##### 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 September 30, 2007
 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(State or other jurisdiction of 
incorporation or organization)
    
    77-0191793(I.R.S. Employer
Identification No.)
 601 McCarthy Blvd. 
Milpitas, California(Address of principal executive offices)
    
    95035(Zip Code)
  (408) 801-1000
  þ o
  þ o o
  o þ




---



##### 



SanDisk Corporation
Index
 Page No.PART I. FINANCIAL INFORMATIONItem 1.
    
    Condensed Consolidated Financial Statements:Condensed Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006
    
    
    3Condensed Consolidated Statements of Operations for the three months and nine months
ended September 30, 2007 and October 1, 2006
    
    
    4Condensed Consolidated Statements of Cash Flows for the nine months ended September 30,
2007 and October 1, 2006
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    44Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    54Item 4.
    
    Controls and Procedures
    
    
    54PART II. OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    55Item 1A.
    
    Risk Factors
    
    
    60Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    78Item 3.
    
    Defaults Upon Senior Securities
    
    
    78Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    78Item 5.
    
    Other Information
    
    
    78Item 6.
    
    Exhibits
    
    
    78Signatures
    
    
    79Exhibit Index
    
    
    80EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




---



##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Condensed Consolidated Financial Statements (in thousands)
 SANDISK CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 September 30, 2007
    
    
    December 31, 2006*(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    970,920
    
    
    $
    1,580,700Short-term investments
    
    
    1,334,677
    
    
    
    1,251,493Accounts receivable from product revenues, net
    
    
    438,016
    
    
    
    611,740Inventory
    
    
    545,199
    
    
    
    495,984Deferred taxes
    
    
    174,352
    
    
    
    176,007Other current assets
    
    
    142,496
    
    
    
    125,937Total current assets
    
    
    3,605,660
    
    
    
    4,241,861Long-term investments
    
    
    923,965
    
    
    
    457,184Property and equipment, net
    
    
    383,943
    
    
    
    317,965Notes receivable and investments in flash ventures
    
    
    900,382
    
    
    
    462,307Deferred taxes
    
    
    109,944
    
    
    
    102,100Goodwill
    
    
    847,977
    
    
    
    910,254Intangibles, net
    
    
    342,580
    
    
    
    389,078Other non-current assets
    
    
    66,255
    
    
    
    87,034Total assets
    
    $
    7,180,706
    
    
    $
    6,967,783LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable trade
    
    $
    223,343
    
    
    $
    261,870Accounts payable to related parties
    
    
    163,869
    
    
    
    139,627Other current accrued liabilities
    
    
    226,410
    
    
    
    311,000Deferred income on shipments to distributors and retailers and deferred revenue
    
    
    204,653
    
    
    
    183,950Total current liabilities
    
    
    818,275
    
    
    
    896,447Convertible long-term debt
    
    
    1,225,000
    
    
    
    1,225,000Non-current
liabilities and deferred taxes
    
    
    128,004
    
    
    
    72,226Total liabilities
    
    
    2,171,279
    
    
    
    2,193,673Minority interest
    
    
    1,067
    
    
    
    5,976Commitments and contingenciesStockholders equity:Preferred stock
    
    
    
    
    
    
    Common stock
    
    
    229
    
    
    
    226Capital in excess of par value
    
    
    3,835,880
    
    
    
    3,656,895Retained earnings
    
    
    1,151,915
    
    
    
    1,105,520Accumulated other comprehensive income
    
    
    20,336
    
    
    
    5,493Total stockholders equity
    
    
    5,008,360
    
    
    
    4,768,134Total liabilities and stockholders equity
    
    $
    7,180,706
    
    
    $
    6,967,783
 
 *
    
    Information derived from the audited Consolidated Financial Statements. The accompanying notes are an integral part of these condensed consolidated financial statements.
 3




---



##### Table of Contents



SANDISK CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 Three months ended
    
    
    Nine months endedSeptember 30, 2007
    
    
    October 1, 2006
    
    
    September 30, 2007
    
    
    October 1, 2006(In thousands, except per share amounts)Revenues:Product
    
    $
    918,810
    
    
    $
    673,189
    
    
    $
    2,328,158
    
    
    $
    1,847,592License and royalty
    
    
    118,613
    
    
    
    78,196
    
    
    
    322,383
    
    
    
    246,238Total revenues
    
    
    1,037,423
    
    
    
    751,385
    
    
    
    2,650,541
    
    
    
    2,093,830Cost of product revenues
    
    
    680,521
    
    
    
    455,345
    
    
    
    1,839,345
    
    
    
    1,270,389Amortization of acquisition-related
intangible assets
    
    
    14,582
    
    
    
    
    
    
    
    50,227
    
    
    
    Total cost of product revenues
    
    
    695,103
    
    
    
    455,345
    
    
    
    1,889,572
    
    
    
    1,270,389Gross profit
    
    
    342,320
    
    
    
    296,040
    
    
    
    760,969
    
    
    
    823,441Operating expenses:Research and development
    
    
    110,533
    
    
    
    78,073
    
    
    
    307,358
    
    
    
    215,620Sales and marketing
    
    
    72,455
    
    
    
    44,961
    
    
    
    189,178
    
    
    
    133,403General and administrative
    
    
    45,581
    
    
    
    40,247
    
    
    
    133,737
    
    
    
    107,445Write-off of acquired in-process technology
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39,600Amortization of acquisition-related
intangible assets
    
    
    4,600
    
    
    
    4,432
    
    
    
    20,750
    
    
    
    12,579Restructuring
    
    
    
    
    
    
    
    
    
    
    6,728
    
    
    
    Total operating expenses
    
    
    233,169
    
    
    
    167,713
    
    
    
    657,751
    
    
    
    508,647Operating income
    
    
    109,151
    
    
    
    128,327
    
    
    
    103,218
    
    
    
    314,794Interest income
    
    
    31,790
    
    
    
    29,943
    
    
    
    104,005
    
    
    
    68,462Interest (expense) and other income
(expense), net
    
    
    (2,590
    )
    
    
    2,280
    
    
    
    10
    
    
    
    4,238Total other income
    
    
    29,200
    
    
    
    32,223
    
    
    
    104,015
    
    
    
    72,700Income before taxes
    
    
    138,351
    
    
    
    160,550
    
    
    
    207,233
    
    
    
    387,494Provision for income taxes
    
    
    53,713
    
    
    
    57,269
    
    
    
    89,475
    
    
    
    153,457Income after taxes
    
    
    84,638
    
    
    
    103,281
    
    
    
    117,758
    
    
    
    234,037Minority interest
    
    
    
    
    
    
    
    
    
    
    5,211
    
    
    
    Net income
    
    $
    84,638
    
    
    $
    103,281
    
    
    $
    112,547
    
    
    $
    234,037Net income per share:Basic
    
    $
    0.37
    
    
    $
    0.53
    
    
    $
    0.49
    
    
    $
    1.20Diluted
    
    $
    0.36
    
    
    $
    0.51
    
    
    $
    0.48
    
    
    $
    1.15Shares used in computing net income per share:Basic
    
    
    228,689
    
    
    
    196,317
    
    
    
    228,034
    
    
    
    194,974Diluted
    
    
    236,930
    
    
    
    202,747
    
    
    
    235,992
    
    
    
    202,660
 The accompanying notes are an integral part of these condensed consolidated financial statements.
 4




---



##### Table of Contents



SANDISK CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Nine months endedSeptember 30, 2007
    
    
    October 1, 2006(In thousands)Cash flows from operating activities:Net income
    
    $
    112,547
    
    
    $
    234,037Adjustments to reconcile net income to net cash provided by operating activities:Deferred and other taxes
    
    
    89,475
    
    
    
    (24,021
    )Gain on equity investments
    
    
    (2,701
    )
    
    
    (1,364
    )Depreciation and amortization
    
    
    196,444
    
    
    
    89,709Provision for doubtful accounts
    
    
    2,977
    
    
    
    2,760Share-based compensation expense
    
    
    102,317
    
    
    
    69,848Excess tax benefit from share-based compensation
    
    
    (15,714
    )
    
    
    (64,080
    )Write-off of acquired in-process technology
    
    
    
    
    
    
    39,600Other non-cash charges
    
    
    2,649
    
    
    
    3,201Changes in operating assets and liabilities:Accounts receivable from product revenues
    
    
    171,177
    
    
    
    28,276Inventory
    
    
    (47,211
    )
    
    
    (57,765
    )Other assets
    
    
    47,001
    
    
    
    47,108Accounts payable trade
    
    
    (38,596
    )
    
    
    (88,363
    )Accounts payable to related parties
    
    
    22,513
    
    
    
    28,380Other liabilities
    
    
    (139,163
    )
    
    
    95,837Total adjustments
    
    
    391,168
    
    
    
    169,126Net cash provided by operating activities
    
    
    503,715
    
    
    
    403,163Cash flows from investing activities:Purchases of short and long-term investments
    
    
    (3,145,884
    )
    
    
    (1,438,195
    )Proceeds from sale and maturities of short and long-term investments
    
    
    2,635,082
    
    
    
    881,772Investment in Flash Partners and Flash Alliance
    
    
    (38,003
    )
    
    
    (132,209
    )Acquisition of property and equipment, net
    
    
    (179,903
    )
    
    
    (123,443
    )Proceeds from notes receivable from FlashVision
    
    
    37,512
    
    
    
    8,524Issuance of notes receivable to Flash Partners
    
    
    (409,601
    )
    
    
    (95,445
    )Purchased technology and other assets
    
    
    (27,803
    )
    
    
    Cash acquired in business combination, net of acquisition costs
    
    
    
    
    
    
    9,432Net cash used in investing activities
    
    
    (1,128,600
    )
    
    
    (889,564
    )Cash flows from financing activities:Proceeds from issuance of convertible senior notes, net of issuance costs
    
    
    
    
    
    
    1,125,500Purchase of convertible bond hedge
    
    
    
    
    
    
    (386,090
    )Proceeds from issuance of warrants
    
    
    
    
    
    
    308,672Proceeds from debt financing
    
    
    7,803
    
    
    
    Proceeds from employee stock programs
    
    
    97,310
    
    
    
    86,108Distribution to minority interest
    
    
    (9,880
    )
    
    
    Excess tax benefit from share-based compensation
    
    
    15,714
    
    
    
    64,080Share repurchase programs
    
    
    (97,417
    )
    
    
    Net cash provided by financing activities
    
    
    13,530
    
    
    
    1,198,270Effect of changes in foreign currency exchange rates on cash
    
    
    1,575
    
    
    
    228Net increase (decrease) in cash and cash equivalents
    
    
    (609,780
    )
    
    
    712,097Cash and cash equivalents at beginning of the period
    
    
    1,580,700
    
    
    
    762,058Cash and cash equivalents at end of the period
    
    $
    970,920
    
    
    $
    1,474,155Supplemental 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




---



##### Table of Contents



SANDISK
CORPORATION
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 1.
    
    Organization and Summary of Significant Accounting Policies
 Organization
   Organization and Nature of Operations.
 Principles of Consolidation.
 Use of Estimates.
 Recent Accounting Pronouncements
 SFAS No. 157. Fair Value Measurements
 6




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
  SFAS No. 159 . Establishing the Fair Value Option for Financial Assets and Liabilities
 EITF Issue No. 07-3 . Accounting for Advance Payments for
Goods or Services to be Received for Use in Future Research and Development Activities.
 FSP No. APB 14-a. Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including
Partial Cash Settlement)
 
 7




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 2.
    Balance Sheet Detail
 Accounts Receivable from Product Revenues, net.
 September 30, 2007
    
    
    December 31, 2006Trade accounts receivable
    
    $
    826,469
    
    
    $
    1,056,616Related party accounts receivable
    
    
    10,209
    
    
    
    41,708Allowance for doubtful accounts
    
    
    (14,235
    )
    
    
    (11,452
    )Price protection, promotions and other activities
    
    
    (384,427
    )
    
    
    (475,132
    )Total accounts receivable from product revenues, net
    
    $
    438,016
    
    
    $
    611,740
 Inventory.
 September 30, 2007
    
    
    December 31, 2006Raw material
    
    $
    192,825
    
    
    $
    157,163Work-in-process
    
    
    84,530
    
    
    
    64,009Finished goods
    
    
    267,844
    
    
    
    274,812Total inventory
    
    $
    545,199
    
    
    $
    495,984
 Other Current Assets.
 September 30, 2007
    
    
    December 31, 2006Royalty and other receivables
    
    $
    96,623
    
    
    $
    82,569Prepaid expenses
    
    
    29,767
    
    
    
    22,276Other current assets
    
    
    16,106
    
    
    
    21,092Total other current assets
    
    $
    142,496
    
    
    $
    125,937
 Notes Receivable and Investments in Flash Ventures.
 September 30, 2007
    
    
    December 31, 2006Notes receivable, FlashVision
    
    $
    
    
    
    $
    38,229Notes receivable, Flash Partners
    
    
    515,800
    
    
    
    92,421Investment in FlashVision
    
    
    166,228
    
    
    
    159,144Investment in Flash Partners
    
    
    175,079
    
    
    
    168,210Investment in Flash Alliance
    
    
    43,275
    
    
    
    4,303Total notes receivable and investments in flash ventures
    
    $
    900,382
    
    
    $
    462,307
 8




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 Other Current Accrued Liabilities.
 September 30, 2007
    
    
    December 31, 2006Accrued payroll and related expenses
    
    $
    80,734
    
    
    $
    61,050Taxes payable
    
    
    5,504
    
    
    
    119,502Research and development liability, related party
    
    
    4,121
    
    
    
    5,850Other accrued liabilities
    
    
    136,051
    
    
    
    124,598Total other current accrued liabilities
    
    $
    226,410
    
    
    $
    311,000
 Convertible Long-term Debt .
 September 30, 2007
    
    
    December 31, 20061% Senior Convertible Notes due 2013
    
    $
    1,150,000
    
    
    $
    1,150,0001% Convertible Notes due 2035
    
    
    75,000
    
    
    
    75,000Total convertible long-term debt
    
    $
    1,225,000
    
    
    $
    1,225,000
 9




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 3. Share-Based Compensation
 Share-Based Plans.
 Valuation Assumptions.
 Three months ended
    
    Nine months endedSeptember 30, 2007
    
    October 1, 2006
    
    September 30, 2007
    
    October 1, 2006Option Plan SharesDividend yield
    
    None
    
    None
    
    None
    
    NoneExpected volatility
    
    
    0.39
    
    
    
    0.50
    
    
    
    0.43
    
    
    
    0.53Risk free interest rate
    
    
    4.33
    %
    
    
    4.85
    %
    
    
    4.54
    %
    
    
    4.63
    %Expected lives
    
    3.3 years
    
    3.3 years
    
    3.4 years
    
    3.8 yearsEstimated annual forfeiture rate
    
    
    7.59
    %
    
    
    7.74
    %
    
    
    7.59
    %
    
    
    7.74
    %Weighted average fair value at grant date
    
    $
    17.74
    
    
    $
    20.34
    
    
    $
    15.90
    
    
    $
    26.70Employee Stock Purchase Plan SharesDividend yield
    
    None
    
    None
    
    None
    
    NoneExpected volatility
    
    
    0.41
    
    
    
    0.51
    
    
    
    0.43
    
    
    
    0.52Risk free interest rate
    
    
    4.96
    %
    
    
    5.18
    %
    
    
    5.08
    %
    
    
    4.96
    %Expected lives
    
    1/2 year
    
    1/2 year
    
    1/2 year
    
    1/2 yearWeighted average fair value for grant period
    
    $
    14.52
    
    
    $
    13.73
    
    
    $
    12.75
    
    
    $
    16.73
 10




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 Share-Based Compensation Plan Activities
 Stock Options and SARs.
 WeightedAverageWeighted
    
    
    Remaining
    
    
    AggregateAverage
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    Term (Years)
    
    
    ValueOptions and SARs outstanding at December 31, 2006
    
    
    26,392
    
    
    $
    31.97Granted
    
    
    5,200
    
    
    
    44.15Exercised
    
    
    (4,393
    )
    
    
    20.84Forfeited
    
    
    (1,411
    )
    
    
    46.15Expired
    
    
    (207
    )
    
    
    57.44Options and SARs outstanding at September 30, 2007
    
    
    25,581
    
    
    
    35.38
    
    
    
    6.0
    
    
    $
    528,652Options and SARs vested and expected to vest
after September 30, 2007, net of forfeitures
    
    
    23,700
    
    
    
    34.42
    
    
    
    5.9
    
    
    
    508,711Options and SARs exercisable at September 30, 2007
    
    
    11,751
    
    
    $
    25.09
    
    
    
    5.2
    
    
    $
    361,729
  Restricted Stock Units.
  WeightedAverage Grant
    
    
    AggregateShares
    
    
    Date Fair Value
    
    
    Intrinsic ValueNon-vested RSUs at December 31, 2006
    
    
    598
    
    
    $
    58.71Granted
    
    
    130
    
    
    
    44.95Vested
    
    
    (179
    )
    
    
    56.49Forfeited
    
    
    (38
    )
    
    
    66.61Non-vested RSUs at September 30, 2007
    
    
    511
    
    
    $
    55.42
    
    
    $
    28,146
  Employee Stock Purchase Plan.
 11




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 Share-Based Compensation Expense.
 Three months ended
    
    
    Nine months endedSeptember 30, 2007
    
    
    October 1, 2006
    
    
    September 30, 2007
    
    
    October 1, 2006Share-based compensation expense by caption:Cost of product sales
    
    $
    4,162
    
    
    $
    2,621
    
    
    $
    10,683
    
    
    $
    5,098Research and development
    
    
    12,528
    
    
    
    10,269
    
    
    
    38,228
    
    
    
    29,476Sales and marketing
    
    
    7,956
    
    
    
    4,623
    
    
    
    25,240
    
    
    
    13,788General and administrative
    
    
    9,481
    
    
    
    7,679
    
    
    
    28,166
    
    
    
    21,486Total share-based compensation expense
    
    $
    34,127
    
    
    $
    25,192
    
    
    $
    102,317
    
    
    $
    69,848Share-based compensation expense by type of
award:Stock options and SARs
    
    $
    28,552
    
    
    $
    21,262
    
    
    $
    85,216
    
    
    $
    59,010Restricted stock and RSUs
    
    
    4,095
    
    
    
    2,888
    
    
    
    13,275
    
    
    
    8,127ESPP
    
    
    1,480
    
    
    
    1,042
    
    
    
    3,826
    
    
    
    2,711Total share-based compensation expense
    
    $
    34,127
    
    
    $
    25,192
    
    
    $
    102,317
    
    
    $
    69,848
  12




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 4. Restructuring
   LeaseObligationsSeverance and
    
    
    and OtherBenefits
    
    
    Charges
    
    
    TotalRestructuring provision
    
    $
    5,970
    
    
    $
    758
    
    
    $
    6,728Cash paid
    
    
    (5,631
    )
    
    
    (360
    )
    
    
    (5,991
    )Reserve balance at September 30, 2007
    
    $
    339
    
    
    $
    398
    
    
    $
    737
  13




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 5.
    
    Warranty
  Three months ended
    
    
    Nine months endedSeptember 30, 2007
    
    
    October 1, 2006
    
    
    September 30, 2007
    
    
    October 1, 2006Balance, beginning of period
    
    $
    13,164
    
    
    $
    9,661
    
    
    $
    15,338
    
    
    $
    11,258Additions and adjustments
to costs of product revenue
    
    
    2,492
    
    
    
    1,836
    
    
    
    7,280
    
    
    
    627Usage
    
    
    (856
    )
    
    
    (924
    )
    
    
    (7,818
    )
    
    
    (1,312
    )Balance, end of period
    
    $
    14,800
    
    
    $
    10,573
    
    
    $
    14,800
    
    
    $
    10,573
  14




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 6. Goodwill and Other Intangible Assets
 Goodwill.
 Balance at December 31, 2006
    
    $
    910,254Goodwill adjustment
    
    
    (62,277
    )Balance at September 30, 2007
    
    $
    847,977
  Intangible Assets.
 September 30, 2007
    
    
    December 31, 2006Gross
    
    
    
    
    
    
    Net
    
    
    Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    Carrying
    
    
    Carrying
    
    
    Accumulated
    
    
    CarryingAmount
    
    
    Amortization
    
    
    Amount
    
    
    Amount
    
    
    Amortization
    
    
    AmountCore technology
    
    $
    311,801
    
    
    $
    (64,688
    )
    
    $
    247,113
    
    
    $
    311,801
    
    
    $
    (18,135
    )
    
    $
    293,666Developed product technology
    
    
    12,900
    
    
    
    (4,199
    )
    
    
    8,701
    
    
    
    12,900
    
    
    
    (2,103
    )
    
    
    10,797Trademarks
    
    
    4,000
    
    
    
    (4,000
    )
    
    
    
    
    
    
    4,000
    
    
    
    (911
    )
    
    
    3,089Backlog
    
    
    5,000
    
    
    
    (5,000
    )
    
    
    
    
    
    
    5,000
    
    
    
    (1,139
    )
    
    
    3,861Supply agreement
    
    
    2,000
    
    
    
    (2,000
    )
    
    
    
    
    
    
    2,000
    
    
    
    (46
    )
    
    
    1,954Customer relationships
    
    
    80,100
    
    
    
    (19,432
    )
    
    
    60,668
    
    
    
    80,100
    
    
    
    (6,008
    )
    
    
    74,092Acquisition-related intangible assets
    
    
    415,801
    
    
    
    (99,319
    )
    
    
    316,482
    
    
    
    415,801
    
    
    
    (28,342
    )
    
    
    387,459Technology licenses and patents
    
    
    38,911
    
    
    
    (12,813
    )
    
    
    26,098
    
    
    
    7,388
    
    
    
    (5,769
    )
    
    
    1,619Total
    
    $
    454,712
    
    
    $
    (112,132
    )
    
    $
    342,580
    
    
    $
    423,189
    
    
    $
    (34,111
    )
    
    $
    389,078
   Estimated Amortization ExpensesAcquisition-Related
    
    
    Technology LicensesFiscal periods:
    
    Intangible Assets
    
    
    and Patents2007 (remaining three months)
    
    $
    19,140
    
    
    $
    2,7912008
    
    
    76,229
    
    
    
    10,4782009
    
    
    71,724
    
    
    
    3,0232010
    
    
    71,529
    
    
    
    3,0232011
    
    
    64,809
    
    
    
    3,0232012 and thereafter
    
    
    13,051
    
    
    
    3,760Total
    
    $
    316,482
    
    
    $
    26,098
 15




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 7. Accumulated Other Comprehensive Income
  September 30, 2007
    
    
    December 31, 2006Accumulated net unrealized gain (loss) on:Available-for-sale investments
    
    $
    8,243
    
    
    $
    (2,528
    )Foreign currency translation
    
    
    12,093
    
    
    
    8,021Total accumulated other comprehensive income
    
    $
    20,336
    
    
    $
    5,493
  Three months ended
    
    
    Nine months endedSeptember 30, 2007
    
    
    October 1, 2006
    
    
    September 30, 2007
    
    
    October 1, 2006Net income
    
    $
    84,638
    
    
    $
    103,281
    
    
    $
    112,547
    
    
    $
    234,037Unrealized income on available-for-sale
investments
    
    
    8,792
    
    
    
    1,340
    
    
    
    10,771
    
    
    
    4,880Foreign currency translation income (loss)
    
    
    17,754
    
    
    
    (6,109
    )
    
    
    4,072
    
    
    
    (1,310
    )Comprehensive net income
    
    $
    111,184
    
    
    $
    98,512
    
    
    $
    127,390
    
    
    $
    237,607
 16




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 8.
    
    Net Income Per Share
  Three months ended
    
    
    Nine months endedSeptember 30, 2007
    
    
    October 1, 2006
    
    
    September 30, 2007
    
    
    October 1, 2006Numerator for basic net income per share:Net income, as reported
    
    $
    84,638
    
    
    $
    103,281
    
    
    $
    112,547
    
    
    $
    234,037Denominator for basic net income per share:Weighted average common shares outstanding
    
    
    228,689
    
    
    
    196,317
    
    
    
    228,034
    
    
    
    194,974Basic net income per share
    
    $
    0.37
    
    
    $
    0.53
    
    
    $
    0.49
    
    
    $
    1.20Numerator for diluted net income per share:Net income, as reported
    
    $
    84,638
    
    
    $
    103,281
    
    
    $
    112,547
    
    
    $
    234,037Interest on the 1% Convertible Notes due 2035,
net of tax
    
    
    116
    
    
    
    
    
    
    
    348
    
    
    
    Net income used in computing diluted net income
per share
    
    $
    84,754
    
    
    $
    103,281
    
    
    $
    112,895
    
    
    $
    234,037Denominator for diluted net income per share:Weighted average common shares outstanding
    
    
    228,689
    
    
    
    196,317
    
    
    
    228,034
    
    
    
    194,974Effect of dilutive 1% Convertible Notes due 2035
    
    
    2,012
    
    
    
    
    
    
    
    2,012
    
    
    
    Effect of dilutive options and restricted stock
    
    
    6,229
    
    
    
    6,430
    
    
    
    5,946
    
    
    
    7,686Shares used in computing diluted net income per
share
    
    
    236,930
    
    
    
    202,747
    
    
    
    235,992
    
    
    
    202,660Diluted net income per share
    
    $
    0.36
    
    
    $
    0.51
    
    
    $
    0.48
    
    
    $
    1.15Anti-dilutive shares excluded from net income
per share calculation
    
    
    39,840
    
    
    
    34,478
    
    
    
    39,777
    
    
    
    32,679
  17




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 9. Share Repurchase Program
  18




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 10. Commitments, Contingencies and Guarantees
 FlashVision.
  Flash Partners .
  Flash Alliance.
  19




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 Toshiba Foundry.
 TwinSys.
 Business Ventures and Foundry Arrangement with Toshiba.
 Other Silicon Sources.
 Subcontractors.
 Off Balance Sheet Liabilities
  Master
Lease Agreements by Execution Date
    
    Lease Amounts(1)
    
    
    Expiration(Yen in billions)
    
    (Dollars in millions)FlashVisionJune 2006
    
    ¥
    4.0
    
    
    $
    34
    
    
    
    2009Flash PartnersDecember 2004
    
    
    17.0
    
    
    
    148
    
    
    
    2010December 2005
    
    
    13.0
    
    
    
    113
    
    
    
    2011June 2006
    
    
    12.3
    
    
    
    108
    
    
    
    2011September 2006
    
    
    41.2
    
    
    
    358
    
    
    
    2011March 2007
    
    
    28.5
    
    
    
    248
    
    
    
    2012Total Flash Partners
    
    
    112.0
    
    
    
    975Total indemnification and guarantee obligations
    
    ¥
    116.0
    
    
    $
    1,009
 
 (1)
    
    The maximum amount of the Companys contingent indemnification or guarantee
obligation, net of payments, and any lease adjustments based upon the exchange rate at
September 30, 2007. 20




---



##### Table of Contents



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




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
   22




---



##### 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
    
    
    4 5 Years
    
    
    Years1 Year
    
    
    (Fiscal 2008
    
    
    (Fiscal 2010
    
    
    (BeyondTotal
    
    

(3 months)
    
    
    and 2009)
    
    
    and 2011)
    
    
    Fiscal 2011)
    
    
    OtherOperating leases
    
    $
    42,444
    
    
    $
    2,177
    
    
    $
    16,479
    
    
    $
    13,409
    
    
    $
    10,379
    
    
    $
    FlashVision fabrication capacity
expansion costs, and reimbursement
for certain other costs including
depreciation
    
    
    150,106
    (4)
    
    
    16,943
    
    
    
    115,943
    
    
    
    16,949
    
    
    
    271
    
    
    
    Flash Partners fabrication
capacity expansion and
reimbursement for certain other
costs including depreciation
    
    
    2,079,778
    (4)
    
    
    220,790
    
    
    
    1,071,311
    
    
    
    660,932
    
    
    
    126,745
    
    
    
    Flash Alliance fabrication
capacity expansion and
reimbursement for certain other
costs including depreciation and
start-up
    
    
    2,450,369
    (4)
    
    
    105,428
    
    
    
    1,538,875
    
    
    
    523,999
    
    
    
    282,067
    
    
    
    Toshiba research and development
    
    
    14,200
    (4)
    
    
    4,200
    
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    Capital equipment purchases
commitments
    
    
    74,979
    
    
    
    74,979
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Convertible notes principal and
interest (1)
    
    
    1,310,241
    
    
    
    3,063
    
    
    
    24,500
    
    
    
    24,500
    
    
    
    1,258,178
    
    
    
    Income taxes payable (2)
    
    
    55,731
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55,731Operating expense commitments
    
    
    80,730
    
    
    
    80,730
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Noncancelable production purchase
commitments (3)
    
    
    437,449
    (4)
    
    
    437,449
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    6,696,027
    
    
    $
    945,759
    
    
    $
    2,777,108
    
    
    $
    1,239,789
    
    
    $
    1,677,640
    
    
    $
    55,731
 23




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 Off Balance Sheet Arrangements.
 As ofSeptember 30, 2007Indemnification of FlashVision foundry equipment lease (5)
    
    $
    34,260Guarantee of Flash Partners equipment leases (6)
    
    $
    975,371
 
 (1)
    
    In May 2006, the Company issued and sold $1.15 billion in aggregate principal
amount of 1% Senior Convertible Notes due May 15, 2013. The Company will pay cash interest
at an annual rate of 1%, payable semi-annually on May 15 and November 15 of each year until
calendar year 2013. In November 2006, through its acquisition of msystems, the Company
assumed msystems $75 million in aggregate principal amount of 1% Convertible Notes due
March 15, 2035. The Company will pay cash interest at an annual rate of 1%, payable
semi-annually on March 15 and September 15 of each year until calendar year 2035.(2)
    
    Includes liability of $9.1 million related to uncertain tax positions subject to
an ongoing examination and unrecognized tax benefits of $46.6 million on issues not
currently under examination.(3)
    
    Includes Toshiba foundries, FlashVision, Flash Partners, related party vendors
and other silicon source vendor 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
September 30, 2007.(5)
    
    The Companys contingent indemnification obligation is 4.0 billion Japanese yen,
or approximately $34 million based upon the exchange rate at September 30, 2007.(6)
    
    The Companys guarantee obligation, net of cumulative lease payments, is 112.0
billion Japanese yen, or approximately $975 million based upon the exchange rate at
September 30, 2007. 24




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
  Fiscal Year Ending:2007 (three months)
    
    $
    2,3652008
    
    
    9,1762009
    
    
    9,0352010
    
    
    8,0442011
    
    
    6,3872012 and beyond
    
    
    10,379Total operating leases
    
    
    45,386Sublease income
    
    
    2,942$
    42,444
 Foreign Currency Exchange and Other Contracts.
 25




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 11.
    
    Related Parties and Strategic Investments
 Toshiba .
 Flash Ventures with Toshiba . Consolidation of Variable Interest Entities,
 TwinSys.
 Tower Semiconductor.
 Flextronics.
 26




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
  Solid State Storage Solutions LLC
 27




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 12. Business Acquisition
 msystems Ltd. Business Combinations
  Fair value of SanDisk common stock issued
    
    $
    1,365,150Estimated fair value of options and stock appreciation rights assumed
    
    
    115,670Direct transaction costs
    
    
    14,918Total estimated purchase price
    
    $
    1,495,738
  Net Tangible Assets
 Cash
    
    $
    41,657Short-term investments
    
    
    100,341Accounts receivable
    
    
    163,705Inventory
    
    
    134,677Property and equipment, net
    
    
    35,872Other assets
    
    
    109,316Total assets acquired
    
    
    585,568Accounts payable
    
    
    (133,263
    )Other liabilities
    
    
    (179,042
    )Total liabilities assumed
    
    
    (312,305
    )Net tangible assets acquired
    
    $
    273,263
 Purchase Price Allocation
 28




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
  Net tangible assets acquired
    
    $
    273,263Goodwill
    
    
    699,975Other identifiable intangible assets:Core technology
    
    
    235,500Trademarks
    
    
    4,000Customer relationships
    
    
    66,000Backlog
    
    
    5,000Supply agreement
    
    
    2,000Total other identifiable intangible assets
    
    
    312,500Acquired in-process technology
    
    
    186,000Deferred tax liability
    
    
    (31,339
    )Assumed unvested share-based awards to be expensed
    
    
    55,339Total preliminary estimated purchase price
    
    $
    1,495,738
 Acquisition-Related Restructuring
 In-process Technology.
  29




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 Matrix Semiconductor, Inc. ®
  Fair value of SanDisk common stock issued
    
    $
    242,303Estimated fair value of options assumed
    
    
    33,169Cash consideration
    
    
    20,000Direct transaction costs
    
    
    907Total purchase price
    
    $
    296,379
 Acquisition-Related Restructuring
 In-process Technology.
   30




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 Pro Forma Results.
 Three months
    
    
    Nine monthsended
    
    
    endedOctober 1, 2006
    
    
    October 1, 2006Net revenues
    
    $
    968,460
    
    
    $
    2,740,350Net income
    
    $
    97,531
    
    
    $
    223,639Net income per share:Basic
    
    $
    0.43
    
    
    $
    0.99Diluted
    
    $
    0.41
    
    
    $
    0.95
  31




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 13. Income Taxes
  Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109,
    32




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
       35




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
        36




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
      37




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 15. Condensed Consolidating Financial Statements
   38




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 Condensed Consolidating Statements of Operations
 Other
    
    
    Combined Non-Parent
    
    
    Subsidiary
    
    
    Guarantor
    
    
    Guarantor
    
    
    Consolidating
    
    
    TotalCompany (1)
    
    

Issuer (1)
    
    

Subsidiary (1)
    
    

Subsidiaries (2)
    
    
    Adjustments
    
    
    Company(In thousands)Total revenues
    
    $
    540,479
    
    
    $
    
    
    
    $
    63,929
    
    
    $
    1,442,818
    
    
    $
    (1,009,803
    )
    
    $
    1,037,423Total cost of revenues
    
    
    298,311
    
    
    
    
    
    
    
    71,364
    
    
    
    1,294,954
    
    
    
    (969,526
    )
    
    
    695,103Gross margin
    
    
    242,168
    
    
    
    
    
    
    
    (7,435
    )
    
    
    147,864
    
    
    
    (40,277
    )
    
    
    342,320Total operating expenses
    
    
    137,832
    
    
    
    
    
    
    
    40,515
    
    
    
    95,767
    
    
    
    (40,945
    )
    
    
    233,169Operating income (loss)
    
    
    104,336
    
    
    
    
    
    
    
    (47,950
    )
    
    
    52,097
    
    
    
    668
    
    
    
    109,151Total other income (expense)
    
    
    32,729
    
    
    
    6
    
    
    
    (4,137
    )
    
    
    (1,021
    )
    
    
    1,623
    
    
    
    29,200Income (loss) before taxes
    
    
    137,065
    
    
    
    6
    
    
    
    (52,087
    )
    
    
    51,076
    
    
    
    2,291
    
    
    
    138,351Provision (benefit) for income taxes
    
    
    45,385
    
    
    
    
    
    
    
    (2,485
    )
    
    
    10,824
    
    
    
    (11
    )
    
    
    53,713Equity in net income (loss) of
consolidated subsidiaries
    
    
    43,185
    
    
    
    
    
    
    
    (10,490
    )
    
    
    (6,185
    )
    
    
    (26,510
    )
    
    
    Net income (loss)
    
    $
    134,865
    
    
    $
    6
    
    
    $
    (60,092
    )
    
    $
    34,067
    
    
    $
    (24,208
    )
    
    $
    84,638
 Condensed Consolidating Statements of Operations
 Other
    
    
    Combined Non-Parent
    
    
    Subsidiary
    
    
    Guarantor
    
    
    Guarantor
    
    
    Consolidating
    
    
    TotalCompany (1)
    
    

Issuer (1)
    
    

Subsidiary (1)
    
    

Subsidiaries (2)
    
    
    Adjustments
    
    
    Company(In thousands)Total revenues
    
    $
    1,492,326
    
    
    $
    
    
    
    $
    217,871
    
    
    $
    3,416,831
    
    
    $
    (2,476,487
    )
    
    $
    2,650,541Total cost of revenues
    
    
    832,172
    
    
    
    
    
    
    
    230,089
    
    
    
    3,207,764
    
    
    
    (2,380,453
    )
    
    
    1,889,572Gross margin
    
    
    660,154
    
    
    
    
    
    
    
    (12,218
    )
    
    
    209,067
    
    
    
    (96,034
    )
    
    
    760,969Total operating expenses
    
    
    398,475
    
    
    
    
    
    
    
    106,820
    
    
    
    247,013
    
    
    
    (94,557
    )
    
    
    657,751Operating income (loss)
    
    
    261,679
    
    
    
    
    
    
    
    (119,038
    )
    
    
    (37,946
    )
    
    
    (1,477
    )
    
    
    103,218Total other income (expense)
    
    
    92,346
    
    
    
    (1
    )
    
    
    21,976
    
    
    
    (14,729
    )
    
    
    4,423
    
    
    
    104,015Income (loss) before taxes
    
    
    354,025
    
    
    
    (1
    )
    
    
    (97,062
    )
    
    
    (52,675
    )
    
    
    2,946
    
    
    
    207,233Provision (benefit) for income taxes
    
    
    76,863
    
    
    
    
    
    
    
    1,578
    
    
    
    11,043
    
    
    
    (9
    )
    
    
    89,475Minority interest
    
    
    
    
    
    
    
    
    
    
    5,211
    
    
    
    
    
    
    
    
    
    
    
    5,211Equity in net income (loss) of
consolidated subsidiaries
    
    
    (38,705
    )
    
    
    
    
    
    
    (1,349
    )
    
    
    (13,555
    )
    
    
    53,609
    
    
    
    Net income (loss)
    
    $
    238,457
    
    
    $
    (1
    )
    
    $
    (105,200
    )
    
    $
    (77,273
    )
    
    $
    56,564
    
    
    $
    112,547
 
 (1)
    
    This represents legal entity results which exclude any subsidiaries required to be
consolidated under GAAP.(2)
    
    This represents all other legal subsidiaries. 39




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 Condensed Consolidating Balance Sheets
 CombinedOther
    
    
    Non-Parent
    
    
    Subsidiary
    
    
    Guarantor
    
    
    Guarantor
    
    
    Consolidating
    
    
    TotalCompany (1)
    
    
    Issuer (1)
    
    
    Subsidiary (1)
    
    
    Subsidiaries (2)
    
    
    Adjustments
    
    
    Company(In thousands)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    512,409
    
    
    $
    222
    
    
    $
    179,215
    
    
    $
    279,074
    
    
    $
    
    
    
    $
    970,920Short-term investments
    
    
    1,308,003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,674
    
    
    
    1,334,677Accounts receivable, net
    
    
    72,654
    
    
    
    
    
    
    
    28,737
    
    
    
    343,758
    
    
    
    (7,133
    )
    
    
    438,016Inventory
    
    
    129,693
    
    
    
    
    
    
    
    30,832
    
    
    
    386,518
    
    
    
    (1,844
    )
    
    
    545,199Deferred taxes
    
    
    150,425
    
    
    
    
    
    
    
    346
    
    
    
    23,503
    
    
    
    78
    
    
    
    174,352Other current assets
    
    
    517,516
    
    
    
    
    
    
    
    105,459
    
    
    
    796,704
    
    
    
    (1,277,183
    )
    
    
    142,496Total current assets
    
    
    2,690,700
    
    
    
    222
    
    
    
    344,589
    
    
    
    1,829,557
    
    
    
    (1,259,408
    )
    
    
    3,605,660Property and equipment, net
    
    
    187,197
    
    
    
    
    
    
    
    35,139
    
    
    
    161,606
    
    
    
    1
    
    
    
    383,943Goodwill
    
    
    
    
    
    
    
    
    
    
    697,814
    
    
    
    150,108
    
    
    
    55
    
    
    
    847,977Intangibles, net
    
    
    
    
    
    
    
    
    
    
    244,213
    
    
    
    98,367
    
    
    
    
    
    
    
    342,580Other non-current assets
    
    
    2,367,213
    
    
    
    71,802
    
    
    
    9,476
    
    
    
    858,832
    
    
    
    (1,306,777
    )
    
    
    2,000,546Total assets
    
    $
    5,245,110
    
    
    $
    72,024
    
    
    $
    1,331,231
    
    
    $
    3,098,470
    
    
    $
    (2,566,129
    )
    
    $
    7,180,706LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    37,067
    
    
    $
    
    
    
    $
    25,574
    
    
    $
    324,120
    
    
    $
    451
    
    
    $
    387,212Other current accrued liabilities
    
    
    464,578
    
    
    
    414
    
    
    
    52,094
    
    
    
    1,243,671
    
    
    
    (1,329,694
    )
    
    
    431,063Total current liabilities
    
    
    501,645
    
    
    
    414
    
    
    
    77,668
    
    
    
    1,567,791
    
    
    
    (1,329,243
    )
    
    
    818,275Convertible long-term debt
    
    
    1,150,000
    
    
    
    75,000
    
    
    
    
    
    
    
    4,614
    
    
    
    (4,614
    )
    
    
    1,225,000Non-current liabilities and deferred
taxes
    
    
    35,067
    
    
    
    
    
    
    
    3,542
    
    
    
    96,477
    
    
    
    (7,082
    )
    
    
    128,004Total liabilities
    
    
    1,686,712
    
    
    
    75,414
    
    
    
    81,210
    
    
    
    1,668,882
    
    
    
    (1,340,939
    )
    
    
    2,171,279Minority interest
    
    
    
    
    
    
    
    
    
    
    1,067
    
    
    
    
    
    
    
    
    
    
    
    1,067Stockholders Equity:Common stock
    
    
    2,667,460
    
    
    
    
    
    
    
    1,293,451
    
    
    
    1,323,595
    
    
    
    (1,448,397
    )
    
    
    3,836,109Retained earnings (accumulated deficit)
    
    
    878,728
    
    
    
    (3,390
    )
    
    
    (43,047
    )
    
    
    281,849
    
    
    
    37,775
    
    
    
    1,151,915Accumulated other comprehensive income
(loss)
    
    
    12,210
    
    
    
    
    
    
    
    (1,450
    )
    
    
    (175,856
    )
    
    
    185,432
    
    
    
    20,336Total stockholders equity
    
    
    3,558,398
    
    
    
    (3,390
    )
    
    
    1,248,954
    
    
    
    1,429,588
    
    
    
    (1,225,190
    )
    
    
    5,008,360Total liabilities and stockholders equity
    
    $
    5,245,110
    
    
    $
    72,024
    
    
    $
    1,331,231
    
    
    $
    3,098,470
    
    
    $
    (2,566,129
    )
    
    $
    7,180,706
 
 (1)
    
    This represents legal entity results which exclude any subsidiaries required to be
consolidated under GAAP.(2)
    
    This represents all other legal subsidiaries. 40




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 Condensed Consolidating Balance Sheets
 CombinedOther
    
    
    Non-Parent
    
    
    Subsidiary
    
    
    Guarantor
    
    
    Guarantor
    
    
    Consolidating
    
    
    TotalCompany (1)
    
    
    Issuer (1)
    
    
    Subsidiary (1)
    
    
    Subsidiaries (2)
    
    
    Adjustments
    
    
    Company(In thousands)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    1,165,473
    
    
    $
    48
    
    
    $
    71,839
    
    
    $
    340,291
    
    
    $
    3,049
    
    
    $
    1,580,700Short-term investments
    
    
    1,192,084
    
    
    
    
    
    
    
    26,294
    
    
    
    2,681
    
    
    
    30,434
    
    
    
    1,251,493Accounts receivable, net
    
    
    256,801
    
    
    
    
    
    
    
    55,864
    
    
    
    313,407
    
    
    
    (14,332
    )
    
    
    611,740Inventory
    
    
    106,772
    
    
    
    
    
    
    
    71,839
    
    
    
    318,154
    
    
    
    (781
    )
    
    
    495,984Deferred taxes
    
    
    152,791
    
    
    
    
    
    
    
    
    
    
    
    23,217
    
    
    
    (1
    )
    
    
    176,007Other current assets
    
    
    344,722
    
    
    
    
    
    
    
    74,434
    
    
    
    229,912
    
    
    
    (523,131
    )
    
    
    125,937Total current assets
    
    
    3,218,643
    
    
    
    48
    
    
    
    300,270
    
    
    
    1,227,662
    
    
    
    (504,762
    )
    
    
    4,241,861Property and equipment, net
    
    
    182,750
    
    
    
    
    
    
    
    34,870
    
    
    
    100,345
    
    
    
    
    
    
    
    317,965Goodwill
    
    
    
    
    
    
    
    
    
    
    759,729
    
    
    
    150,470
    
    
    
    55
    
    
    
    910,254Intangibles, net
    
    
    
    
    
    
    
    
    
    
    312,682
    
    
    
    76,396
    
    
    
    
    
    
    
    389,078Other non-current assets
    
    
    1,735,998
    
    
    
    71,789
    
    
    
    111,754
    
    
    
    368,467
    
    
    
    (1,179,383
    )
    
    
    1,108,625Total assets
    
    $
    5,137,391
    
    
    $
    71,837
    
    
    $
    1,519,305
    
    
    $
    1,923,340
    
    
    $
    (1,684,090
    )
    
    $
    6,967,783LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    43,910
    
    
    $
    
    
    
    $
    46,349
    
    
    $
    312,219
    
    
    $
    (981
    )
    
    $
    401,497Other current accrued liabilities
    
    
    515,042
    
    
    
    226
    
    
    
    59,287
    
    
    
    512,525
    
    
    
    (592,130
    )
    
    
    494,950Total current liabilities
    
    
    558,952
    
    
    
    226
    
    
    
    105,636
    
    
    
    824,744
    
    
    
    (593,111
    )
    
    
    896,447Convertible long-term debt
    
    
    1,150,000
    
    
    
    75,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,225,000Non-current
liabilities and deferred taxes
    
    
    18,029
    
    
    
    
    
    
    
    32,229
    
    
    
    29,770
    
    
    
    (7,802
    )
    
    
    72,226Total liabilities
    
    
    1,726,981
    
    
    
    75,226
    
    
    
    137,865
    
    
    
    854,514
    
    
    
    (600,913
    )
    
    
    2,193,673Minority interest
    
    
    
    
    
    
    
    
    
    
    5,976
    
    
    
    
    
    
    
    
    
    
    
    5,976Stockholders Equity:Common stock
    
    
    2,387,819
    
    
    
    
    
    
    
    1,085,277
    
    
    
    675,218
    
    
    
    (491,193
    )
    
    
    3,657,121Retained earnings (accumulated deficit)
    
    
    1,018,566
    
    
    
    (3,389
    )
    
    
    284,414
    
    
    
    384,471
    
    
    
    (578,542
    )
    
    
    1,105,520Accumulated other comprehensive income
(loss)
    
    
    4,025
    
    
    
    
    
    
    
    5,773
    
    
    
    9,137
    
    
    
    (13,442
    )
    
    
    5,493Total stockholders equity
    
    
    3,410,410
    
    
    
    (3,389
    )
    
    
    1,375,464
    
    
    
    1,068,826
    
    
    
    (1,083,177
    )
    
    
    4,768,134Total liabilities and stockholders equity
    
    $
    5,137,391
    
    
    $
    71,837
    
    
    $
    1,519,305
    
    
    $
    1,923,340
    
    
    $
    (1,684,090
    )
    
    $
    6,967,783
 
 (1)
    
    This represents legal entity results which exclude any subsidiaries required to be
consolidated under GAAP.(2)
    
    This represents all other legal subsidiaries. 41




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 Condensed Consolidating Statements of Cash Flows
 CombinedOther
    
    
    Non-Parent
    
    
    Subsidiary
    
    
    Guarantor
    
    
    Guarantor
    
    
    Consolidating
    
    
    TotalCompany (1)
    
    
    Issuer (1)
    
    
    Subsidiary (1)
    
    
    Subsidiaries (2)
    
    
    Adjustments
    
    
    Company(In thousands)Net cash provided by operating activities
    
    $
    345,616
    
    
    $
    174
    
    
    $
    88,175
    
    
    $
    72,799
    
    
    $
    (3,049
    )
    
    $
    503,715Net cash provided by (used in) investing
activities
    
    
    (1,023,282
    )
    
    
    
    
    
    
    28,698
    
    
    
    (134,016
    )
    
    
    
    
    
    
    (1,128,600
    )Net cash provided by (used in) financing
activities
    
    
    23,410
    
    
    
    
    
    
    
    (9,880
    )
    
    
    
    
    
    
    
    
    
    
    13,530Effect of changes in foreign currency
exchange rates on cash
    
    
    1,192
    
    
    
    
    
    
    
    383
    
    
    
    
    
    
    
    
    
    
    
    1,575Net increase (decrease) in cash and cash
equivalents
    
    
    (653,064
    )
    
    
    174
    
    
    
    107,376
    
    
    
    (61,217
    )
    
    
    (3,049
    )
    
    
    (609,780
    )Cash and cash equivalents at beginning of
period
    
    
    1,165,473
    
    
    
    48
    
    
    
    71,839
    
    
    
    340,291
    
    
    
    3,049
    
    
    
    1,580,700Cash and cash equivalents at end of period
    
    $
    512,409
    
    
    $
    222
    
    
    $
    179,215
    
    
    $
    279,074
    
    
    $
    
    
    
    $
    970,920
 
 (1)
    
    This represents legal entity results which exclude any subsidiaries required to be
consolidated under GAAP.(2)
    
    This represents all other legal subsidiaries. 42




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 16.
Subsequent Events
   43




---



##### Table of Contents



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
    Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109
 44




---



##### Table of Contents



Results of Operations.
 Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    % of
    
    
    October 1,
    
    
    % of
    
    
    September 30,
    
    
    % of
    
    
    October 1,
    
    
    % of2007
    
    
    Revenues
    
    
    2006
    
    
    Revenues
    
    
    2007
    
    
    Revenues
    
    
    2006
    
    
    Revenues(In millions, except percentages)Product revenues
    
    $
    918.8
    
    
    
    88.6%
    
    
    $
    673.2
    
    
    
    89.6%
    
    
    $
    2,328.1
    
    
    
    87.8%
    
    
    $
    1,847.6
    
    
    
    88.2%License and royalty revenues
    
    
    118.6
    
    
    
    11.4%
    
    
    
    78.2
    
    
    
    10.4%
    
    
    
    322.4
    
    
    
    12.2%
    
    
    
    246.2
    
    
    
    11.8%Total revenues
    
    
    1,037.4
    
    
    
    100.0%
    
    
    
    751.4
    
    
    
    100.0%
    
    
    
    2,650.5
    
    
    
    100.0%
    
    
    
    2,093.8
    
    
    
    100.0%Cost of product revenues
    
    
    680.5
    
    
    
    65.6%
    
    
    
    455.4
    
    
    
    60.6%
    
    
    
    1,839.3
    
    
    
    69.4%
    
    
    
    1,270.4
    
    
    
    60.7%Amortization of
acquisition-related
intangible assets
    
    
    14.6
    
    
    
    1.4%
    
    
    
    
    
    
    
    
    
    
    
    50.2
    
    
    
    1.9%
    
    
    
    
    
    
    
    Total cost of product
revenues
    
    
    695.1
    
    
    
    67.0%
    
    
    
    455.4
    
    
    
    60.6%
    
    
    
    1,889.5
    
    
    
    71.3%
    
    
    
    1,270.4
    
    
    
    60.7%Gross margins
    
    
    342.3
    
    
    
    33.0%
    
    
    
    296.0
    
    
    
    39.4%
    
    
    
    761.0
    
    
    
    28.7%
    
    
    
    823.4
    
    
    
    39.3%Operating
expensesResearch and development
    
    
    110.5
    
    
    
    10.7%
    
    
    
    78.1
    
    
    
    10.4%
    
    
    
    307.4
    
    
    
    11.6%
    
    
    
    215.6
    
    
    
    10.3%Sales and marketing
    
    
    72.5
    
    
    
    7.0%
    
    
    
    45.0
    
    
    
    6.0%
    
    
    
    189.2
    
    
    
    7.1%
    
    
    
    133.4
    
    
    
    6.4%General and administrative
    
    
    45.6
    
    
    
    4.4%
    
    
    
    40.2
    
    
    
    5.3%
    
    
    
    133.8
    
    
    
    5.1%
    
    
    
    107.4
    
    
    
    5.1%Write-off of acquired
in-process technology
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39.6
    
    
    
    1.9%Amortization of
acquisition-related
intangible assets
    
    
    4.6
    
    
    
    0.4%
    
    
    
    4.4
    
    
    
    0.6%
    
    
    
    20.7
    
    
    
    0.8%
    
    
    
    12.6
    
    
    
    0.6%Restructuring
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6.7
    
    
    
    0.2%
    
    
    
    
    
    
    
    Total operating expenses
    
    
    233.2
    
    
    
    22.5%
    
    
    
    167.7
    
    
    
    22.3%
    
    
    
    657.8
    
    
    
    24.8%
    
    
    
    508.6
    
    
    
    24.3%Operating income
    
    
    109.1
    
    
    
    10.5%
    
    
    
    128.3
    
    
    
    17.1%
    
    
    
    103.2
    
    
    
    3.9%
    
    
    
    314.8
    
    
    
    15.0%Other income
    
    
    29.2
    
    
    
    2.8%
    
    
    
    32.3
    
    
    
    4.3%
    
    
    
    104.0
    
    
    
    3.9%
    
    
    
    72.7
    
    
    
    3.5%Income before taxes
    
    
    138.3
    
    
    
    13.3%
    
    
    
    160.6
    
    
    
    21.4%
    
    
    
    207.2
    
    
    
    7.8%
    
    
    
    387.5
    
    
    
    18.5%Provision for income taxes
    
    
    53.7
    
    
    
    5.1%
    
    
    
    57.3
    
    
    
    7.6%
    
    
    
    89.5
    
    
    
    3.4%
    
    
    
    153.5
    
    
    
    7.3%Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5.2
    
    
    
    0.1%
    
    
    
    
    
    
    
    Net income
    
    $
    84.6
    
    
    
    8.2%
    
    
    $
    103.3
    
    
    
    13.8%
    
    
    $
    112.5
    
    
    
    4.3%
    
    
    $
    234.0
    
    
    
    11.2%
 Product Revenues.
 Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    October 1,
    
    
    Percent
    
    
    September 30,
    
    
    October 1,
    
    
    Percent2007
    
    
    2006
    
    
    Change
    
    
    2007
    
    
    2006
    
    
    Change(In millions, except percentages)Retail
    
    $
    607.7
    
    
    $
    445.5
    
    
    
    36.4%
    
    
    $
    1,436.0
    
    
    $
    1,263.8
    
    
    
    13.6%OEM
    
    
    311.1
    
    
    
    227.7
    
    
    
    36.6%
    
    
    
    892.1
    
    
    
    583.8
    
    
    
    52.8%Product revenues
    
    $
    918.8
    
    
    $
    673.2
    
    
    
    36.5%
    
    
    $
    2,328.1
    
    
    $
    1,847.6
    
    
    
    26.0%
     45




---



##### Table of Contents



Geographical Product Revenues.
 Three months ended
    
    
    Nine months ended% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofSeptember 30,
    
    
    Product
    
    
    October 1,
    
    
    Product
    
    
    Percent
    
    
    September 30,
    
    
    Product
    
    
    October 1,
    
    
    Product
    
    
    Percent2007
    
    
    Revenues
    
    
    2006
    
    
    Revenues
    
    
    Change
    
    
    2007
    
    
    Revenues
    
    
    2006
    
    
    Revenues
    
    
    Change(In millions, except percentages)North America
    
    $
    300.8
    
    
    
    32.7%
    
    
    $
    281.7
    
    
    
    41.8%
    
    
    
    6.8%
    
    
    $
    835.7
    
    
    
    35.9%
    
    
    $
    775.1
    
    
    
    42.0%
    
    
    
    7.8%Japan
    
    
    62.3
    
    
    
    6.8%
    
    
    
    44.0
    
    
    
    6.5%
    
    
    
    41.6%
    
    
    
    215.7
    
    
    
    9.3%
    
    
    
    100.3
    
    
    
    5.4%
    
    
    
    115.1%Europe and Middle
East
    
    
    281.0
    
    
    
    30.6%
    
    
    
    163.4
    
    
    
    24.3%
    
    
    
    72.0%
    
    
    
    610.2
    
    
    
    26.2%
    
    
    
    457.0
    
    
    
    24.7%
    
    
    
    33.5%Asia-Pacific
    
    
    273.3
    
    
    
    29.7%
    
    
    
    182.9
    
    
    
    27.2%
    
    
    
    49.4%
    
    
    
    654.7
    
    
    
    28.1%
    
    
    
    512.5
    
    
    
    27.7%
    
    
    
    27.7%Other foreign
countries
    
    
    1.4
    
    
    
    0.2%
    
    
    
    1.2
    
    
    
    0.2%
    
    
    
    16.7%
    
    
    
    11.8
    
    
    
    0.5%
    
    
    
    2.7
    
    
    
    0.2%
    
    
    
    337.0%Product revenues
    
    $
    918.8
    
    
    
    100.0%
    
    
    $
    673.2
    
    
    
    100.0%
    
    
    
    36.5%
    
    
    $
    2,328.1
    
    
    
    100.0%
    
    
    $
    1,847.6
    
    
    
    100.0%
    
    
    
    26.0%
   License and Royalty Revenues.
 Three months ended
    
    Nine months endedSeptember 30,
    
    October 1,
    
    Percent
    
    September 30,
    
    October 1,
    
    Percent2007
    
    2006
    
    Change
    
    2007
    
    2006
    
    Change(In millions, except percentages)License and royalty revenues
    
    $
    118.6
    
    
    $
    78.2
    
    
    
    51.7
    %
    
    $
    322.4
    
    
    $
    246.2
    
    
    
    31.0
    %
  46




---



##### Table of Contents



Gross Margin.
 Three months ended
    
    Nine months endedSeptember 30,
    
    October 1,
    
    Percent
    
    September 30,
    
    October 1,
    
    Percent2007
    
    2006
    
    Change
    
    2007
    
    2006
    
    Change(In millions, except percentages)Product gross margin
    
    $
    223.7
    
    
    $
    217.8
    
    
    
    2.7
    %
    
    $
    438.6
    
    
    $
    577.2
    
    
    
    (24.0
    %)Product gross
margin (as a
percent of product
revenues)
    
    
    24.4
    %
    
    
    32.4
    %
    
    
    
    
    
    
    18.8
    %
    
    
    31.2
    %Total gross margin
(as a percent of
total revenues)
    
    
    33.0
    %
    
    
    39.4
    %
    
    
    
    
    
    
    28.7
    %
    
    
    39.3
    %
    Research and Development.
 Three months ended
    
    Nine months endedSeptember 30,
    
    October 1,
    
    Percent
    
    September 30,
    
    October 1,
    
    Percent2007
    
    2006
    
    Change
    
    2007
    
    2006
    
    Change(In millions, except percentages)Research and development
    
    $
    110.5
    
    
    $
    78.1
    
    
    
    41.6
    %
    
    $
    307.4
    
    
    $
    215.6
    
    
    
    42.6
    %Percent of revenue
    
    
    10.7
    %
    
    
    10.4
    %
    
    
    
    
    
    
    11.6
    %
    
    
    10.3
    %
  Sales and Marketing.
 Three months ended
    
    Nine months endedSeptember 30,
    
    October 1,
    
    Percent
    
    September 30,
    
    October 1,
    
    Percent2007
    
    2006
    
    Change
    
    2007
    
    2006
    
    Change(In millions, except percentages)Sales and marketing
    
    $
    72.5
    
    
    $
    45.0
    
    
    
    61.2
    %
    
    $
    189.2
    
    
    $
    133.4
    
    
    
    41.8
    %Percent of revenue
    
    
    7.0
    %
    
    
    6.0
    %
    
    
    
    
    
    
    7.1
    %
    
    
    6.4
    %
  47




---



##### Table of Contents



General and Administrative.
 Three months ended
    
    Nine months endedSeptember 30,
    
    October 1,
    
    Percent
    
    September 30,
    
    October 1,
    
    Percent2007
    
    2006
    
    Change
    
    2007
    
    2006
    
    Change(In millions, except percentages)General and administrative
    
    $
    45.6
    
    
    $
    40.2
    
    
    
    13.3
    %
    
    $
    133.8
    
    
    $
    107.4
    
    
    
    24.5
    %Percent of revenue
    
    
    4.4
    %
    
    
    5.3
    %
    
    
    
    
    
    
    5.1
    %
    
    
    5.1
    %
  Write-off of Acquired In-process Technology.
 Three months ended
    
    Nine months endedSeptember 30,
    
    October 1,
    
    Percent
    
    September 30,
    
    October 1,
    
    Percent2007
    
    2006
    
    Change
    
    2007
    
    2006
    
    Change(In millions, except percentages)Write-off of
acquired in-process
technology
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    $
    39.6
    
    
    
    Percent of revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.9
    %
  Amortization of Acquisition-Related Intangible Assets.
 Three months ended
    
    Nine months endedSeptember 30,
    
    October 1,
    
    Percent
    
    September 30,
    
    October 1,
    
    Percent2007
    
    2006
    
    Change
    
    2007
    
    2006
    
    Change(In millions, except percentages)Amortization of
acquisition-related
intangible assets
    
    $
    4.6
    
    
    $
    4.4
    
    
    
    3.8
    %
    
    $
    20.7
    
    
    $
    12.6
    
    
    
    65.0
    %Percent of revenue
    
    
    0.4
    %
    
    
    0.6
    %
    
    
    
    
    
    
    0.8
    %
    
    
    0.6
    %
  Restructuring.
 Three months ended
    
    Nine months endedSeptember 30,
    
    October 1,
    
    Percent
    
    September 30,
    
    October 1,
    
    Percent2007
    
    2006
    
    Change
    
    2007
    
    2006
    
    Change(In millions, except percentages)Restructuring
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    6.7
    
    
    $
    
    
    
    
    Percent of revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.2
    %
    
    
    
 48




---



##### Table of Contents



Other Income.
 Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    October 1,
    
    
    Percent
    
    
    September 30,
    
    
    October 1,
    
    
    Percent2007
    
    
    2006
    
    
    Change
    
    
    2007
    
    
    2006
    
    
    Change(In millions, except percentages)Interest income
    
    $
    31.8
    
    
    $
    29.9
    
    
    
    6.2%
    
    
    $
    104.0
    
    
    $
    68.5
    
    
    
    51.9%Interest (expense)
and other income
(expense), net
    
    
    (3.2
    )
    
    
    2.0
    
    
    
    (268.6%
    )
    
    
    (0.6
    )
    
    
    3.4
    
    
    
    (116.9%)Equity in income of
business ventures
    
    
    0.6
    
    
    
    0.4
    
    
    
    53.6%
    
    
    
    0.6
    
    
    
    0.8
    
    
    
    (20.4)Total other income
    
    $
    29.2
    
    
    $
    32.3
    
    
    
    (9.4%)
    
    
    $
    104.0
    
    
    $
    72.7
    
    
    
    43.1%
  49




---



##### Table of Contents



Provision for Income Taxes.
 Three months ended
    
    Nine months endedSeptember 30,
    
    October 1,
    
    September 30,
    
    October 1,2007
    
    2006
    
    2007
    
    2006(In millions, except for percentages)Provision for income taxes
    
    $
    53.7
    
    
    $
    57.3
    
    
    $
    89.5
    
    
    $
    153.5Effective tax rates
    
    
    38.8
    %
    
    
    35.7
    %
    
    
    43.2
    %
    
    
    39.6
    %
      50




---



##### Table of Contents



Liquidity and Capital Resources.
  Nine months endedSeptember 30,
    
    October 1,
    
    Percent2007
    
    2006
    
    Change(In millions, except percentages)Net cash provided by operating activities
    
    $
    503.7
    
    
    $
    403.2
    
    
    
    24.9
    %Net cash used in investing activities
    
    
    (1,128.6
    )
    
    
    (889.6
    )
    
    
    26.9
    %Net cash provided by financing activities
    
    
    13.5
    
    
    
    1,198.3
    
    
    
    (98.9
    %)Effect of changes in foreign currency exchange rates on cash
    
    
    1.6
    
    
    
    0.2
    
    
    
    700.0
    %Net increase (decrease) in cash and cash equivalents
    
    $
    (609.8
    )
    
    $
    712.1
    
    
    
    (185.6
    %)
 Operating Activities.
 Investing Activities.
 Financing Activities.
 Liquid Assets.
 Short-Term Liquidity.
 Long-Term Requirements.
 51




---



##### Table of Contents



Financing Arrangements.
  Toshiba Ventures.
    52




---



##### Table of Contents



Contractual Obligations and Off Balance Sheet Arrangements
  Critical Accounting Policies
   Recent Accounting Pronouncements
 SFAS No. 157. Fair Value Measurements
 SFAS No. 159. Establishing the Fair Value Option for Financial Assets and Liabilities
 53




---



##### Table of Contents



EITF Issue No. 07-3 Accounting for Advance Payments for
Goods or Services to be Received for Use in Future Research and Development Activities.
 FSP No. APB 14-a. Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including
Partial Cash Settlement)
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
   54




---



##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
     55




---



##### Table of Contents



56




---



##### Table of Contents



57




---



##### Table of Contents



58




---



##### Table of Contents



59




---



##### Table of Contents



Item 1A. Risk Factors
 The following description of the risk factors associated with our business includes any
material changes to and supersedes the description of the risk factors associated with our business
previously disclosed in Part 1, Item 1A of our Annual Report on Form 10-K for the fiscal year ended
December 31, 2006 and our most recent Quarterly Report on Form 10-Q .
 Our operating results may fluctuate significantly, which may adversely affect our financial
condition and our stock price.
 
    
    average selling prices, net of promotions, declining at a faster rate than cost
reductions for our products due to industry or SanDisk excess supply and competitive
pricing pressures;
    
    reduction in price elasticity of demand related to pricing changes for some of our
markets and products;
    
    our license and royalty revenues may decline significantly in the future as our
existing license agreements and key patents expire or if licensees fail to perform on a
portion or all of their contractual obligations, which may also lead to increased patent
litigation costs;
    
    increased purchases of non-captive flash memory, which typically costs more than
captive flash memory and may be of less consistent quality;
    
    insufficient assembly and test capacity from our contract manufacturers or our
Shanghai facility;
    
    excess supply from captive sources due to output increasing faster than the growth in
demand resulting in excess inventory;
    
    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;
    
    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;
    
    difficulty in forecasting and managing inventory levels, particularly due to
noncancelable contractual obligations to purchase materials such as custom non-memory
materials, and the need to build finished product in advance of customer purchase
orders;
    
    timing, volume and cost of wafer production from the Flash Ventures as impacted by
fab start-up delays and costs, technology transitions, yields or production
interruptions;
    
    disruption in the manufacturing operations of suppliers, including suppliers of
sole-sourced components;
    
    increased memory component and other costs as a result of exchange rate fluctuations
to the United States dollar, particularly with respect to the Japanese yen;
    
    potential delays in the emergence of new markets and products for NAND flash memory
and acceptance of our products in these markets;
    
    timing of sell-through by our distributors and retail customers;
    
    errors or defects in our products caused by, among other things, errors or defects in
the memory or controller components, including memory and non-memory components we
procure from third-party suppliers;
    
    write-downs of our investments in fabrication capacity, equity investments and other
assets;
    
    impairment of goodwill and other challenges related to our acquisitions of msystems
and Matrix;
    
    estimates used in calculating share-based compensation expense; and
    
    other factors described under Risk Factors and elsewhere in this report.
 Our average selling prices, net of promotions, may decline faster than cost reductions due to
industry or SanDisk excess supply, competitive pricing pressures or strategic price reductions
initiated by us or our competitors.
 60




---



##### Table of Contents



Sales to a small number of customers represent a significant portion of our revenues, and if
we were to lose one of our major licensees or customers or experience any material reduction in
orders from any of our customers, our revenues and operating results would suffer
 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
retailers and distributors  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 revenues depend in part on the success of products sold by our OEM customers.
 The continued growth of our business depends on development and performance of new markets and
products for NAND flash.
 61




---



##### Table of Contents



Our
strategy of investing in captive manufacturing sources could harm us if our competitors
are able to produce products more cheaply or if industry supply exceeds demand.
 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; and our competitors seek to develop new standards which could reduce demand for our
products. ®     
   62




---



##### Table of Contents



We face competition from numerous manufacturers and marketers of products using flash memory,
as well as from manufacturers of new and alternative technologies, and if we cannot compete
effectively, our results of operations and financial condition will suffer.
 
  63




---



##### 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, the absence of which could lead to loss of market
share;
    
    efficiency of production;
    
    timing of new product announcements or introductions by us, our customers and our
competitors;
    
    the ability of our competitors to incorporate standards or develop formats which we
do not offer;
    
    the number and nature of our competitors in a given market;
    
    successful protection of intellectual property rights; and
    
    general market and economic conditions.
  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.
 We depend on third-party foundries for silicon supply and any disruption or shortage in our
supply from these sources will reduce our revenues, earnings and gross margins.
  64




---



##### Table of Contents



Our business and the markets we address are subject to significant fluctuations in supply and
demand and our commitments to our ventures with Toshiba may result in periods of significant excess
inventory.
 If actual manufacturing yields are lower than our expectations, this may result in increased
costs and product shortages.
 We depend on our third-party subcontractors and our business could be harmed if our
subcontractors do not perform as planned.
 We have commenced production at a captive assembly and test manufacturing facility in China.
 In transitioning to new processes, products and silicon sources, we face production and market
acceptance risks that may cause significant product delays, cost overruns or performance issues
that could harm our business.
 65




---



##### 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 Alliance
business venture, for which we will make substantial capital investments and incur substantial
start-up costs, which could adversely impact our operating results.
 We have an investment of approximately $166 million in 200-millimeter wafer manufacturing
assets that we expect will no longer be competitive beginning at some time during fiscal 2008.
 We have a contingent indemnification obligation and guarantee obligations related to the
ventures with Toshiba.
 66




---



##### Table of Contents



.
  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, or
underestimate our requirements and have a shortage of supply, both of which harm our financial
results.
  67




---



##### 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. ®
 Our global operations and operations at the Flash Ventures and third-party subcontractors are
subject to risks for which we may not be adequately insured.
 We are exposed to foreign currency risks.
 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.
 68




---



##### Table of Contents



We may be unable to license intellectual property to or from third parties as needed, or renew
existing licenses, which could expose us to liability for damages, reduce our royalty revenues,
increase our costs or limit or prohibit us from selling products.
 We are currently and may in the future be involved in litigation, including litigation
regarding our intellectual property rights or those of third parties, which may be costly, may
divert the efforts of our key personnel and could result in adverse court rulings, which could
materially harm our business.
   69




---



##### Table of Contents



Because of our international business and operations, we must comply with numerous
international laws and regulations, and we are vulnerable to political instability, currency
fluctuations and other risks related to international operations.
   
    
    the need to comply with foreign government regulation;
    
    changes in diplomatic and trade relationships;
    
    reduced sales to our customers or interruption to our manufacturing processes in the
Pacific Rim that may arise from regional issues in Asia;
    
    imposition of regulatory requirements, tariffs, import and export restrictions and other
barriers and restrictions;
    
    changes in, or the particular application of, government regulations;
    
    duties and/or fees related to customs entries for our products, which are all
manufactured offshore;
 70




---



##### Table of Contents




    
    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 investments.
 We may engage in business combinations that are dilutive to existing stockholders, result in
unanticipated accounting charges or otherwise adversely affect our results of operations, and
result in difficulties in assimilating and integrating the operations, personnel, technologies,
products and information systems of acquired companies or businesses.
  71




---



##### Table of Contents



Our success depends on our key personnel, including our executive officers, the loss of whom
could disrupt our business.
 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.
 To manage our growth, we may need to improve our systems, controls, processes and procedures.
We have experienced and may continue to experience rapid growth, which has placed, and could
continue to place a significant strain on our managerial, financial and operations resources and
personnel.
 72




---



##### Table of Contents



We may need to raise additional financing, which could be difficult to obtain, and which if
not obtained in satisfactory amounts may prevent us from funding ventures with Toshiba or other
third parties, 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.
 We may be subject to risks associated with environmental regulations.
 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
controls over financial reporting are not effective, our business could suffer.
 73




---



##### Table of Contents



Our debt service obligations may adversely affect our cash flow.
 
    
    increase our vulnerability to general adverse economic and industry conditions;
    
    limit our ability to obtain additional financing;
    
    require the dedication of a substantial portion of any cash flow from operations to the
payment of principal of, and interest on, our indebtedness, thereby reducing the
availability of such cash flow to fund our growth strategy, working capital, capital
expenditures and other general corporate purposes;
    
    limit our flexibility in planning for, or reacting to, changes in our business and our
industry; and
    
    place us at a competitive disadvantage relative to our competitors with less debt.
 The accounting method for convertible debt securities with net share settlement, such as our
1% Senior Convertible Notes due 2013 may be subject to change. Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Companys Own Stock
 Accounting for
Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash
Settlement)
 74




---



##### Table of Contents



We have significant financial obligations related to our ventures with Toshiba, which could
impact our ability to comply with our obligations under our 1% Senior Convertible Notes due 2013
and our 1% Convertible Notes due 2035.
 The net share settlement feature of the 1% Senior Convertible Notes due 2013 may have adverse
consequences.
  The convertible note hedge transactions and the warrant option transactions may affect the
value of the notes and our common stock.
 
    
    have entered into various over-the-counter cash-settled derivative transactions with
respect to our common stock, concurrently with, and shortly after, the pricing of the
notes; and
    
    may enter into, or may unwind, various over-the-counter derivatives and/or purchase or
sell our common stock in secondary market transactions following the pricing of the notes,
including during any observation period related to a conversion of notes.
  75




---



##### Table of Contents



There are numerous risks associated with our acquisition of msystems Ltd.
 
    
    maintaining employee morale and retaining key employees;
    
    retaining key sources of supply;
    
    incorporating msystems technology and products into our business and future product
lines;
    
    integrating msystems sales force into our worldwide product sales network;
    
    demonstrating to msystems customers that the merger will not result in adverse changes
in pricing, customer service standards or product support;
    
    coordinating research and development activities to enhance introduction of new products
and technologies;
    
    integrating msystems internal control over financial reporting with our internal
control over financial reporting;
    
    migrating both companies to a common enterprise resource planning information system to
integrate all operations, sales and administrative activities for the combined companies in
a timely and cost effective way;
    
    integrating msystems international operations with ours;
    
    integrating the business cultures of both companies; and
    
    ensuring there are no delays in releasing new products to market.
  There is pending litigation.
 There are risks related to msystems prior option grant practices.
 76




---



##### Table of Contents



77




---



##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 (c)
    
    Issuer Repurchases of Equity Securities.The table below summarizes information about the
Companys repurchases of its equity securities registered pursuant to Section 12 of the
Exchange Act during the three months ended September 30, 2007.
 Total Number of
    
    
    Approximate DollarShares Purchased as
    
    
    Value of Shares thatPart of Publicly
    
    
    May Yet BeTotal Number of
    
    
    Average Price Paid
    
    
    Announced Plans or
    
    
    Purchased Under thePeriod
    

Shares Purchased (1)
    
    

per Share (2)
    
    

Programs (1)
    
    
    Plans or ProgramsJuly 2, 2007 to July 29, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    237,596,251July 30, 2007 to August 26, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    237,596,251August 27, 2007 to September 30, 2007
    
    
    735,342
    
    
    
    47.60
    
    
    
    735,342
    
    
    
    202,596,251Total
    
    
    735,342
    
    
    $
    47.60
    
    
    
    735,342
    
    
    $
    202,596,251
 
 (1)
    
    In December 2006, the Company announced its intention to repurchase up to $300
million of its common stock in the open market over the two years following the date of
authorization.(2)
    
    Represents the weighted average price paid per share without commissions. 
 Item 3. Defaults upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
  78




---



##### Table of Contents



SIGNATURES
  SANDISK CORPORATION
(Registrant)Dated: November 8, 2007By:
    /s/ Judy BrunerJudy BrunerExecutive Vice President, Administration and
Chief Financial Officer
(On behalf of the Registrant and as Principal
Financial and Accounting Officer) 79




---



##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Exhibit Title2.1
    
    Agreement and Plan of Merger and Reorganization, dated as of October 20, 2005, by and among the
Registrant, Mike Acquisition Company LLC, Matrix Semiconductor, Inc. and Bruce Dunlevie as the
stockholder representative for the stockholders of Matrix Semiconductor, Inc.(1)2.2
    
    Agreement and Plan of Merger, dated as of July 30, 2006, by and among the Registrant, 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
    
    Amended and 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, 3.3, and 3.4.(3), (4), (5), (6)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.(10)10.1
    
    Form of Second Amendment to Change of Control Agreement for those officers of the Registrant who are
party to such Agreement.(11)31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(*)31.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(*)32.1
    
    Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.(**)32.2
    
    Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.(**)
 
 *
    
    Filed herewith.**
    
    Furnished herewith.(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).(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 July 27, 2007.(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 Registration Statement on Form 8-A/A dated
November 8, 2006.(11)
    
    Previously filed as an Exhibit to the Registrants Form 10-Q for the quarter ended July 1,
2007. 80