    
    (542
    )
    
    
    958Customer relationships
    
    
    14,100
    
    
    
    (3,329
    )
    
    
    10,771
    
    
    
    
    
    
    
    
    
    
    
    Acquisition-related
intangible assets
    
    
    103,300
    
    
    
    (13,120
    )
    
    
    90,180
    
    
    
    1,500
    
    
    
    (542
    )
    
    
    958Technology licenses
    
    
    7,389
    
    
    
    (5,270
    )
    
    
    2,119
    
    
    
    7,389
    
    
    
    (3,739
    )
    
    
    3,650Total
    
    $
    110,689
    
    
    $
    (18,390
    )
    
    $
    92,299
    
    
    $
    8,889
    
    
    $
    (4,281
    )
    
    $
    4,608
   Estimated Amortization ExpensesAcquisition-RelatedIntangibleAssets
    
    

TechnologyLicense(In thousands)Fiscal periods:2006 (remaining three months)
    
    $
    4,432
    
    
    $
    5912007
    
    
    17,687
    
    
    
    9032008
    
    
    17,229
    
    
    
    6252009
    
    
    12,724
    
    
    
    2010
    
    
    12,529
    
    
    
    2011 and thereafter
    
    
    25,579
    
    
    
    Total
    
    $
    90,180
    
    
    $
    2,119
 13




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 6. Accumulated Other Comprehensive Income
  October 1, 2006
    
    
    January 1, 2006(In thousands)Accumulated net unrealized gain (loss) on:Available-for-sale investments
    
    $
    (543
    )
    
    $
    (4,233
    )Available-for-sale investments in foundries
    
    
    807
    
    
    
    (383
    )Foreign currency translation
    
    
    5,941
    
    
    
    7,251Total accumulated other comprehensive income
    
    $
    6,205
    
    
    $
    2,635
  Three months ended
    
    
    Nine months endedOctober 1, 2006
    
    
    October 2, 2005
    
    
    October 1, 2006
    
    
    October 2, 2005(In thousands)Net income
    
    $
    103,281
    
    
    $
    107,458
    
    
    $
    234,037
    
    
    $
    252,470Unrealized income (loss)
on available-for-sale
investment in foundries
    
    
    (1,025
    )
    
    
    32
    
    
    
    1,190
    
    
    
    1,245Unrealized income (loss)
on available-for-sale
investments
    
    
    2,365
    
    
    
    (688
    )
    
    
    3,690
    
    
    
    (1,706
    )Currency translation (loss)
    
    
    (6,109
    )
    
    
    (1,478
    )
    
    
    (1,310
    )
    
    
    (9,510
    )Comprehensive net income
    
    $
    98,512
    
    
    $
    105,324
    
    
    $
    237,607
    
    
    $
    242,499
 14




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 7. Net Income Per Share
  Three months ended
    
    
    Nine months endedOctober 1, 2006
    
    
    October 2, 2005
    
    
    October 1, 2006
    
    
    October 2, 2005Numerator for basic net income per share:Net income, as reported
    
    $
    103,281
    
    
    $
    107,458
    
    
    $
    234,037
    
    
    $
    252,470Denominator for basic net income per share:Weighted average common shares outstanding
    
    
    196,317
    
    
    
    183,047
    
    
    
    194,974
    
    
    
    181,716Basic net income per share
    
    $
    0.53
    
    
    $
    0.59
    
    
    $
    1.20
    
    
    $
    1.39Numerator for diluted net income per share:Net income, as reported
    
    $
    103,281
    
    
    $
    107,458
    
    
    $
    234,037
    
    
    $
    252,470Denominator for basic net income per share:Weighted average common shares outstanding
    
    
    196,317
    
    
    
    183,047
    
    
    
    194,974
    
    
    
    181,716Effect of dilutive options and restricted stock
    
    
    6,430
    
    
    
    11,274
    
    
    
    7,686
    
    
    
    9,811Shares used in computing diluted net income
per share
    
    
    202,747
    
    
    
    194,321
    
    
    
    202,660
    
    
    
    191,527Diluted net income per share
    
    $
    0.51
    
    
    $
    0.55
    
    
    $
    1.15
    
    
    $
    1.32Anti-dilutive shares excluded from net income per
share calculation
    
    
    34,478
    
    
    
    468
    
    
    
    32,679
    
    
    
    5,629
   15




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 8. Financing Arrangements
  October 1, 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
 16




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 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. 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 October 1, 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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##### Table of Contents



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




---



##### 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
  Master Lease Agreements by Execution Date
    
    Lease Amounts(1)
    
    
    Expiration(Yen in billions)
    
    
    (Dollars in millions)FlashVisionJune 2006
    
    ¥
    6.6
    
    
    $
    56
    
    
    
    2009Flash PartnersDecember 2004
    
    
    20.5
    
    
    
    174
    
    
    
    2010December 2005
    
    
    15.8
    
    
    
    134
    
    
    
    2011June 2006
    
    
    15.2
    
    
    
    129
    
    
    
    2011September 2006 (2)
    
    
    
    
    
    
    
    
    
    
    2011Total Flash Partners
    
    
    51.5
    
    
    
    437Total indemnification or guarantee obligation
    
    ¥
    58.1
    
    
    $
    493
 
 (1)
    
    The maximum amount of the Companys contingent indemnification or guarantee
obligation, net of payments and any lease adjustments.(2)
    
    In September 2006, Flash Partners entered into a master equipment lease agreement
providing for up to 98.0 billion Japanese yen, or approximately $830 million based upon the
exchange rate at October 1, 2006, of original lease obligations. On October 10, 2006, Flash
Partners utilized approximately 46.0 billion Japanese yen, or approximately $390 million
based upon the exchange rate at October 1, 2006 of the amount
provided under this lease line. The Companys guarantee
for half of this latest 46.0 billion Japanese yen draw-down was 23.0 billion Japanese yen, or
approximately $195 million based upon the exchange rate at October 1, 2006. See Note 14,
Subsequent Events. FlashVision.
 Flash Partners.
 20




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




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##### Table of Contents



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
    
    
    (3 months 2006)
    
    
    and 2008)
    
    
    and 2010)
    
    
    Fiscal 2010)Operating leases
    
    $
    40,453
    
    
    $
    1,572
    
    
    $
    11,129
    
    
    $
    10,583
    
    
    $
    17,169FlashVision, fabrication capacity
expansion costs, and reimbursement for
certain other costs including
depreciation
    
    
    230,678
    (4)
    
    
    23,140
    
    
    
    137,614
    
    
    
    67,129
    
    
    
    2,795Flash Partners fabrication capacity
expansion and reimbursement for
certain other costs including
depreciation (1)
    
    
    2,713,192
    (4)
    
    
    76,377
    
    
    
    1,110,887
    
    
    
    755,895
    
    
    
    770,033Toshiba research and development
    
    
    70,500
    (4)
    
    
    5,500
    
    
    
    65,000
    
    
    
    
    
    
    
    Capital equipment purchases commitments
    
    
    67,373
    
    
    
    67,373
    
    
    
    
    
    
    
    
    
    
    
    1% Convertible Senior Notes principal
andinterest (2)
    
    
    1,229,016
    
    
    
    5,750
    
    
    
    23,000
    
    
    
    23,000
    
    
    
    1,177,266Operating expense commitments
    
    
    88,399
    
    
    
    88,399
    
    
    
    
    
    
    
    
    
    
    
    Noncancelable
production purchasecommitments (3)
    
    
    310,832
    (4)
    
    
    310,832
    
    
    
    
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    4,750,443
    
    
    $
    578,943
    
    
    $
    1,347,630
    
    
    $
    856,607
    
    
    $
    1,967,263
 Off Balance Sheet Arrangements.
 As ofOctober
1, 2006Indemnification of FlashVision foundry equipment lease (5)
    
    $
    55,664Guarantee of Flash Partners lease(6)
    
    $
    436,921
 
 (1)
    
    In July 2006, the Company and Toshiba agreed to expand Fab 3 to 110,000 wafers per
month and agreed to an additional investment in Fab 3 of which the Companys share is
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 October
1, 2006.(5)
    
    The Companys contingent indemnification obligation is 6.6 billion Japanese yen,
or approximately $56 million based upon the exchange rate at October 1, 2006.(6)
    
    The Companys guarantee obligation, net of cumulative lease payments, is 51.5
billion Japanese yen, or approximately $437 million based upon the exchange rate at October
1, 2006. 22




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




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##### Table of Contents



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
 msystems Ltd.
 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
    
    
    (17,462
    )Deferred income tax assets, net
    
    
    3,928Goodwill
    
    
    155,230Other intangible assets:Core technology
    
    
    76,300Developed product technology
    
    
    11,400Customer relationships
    
    
    14,100281,816Assumed unvested equity instruments to be expensed
    
    
    14,563Purchase price
    
    $
    296,379
  25




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 Acquisition-Related Restructuring
 In-process Technology.
   26




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 Pro Forma Results.
 Three monthsended
    
    Nine months endedOctober 2, 2005
    
    October 1, 2006
    
    October 2, 2005(In thousands, except per share amounts)Net revenues
    
    $
    593,531
    
    
    $
    2,094,671
    
    
    $
    1,565,941Net income
    
    $
    98,088
    
    
    $
    263,329
    
    
    $
    221,452Net income per shareBasic
    
    $
    0.53
    
    
    $
    1.35
    
    
    $
    1.19Diluted
    
    $
    0.49
    
    
    $
    1.29
    
    
    $
    1.13
  27




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 12. Income Taxes
   28




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 13. Litigation
       29




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
     30




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
      31




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
   32




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 14. Subsequent Events
  33




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 
 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
   ®
   34




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Share Based
Payments
 35




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##### Table of Contents



Results of Operations
 Three months ended
    
    Nine months endedOctober 1,
    
    
    % of
    

    October 2,
    

    % of
    

    October 1,
    

    % of
    

    October 2,
    

    % of2006
    
    
    Revenue

    
    2005
    
    
    Revenue
    
    2006
    
    
    Revenue

    
    2005
    
    
    Revenue(In millions, except percentages)Product revenues
    
    $
    673.2
    
    
    
    89.6
    %
    
    $
    529.7
    
    
    
    89.8
    %
    
    $
    1,847.6
    
    
    
    88.2
    %
    
    $
    1,383.2
    
    
    
    88.9
    %License and royalty revenues
    
    
    78.2
    
    
    
    10.4
    %
    
    
    59.9
    
    
    
    10.2
    %
    
    
    246.2
    
    
    
    11.8
    %
    
    
    172.3
    
    
    
    11.1
    %Total revenues
    
    
    751.4
    
    
    
    100.0
    %
    
    
    589.6
    
    
    
    100.0
    %
    
    
    2,093.8
    
    
    
    100.0
    %
    
    
    1,555.5
    
    
    
    100.0
    %Cost of product revenues
    
    
    455.4
    
    
    
    60.6
    %
    
    
    332.8
    
    
    
    56.4
    %
    
    
    1,270.4
    
    
    
    60.7
    %
    
    
    884.8
    
    
    
    56.9
    %Gross margins
    
    
    296.0
    
    
    
    39.4
    %
    
    
    256.8
    
    
    
    43.6
    %
    
    
    823.4
    
    
    
    39.3
    %
    
    
    670.7
    
    
    
    43.1
    %Operating expensesResearch and development
    
    
    78.0
    
    
    
    10.4
    %
    
    
    43.4
    
    
    
    7.4
    %
    
    
    215.6
    
    
    
    10.3
    %
    
    
    150.8
    
    
    
    9.7
    %Sales and marketing
    
    
    45.0
    
    
    
    6.0
    %
    
    
    31.6
    
    
    
    5.4
    %
    
    
    133.4
    
    
    
    6.4
    %
    
    
    83.2
    
    
    
    5.3
    %General and administrative
    
    
    40.2
    
    
    
    5.3
    %
    
    
    23.2
    
    
    
    3.9
    %
    
    
    107.4
    
    
    
    5.1
    %
    
    
    58.5
    
    
    
    3.8
    %Write-off of acquired
in-process technology
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39.6
    
    
    
    1.9
    %
    
    
    
    
    
    
    Amortization
of acquisition-related intangible assets
    
    
    4.4
    
    
    
    0.6
    %
    
    
    
    
    
    
    
    
    
    
    12.6
    
    
    
    0.6
    %
    
    
    
    
    
    
    Total operating expenses
    
    
    167.6
    
    
    
    22.3
    %
    
    
    98.2
    
    
    
    16.7
    %
    
    
    508.6
    
    
    
    24.3
    %
    
    
    292.5
    
    
    
    18.8
    %Operating income
    
    
    128.4
    
    
    
    17.1
    %
    
    
    158.6
    
    
    
    26.9
    %
    
    
    314.8
    
    
    
    15.0
    %
    
    
    378.2
    
    
    
    24.3
    %Other income
    
    
    32.2
    
    
    
    4.3
    %
    
    
    12.0
    
    
    
    2.0
    %
    
    
    72.7
    
    
    
    3.5
    %
    
    
    22.6
    
    
    
    1.5
    %Income before taxes
    
    
    160.6
    
    
    
    21.4
    %
    
    
    170.6
    
    
    
    28.9
    %
    
    
    387.5
    
    
    
    18.5
    %
    
    
    400.8
    
    
    
    25.8
    %Provision for income taxes
    
    
    57.3
    
    
    
    7.7
    %
    
    
    63.1
    
    
    
    10.7
    %
    
    
    153.5
    
    
    
    7.3
    %
    
    
    148.3
    
    
    
    9.6
    %Net income
    
    $
    103.3
    
    
    
    13.7
    %
    
    $
    107.5
    
    
    
    18.2
    %
    
    $
    234.0
    
    
    
    11.2
    %
    
    $
    252.5
    
    
    
    16.2
    %
 Product Revenues
 Three months ended
    
    
    Nine months endedPercent
    
    
    
    
    
    
    
    
    
    
    PercentOctober 1, 2006
    
    
    October 2, 2005
    
    
    Change
    
    
    October 1, 2006
    
    
    October 2, 2005
    
    
    Change(In millions, except percentages)Retail
    
    $
    445.5
    
    
    $
    401.4
    
    
    
    11
    %
    
    $
    1,263.8
    
    
    $
    1,094.5
    
    
    
    15
    %OEM
    
    
    227.7
    
    
    
    128.3
    
    
    
    77
    %
    
    
    583.8
    
    
    
    288.7
    
    
    
    102
    %Product revenues
    
    $
    673.2
    
    
    $
    529.7
    
    
    
    27
    %
    
    $
    1,847.6
    
    
    $
    1,383.2
    
    
    
    34
    %
 
  36




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##### Table of Contents



Geographical Product Revenues
 Three months ended
    
    
    Nine months endedOctober 1, 2006

    
    October 2, 2005

    
    
    
    
    
    October 1, 2006

    
    October 2, 2005% of

    
    
    
    
    
    % of

    
    
    
    
    
    
    
    
    
    % of

    
    
    
    
    
    % ofProduct

    
    
    
    
    
    Product

    
    Percent
    
    
    
    
    
    
    Product

    
    
    
    
    
    Product

    
    PercentRevenue
    
    
    Revenue

    
    Revenue
    
    
    Revenue

    
    Change
    
    
    Revenue
    
    
    Revenue

    
    Revenue
    
    
    Revenue

    
    Change(In millions, except percentages)North America
    
    $
    281.7
    
    
    
    42
    %
    
    $
    256.6
    
    
    
    48
    %
    
    
    10
    %
    
    $
    775.1
    
    
    
    42
    %
    
    $
    695.0
    
    
    
    50
    %
    
    
    12
    %EMEA
    
    
    207.4
    
    
    
    31
    %
    
    
    160.9
    
    
    
    30
    %
    
    
    29
    %
    
    
    557.3
    
    
    
    30
    %
    
    
    444.2
    
    
    
    32
    %
    
    
    25
    %Other foreign countries
    
    
    184.1
    
    
    
    27
    %
    
    
    112.2
    
    
    
    22
    %
    
    
    64
    %
    
    
    515.2
    
    
    
    28
    %
    
    
    244.0
    
    
    
    18
    %
    
    
    111
    %$
    673.2
    
    
    
    100
    %
    
    $
    529.7
    
    
    
    100
    %
    
    
    27
    %
    
    $
    1,847.6
    
    
    
    100
    %
    
    $
    1,383.2
    
    
    
    100
    %
    
    
    34
    %
  License and Royalty Revenues
 Three months ended
    
    Nine months endedOctober 1,
    
    October 2,
    
    Percent
    



    October 1,
    
    October 2,
    
    Percent2006
    
    2005
    
    Change
    
    2006
    
    2005
    
    Change(In millions, except percentages)License and royalty revenues
    
    $
    78.2
    
    
    $
    59.9
    
    
    
    31
    %
    
    $
    246.2
    
    
    $
    172.3
    
    
    
    43
    %
  Gross Margin
 Three months ended
    
    Nine months endedOctober 1,
    
    October 2,
    
    Percent
    
    October 1,
    
    October 2,
    
    Percent2006
    
    2005
    
    Change
    
    2006
    
    2005
    
    Change(In millions, except percentages)Product gross margin
    
    $
    217.8
    
    
    $
    196.9
    
    
    
    11
    %
    
    $
    577.2
    
    
    $
    498.3
    
    
    
    16
    %Product gross margin (as a percent of product
revenues)
    
    
    32.4
    %
    
    
    37.2
    %
    
    
    
    
    
    
    31.2
    %
    
    
    36.0
    %Total gross margin (as a percent of total revenues)
    
    
    39.4
    %
    
    
    43.6
    %
    
    
    
    
    
    
    39.3
    %
    
    
    43.1
    %
  Research and Development
 Three months ended
    
    Nine months endedOctober 1,
    
    October 2,
    
    Percent
    
    October 1,
    
    October 2,
    
    Percent2006
    
    2005
    
    Change
    
    2006
    
    2005
    
    Change(In millions, except percentages)Research and development
    
    $
    78.0
    
    
    $
    43.4
    
    
    
    80
    %
    
    $
    215.6
    
    
    $
    150.8
    
    
    
    43
    %Percent of revenue
    
    
    10.4
    %
    
    
    7.4
    %
    
    
    
    
    
    
    10.3
    %
    
    
    9.7
    %
  37




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Sales and Marketing
 Three months ended
    
    Nine months endedOctober 1,
    
    October 2,
    
    Percent
    
    October 1,
    
    October 2,
    
    Percent2006
    
    2005
    
    Change
    
    2006
    
    2005
    
    Change(In millions, except percentages)Sales and marketing
    
    $
    45.0
    
    
    $
    31.6
    
    
    
    42
    %
    
    $
    133.4
    
    
    $
    83.2
    
    
    
    60
    %Percent of revenue
    
    
    6.0
    %
    
    
    5.4
    %
    
    
    
    
    
    
    6.4
    %
    
    
    5.3
    %
  General and Administrative
 Three months ended
    
    Nine months endedOctober 1,
    
    October 2,
    
    Percent
    
    October 1,
    
    October 2,
    
    Percent2006
    
    2005
    
    Change
    
    2006
    
    2005
    
    Change(In millions, except percentages)General and administrative
    
    $
    40.2
    
    
    $
    23.2
    
    
    
    73
    %
    
    $
    107.4
    
    
    $
    58.5
    
    
    
    84
    %Percent of revenue
    
    
    5.3
    %
    
    
    3.9
    %
    
    
    
    
    
    
    5.1
    %
    
    
    3.8
    %
  Write-off of Acquired In-process Technology
 Three months ended
    
    Nine months endedOctober 1,
    
    October 2,
    
    Percent
    
    October 1,
    
    October 2,
    
    Percent2006
    
    2005
    
    Change
    
    2006
    
    2005
    
    Change(In millions, except percentages)Write-off of acquired in-process technology
    
    $
    
    
    
    $
    
    
    
    
    n/a
    
    
    $
    39.6
    
    
    $
    
    
    
    
    n/aPercent of revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.9
    %
    
    
    
  Amortization
of Acquisition-Related Intangible Assets
 Three months ended
    
    Nine months endedOctober 1,
    
    October 2,
    
    Percent
    
    October 1,
    
    October 2,
    
    Percent2006
    
    2005
    
    Change
    
    2006
    
    2005
    
    Change(In millions, except percentages)Amortization
of acquisition-related intangible
assets
    
    $
    4.4
    
    
    $
    
    
    
    
    n/a
    
    
    $
    12.6
    
    
    $
    
    
    
    
    n/aPercent of revenue
    
    
    0.6
    %
    
    
    
    
    
    
    
    
    
    
    0.6
    %
    
    
    
  38




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Other Income
 Three months ended
    
    
    Nine months endedOctober 1,
    
    
    October 2,
    
    
    Percent
    
    
    October 1,
    
    
    October 2,
    
    
    Percent2006
    
    
    2005
    
    
    Change
    
    
    2006
    
    
    2005
    
    
    Change(In millions, except percentages)Equity in income (loss) of business ventures
    
    $
    0.4
    
    
    $
    
    
    
    
    n/a
    
    
    $
    0.8
    
    
    $
    
    
    
    
    n/aInterest income
    
    
    29.9
    
    
    
    11.1
    
    
    
    169
    %
    
    
    68.5
    
    
    
    28.8
    
    
    
    138
    %Gain
(loss) on investment in foundries
    
    
    1.6
    
    
    
    0.5
    
    
    
    220
    %
    
    
    3.8
    
    
    
    (8.8
    )
    
    
    143
    %Interest
expense and other income (expense), net
    
    
    0.3
    
    
    
    0.4
    
    
    
    (25
    )%
    
    
    (0.4
    )
    
    
    2.6
    
    
    
    (115
    )%Total other
income
    
    $
    32.2
    
    
    $
    12.0
    
    
    
    168
    %
    
    $
    72.7
    
    
    $
    22.6
    
    
    
    222
    %
  Provision for Income Taxes
 Three months ended
    
    Nine months endedOctober 1,
    
    October 2,
    
    October 1,
    
    October 2,2006
    
    2005
    
    2006
    
    2005Provision for income taxes
    
    
    35.7
    %
    
    
    37.0
    %
    
    
    39.6
    %
    
    
    37.0
    %
   39




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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.
 40




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Settlement of the convertible bond hedge in net shares on the
expiration date would result in us receiving net shares equivalent to the number of shares
issuable by us upon conversion of the 1% Notes. Should there be an
early unwind of the convertible bond hedge transaction, the number of net shares potentially received by us
will depend upon 1) the then existing overall market conditions, 2) our stock price, 3) the
volatility of our stock, and 4) the amount of time remaining before expiration of the
convertible bond hedge. The convertible bond hedge transaction cost of $386.1 million has
been accounted for as an equity transaction in accordance with Emerging Issues Task Force No.
00-19, or EITF 00-19, Accounting for Derivative Financial Statements Indexed to, and
Potentially Settled in, a Companys Own Stock. We recorded a tax benefit of approximately
$145.6 million in stockholders equity from the deferred tax assets related to the convertible
bond hedge.
    
    Sold Warrants.We received $308.7 million from the same counterparties from the sale of
warrants to purchase up to approximately 14.0 million shares of our common stock at an
exercise price of $95.03 per share. The warrants have an expected life of 7.25 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 October 1, 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.
    41




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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 123(R) Share-Based
Payments Accounting for Stock Issued to Employees, Accounting For Stock-Based Compensation
 Transition and Disclosure Accounting For Stock-Based Compensation
 Form 10-K
 43




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Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
   44




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PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
      45




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46




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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;
    
    purchase accounting, business integration and other challenges related to our proposed
acquisition of msystems;
    
    timing, volume and cost of wafer production from the FlashVision, Flash Partners and
Flash Alliance ventures as impacted by fab start-up delays and costs, technology
transitions, yields or production interruptions due to natural disasters, power outages,
equipment failure or other factors;
    
    disruption in the manufacturing operations of suppliers, including for sole sourced
components;
    
    unpredictable or changing demand for our products, particularly demand for certain types
or capacities of our products or demand for our products in certain markets or geographies;
    
    excess supply from captive sources due to output increasing faster than the growth in
demand;
    
    insufficient supply from captive and non-captive sources or insufficient capacity from
our test and assembly sub-contractors to meet demand;
    
    slowdown in price elasticity for some of our more mature markets for NAND flash memory;
    
    potential delay in the emergence of new markets and products for NAND flash memory and
acceptance of our products in these markets;
    
    our license and royalty revenues may decline significantly in the future as our existing
license agreements and key patents expire;
    
    timing of sell-through by our distributors and retail customers;
    
    increased purchases of flash memory products from our non-captive sources, which
typically cost more than products from our captive sources;
    
    difficulty in forecasting and managing inventory levels; particularly due to
noncancelable contractual obligations to purchase materials such as flash memory and
controllers, and the need to build finished product in advance of customer purchase orders;
    
    errors or defects in our products caused by, among other things, errors or defects in the
memory or controller components, including memory and non-memory components we procure from
third-party suppliers;
    
    write-downs of our investments in fabrication capacity, equity investments and other assets;
 49




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
    
    expensing of share-based compensation; 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.
 50




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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 
 51




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##### Table of Contents




    
    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.
 52




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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.
 53




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##### Table of Contents



Our products may contain errors or defects, which could result in the rejection of our
products, product recalls, damage to our reputation, lost revenues, diverted development resources
and increased service costs and warranty claims and litigation.
  We and Toshiba plan to continue to expand the wafer fabrication capacity of the Flash Partners
business venture and have formed a new venture, Flash Alliance, for which we will make substantial
capital investments and incur substantial start-up and tool relocation costs, which could adversely
impact our operating results.
 There is no assurance that Flash Partners 300-millimeter NAND flash memory facility will
perform as expected, in particular as we transition to new lithography feature sizes.
 54




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##### Table of Contents



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.
    Seasonality in our business may result in our inability to accurately forecast our product
purchase requirements.
 From time-to-time, we overestimate our requirements and build excess inventory, and
underestimate our requirements and have a shortage of supply, both of which harm our financial
results.
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##### Table of Contents



We are sole sourced for a number of our critical components and the absence of a back-up
supplier exposes our supply chain to unanticipated disruptions.
 We are exposed to foreign currency risks.
 Terrorist attacks, war, threats of war and government responses thereto may negatively impact
our operations, revenues, costs and stock price.
 Natural disasters or epidemics in the countries in which we or our suppliers or subcontractors
operate could negatively impact our operations.
 We may be unable to protect our intellectual property rights, which would harm our business,
financial condition and results of operations.
 
    
    any of our existing patents will not be invalidated;
    
    patents will be issued for any of our pending applications;
    
    any claims allowed from existing or pending patents will have sufficient scope or strength;
    
    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.
 56




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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.
    57




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Because of our international business and operations, we must comply with numerous
international laws and regulations, and we are vulnerable to political instability, currency
fluctuations and other risks related to international operations.
   
    
    the need to comply with foreign government regulation;
    
    general geopolitical risks such as political and economic instability, potential
hostilities and changes in diplomatic and trade relationships;
    
    natural disasters affecting the countries in which we conduct our business, particularly
Japan, such as the earthquakes experienced in Taiwan in 1999, in Japan in 2004, 2003 and
previous years, and in China in previous years;
    
    reduced sales to our customers or interruption to our manufacturing processes in the
Pacific Rim that may arise from regional issues in Asia;
    
    imposition of regulatory requirements, tariffs, import and export restrictions and other
barriers and restrictions;
    
    imposition of additional duties, charges and/or fees related to customs entries for our
products, which are all manufactured offshore;
    
    inability to successfully manage our foreign exchange exposures;
    
    longer payment cycles and greater difficulty in accounts receivable collection;
    
    adverse tax rules and regulations;
    
    weak protection of our intellectual property rights; and
    
    delays in product shipments due to local customs restrictions.
 Tower Semiconductors Financial Situation is Challenging.
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Our stock price has been, and may continue to be, volatile, which could result in investors
losing all or part of their investments.
 We may make acquisitions that are dilutive to existing stockholders, result in
unanticipated accounting charges or otherwise adversely affect our results of operations,
and result in difficulties in assimilating and integrating the operations, personnel,
technologies, products and information systems of acquired companies or businesses.
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Our success depends on key personnel, including our executive officers, the loss of 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.
 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.
 60




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Changes in securities laws and regulations have increased our costs; further, in the event we
are unable to satisfy regulatory requirements relating to internal control, or if our internal
control over financial reporting is not effective, our business could suffer.
  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 our 1% Notes.
 Our debt service obligations may adversely affect our cash flow.
 61




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
    
    increase our vulnerability to general adverse economic and industry conditions;
    
    limit our ability to obtain additional financing;
    
    require the dedication of a substantial portion of any cash flow from operations to the
payment of principal of, and interest on, our indebtedness, thereby reducing the
availability of such cash flow to fund our growth strategy, working capital, capital
expenditures and other general corporate purposes;
    
    limit our flexibility in planning for, or reacting to, changes in our business and our industry; and
    
    place us at a competitive disadvantage relative to our competitors with less debt.
 The
net share settlement feature of the 1% Notes may have adverse consequences.
  The convertible note hedge transactions and the warrant option transactions may affect the
value of the notes and our common stock.
 
    
    have entered into various over-the-counter cash-settled derivative transactions with
respect to our common stock, concurrently with, and shortly after, the pricing of the
notes; and
    
    may enter into, or may unwind, various over-the-counter derivatives and/or purchase
or sell our common stock in secondary market transactions following the pricing of the
notes, including during any observation period related to a conversion of notes.
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There are numerous risks associated with our entry into an agreement to acquire msystems.
 All conditions to the merger may not be completed and the merger may not be consummated.
 Although we expect that the merger will result in benefits to us, those benefits may not occur
because of integration and other challenges, and failure to realize the benefits of the merger may
result in the dilution of our per share operating results.
 
    
    retaining the customers and sales distribution channels of both companies, including
msystems OEM customers who compete with our branded products in retail channels;
    
    maintaining employee morale and retaining key employees;
    
    retaining the main sources of supply;
    
    incorporating msystems technology and products into our business and future product lines;
    
    integrating msystems sales force into our worldwide product sales network;
    
    demonstrating to msystems customers that the merger will not result in adverse changes
in pricing, customer service standards or product support;
    
    coordinating research and development activities to enhance introduction of new products and technologies;
    
    integrating msystems internal control over financial reporting with our internal control over financial reporting;
    
    migrating both companies to a common enterprise resource planning information system to
integrate all operations, sales and administrative activities for the combined companies in
a timely and cost effective way;
    
    integrating msystems international operations with ours;
    
    integrating the business cultures of both companies; and
    
    ensuring there are no delays in releasing new products to market.
 63




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The proposed merger may result in a loss of customers.
  Third parties may terminate or alter existing contracts or relationships with msystems or us.
 Our supply of flash components could be adversely impacted as a result of the proposed merger.
 64




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General uncertainty related to the merger could harm us.
   Any delay in completing the merger may reduce or eliminate the expected benefits of the
merger.
  There is pending litigation.
 There are risks related to msystems prior option grant practices.
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Charges and other accounting changes resulting from the merger may adversely affect our
earnings and the market value of our common stock following the merger.
 If msystems shareholders sell the SanDisk common stock received in the merger immediately,
these sales could cause a decline in the market price of our common stock.
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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
  
 Item 5. Other Information
    67




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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)2.2
    
    Agreement and Plan of Merger, dated as of July 30, 2006, by and among SanDisk Corporation, Project
Desert, Ltd. and msystems Ltd.(2)3.1
    
    Restated Certificate of Incorporation of the Registrant.(3)3.2
    
    Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant dated
December 9, 1999.(4)3.3
    
    Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant dated May
11, 2000.(5)3.4
    
    Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the
Registrant dated May 26, 2006.(6)3.5
    
    Restated Bylaws of the Registrant, as amended to date.(7)3.6
    
    Certificate of Designations for the Series A Junior Participating Preferred Stock, as filed with
the Delaware Secretary of State on October 14, 1997.(8)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.(9)4.1
    
    Reference is made to Exhibits 3.1,
3.2 and 3.3.(3), (4), (5)4.2
    
    Rights Agreement, dated as of September 15, 2003, between the Registrant and Computershare Trust
Company, Inc.(9)4.3
    
    Amendment No. 1 to Rights Agreement, dated as of November 6, 2006,
by and between the Registrant and Computershare Trust Company, Inc.(11)10.1
    
    Flash Alliance Master Agreement, dated as of July 7, 2006, by and among the Registrant, Toshiba
Corporation and SanDisk (Ireland) Limited.(*), (+)10.2
    
    Operating Agreement of Flash Alliance, Ltd., dated as of July 7, 2006, by and between Toshiba
Corporation and SanDisk (Ireland) Limited.(*), (+)10.3
    
    Second Amended and Restated Common R&D and Participation Agreement, dated as of July 7, 2006, by
and between the Registrant and Toshiba Corporation.(*), (+)10.4
    
    Second Amended and Restated Product Development Agreement, dated as of July 7, 2006, by and
between the Registrant and Toshiba Corporation.(*), (+)10.5
    
    Flash Alliance Mutual Contribution and Environmental Indemnification Agreement, dated as of July
7, 2006, by and between Toshiba Corporation and SanDisk (Ireland) Limited.(*), (+)10.6
    
    Patent Indemnification Agreement, dated as of July 7, 2006, by and among the Registrant and the
other parties thereto.(*), (+)10.7
    
    Form of Voting Undertaking.(2)10.8
    
    Guarantee Agreement, dated as of September 22, 2006, by and among the Registrant, SMBC Leasing
Company, Limited and Toshiba Finance Corporation.(*)10.9
    
    Master Lease Agreement, dated as of September 22, 2006, by and among Flash Partners Limited
Company, SMBC Leasing Company, Limited, Toshiba Finance Corporation, Sumisho Lease Co., Ltd., Fuyo
General Lease Co., Ltd., Tokyo Leasing Co., Ltd., STB Leasing Co., Ltd. and IBJ Leasing Co.,
Ltd.(*), (+)10.10
    
    Agreement, dated as of September 28, 2006, by and among the Registrant, Bank Leumi Le Israel B.M.,
The Israel Corporation
Ltd., Alliance Semiconductor Corporation and Macronix International Co. Ltd.(10)10.11
    
    Agreement, dated as of September 28, 2006, by and among the Registrant, Bank Hapoalim B.M., The Israel Corporation Ltd.,
Alliance Semiconductor Corporation and Macronix International Co. Ltd.(10)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. 68




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##### Table of Contents



(2)
    
    Previously filed as an Exhibit to the Registrants Current Report on Form 8-K/A filed
with the SEC on August 1, 2006.(3)
    
    Previously filed as an Exhibit to the Registrants Registration Statement on Form S-1
(No. 33-96298).(4)
    
    Previously filed as an Exhibit to the Registrants Form 10-Q for the quarter ended June
30, 2000.(5)
    
    Previously filed as an Exhibit to the Registrants Registration Statement on Form S-3
(No. 333-85686).(6)
    
    Previously filed as an Exhibit to the Registrants Current Report on Form 8-K filed with
the SEC on June 1, 2006.(7)
    
    Previously filed as an Exhibit to the Registrants Current Report on Form 8-K filed with
the SEC on April 10, 2006.(8)
    
    Previously filed as an Exhibit to the Registrants Current Report on Form 8-K/A dated
April 18, 1997.(9)
    
    Previously filed as an Exhibit to the Registrants Registration Statement on Form 8-A
dated September 25, 2003.(10)
    
    Previously filed as an Exhibit to the Registrants Form 13D/A dated October 12, 2006.(11)
    
    Previously filed as an Exhibit to the Registrants Registration Statement
on Form 8-A/A dated  November 8, 2006. 69




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##### Table of Contents



SIGNATURES
  SANDISK CORPORATION(Registrant)Dated: November 8, 2006
    
    By:
    
    /s/ Judy BrunerJudy BrunerExecutive Vice President, Administration andChief Financial Officer(On behalf of the Registrant and as PrincipalFinancial and Accounting Officer)
 70




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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, Mike
Acquisition Company LLC, Matrix Semiconductor, Inc. and Bruce Dunlevie as the stockholder
representative for the stockholders of Matrix Semiconductor, Inc.(1)2.2
    
    Agreement and Plan of Merger, dated as of July 30, 2006, by and among SanDisk Corporation, Project
Desert, Ltd. and msystems Ltd.(2)3.1
    
    Restated Certificate of Incorporation of the Registrant.(3)3.2
    
    Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant dated
December 9, 1999.(4)3.3
    
    Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant dated May
11, 2000.(5)3.4
    
    Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the
Registrant dated May 26, 2006.(6)3.5
    
    Restated Bylaws of the Registrant, as amended to date.(7)3.6
    
    Certificate of Designations for the Series A Junior Participating Preferred Stock, as filed with
the Delaware Secretary of State on October 14, 1997.(8)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.(9)4.1
    
    Reference is made to Exhibits 3.1,
3.2 and 3.3.(3), (4), (5)4.2
    
    Rights Agreement, dated as of September 15, 2003, between the Registrant and Computershare Trust
Company, Inc.(9)4.3
    
    Amendment No. 1 to Rights Agreement, dated as of November 6, 2006,
by and between the Registrant and Computershare Trust Company, Inc.(11)10.1
    
    Flash Alliance Master Agreement, dated as of July 7, 2006, by and among the Registrant, Toshiba
Corporation and SanDisk (Ireland) Limited.(*), (+)10.2
    
    Operating Agreement of Flash Alliance, Ltd., dated as of July 7, 2006, by and between Toshiba
Corporation and SanDisk (Ireland) Limited.(*), (+)10.3
    
    Second Amended and Restated Common R&D and Participation Agreement, dated as of July 7, 2006, by
and between the Registrant and Toshiba Corporation.(*), (+)10.4
    
    Second Amended and Restated Product Development Agreement, dated as of July 7, 2006, by and
between the Registrant and Toshiba Corporation.(*), (+)10.5
    
    Flash Alliance Mutual Contribution and Environmental Indemnification Agreement, dated as of July
7, 2006, by and between Toshiba Corporation and SanDisk (Ireland) Limited.(*), (+)10.6
    
    Patent Indemnification Agreement, dated as of July 7, 2006, by and among the Registrant and the
other parties thereto.(*), (+)10.7
    
    Form of Voting Undertaking.(2)10.8
    
    Guarantee Agreement, dated as of September 22, 2006, by and among the Registrant, SMBC Leasing
Company, Limited and Toshiba Finance Corporation.(*)10.9
    
    Master Lease Agreement, dated as of September 22, 2006, by and among Flash Partners Limited
Company, SMBC Leasing Company, Limited, Toshiba Finance Corporation, Sumisho Lease Co., Ltd., Fuyo
General Lease Co., Ltd., Tokyo Leasing Co., Ltd., STB Leasing Co., Ltd. and IBJ Leasing Co.,
Ltd.(*), (+)10.10
    
    Agreement, dated as of September 28, 2006, by and among the Registrant, Bank Leumi Le Israel B.M.,
The Israel Corporation
Ltd., Alliance Semiconductor Corporation and Macronix International Co. Ltd.(10)10.11
    
    Agreement, dated as of September 28, 2006, by and among the Registrant, Bank Hapoalim B.M., The Israel Corporation Ltd.,
Alliance Semiconductor Corporation and Macronix International Co. Ltd.(10)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 Current Report on Form 8-K/A filed
with the SEC on August 1, 2006.(3)
    
    Previously filed as an Exhibit to the Registrants Registration Statement on Form S-1
(No. 33-96298). 71




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##### Table of Contents



(4)
    
    Previously filed as an Exhibit to the Registrants Form 10-Q for the quarter ended June
30, 2000.(5)
    
    Previously filed as an Exhibit to the Registrants Registration Statement on Form S-3
(No. 333-85686).(6)
    
    Previously filed as an Exhibit to the Registrants Current Report on Form 8-K filed with
the SEC on June 1, 2006.(7)
    
    Previously filed as an Exhibit to the Registrants Current Report on Form 8-K filed with
the SEC on April 10, 2006.(8)
    
    Previously filed as an Exhibit to the Registrants Current Report on Form 8-K/A dated
April 18, 1997.(9)
    
    Previously filed as an Exhibit to the Registrants Registration Statement on Form 8-A
dated September 25, 2003.(10)
    
    Previously filed as an Exhibit to the Registrants Form 13D/A dated October 12, 2006.(11)
    
    Previously filed as an Exhibit to the Registrants Registration Statement
on Form 8-A/A dated  November 8, 2006. 72