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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended June 29, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 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
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a
smaller reporting company)
  o þ




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##### 



SanDisk Corporation
Index
 Page No.PART I. FINANCIAL INFORMATIONItem 1.
    
    Condensed Consolidated Financial Statements:Condensed Consolidated Balance Sheets as of June 29, 2008 and December 30, 2007
    
    
    3Condensed Consolidated Statements of Operations for the three and six months ended June 29, 2008 and July 1, 2007
    
    
    4Condensed Consolidated Statements of Cash Flows for the six months ended June 29, 2008 and July 1, 2007
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    43Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    54Item 4.
    
    Controls and Procedures
    
    
    54PART II. OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    55Item 1A.
    
    Risk Factors
    
    
    61Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    79Item 3.
    
    Defaults Upon Senior Securities
    
    
    79Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    79Item 5.
    
    Other Information
    
    
    79Item 6.
    
    Exhibits
    
    
    79Signatures
    
    
    80Exhibit Index
    
    
    81EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




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PART I. FINANCIAL INFORMATION
 
 Item 1. Condensed Consolidated Financial Statements (in thousands)
 SANDISK CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 June 29, 2008
    
    
    December 30, 2007*(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    689,578
    
    
    $
    833,749Short-term investments
    
    
    619,632
    
    
    
    1,001,641Accounts receivable from product revenues, net
    
    
    204,030
    
    
    
    462,983Inventory
    
    
    795,606
    
    
    
    555,077Deferred taxes
    
    
    192,128
    
    
    
    212,255Other current assets
    
    
    337,660
    
    
    
    233,952Total current assets
    
    
    2,838,634
    
    
    
    3,299,657Long-term investments
    
    
    1,230,562
    
    
    
    1,060,393Property and equipment, net
    
    
    414,387
    
    
    
    422,895Notes receivable and investments in the flash ventures with Toshiba
    
    
    1,284,617
    
    
    
    1,108,905Deferred taxes
    
    
    150,661
    
    
    
    117,130Goodwill
    
    
    844,048
    
    
    
    840,870Intangibles, net
    
    
    286,740
    
    
    
    322,023Other non-current assets
    
    
    60,918
    
    
    
    62,946Total assets
    
    $
    7,110,567
    
    
    $
    7,234,819LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable trade
    
    $
    237,822
    
    
    $
    285,711Accounts payable to related parties
    
    
    132,188
    
    
    
    158,443Other current accrued liabilities
    
    
    205,877
    
    
    
    286,850Deferred income on shipments to distributors and retailers and deferred revenue
    
    
    155,466
    
    
    
    182,879Total current liabilities
    
    
    731,353
    
    
    
    913,883Convertible long-term debt
    
    
    1,225,000
    
    
    
    1,225,000Non-current liabilities
    
    
    191,299
    
    
    
    135,252Total liabilities
    
    
    2,147,652
    
    
    
    2,274,135Minority interest
    
    
    151
    
    
    
    1,067Commitments and contingenciesStockholders equity:Preferred stock
    
    
    
    
    
    
    Common stock
    
    
    225
    
    
    
    224Capital in excess of par value
    
    
    3,855,556
    
    
    
    3,796,849Retained earnings
    
    
    1,080,072
    
    
    
    1,130,069Accumulated other comprehensive income
    
    
    26,911
    
    
    
    32,475Total stockholders equity
    
    
    4,962,764
    
    
    
    4,959,617Total liabilities and stockholders equity
    
    $
    7,110,567
    
    
    $
    7,234,819
 
 *
    
    Information derived from the audited Consolidated Financial Statements. The accompanying notes are an integral part of these condensed consolidated financial statements.
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SANDISK CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 Three months ended
    
    
    Six months endedJune 29, 2008
    
    
    July 1, 2007
    
    
    June 29, 2008
    
    
    July 1, 2007(In thousands, except per share amounts)Revenues:Product
    
    $
    687,508
    
    
    $
    719,991
    
    
    $
    1,411,559
    
    
    $
    1,409,348License and royalty
    
    
    128,503
    
    
    
    107,041
    
    
    
    254,419
    
    
    
    203,770Total revenues
    
    
    816,011
    
    
    
    827,032
    
    
    
    1,665,978
    
    
    
    1,613,118Cost of product revenues
    
    
    650,558
    
    
    
    588,736
    
    
    
    1,227,162
    
    
    
    1,158,824Amortization of acquisition-related
intangible assets
    
    
    14,582
    
    
    
    14,583
    
    
    
    29,164
    
    
    
    35,645Total cost of product revenues
    
    
    665,140
    
    
    
    603,319
    
    
    
    1,256,326
    
    
    
    1,194,469Gross profit
    
    
    150,871
    
    
    
    223,713
    
    
    
    409,652
    
    
    
    418,649Operating expenses:Research and development
    
    
    112,143
    
    
    
    101,185
    
    
    
    223,577
    
    
    
    196,825Sales and marketing
    
    
    77,638
    
    
    
    60,517
    
    
    
    157,794
    
    
    
    116,723General and administrative
    
    
    53,684
    
    
    
    41,165
    
    
    
    111,488
    
    
    
    88,156Amortization of acquisition-related
intangible assets
    
    
    4,553
    
    
    
    7,050
    
    
    
    9,028
    
    
    
    16,150Restructuring
    
    
    4,085
    
    
    
    212
    
    
    
    4,085
    
    
    
    6,728Total operating expenses
    
    
    252,103
    
    
    
    210,129
    
    
    
    505,972
    
    
    
    424,582Operating income (loss)
    
    
    (101,232
    )
    
    
    13,584
    
    
    
    (96,320
    )
    
    
    (5,933
    )Interest income
    
    
    23,282
    
    
    
    34,727
    
    
    
    49,038
    
    
    
    72,215Interest expense and other income
(expense), net
    
    
    (2,740
    )
    
    
    3,829
    
    
    
    (2,614
    )
    
    
    2,600Total other income
    
    
    20,542
    
    
    
    38,556
    
    
    
    46,424
    
    
    
    74,815Income (loss) before provision for
(benefit from) income taxes
    
    
    (80,690
    )
    
    
    52,140
    
    
    
    (49,896
    )
    
    
    68,882Provision for (benefit from) income taxes
    
    
    (12,813
    )
    
    
    23,605
    
    
    
    101
    
    
    
    35,762Income (loss) after taxes
    
    
    (67,877
    )
    
    
    28,535
    
    
    
    (49,997
    )
    
    
    33,120Minority interest
    
    
    
    
    
    
    51
    
    
    
    
    
    
    
    5,211Net income (loss)
    
    $
    (67,877
    )
    
    $
    28,484
    
    
    $
    (49,997
    )
    
    $
    27,909Net income (loss) per share:Basic
    
    $
    (0.30
    )
    
    $
    0.12
    
    
    $
    (0.22
    )
    
    $
    0.12Diluted
    
    $
    (0.30
    )
    
    $
    0.12
    
    
    $
    (0.22
    )
    
    $
    0.12Shares used in computing net income
(loss) per share:Basic
    
    
    224,888
    
    
    
    227,959
    
    
    
    224,703
    
    
    
    227,707Diluted
    
    
    224,888
    
    
    
    236,036
    
    
    
    224,703
    
    
    
    235,951
 The accompanying notes are an integral part of these condensed consolidated financial statements.
 4




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SANDISK
CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 Six months endedJune 29, 2008
    
    
    July 1, 2007(In thousands)Cash flows from operating activities:Net income (loss)
    
    $
    (49,997
    )
    
    $
    27,909Adjustments to reconcile net income (loss) to net cash provided by operating activities:Deferred and other taxes
    
    
    (2,212
    )
    
    
    35,760(Gain) loss on equity investments
    
    
    4,483
    
    
    
    (567
    )Depreciation and amortization
    
    
    130,373
    
    
    
    129,233Provision for doubtful accounts
    
    
    6,951
    
    
    
    1,538Share-based compensation expense
    
    
    48,334
    
    
    
    68,190Excess tax benefit from share-based compensation
    
    
    (1,677
    )
    
    
    (11,508
    )Other non-cash charges
    
    
    7,284
    
    
    
    8,576Changes in operating assets and liabilities:Accounts receivable from product revenues
    
    
    252,002
    
    
    
    298,927Inventory
    
    
    (240,359
    )
    
    
    (104,563
    )Other assets
    
    
    (49,575
    )
    
    
    (30,176
    )Accounts payable trade
    
    
    (47,889
    )
    
    
    (71,698
    )Accounts payable to related parties
    
    
    (32,255
    )
    
    
    10,879Other liabilities
    
    
    (139,476
    )
    
    
    (197,702
    )Total adjustments
    
    
    (64,016
    )
    
    
    136,889Net cash (used in) provided by operating activities
    
    
    (114,013
    )
    
    
    164,798Cash flows from investing activities:Purchases of short and long-term investments
    
    
    (892,220
    )
    
    
    (1,591,857
    )Proceeds from sale of short and long-term investments
    
    
    728,896
    
    
    
    233,382Proceeds from maturities of short and long-term investments
    
    
    352,563
    
    
    
    971,300Acquisition of capital equipment, net
    
    
    (106,912
    )
    
    
    (97,801
    )Investment in Flash Alliance Ltd.
    
    
    (96,705
    )
    
    
    Distributions from FlashVision Ltd.
    
    
    28,987
    
    
    
    Notes receivable from Flash Partners Ltd.
    
    
    (37,418
    )
    
    
    (123,305
    )Notes receivable from FlashVision Ltd.
    
    
    
    
    
    
    37,512Purchased technology and other assets
    
    
    (1,875
    )
    
    
    (13,240
    )Acquisition
of MusicGremlin, Inc.
    
    
    (4,528
    )
    
    
    Net cash used in investing activities
    
    
    (29,212
    )
    
    
    (584,009
    )Cash flows from financing activities:Proceeds (repayment) from debt financing
    
    
    (9,785
    )
    
    
    3,791Proceeds from employee stock programs
    
    
    9,350
    
    
    
    54,102Distribution to minority interest
    
    
    
    
    
    
    (9,880
    )Excess tax benefit from share-based compensation
    
    
    1,677
    
    
    
    11,508Share repurchase programs
    
    
    
    
    
    
    (97,417
    )Net cash provided by (used in) financing activities
    
    
    1,242
    
    
    
    (37,896
    )Effect of changes in foreign currency exchange rates on cash
    
    
    (2,188
    )
    
    
    620Net decrease in cash and cash equivalents
    
    
    (144,171
    )
    
    
    (456,487
    )Cash and cash equivalents at beginning of the period
    
    
    833,749
    
    
    
    1,580,700Cash and cash equivalents at end of the period
    
    $
    689,578
    
    
    $
    1,124,213
 The accompanying notes are an integral part of these condensed consolidated financial statements.
 5




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SANDISK CORPORATION
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 1. Organization and Summary of Significant Accounting Policies
 Organization
   Organization and Nature of Operations.
 Principles of Consolidation.
 Use of Estimates.
 Recent Accounting Pronouncements
 SFAS No. 161. Disclosures about Derivative
Instruments and Hedging Activities Accounting for Derivative
Instruments and Hedging Activities,
 6




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
  SFAS No. 160. Noncontrolling Interests in Consolidated Financial Statements, an amendment
of ARB No. 51
 SFAS No. 141 (revised Business Combinations
 FSP No. APB 14-1. Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion
(Including Partial Cash Settlement)
  June 29, 2008
    


    December 30, 2007Convertible
long-term debt, as reported
    
    $1,225,000

    
    $1,225,000Convertible
long-term debt, pro forma
    
    916,160
    
    
    891,204
 7




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
  Three months ended
    
    
    Six months ended
    
    

Twelve months endedJune 29, 2008
    
    
    July 1, 2007
    
    
    June 29, 2008
    
    
    July 1, 2007
    
    
    December 30, 2007
    
    
    December 31, 2006Net income (loss), as reported
    
    $
    (67,877
    )
    
    $
    28,484
    
    
    $
    (49,997
    )
    
    $
    27,909
    
    
    $
    218,357
    
    
    $
    198,896Amortization of bond discount
    
    
    (12,710
    )
    
    
    (11,810
    )
    
    
    (25,189
    )
    
    
    (23,398
    )
    
    
    (47,664
    )
    
    
    (28,504
    )Tax effect of amortization of
bond discount
    
    
    6,529
    
    
    
    5,048
    
    
    
    11,812
    
    
    
    10,769
    
    
    
    18,756
    
    
    
    10,991Pro forma net income (loss)
    
    $
    (74,058
    )
    
    $
    21,722
    
    
    $
    (63,374
    )
    
    $
    15,280
    
    
    $
    189,449
    
    
    $
    181,383Basic net income (loss) per shareAs reported
    
    $
    (0.30
    )
    
    $
    0.12
    
    
    $
    (0.22
    )
    
    $
    0.12
    
    
    $
    0.96
    
    
    $
    1.00Pro forma
    
    $
    (0.33
    )
    
    $
    0.10
    
    
    $
    (0.28
    )
    
    $
    0.07
    
    
    $
    0.83
    
    
    $
    0.91Diluted net income (loss) per
shareAs reported
    
    $
    (0.30
    )
    
    $
    0.12
    
    
    $
    (0.22
    )
    
    $
    0.12
    
    
    $
    0.93
    
    
    $
    0.96Pro forma
    
    $
    (0.33
    )
    
    $
    0.09
    
    
    $
    (0.28
    )
    
    $
    0.06
    
    
    $
    0.80
    
    
    $
    0.87
  8




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 2. Fair Value Measurements
 Fair Value
Measurements Effective Date of FASB Statement No. 157,
 Establishing the Fair Value Option for Financial Assets
and Liabilities,
 Fair Value Hierarchy.
 Level 1
    
    Valuations based on quoted prices in active markets for identical
assets or liabilities that the entity has the ability to access.Level 2
    
    Valuations based on quoted prices for similar assets or
liabilities, quoted prices in markets that are not active, or
other inputs that are observable or can be corroborated by
observable data for substantially the full term of the assets or
liabilities.Level 3
    
    Valuations based on inputs that are supported by little or no
market activity and that are significant to the fair value of the
assets or liabilities.
   9




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
  Quoted Prices inActive Markets for
    
    
    Significant Other
    
    
    SignificantIdentical Assets
    
    
    Observable Inputs
    
    
    Unobservable InputsTotal
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Fixed income securities
    
    $
    2,242,171
    
    
    $
    319,537
    
    
    $
    1,922,634
    
    
    $
    Equity securities
    
    
    74,284
    
    
    
    74,284
    
    
    
    
    
    
    
    Derivative assets
    
    
    60,336
    
    
    
    
    
    
    
    60,336
    
    
    
    Other
    
    
    3,617
    
    
    
    
    
    
    
    3,617
    
    
    
    Total financial assets under SFAS 157
    
    $
    2,380,408
    
    
    $
    393,821
    
    
    $
    1,986,587
    
    
    $
    Derivative liabilities
    
    $
    16,933
    
    
    $
    
    
    
    $
    16,933
    
    
    $
    Total financial liabilities under SFAS 157
    
    $
    16,933
    
    
    $
    
    
    
    $
    16,933
    
    
    $
    
  Quoted Prices inActive Markets for
    
    
    Significant Other
    
    
    SignificantIdentical Assets
    
    
    Observable Inputs
    
    
    Unobservable InputsTotal
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Cash equivalents
    
    $
    469,059
    
    
    $
    319,537
    
    
    $
    149,522
    
    
    $
    Short-term investments
    
    
    619,632
    
    
    
    12,105
    
    
    
    607,527
    
    
    
    Long-term investments
    
    
    1,230,562
    
    
    
    62,179
    
    
    
    1,168,383
    
    
    
    Other assets
    
    
    61,155
    
    
    
    
    
    
    
    61,155
    
    
    
    Total financial assets under SFAS 157
    
    $
    2,380,408
    
    
    $
    393,821
    
    
    $
    1,986,587
    
    
    $
    Other current accrued liabilities
    
    $
    16,933
    
    
    $
    
    
    
    $
    16,933
    
    
    $
    Total financial liabilities under SFAS 157
    
    $
    16,933
    
    
    $
    
    
    
    $
    16,933
    
    
    $
    
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 3. Balance Sheet Detail
 Accounts Receivable from Product Revenues, net.
 June 29, 2008
    
    
    December 30, 2007Trade accounts receivable
    
    $
    616,962
    
    
    $
    1,027,588Related party accounts receivable
    
    
    3,938
    
    
    
    4,725Allowance for doubtful accounts
    
    
    (20,427
    )
    
    
    (13,790
    )Price protection, promotions and other activities
    
    
    (396,443
    )
    
    
    (555,540
    )Total accounts receivable from product revenues, net
    
    $
    204,030
    
    
    $
    462,983
  Inventory.
 June 29, 2008
    
    
    December 30, 2007Raw material
    
    $
    310,553
    
    
    $
    197,077Work-in-process
    
    
    126,931
    
    
    
    94,283Finished goods
    
    
    358,122
    
    
    
    263,717Total inventory
    
    $
    795,606
    
    
    $
    555,077
 Other Current Assets.
 June 29, 2008
    
    
    December 30, 2007Royalty and other receivables
    
    $
    123,110
    
    
    $
    103,802Prepaid expenses
    
    
    114,965
    
    
    
    21,874Tax related receivables
    
    
    42,047
    
    
    
    33,589Other current assets
    
    
    57,538
    
    
    
    74,687Total other current assets
    
    $
    337,660
    
    
    $
    233,952
 Notes Receivable and Investments in the Flash Ventures with Toshiba.
 June 29, 2008
    
    
    December 30, 2007Notes receivable, Flash Partners Ltd.
    
    $
    717,647
    
    
    $
    639,834Investment in FlashVision Ltd.
    
    
    141,911
    
    
    
    159,146Investment in Flash Partners Ltd.
    
    
    189,575
    
    
    
    177,529Investment in Flash Alliance Ltd.
    
    
    235,484
    
    
    
    132,396Total notes receivable and investments in the flash ventures with Toshiba
    
    $
    1,284,617
    
    
    $
    1,108,905
 11




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 Other Current Accrued Liabilities.
 June 29, 2008
    
    
    December 30, 2007Accrued payroll and related expenses
    
    $
    63,870
    
    
    $
    94,220Taxes payable
    
    
    3,290
    
    
    
    56,945Accrued restructuring
    
    
    2,028
    
    
    
    2,071Research and development liability, related party
    
    
    2,000
    
    
    
    8,000Foreign currency forward contract payables
    
    
    16,933
    
    
    
    5,714Other accrued liabilities
    
    
    117,756
    
    
    
    119,900Total other current accrued liabilities
    
    $
    205,877
    
    
    $
    286,850
 Convertible Long-term Debt .
 June 29, 2008
    
    
    December 30, 20071% 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
 Non-current liabilities.
 June 29, 2008
    
    
    December 30, 2007Deferred tax liability
    
    $
    20,085
    
    
    $
    14,479Income taxes payable
    
    
    112,332
    
    
    
    79,608Accrued restructuring
    
    
    11,027
    
    
    
    11,891Other non-current liabilities
    
    
    47,855
    
    
    
    29,274Total non-current liabilities
    
    $
    191,299
    
    
    $
    135,252
  12




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 4. Goodwill and Other Intangible Assets
 Goodwill.
 Balance at December 30, 2007
    
    $
    840,870Goodwill additions, net
    
    
    3,178Balance at June 29, 2008
    
    $
    844,048
  Goodwill and Other Intangible
Assets
 Intangible Assets.
 June 29, 2008
    
    
    December 30, 2007Gross
    
    
    
    
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    Net Carrying
    
    
    Carrying
    
    
    Accumulated
    
    
    CarryingAmount
    
    
    Amortization
    
    
    Amount
    
    
    Amount
    
    
    Amortization
    
    
    AmountCore technology
    
    $
    315,301
    
    
    $
    (107,289
    )
    
    $
    208,012
    
    
    $
    311,801
    
    
    $
    (78,863
    )
    
    $
    232,938Developed product technology
    
    
    12,900
    
    
    
    (5,504
    )
    
    
    7,396
    
    
    
    12,900
    
    
    
    (4,689
    )
    
    
    8,211Trademarks
    
    
    4,000
    
    
    
    (4,000
    )
    
    
    
    
    
    
    4,000
    
    
    
    (4,000
    )
    
    
    Backlog
    
    
    5,000
    
    
    
    (5,000
    )
    
    
    
    
    
    
    5,000
    
    
    
    (5,000
    )
    
    
    Supply agreement
    
    
    2,000
    
    
    
    (2,000
    )
    
    
    
    
    
    
    2,000
    
    
    
    (2,000
    )
    
    
    Customer relationships
    
    
    80,100
    
    
    
    (32,858
    )
    
    
    47,242
    
    
    
    80,100
    
    
    
    (23,907
    )
    
    
    56,193Acquisition-related intangible assets
    
    
    419,301
    
    
    
    (156,651
    )
    
    
    262,650
    
    
    
    415,801
    
    
    
    (118,459
    )
    
    
    297,342Technology licenses and patents
    
    
    42,243
    
    
    
    (18,153
    )
    
    
    24,090
    
    
    
    39,243
    
    
    
    (14,562
    )
    
    
    24,681Total
    
    $
    461,544
    
    
    $
    (174,804
    )
    
    $
    286,740
    
    
    $
    455,044
    
    
    $
    (133,021
    )
    
    $
    322,023
  Estimated Amortization ExpensesTechnologyAcquisition-Related
    
    
    Licenses andFiscal year:
    
    Intangible Assets
    
    
    Patents2008 (remaining six months)
    
    $
    38,698
    
    
    $
    3,6082009
    
    
    72,891
    
    
    
    6,7992010
    
    
    72,695
    
    
    
    5,4752011
    
    
    65,315
    
    
    
    3,6232012
    
    
    12,529
    
    
    
    2,9752013 and thereafter
    
    
    522
    
    
    
    1,610Total
    
    $
    262,650
    
    
    $
    24,090
 13




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 5. Warranty
  Three months ended
    
    
    Six months endedJune 29, 2008
    
    
    July 1, 2007
    
    
    June 29, 2008
    
    
    July 1, 2007Balance, beginning of period
    
    $
    13,693
    
    
    $
    10,732
    
    
    $
    18,662
    
    
    $
    15,338Reductions and adjustments
to costs of product revenue
    
    
    7,975
    
    
    
    6,283
    
    
    
    4,577
    
    
    
    4,787Usage
    
    
    (538
    )
    
    
    (3,851
    )
    
    
    (2,109
    )
    
    
    (6,961
    )Balance, end of period
    
    $
    21,130
    
    
    $
    13,164
    
    
    $
    21,130
    
    
    $
    13,164
  14




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 6. Restructuring
   Severance and
    
    
    Lease ObligationsBenefits
    
    
    and Other Charges
    
    
    TotalRestructuring provision
    
    $
    3,888
    
    
    $
    197
    
    
    $
    4,085Cash paid
    
    
    (2,772
    )
    
    
    
    
    
    
    (2,772
    )Restructuring plan balance at June 29, 2008
    
    $
    1,116
    
    
    $
    197
    
    
    $
    1,313
  15




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 7. Accumulated Other Comprehensive Income
  June 29, 2008
    
    
    December 30, 2007Accumulated net unrealized gain (loss) on:Available-for-sale investments
    
    $
    6,794
    
    
    $
    12,750Foreign currency translation
    
    
    43,621
    
    
    
    23,818Hedging activities
    
    
    (23,504
    )
    
    
    (4,093
    )Total accumulated other comprehensive income
    
    $
    26,911
    
    
    $
    32,475
  Three months ended
    
    
    Six months endedJune 29, 2008
    
    
    July 1, 2007
    
    
    June 29, 2008
    
    
    July 1, 2007Net income (loss)
    
    $
    (67,877
    )
    
    $
    28,484
    
    
    $
    (49,997
    )
    
    $
    27,909Unrealized income (loss) on
available-for-sale investments
    
    
    (10,784
    )
    
    
    1,908
    
    
    
    (5,956
    )
    
    
    1,979Foreign currency translation income (loss)
    
    
    (18,755
    )
    
    
    (17,916
    )
    
    
    19,803
    
    
    
    (13,682
    )Unrealized loss on hedging activities
    
    
    (20,741
    )
    
    
    
    
    
    
    (19,411
    )
    
    
    Comprehensive net income (loss)
    
    $
    (118,157
    )
    
    $
    12,476
    
    
    $
    (55,561
    )
    
    $
    16,206
 
 16




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 8. Derivatives and Hedging Activities
    Cash Flow Hedges.
  Other Derivatives.
  17




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 Fair Value of Derivative Contracts.
 Derivative Assets Reported
    
    
    
    
    
    
    
    
    
    
    Derivative Liabilities Reported inin Other Current Assets
    
    
    Long-term Investments
    
    
    Other Current Accrued LiabilitiesJune 29, 2008
    
    
    December 30, 2007
    
    
    June 29, 2008
    
    
    December 30, 2007
    
    
    June 29, 2008
    
    
    December 30, 2007Foreign exchange
contracts
designated as cash
flow hedges under
SFAS 133
    
    $
    5,741
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    14,517
    
    
    $
    Equity market risk
contract designated
as cash flow hedge
under SFAS 133
    
    
    
    
    
    
    
    
    
    
    2,798
    
    
    
    4,415
    
    
    
    
    
    
    
    Total derivatives
designated as
hedging instruments
under SFAS 133
    
    
    5,741
    
    
    
    
    
    
    
    2,798
    
    
    
    4,415
    
    
    
    14,517
    
    
    
    Foreign exchange
contracts not
designated under
SFAS 133
    
    
    51,797
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,416
    
    
    
    5,714Total derivatives
    
    $
    57,538
    
    
    $
    
    
    
    $
    2,798
    
    
    $
    4,415
    
    
    $
    16,933
    
    
    $
    5,714
 Effect of Designated Derivative Contracts on Accumulated Other Comprehensive Income and the
Condensed Consolidated Statement of Operations.
 Three months ended
    

    Six months endedJune 29, 2008
    
    
    July 1, 2007
    
    
    June 29, 2008
    
July 1, 2007Loss on foreign
exchange contracts
recognized in OCI
(effective portion)
    
    
    $
    (19,508
    )
   
$



    


    $
    (19,508
    )
    $
    Gain (loss) on
equity market risk
contract recognized
in OCI
    
    

    
19
    
    

    (1,827

    )
    

    (1,617

    )
    
    1,915
  Effect of Non-Designated Derivative Contracts on the Condensed Consolidated Statement of
Operations.
 Three months ended
    

    Six months endedJune 29, 2008
    

    July 1, 2007
    

    June 29, 2008
    

    July 1, 2007Gain (loss) on
foreign exchange
contracts
recognized in other
income (expense)
    

    $
    42,571

    

    $
    3,622
    


    $
    (22,515
    )
    
    $
    4,274
 18




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 9. Share-Based Compensation
 Share-Based Plans.
 Valuation Assumptions.
 Three months ended
    
    Six months endedJune 29, 2008
    
    July 1, 2007
    
    June 29, 2008
    
    July 1, 2007Option Plan SharesDividend yield
    
    None
    
    None
    
    None
    
    NoneExpected volatility
    
    
    0.54
    
    
    
    0.38
    
    
    
    0.50
    
    
    
    0.44Risk free interest rate
    
    
    2.68%
    
    
    
    4.81%
    
    
    
    2.34%
    
    
    
    4.58%Expected lives
    
    3.4 years
    
    3.3 years
    
    3.5 years
    
    3.4 yearsEstimated annual forfeiture rate
    
    
    8.31%
    
    
    
    7.59%
    
    
    
    8.31%
    
    
    
    7.59%Weighted average fair value at grant date
    
    
    $10.48
    
    
    
    $14.66
    
    
    
    $9.86
    
    
    
    $15.55Employee Stock Purchase Plan SharesDividend yield
    
    None
    
    None
    
    None
    
    NoneExpected volatility
    
    
    0.53
    
    
    
    0.44
    
    
    
    0.53
    
    
    
    0.44Risk free interest rate
    
    
    2.15%
    
    
    
    5.16%
    
    
    
    2.15%
    
    
    
    5.16%Expected lives
    
    1/2 year
    
    1/2 year
    
    1/2 year
    
    1/2 yearWeighted average fair value for grant period
    
    
    $8.34
    
    
    
    $11.44
    
    
    
    $8.34
    
    
    
    $11.44
 19




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 Share-Based Compensation Plan Activities
 Stock Options and SARs.
 WeightedAverageWeighted
    
    RemainingAverage
    
    Contractual
    
    AggregateShares
    
    Exercise Price
    
    Term (Years)
    
    Intrinsic ValueOptions and SARs outstanding at December 30, 2007
    
    
    25,557
    
    
    $
    35.59
    
    
    
    5.8
    
    
    $
    165,185Granted
    
    
    2,216
    
    
    
    25.36Exercised
    
    
    (454
    )
    
    
    9.84
    
    
    
    
    
    
    
    8,182Forfeited
    
    
    (1,272
    )
    
    
    43.36Expired
    
    
    (201
    )
    
    
    50.08Options and SARs outstanding at June 29, 2008
    
    
    25,846
    
    
    
    34.67
    
    
    
    5.3
    
    
    
    45,324Options and SARs vested and expected to vest
after June 29, 2008,
 net of forfeitures
    
    
    24,458
    
    
    
    34.30
    
    
    
    5.2
    
    
    
    45,314Options and SARs exercisable at June 29, 2008
    
    
    15,860
    
    
    
    30.31
    
    
    
    4.8
    
    
    
    45,175
  Restricted Stock Units.
  WeightedAverage Grant
    
    AggregateShares
    
    Date Fair Value
    
    Intrinsic ValueNon-vested share units at December 30, 2007
    
    
    499
    
    
    $
    55.20
    
    
    $
    16,735Granted
    
    
    530
    
    
    
    24.94Vested
    
    
    (155
    )
    
    
    54.93
    
    
    
    3,810Forfeited
    
    
    (65
    )
    
    
    40.71Non-vested share units at June 29, 2008
    
    
    809
    
    
    
    36.73
    
    
    
    15,554
  Employee Stock Purchase Plan.
 20




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 Share-Based Compensation Expense.
 Three months ended
    
    
    Six months endedJune 29, 2008
    
    
    July 1, 2007
    
    
    June 29, 2008
    
    
    July 1, 2007Share-based compensation expense by caption:Cost of product sales
    
    $
    2,008
    
    
    $
    3,306
    
    
    $
    5,637
    
    
    $
    6,521Research and development
    
    
    9,323
    
    
    
    13,013
    
    
    
    18,149
    
    
    
    25,700Sales and marketing
    
    
    6,424
    
    
    
    10,361
    
    
    
    9,935
    
    
    
    17,284General and administrative
    
    
    7,353
    
    
    
    10,290
    
    
    
    14,613
    
    
    
    18,685Total share-based compensation expense
    
    $
    25,108
    
    
    $
    36,970
    
    
    $
    48,334
    
    
    $
    68,190Share-based compensation expense by type of
award:Stock options and SARs
    
    $
    19,689
    
    
    $
    30,018
    
    
    $
    40,323
    
    
    $
    56,663Restricted stock
    
    
    3,929
    
    
    
    5,714
    
    
    
    5,416
    
    
    
    9,181ESPP
    
    
    1,490
    
    
    
    1,238
    
    
    
    2,595
    
    
    
    2,346Total share-based compensation expense
    
    $
    25,108
    
    
    $
    36,970
    
    
    $
    48,334
    
    
    $
    68,190
   21




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 10. Net Income (Loss) Per Share
  Three months ended
    
    
    Six months endedJune 29, 2008
    
    
    July 1, 2007
    
    
    June 29, 2008
    
    
    July 1, 2007Numerator for basic net income (loss) per share:Net income (loss), as reported
    
    $
    (67,877
    )
    
    $
    28,484
    
    
    $
    (49,997
    )
    
    $
    27,909Denominator for basic net income (loss) per share:Weighted average common shares outstanding
    
    
    224,888
    
    
    
    227,959
    
    
    
    224,703
    
    
    
    227,707Basic net income (loss) per share
    
    $
    (0.30
    )
    
    $
    0.12
    
    
    $
    (0.22
    )
    
    $
    0.12Numerator for diluted net income (loss) per share:Net income (loss), as reported
    
    $
    (67,877
    )
    
    $
    28,484
    
    
    $
    (49,997
    )
    
    $
    27,909Interest on the 1% Convertible Notes due 2035,
net of tax
    
    
    
    
    
    
    116
    
    
    
    
    
    
    
    232Net income (loss) used in computing diluted net
income per share
    
    $
    (67,877
    )
    
    $
    28,600
    
    
    $
    (49,997
    )
    
    $
    28,141Denominator for diluted net income (loss) per
share:Weighted average common shares outstanding
    
    
    224,888
    
    
    
    227,959
    
    
    
    224,703
    
    
    
    227,707Effect of dilutive 1% Convertible Notes due 2035
    
    
    
    
    
    
    2,012
    
    
    
    
    
    
    
    2,012Effect of dilutive options and restricted stock
    
    
    
    
    
    
    6,065
    
    
    
    
    
    
    
    6,232Shares used in computing diluted net income
(loss) per share
    
    
    224,888
    
    
    
    236,036
    
    
    
    224,703
    
    
    
    235,951Diluted net income (loss) per share
    
    $
    (0.30
    )
    
    $
    0.12
    
    
    $
    (0.22
    )
    
    $
    0.12Anti-dilutive shares excluded from net income
(loss) per share calculation
    
    
    48,439
    
    
    
    41,158
    
    
    
    49,198
    
    
    
    39,798
   22




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 11.

    Commitments, Contingencies and Guarantees
 FlashVision.
 Consolidation of Variable Interest Entities,
 Flash Partners .
  Flash Alliance.
   23




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 Toshiba Foundry.
 Business Ventures and Foundry Arrangement with Toshiba.
 Other Silicon Sources.
 Subcontractors.
 Off-Balance Sheet Liabilities
  Master Lease Agreements by Execution Date
    
    Lease Amounts
    
    
    Expiration(Yen in billions)
    
    
    (Dollars in thousands)Flash PartnersDecember 2004
    
    ¥
    14.1
    
    
    $
    132,766
    
    
    
    2010December 2005
    
    
    11.1
    
    
    
    104,446
    
    
    
    2011June 2006
    
    
    11.3
    
    
    
    106,285
    
    
    
    2011September 2006
    
    
    37.3
    
    
    
    350,964
    
    
    
    2011March 2007
    
    
    25.5
    
    
    
    240,068
    
    
    
    2012February 2008
    
    
    11.9
    
    
    
    111,525
    
    
    
    2013¥
    111.2
    
    
    $
    1,046,054Flash AllianceNovember 2007
    
    ¥
    48.5
    
    
    $
    456,821
    
    
    
    2013June 2008
    
    
    25.0
    
    
    
    235,293
    
    
    
    2013¥
    73.5
    
    
    $
    692,114Total guarantee obligations
    
    ¥
    184.7
    
    
    $
    1,738,168
 24




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
  PurchaseOptionPayment of
    
    
    Exercise PricePrincipal
    
    
    at Final Lease
    
    
    GuaranteeAnnual Installments
    
    Amortization
    
    
    Terms
    
    
    Amount(In thousands)Year 1
    
    $
    372,698
    
    
    $
    
    
    
    $
    372,698Year 2
    
    
    354,474
    
    
    
    15,302
    
    
    
    369,776Year 3
    
    
    285,841
    
    
    
    80,896
    
    
    
    366,737Year 4
    
    
    176,234
    
    
    
    179,813
    
    
    
    356,047Year 5
    
    
    68,651
    
    
    
    204,259
    
    
    
    272,910Total guarantee obligations
    
    $
    1,257,898
    
    
    $
    480,270
    
    
    $
    1,738,168
 FlashVision.
 Flash Partners.
   25




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
  Flash Alliance.
   Guarantees
 Indemnification Agreements.
   26




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
  27




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 Contractual Obligations and Off-Balance Sheet Arrangements
  Contractual Obligations.
 More than 52  3 Years
    
    
    4  5 Years
    
    
    Years1 Year or Less
    
    
    (Fiscal 2009
    
    
    (Fiscal 2011
    
    
    (BeyondTotal
    
    
    (6 months)
    
    
    and 2010)
    
    
    and 2012)
    
    
    Fiscal 2012)Operating leases
    
    $
    40,255
    
    
    $
    4,853
    
    
    $
    18,114
    
    
    $
    9,113
    
    
    $
    8,175Flash Partners reimbursement for
certain other costs including
depreciation
    
    
    1,798,868
    (3)
    
    
    257,888
    
    
    
    1,009,576
    
    
    
    463,234
    
    
    
    68,170Flash Alliance fabrication
capacity expansion and
reimbursement for certain other
costs including depreciation and
start-up
    
    
    2,592,164
    (3)
    
    
    754,239
    
    
    
    1,073,165
    
    
    
    696,291
    
    
    
    68,469Toshiba research and development
    
    
    13,478
    (3)
    
    
    13,478
    
    
    
    
    
    
    
    
    
    
    
    Capital equipment purchases
commitments
    
    
    45,197
    
    
    
    45,197
    
    
    
    
    
    
    
    
    
    
    
    Convertible notes principal and
interest (1)
    
    
    1,304,108
    
    
    
    9,188
    
    
    
    24,500
    
    
    
    24,500
    
    
    
    1,245,920Operating expense commitments
    
    
    224,773
    
    
    
    224,773
    
    
    
    
    
    
    
    
    
    
    
    Noncancelable production purchase
commitments (2)
    
    
    474,537
    (3)
    
    
    474,537
    
    
    
    
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    6,493,380
    
    
    $
    1,784,153
    
    
    $
    2,125,355
    
    
    $
    1,193,138
    
    
    $
    1,390,734
 Off-Balance Sheet Arrangements.
 As ofJune 29, 2008Guarantee of Flash Partners equipment leases (4)
    
    
    $          1,046,054Guarantee of
Flash Alliance equipment leases (4)
    
    
    692,114
 
 (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 Ltd. (msystems), the
Company assumed msystems $75 million in aggregate principal amount of 1% Convertible Notes
due March 15, 2035. The Company will pay cash interest at an annual rate of 1%, payable
semi-annually on March 15 and September 15 of each year until calendar year 2035.(2)
    
    Includes Toshiba foundries, Flash Ventures, related party vendors and other silicon
source vendor purchase commitments.(3)
    
    Includes amounts denominated in Japanese yen, which are subject to fluctuation in
exchange rates prior to payment and have been translated using the exchange rate at June 29,
2008.(4)
    
    The Companys guarantee obligation, net of cumulative lease payments, is
184.7 billion Japanese yen, or approximately $1.74 billion based upon the exchange rate at
June 29, 2008. 
 28




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 
   Fiscal Year:2008 (remaining six months)
    
    $
    5,3032009
    
    
    10,4012010
    
    
    9,1562011
    
    
    6,8742012
    
    
    4,9582013 and thereafter
    
    
    8,17544,867Sublease income to be received in the future under noncancelable subleases
    
    
    (4,612
    )Net operating leases
    
    $
    40,255
 29




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 12. Related Parties and Strategic Investments
 Toshiba .
 Flash Ventures with Toshiba . ,
 Tower Semiconductor.
 Flextronics.
 30




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##### Table of Contents



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




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




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##### Table of Contents



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




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##### Table of Contents



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




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##### Table of Contents



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




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##### Table of Contents



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




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Contd)
 14. Condensed Consolidating Financial Statements
   37




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##### 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
    
    $
    422,223
    
    
    $
    
    
    
    $
    58,231
    
    
    $
    1,109,856
    
    
    $
    (774,299
    )
    
    $
    816,011Total cost of revenues
    
    
    212,657
    
    
    
    
    
    
    
    44,724
    
    
    
    1,125,062
    
    
    
    (717,303
    )
    
    
    665,140Gross margin
    
    
    209,566
    
    
    
    
    
    
    
    13,507
    
    
    
    (15,206
    )
    
    
    (56,996
    )
    
    
    150,871Total operating expenses
    
    
    191,755
    
    
    
    
    
    
    
    33,590
    
    
    
    84,774
    
    
    
    (58,016
    )
    
    
    252,103Operating income (loss)
    
    
    17,811
    
    
    
    
    
    
    
    (20,083
    )
    
    
    (99,980
    )
    
    
    1,020
    
    
    
    (101,232
    )Total other income (expense)
    
    
    5,572
    
    
    
    (9
    )
    
    
    2,102
    
    
    
    13,473
    
    
    
    (596
    )
    
    
    20,542Income (loss) before taxes
    
    
    23,383
    
    
    
    (9
    )
    
    
    (17,981
    )
    
    
    (86,507
    )
    
    
    424
    
    
    
    (80,690
    )Provision for (benefit
from) income taxes
    
    
    (15,688
    )
    
    
    
    
    
    
    (3,728
    )
    
    
    7,910
    
    
    
    (1,307
    )
    
    
    (12,813
    )Equity in net income (loss)
of consolidated
subsidiaries
    
    
    (80,673
    )
    
    
    
    
    
    
    (4,730
    )
    
    
    1,924
    
    
    
    83,479
    
    
    
    Net income (loss)
    
    $
    (41,602
    )
    
    $
    (9
    )
    
    $
    (18,983
    )
    
    $
    (92,493
    )
    
    $
    85,210
    
    
    $
    (67,877
    )
 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
    
    $
    895,452
    
    
    $
    
    
    
    $
    146,604
    
    
    $
    2,207,670
    
    
    $
    (1,583,748
    )
    
    $
    1,665,978Total cost of revenues
    
    
    471,255
    
    
    
    
    
    
    
    93,683
    
    
    
    2,154,068
    
    
    
    (1,462,680
    )
    
    
    1,256,326Gross margin
    
    
    424,197
    
    
    
    
    
    
    
    52,921
    
    
    
    53,602
    
    
    
    (121,068
    )
    
    
    409,652Total operating expenses
    
    
    338,059
    
    
    
    
    
    
    
    77,449
    
    
    
    212,529
    
    
    
    (122,065
    )
    
    
    505,972Operating income (loss)
    
    
    86,138
    
    
    
    
    
    
    
    (24,528
    )
    
    
    (158,927
    )
    
    
    997
    
    
    
    (96,320
    )Total other income (expense)
    
    
    22,255
    
    
    
    
    
    
    
    5,177
    
    
    
    20,021
    
    
    
    (1,029
    )
    
    
    46,424Income (loss) before taxes
    
    
    108,393
    
    
    
    
    
    
    
    (19,351
    )
    
    
    (138,906
    )
    
    
    (32
    )
    
    
    (49,896
    )Provision for (benefit
from) income taxes
    
    
    (11,583
    )
    
    
    
    
    
    
    (382
    )
    
    
    13,372
    
    
    
    (1,306
    )
    
    
    101Equity in net income (loss)
of consolidated
subsidiaries
    
    
    (153,523
    )
    
    
    
    
    
    
    (6,134
    )
    
    
    15,897
    
    
    
    143,760
    
    
    
    Net income (loss)
    
    $
    (33,547
    )
    
    $
    
    
    
    $
    (25,103
    )
    
    $
    (136,381
    )
    
    $
    145,034
    
    
    $
    (49,997
    )
 
 (1)
    
    This represents legal entity results which exclude any subsidiaries required to be
consolidated under GAAP.(2)
    
    This represents all other legal subsidiaries. 
 38




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##### 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
    
    $
    530,353
    
    
    $
    
    
    
    $
    61,547
    
    
    $
    1,032,172
    
    
    $
    (797,040
    )
    
    $
    827,032Total cost of revenues
    
    
    307,074
    
    
    
    
    
    
    
    59,128
    
    
    
    1,004,976
    
    
    
    (767,859
    )
    
    
    603,319Gross margin
    
    
    223,279
    
    
    
    
    
    
    
    2,419
    
    
    
    27,196
    
    
    
    (29,181
    )
    
    
    223,713Total operating expenses
    
    
    131,054
    
    
    
    
    
    
    
    27,819
    
    
    
    82,130
    
    
    
    (30,874
    )
    
    
    210,129Operating income (loss)
    
    
    92,225
    
    
    
    
    
    
    
    (25,400
    )
    
    
    (54,934
    )
    
    
    1,693
    
    
    
    13,584Total other income (expense)
    
    
    21,261
    
    
    
    180
    
    
    
    22,861
    
    
    
    (11,376
    )
    
    
    5,630
    
    
    
    38,556Income (loss) before taxes
    
    
    113,486
    
    
    
    180
    
    
    
    (2,539
    )
    
    
    (66,310
    )
    
    
    7,323
    
    
    
    52,140Provision for (benefit
from) income taxes
    
    
    19,198
    
    
    
    
    
    
    
    5,035
    
    
    
    548
    
    
    
    (1,176
    )
    
    
    23,605Minority interest
    
    
    
    
    
    
    
    
    
    
    51
    
    
    
    
    
    
    
    
    
    
    
    51Equity in net income (loss)
of consolidated
subsidiaries
    
    
    (46,334
    )
    
    
    
    
    
    
    3,929
    
    
    
    (6,331
    )
    
    
    48,736
    
    
    
    Net income (loss)
    
    $
    47,954
    
    
    $
    180
    
    
    $
    (3,696
    )
    
    $
    (73,189
    )
    
    $
    57,235
    
    
    $
    28,484
 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
    
    $
    951,846
    
    
    $
    
    
    
    $
    153,942
    
    
    $
    1,974,013
    
    
    $
    (1,466,683
    )
    
    $
    1,613,118Total cost of revenues
    
    
    533,860
    
    
    
    
    
    
    
    158,725
    
    
    
    1,912,810
    
    
    
    (1,410,926
    )
    
    
    1,194,469Gross margin
    
    
    417,986
    
    
    
    
    
    
    
    (4,783
    )
    
    
    61,203
    
    
    
    (55,757
    )
    
    
    418,649Total operating expenses
    
    
    260,642
    
    
    
    
    
    
    
    66,305
    
    
    
    151,246
    
    
    
    (53,611
    )
    
    
    424,582Operating income (loss)
    
    
    157,344
    
    
    
    
    
    
    
    (71,088
    )
    
    
    (90,043
    )
    
    
    (2,146
    )
    
    
    (5,933
    )Total other income (expense)
    
    
    59,616
    
    
    
    (7
    )
    
    
    26,114
    
    
    
    (13,708
    )
    
    
    2,800
    
    
    
    74,815Income (loss) before taxes
    
    
    216,960
    
    
    
    (7
    )
    
    
    (44,974
    )
    
    
    (103,751
    )
    
    
    654
    
    
    
    68,882Provision for income taxes
    
    
    31,479
    
    
    
    
    
    
    
    4,063
    
    
    
    219
    
    
    
    1
    
    
    
    35,762Minority interest
    
    
    
    
    
    
    
    
    
    
    5,211
    
    
    
    
    
    
    
    
    
    
    
    5,211Equity in net income (loss)
of consolidated
subsidiaries
    
    
    (81,890
    )
    
    
    
    
    
    
    9,140
    
    
    
    (7,370
    )
    
    
    80,120
    
    
    
    Net income (loss)
    
    $
    103,591
    
    
    $
    (7
    )
    
    $
    (45,108
    )
    
    $
    (111,340
    )
    
    $
    80,773
    
    
    $
    27,909
 
 (1)
    
    This represents legal entity results which exclude any subsidiaries required to be
consolidated under GAAP.(2)
    
    This represents all other legal subsidiaries. 39




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##### 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)
    
    

Subsidiary (2)
    
    
    Adjustments
    
    
    Company(In thousands)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    452,446
    
    
    $
    56
    
    
    $
    86,002
    
    
    $
    151,073
    
    
    $
    1
    
    
    $
    689,578Short-term investments
    
    
    618,300
    
    
    
    
    
    
    
    1,332
    
    
    
    
    
    
    
    
    
    
    
    619,632Accounts receivable, net
    
    
    36,397
    
    
    
    
    
    
    
    14,995
    
    
    
    165,874
    
    
    
    (13,236
    )
    
    
    204,030Inventory
    
    
    121,440
    
    
    
    
    
    
    
    8,523
    
    
    
    669,120
    
    
    
    (3,477
    )
    
    
    795,606Other current assets
    
    
    1,292,989
    
    
    
    187
    
    
    
    239,542
    
    
    
    812,665
    
    
    
    (1,815,595
    )
    
    
    529,788Total current assets
    
    
    2,521,572
    
    
    
    243
    
    
    
    350,394
    
    
    
    1,798,732
    
    
    
    (1,832,307
    )
    
    
    2,838,634Property and equipment, net
    
    
    226,177
    
    
    
    
    
    
    
    34,274
    
    
    
    153,936
    
    
    
    
    
    
    
    414,387Other non-current assets
    
    
    2,641,174
    
    
    
    71,588
    
    
    
    894,261
    
    
    
    1,583,748
    
    
    
    (1,333,225
    )
    
    
    3,857,546Total assets
    
    $
    5,388,923
    
    
    $
    71,831
    
    
    $
    1,278,929
    
    
    $
    3,536,416
    
    
    $
    (3,165,532
    )
    
    $
    7,110,567LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    77,262
    
    
    $
    
    
    
    $
    8,834
    
    
    $
    284,559
    
    
    $
    (645
    )
    
    $
    370,010Other current accrued liabilities
    
    
    517,370
    
    
    
    219
    
    
    
    42,396
    
    
    
    1,551,113
    
    
    
    (1,749,755
    )
    
    
    361,343Total current liabilities
    
    
    594,632
    
    
    
    219
    
    
    
    51,230
    
    
    
    1,835,672
    
    
    
    (1,750,400
    )
    
    
    731,353Convertible long-term debt
    
    
    1,150,000
    
    
    
    75,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,225,000Non-current liabilities and deferred taxes
    
    
    115,908
    
    
    
    
    
    
    
    13,854
    
    
    
    69,139
    
    
    
    (7,602
    )
    
    
    191,299Total liabilities
    
    
    1,860,540
    
    
    
    75,219
    
    
    
    65,084
    
    
    
    1,904,811
    
    
    
    (1,758,002
    )
    
    
    2,147,652Minority interest
    
    
    
    
    
    
    
    
    
    
    151
    
    
    
    
    
    
    
    
    
    
    
    151Total stockholders equity
    
    
    3,528,383
    
    
    
    (3,388
    )
    
    
    1,213,694
    
    
    
    1,631,605
    
    
    
    (1,407,530
    )
    
    
    4,962,764Total liabilities and stockholders equity
    
    $
    5,388,923
    
    
    $
    71,831
    
    
    $
    1,278,929
    
    
    $
    3,536,416
    
    
    $
    (3,165,532
    )
    
    $
    7,110,567
 
 (1)
    
    This represents legal entity results which exclude any subsidiaries required to be
consolidated under GAAP.(2)
    
    This represents all other legal subsidiaries. 40




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##### 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
    
    $
    389,337
    
    
    $
    215
    
    
    $
    90,639
    
    
    $
    353,558
    
    
    $
    
    
    
    $
    833,749Short-term investments
    
    
    1,001,641
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,001,641Accounts receivable, net
    
    
    215,049
    
    
    
    
    
    
    
    32,497
    
    
    
    223,624
    
    
    
    (8,187
    )
    
    
    462,983Inventory
    
    
    104,626
    
    
    
    
    
    
    
    30,238
    
    
    
    423,850
    
    
    
    (3,637
    )
    
    
    555,077Other current assets
    
    
    759,872
    
    
    
    
    
    
    
    221,932
    
    
    
    823,387
    
    
    
    (1,358,984
    )
    
    
    446,207Total current assets
    
    
    2,470,525
    
    
    
    215
    
    
    
    375,306
    
    
    
    1,824,419
    
    
    
    (1,370,808
    )
    
    
    3,299,657Property and equipment, net
    
    
    222,038
    
    
    
    
    
    
    
    34,975
    
    
    
    165,882
    
    
    
    
    
    
    
    422,895Other non-current assets
    
    
    2,684,232
    
    
    
    71,998
    
    
    
    925,424
    
    
    
    1,350,985
    
    
    
    (1,520,372
    )
    
    
    3,512,267Total assets
    
    $
    5,376,795
    
    
    $
    72,213
    
    
    $
    1,335,705
    
    
    $
    3,341,286
    
    
    $
    (2,891,180
    )
    
    $
    7,234,819LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    48,386
    
    
    $
    
    
    
    $
    34,462
    
    
    $
    362,138
    
    
    $
    (832
    )
    
    $
    444,154Other current accrued liabilities
    
    
    587,129
    
    
    
    601
    
    
    
    66,353
    
    
    
    1,253,114
    
    
    
    (1,437,468
    )
    
    
    469,729Total current liabilities
    
    
    635,515
    
    
    
    601
    
    
    
    100,815
    
    
    
    1,615,252
    
    
    
    (1,438,300
    )
    
    
    913,883Convertible long-term debt
    
    
    1,150,000
    
    
    
    75,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,225,000Non-current liabilities
    
    
    67,895
    
    
    
    
    
    
    
    11,428
    
    
    
    60,839
    
    
    
    (4,910
    )
    
    
    135,252Total liabilities
    
    
    1,853,410
    
    
    
    75,601
    
    
    
    112,243
    
    
    
    1,676,091
    
    
    
    (1,443,210
    )
    
    
    2,274,135Minority interest
    
    
    
    
    
    
    
    
    
    
    1,067
    
    
    
    
    
    
    
    
    
    
    
    1,067Total stockholders equity
    
    
    3,523,385
    
    
    
    (3,388
    )
    
    
    1,222,395
    
    
    
    1,665,195
    
    
    
    (1,447,970
    )
    
    
    4,959,617Total liabilities and stockholders equity
    
    $
    5,376,795
    
    
    $
    72,213
    
    
    $
    1,335,705
    
    
    $
    3,341,286
    
    
    $
    (2,891,180
    )
    
    $
    7,234,819
 
 (1)
    
    This represents legal entity results which exclude any subsidiaries required to be
consolidated under GAAP.(2)
    
    This represents all other legal subsidiaries. 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 (used in) operating

activities
    
    $
    (106,801
    )
    
    $
    (159
    )
    
    $
    (1,449
    )
    
    $
    (5,605
    )
    
    $
    1
    
    
    $
    (114,013
    )Net cash provided by (used in) investing

activities
    
    
    158,941
    
    
    
    
    
    
    
    (3,188
    )
    
    
    (184,965
    )
    
    
    
    
    
    
    (29,212
    )Net cash provided by (used in) financing

activities
    
    
    11,027
    
    
    
    
    
    
    
    
    
    
    
    (9,785
    )
    
    
    
    
    
    
    1,242Effect of changes in foreign currency

exchange rates on cash
    
    
    (58
    )
    
    
    
    
    
    
    
    
    
    
    (2,130
    )
    
    
    
    
    
    
    (2,188
    )Net increase (decrease) in cash and
 cash
equivalents
    
    
    63,109
    
    
    
    (159
    )
    
    
    (4,637
    )
    
    
    (202,485
    )
    
    
    1
    
    
    
    (144,171
    )Cash and cash equivalents at
 beginning of
period
    
    
    389,337
    
    
    
    215
    
    
    
    90,639
    
    
    
    353,558
    
    
    
    
    
    
    
    833,749Cash and cash equivalents at end of
 period
    
    $
    452,446
    
    
    $
    56
    
    
    $
    86,002
    
    
    $
    151,073
    
    
    $
    1
    
    
    $
    689,578
 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 (used in)
 operating
activities
    
    $
    153,669
    
    
    $
    168
    
    
    $
    78,621
    
    
    $
    (65,752
    )
    
    $
    (1,908
    )
    
    $
    164,798Net cash provided by (used in)
 investing
activities
    
    
    (543,608
    )
    
    
    
    
    
    
    39,951
    
    
    
    (80,352
    )
    
    
    
    
    
    
    (584,009
    )Net cash used in
 financing activities
    
    
    (31,807
    )
    
    
    
    
    
    
    (6,089
    )
    
    
    
    
    
    
    
    
    
    
    (37,896
    )Effect of changes in foreign currency

exchange rates on cash
    
    
    450
    
    
    
    
    
    
    
    170
    
    
    
    
    
    
    
    
    
    
    
    620Net increase (decrease) in cash and
 cash
equivalents
    
    
    (421,296
    )
    
    
    168
    
    
    
    112,653
    
    
    
    (146,104
    )
    
    
    (1,908
    )
    
    
    (456,487
    )Cash and cash equivalents at
 beginning of
period
    
    
    1,165,473
    
    
    
    48
    
    
    
    71,839
    
    
    
    340,292
    
    
    
    3,048
    
    
    
    1,580,700Cash and cash equivalents at end of
 period
    
    $
    744,177
    
    
    $
    216
    
    
    $
    184,492
    
    
    $
    194,188
    
    
    $
    1,140
    
    
    $
    1,124,213
 
 (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



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
    Fair Value
Measurements Effective Date of FASB
Statement No. 157
 Establishing the
Fair Value Option for Financial Assets and Liabilities
 43




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##### Table of Contents



Results of Operations.
 Three months ended
    
    
    Six months endedJune 29,
    
    
    % of
    
    
    July 1,
    
    
    % of
    
    
    June 29,
    
    
    % of
    
    
    July 1,
    
    
    % of2008
    
    
    Revenues
    
    
    2007
    
    
    Revenues
    
    
    2008
    
    
    Revenues
    
    
    2007
    
    
    Revenues(In millions, except percentages)Product revenues
    
    $
    687.5
    
    
    
    84.3
    %
    
    $
    720.0
    
    
    
    87.1
    %
    
    $
    1,411.6
    
    
    
    84.7
    %
    
    $
    1,409.3
    
    
    
    87.4
    %License and royalty
revenues
    
    
    128.5
    
    
    
    15.7
    %
    
    
    107.0
    
    
    
    12.9
    %
    
    
    254.4
    
    
    
    15.3
    %
    
    
    203.8
    
    
    
    12.6
    %Total revenues
    
    
    816.0
    
    
    
    100.0
    %
    
    
    827.0
    
    
    
    100.0
    %
    
    
    1,666.0
    
    
    
    100.0
    %
    
    
    1,613.1
    
    
    
    100.0
    %Cost of product revenues
    
    
    650.5
    
    
    
    79.7
    %
    
    
    588.7
    
    
    
    71.2
    %
    
    
    1,227.1
    
    
    
    73.7
    %
    
    
    1,158.8
    
    
    
    71.8
    %Amortization of
acquisition-related
intangible assets
    
    
    14.6
    
    
    
    1.8
    %
    
    
    14.6
    
    
    
    1.8
    %
    
    
    29.2
    
    
    
    1.7
    %
    
    
    35.7
    
    
    
    2.2
    %Total cost of product
revenues
    
    
    665.1
    
    
    
    81.5
    %
    
    
    603.3
    
    
    
    73.0
    %
    
    
    1,256.3
    
    
    
    75.4
    %
    
    
    1,194.5
    
    
    
    74.0
    %Gross margin
    
    
    150.9
    
    
    
    18.5
    %
    
    
    223.7
    
    
    
    27.0
    %
    
    
    409.7
    
    
    
    24.6
    %
    
    
    418.6
    
    
    
    26.0
    %Operating expenses
Research and development
    
    
    112.1
    
    
    
    13.7
    %
    
    
    101.2
    
    
    
    12.2
    %
    
    
    223.6
    
    
    
    13.4
    %
    
    
    196.8
    
    
    
    12.2
    %Sales and marketing
    
    
    77.6
    
    
    
    9.5
    %
    
    
    60.5
    
    
    
    7.3
    %
    
    
    157.8
    
    
    
    9.5
    %
    
    
    116.7
    
    
    
    7.3
    %General and
administrative
    
    
    53.7
    
    
    
    6.6
    %
    
    
    41.2
    
    
    
    5.0
    %
    
    
    111.5
    
    
    
    6.7
    %
    
    
    88.2
    
    
    
    5.5
    %Amortization of
acquisition-related
intangible assets
    
    
    4.6
    
    
    
    0.6
    %
    
    
    7.0
    
    
    
    0.9
    %
    
    
    9.0
    
    
    
    0.5
    %
    
    
    16.1
    
    
    
    1.0
    %Restructuring
    
    
    4.1
    
    
    
    0.5
    %
    
    
    0.2
    
    
    
    
    
    
    
    4.1
    
    
    
    0.3
    %
    
    
    6.7
    
    
    
    0.4
    %Total operating
expenses
    
    
    252.1
    
    
    
    30.9
    %
    
    
    210.1
    
    
    
    25.4
    %
    
    
    506.0
    
    
    
    30.4
    %
    
    
    424.5
    
    
    
    26.4
    %Operating income (loss)
    
    
    (101.2
    )
    
    
    (12.4
    %)
    
    
    13.6
    
    
    
    1.6
    %
    
    
    (96.3
    )
    
    
    (5.8
    %)
    
    
    (5.9
    )
    
    
    (0.4
    %)Other income
    
    
    20.5
    
    
    
    2.5
    %
    
    
    38.5
    
    
    
    4.7
    %
    
    
    46.4
    
    
    
    2.8
    %
    
    
    74.8
    
    
    
    4.7
    %Income (loss) before taxes
    
    
    (80.7
    )
    
    
    (9.9
    %)
    
    
    52.1
    
    
    
    6.3
    %
    
    
    (49.9
    )
    
    
    (3.0
    %)
    
    
    68.9
    
    
    
    4.3
    %Provision for (benefit
from) income taxes
    
    
    (12.8
    )
    
    
    (1.6
    %)
    
    
    23.6
    
    
    
    2.9
    %
    
    
    0.1
    
    
    
    
    
    
    
    35.8
    
    
    
    2.3
    %Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5.2
    
    
    
    0.3
    %Net income (loss)
    
    $
    (67.9
    )
    
    
    (8.3
    %)
    
    $
    28.5
    
    
    
    3.4
    %
    
    $
    (50.0
    )
    
    
    (3.0
    %)
    
    $
    27.9
    
    
    
    1.7
    %
 44




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##### Table of Contents



Product Revenues.
 Three months ended
    
    
    Six months endedJune 29,
    
    
    July 1,
    
    
    Percent
    
    
    June 29,
    
    
    July 1,
    
    
    Percent2008
    
    
    2007
    
    
    Change
    
    
    2008
    
    
    2007
    
    
    Change(In millions, except percentages)Retail
    
    $
    421.4
    
    
    $
    484.3
    
    
    
    (13.0
    )%
    
    $
    839.8
    
    
    $
    820.1
    
    
    
    2.4
    %OEM
    
    
    266.1
    
    
    
    235.7
    
    
    
    12.9
    %
    
    
    571.8
    
    
    
    589.2
    
    
    
    (3.0
    %)Product revenues
    
    $
    687.5
    
    
    $
    720.0
    
    
    
    (4.6
    %)
    
    $
    1,411.6
    
    
    $
    1,409.3
    
    
    
    0.2
    %
     Geographical Product Revenues.
 Three months ended
    
    
    Six months ended% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofJune 29,
    
    
    Product
    
    
    July 1,
    
    
    Product
    
    
    Percent
    
    
    June 29,
    
    
    Product
    
    
    July 1,
    
    
    Product
    
    
    Percent2008
    
    
    Revenues
    
    
    2007
    
    
    Revenues
    
    
    Change
    
    
    2008
    
    
    Revenues
    
    
    2007
    
    
    Revenues
    
    
    Change(In millions, except percentages)United States
    
    $
    217.8
    
    
    
    31.7
    %
    
    $
    272.6
    
    
    
    37.9
    %
    
    
    (20.1
    %)
    
    $
    470.9
    
    
    
    33.4
    %
    
    $
    466.0
    
    
    
    33.1
    %
    
    
    1.0
    %Japan
    
    
    52.1
    
    
    
    7.6
    %
    
    
    43.8
    
    
    
    6.1
    %
    
    
    19.0
    %
    
    
    101.6
    
    
    
    7.2
    %
    
    
    153.3
    
    
    
    10.9
    %
    
    
    (33.7
    %)Europe and Middle East
    
    
    193.3
    
    
    
    28.1
    %
    
    
    194.7
    
    
    
    27.0
    %
    
    
    (0.7
    %)
    
    
    369.6
    
    
    
    26.2
    %
    
    
    329.2
    
    
    
    23.3
    %
    
    
    12.3
    %Asia-Pacific
    
    
    209.5
    
    
    
    30.5
    %
    
    
    179.6
    
    
    
    24.9
    %
    
    
    16.7
    %
    
    
    438.7
    
    
    
    31.1
    %
    
    
    381.4
    
    
    
    27.1
    %
    
    
    15.0
    %Other foreign countries
    
    
    14.8
    
    
    
    2.1
    %
    
    
    29.3
    
    
    
    4.1
    %
    
    
    (49.6
    %)
    
    
    30.8
    
    
    
    2.2
    %
    
    
    79.4
    
    
    
    5.6
    %
    
    
    (61.3
    %)Product revenues
    
    $
    687.5
    
    
    
    100.0
    %
    
    $
    720.0
    
    
    
    100.0
    %
    
    
    (4.5
    %)
    
    $
    1,411.6
    
    
    
    100.0
    %
    
    $
    1,409.3
    
    
    
    100.0
    %
    
    
    0.2
    %
  45




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##### Table of Contents



License and Royalty Revenues.
 Three months ended
    
    Six months endedJune 29,
    
    July 1,
    
    Percent
    
    June 29,
    
    July 1,
    
    Percent2008
    
    2007
    
    Change
    
    2008
    
    2007
    
    Change(In millions, except percentages)License and royalty revenues
    
    $
    128.5
    
    
    $
    107.0
    
    
    
    20.1
    %
    
    $
    254.4
    
    
    $
    203.8
    
    
    
    24.9
    %
  Gross Margin.
 Three months ended
    
    Six months endedJune 29,
    
    July 1,
    
    Percent
    
    June 29,
    
    July 1,
    
    Percent2008
    
    2007
    
    Change
    
    2008
    
    2007
    
    Change(In millions, except percentages)Product gross margin
    
    $
    22.4
    
    
    $
    116.7
    
    
    
    (80.8
    %)
    
    $
    155.2
    
    
    $
    214.9
    
    
    
    (27.8
    %)Product gross
margin (as a
percent of product
revenues)
    
    
    3.3
    %
    
    
    16.2
    %
    
    
    
    
    
    
    11.0
    %
    
    
    15.2
    %Total gross margin
(as a percent of
total revenues)
    
    
    18.5
    %
    
    
    27.0
    %
    
    
    
    
    
    
    24.6
    %
    
    
    26.0
    %
   Research and Development.
 Three months ended
    
    Six months endedJune 29,
    
    July 1,
    
    Percent
    
    June 29,
    
    July 1,
    
    Percent2008
    
    2007
    
    Change
    
    2008
    
    2007
    
    Change(In millions, except percentages)Research and development
    
    $
    112.1
    
    
    $
    101.2
    
    
    
    10.8
    %
    
    $
    223.6
    
    
    $
    196.8
    
    
    
    13.6
    %Percent of revenue
    
    
    13.7
    %
    
    
    12.2
    %
    
    
    
    
    
    
    13.4
    %
    
    
    12.2
    %
   46




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##### Table of Contents



Sales and Marketing.
 Three months ended
    
    Six months endedJune 29,
    
    July 1,
    
    Percent
    
    June 29,
    
    July 1,
    
    Percent2008
    
    2007
    
    Change
    
    2008
    
    2007
    
    Change(In millions, except percentages)Sales and marketing
    
    $
    77.6
    
    
    $
    60.5
    
    
    
    28.3
    %
    
    $
    157.8
    
    
    $
    116.7
    
    
    
    35.2
    %Percent of revenue
    
    
    9.5
    %
    
    
    7.3
    %
    
    
    
    
    
    
    9.5
    %
    
    
    7.3
    %
   General and Administrative.
 Three months ended
    
    Six months endedJune 29,
    
    July 1,
    
    Percent
    
    June 29,
    
    July 1,
    
    Percent2008
    
    2007
    
    Change
    
    2008
    
    2007
    
    Change(In millions, except percentages)General and administrative
    
    $
    53.7
    
    
    $
    41.2
    
    
    
    30.4
    %
    
    $
    111.5
    
    
    $
    88.2
    
    
    
    26.5
    %Percent of revenue
    
    
    6.6
    %
    
    
    5.0
    %
    
    
    
    
    
    
    6.7
    %
    
    
    5.5
    %
   Amortization of Acquisition-Related Intangible Assets.
 Three months ended
    
    Six months endedJune 29,
    
    July 1,
    
    Percent
    
    June 29,
    
    July 1,
    
    Percent2008
    
    2007
    
    Change
    
    2008
    
    2007
    
    Change(In millions, except percentages)Amortization of
acquisition-related
intangible assets
    
    $
    4.6
    
    
    $
    7.0
    
    
    
    (35.4
    %)
    
    $
    9.0
    
    
    $
    16.1
    
    
    
    (44.1
    %)Percent of revenue
    
    
    0.6
    %
    
    
    0.9
    %
    
    
    
    
    
    
    0.5
    %
    
    
    1.0
    %
  47




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##### Table of Contents



Restructuring.
 Three months ended
    
    Six months endedJune 29,
    
    July 1,
    
    Percent
    
    June 29,
    
    July 1,
    
    Percent2008
    
    2007
    
    Change
    
    2008
    
    2007
    
    Change(In millions, except percentages)Restructuring
    
    $
    4.1
    
    
    $
    0.2
    
    
    
    1826.9
    %
    
    $
    4.1
    
    
    $
    6.7
    
    
    
    (39.3
    %)Percent of revenue
    
    
    0.5
    %
    
    
    
    
    
    
    
    
    
    
    0.3
    %
    
    
    0.4
    %
   Other Income.
 Three months ended
    
    
    Six months endedJune 29,
    
    
    July 1,
    
    
    Percent
    
    
    June 29,
    
    
    July 1,
    
    
    Percent2008
    
    
    2007
    
    
    Change
    
    
    2008
    
    
    2007
    
    
    Change(In millions, except percentages)Interest income
    
    $
    23.3
    
    
    $
    34.7
    
    
    
    (33.0
    %)
    
    $
    49.0
    
    
    $
    72.2
    
    
    
    (32.1
    %)Interest expense
and other income
(expense), net
    
    
    (2.8
    )
    
    
    3.8
    
    
    
    (171.6
    %)
    
    
    (2.6
    )
    
    
    2.6
    
    
    
    (200.5
    %)Total other income
    
    $
    20.5
    
    
    $
    38.5
    
    
    
    (46.7
    %)
    
    $
    46.4
    
    
    $
    74.8
    
    
    
    (38.0
    %)
  Provision
for (Benefit from) Income Taxes.
 Three months ended
    
    Six months endedJune 29,
    
    July 1,
    
    June 29,
    
    July 1,2008
    
    2007
    
    2008
    
    2007(In millions, except for percentages)Provision for (benefit from) income taxes
    
    $
    (12.8
    )
    
    $
    23.6
    
    
    $
    0.1
    
    
    $
    35.8Effective tax rate
    
    
    15.9
    %
    
    
    45.3
    %
    
    
    (0.2
    %)
    
    
    51.9
    %
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Liquidity and Capital Resources.
  Six months endedJune 29,
    
    
    July 1,
    
    
    Percent2008
    
    
    2007
    
    
    Change(In millions, except percentages)Net cash (used in) provided by operating activities
    
    $
    (114.0
    )
    
    $
    164.8
    
    
    
    (169.2
    %)Net cash used in investing activities
    
    
    (29.2
    )
    
    
    (584.0
    )
    
    
    95.0
    %Net cash provided by (used in) financing activities
    
    
    1.2
    
    
    
    (37.9
    )
    
    
    103.3
    %Effect of changes in foreign currency exchange rates on cash
    
    
    (2.2
    )
    
    
    0.6
    
    
    
    (452.9
    %)Net decrease in cash and cash equivalents
    
    $
    (144.2
    )
    
    $
    (456.5
    )
    
    
    68.4
    %
 Operating
Activities.
 Investing Activities.
 Financing Activities.
 Short-Term Liquidity.
 Long-Term Requirements.
 Financing Arrangements.
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Flash Partners and Flash Alliance Ventures with Toshiba.
      50




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FlashVision Venture with Toshiba. Consolidation of Variable Interest Entities,
 Contractual Obligations and Off-Balance Sheet Arrangements
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Critical Accounting Policies
   Recent Accounting Pronouncements
 SFAS No. 161. Disclosures about Derivative Instruments and Hedging Activities Accounting for Derivative Instruments and Hedging Activities,
 SFAS No. 160. Noncontrolling Interests in Consolidated Financial Statements, an amendment
of ARB No. 51
 SFAS No. 141 (revised Business Combinations
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FSP No. APB 14-1. Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon
Conversion (Including Partial Cash Settlement)
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Foreign Currency Risk.
  
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures.
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PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
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Item 1A. Risk Factors
 The following description of the risk factors associated with our business includes any
material changes to and supersedes the description of the risk factors associated with our business
previously disclosed in Part 1, Item 1A of our Annual Report on Form 10-K for the fiscal year ended
December 30, 2007.
 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 demand due to global economic conditions, industry-wide demand or
other conditions;
    
    reduction in price elasticity of demand related to pricing changes for our markets and products;
    
    memory output from captive sources increasing faster than the growth in demand,
resulting in write-downs for excess inventory or lower of cost or market reserves;
    
    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;
    
    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;
    
    inability to develop or unexpected difficulties in developing or manufacturing
with acceptable yields, X3, X4, 3D Read/Write, or other advanced, alternative
technologies or difficulty in bringing advanced technologies into volume production
at cost competitive levels;
    
    increased memory component and other costs as a result of currency exchange rate
fluctuations to the U.S. dollar, particularly with respect to the Japanese yen;
    
    increased purchases of non-captive flash memory, including due to our plan to
slow captive capacity, 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;
    
    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;
    
    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 Flash Ventures as impacted by
fab start-up delays and costs, technology transitions, yields or production
interruptions;
    
    disruption in the manufacturing operations of suppliers, including suppliers of
sole-sourced components;
    
    potential delays in the emergence of new markets and products for NAND 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 or impairments of our investments in fabrication capacity, equity
investments and other assets;
    
    impairment of goodwill and/or intangible assets related to our acquisitions;
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
    
    estimates used in calculating share-based compensation expense;
    
    reduced sales to our retail customers if consumer confidence declines or due to
economic declines in the United States, Europe or other geographies; 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.
 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 through retailers and distributors, and if our
retailers and distributors are not successful, we could experience substantial product returns,
which would negatively impact our business, financial condition and results of operations.
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Our operations and financial performance depend significantly on worldwide economic conditions
and related impact on levels of consumer spending, which have recently deteriorated significantly
in many countries and regions, including, without limitation, the United States, and may remain
depressed for the foreseeable future.
 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.
  Our strategy of investing in captive manufacturing sources could harm us if our competitors
are able to produce products at lower costs or if industry supply exceeds demand.
 We 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.
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®  ®
       We face competition from numerous manufacturers and marketers of products using flash memory,
as well as from manufacturers of new and alternative technologies, and if we cannot compete
effectively, our results of operations and financial condition will suffer.
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
    
    
    price, quality and on-time delivery to our customers;
    
    product performance, availability and differentiation;
    
    success in developing new applications and new market segments;
    
    sufficient availability of supply, 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.
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The semiconductor industry is subject to significant downturns that have harmed our business,
financial condition and results of operations in the past and may do so in the future.
 Our business and the markets we address are subject to significant fluctuations in supply and
demand and our commitments to our flash ventures with Toshiba may result in periods of significant
excess inventory.
 We depend on our Flash Ventures and third parties for silicon supply and any disruption or
shortage in our supply from these sources will reduce our revenues, earnings and gross margins.
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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.
 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.
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We and Toshiba plan to continue to expand the wafer fabrication capacity of the Flash Alliance
business venture as well as form a new venture, for which we will make substantial capital
investments, which could adversely impact our operating results.
 Our investment of approximately $142 million in our FlashVision venture may not be
recoverable.
 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, either of which harm our financial
results.
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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 Flash Ventures and third-party subcontractors are
subject to risks for which we may not be adequately insured.
 We are exposed to significant risk from foreign currency fluctuations and if we do not
successfully manage future foreign exchange exposures, our business, results of operations and
financial condition could be harmed.
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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.
    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.
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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.
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Because of our international business and operations, we must comply with numerous
international laws and regulations, and we are vulnerable to political instability 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;
    
    longer payment cycles and greater difficulty in accounts receivable collection;
    
    adverse tax rules and regulations;
    
    weak protection of our intellectual property rights;
    
    delays in product shipments due to local customs restrictions; and
    
    delays in research and development that may arise from political unrest at our
development centers in Israel.
 Tower Semiconductors financial situation is challenging.
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Our stock price has been, and may continue to be, volatile, which could result in investors
losing all or part of their investments.
 Our goodwill and other intangible assets could become impaired, which may require us to take
significant non-cash charges against earnings.
 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.
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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.
 Flash Partners is currently not in compliance with a covenant in certain of its master lease
agreements, related to equipment, and as a result, we may have to spend up to $1.05 billion to
terminate Flash Partners master lease agreements, which would negatively impact our liquidity and
reduce our cash.
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We may need to raise additional financing, which could be difficult to obtain, and which if
not obtained in satisfactory amounts may prevent us from funding flash ventures 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.
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We may be subject to risks associated with environmental regulations.
 In the event we are unable to satisfy regulatory requirements relating to internal controls,
or if our internal controls over financial reporting are not effective, our business could suffer.
 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 Convertible Debt Instruments
That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement)
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We have significant financial obligations related to our flash 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.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  Votes For
    
    Votes AgainstIrwin Federman
    
    
    177,390,926
    
    
    
    11,251,514Steven J. Gomo
    
    
    185,452,731
    
    
    
    3,189,709Dr. Eli Harari
    
    
    183,840,983
    
    
    
    4,801,458Eddy W. Hartenstein
    
    
    185,665,497
    
    
    
    2,976,944Catherine P. Lego
    
    
    185,110,016
    
    
    
    3,532,425Michael E. Marks
    
    
    175,657,357
    
    
    
    12,985,084Dr. James D. Meindl
    
    
    183,577,947
    
    
    
    5,064,494
  VotesVotes For
    
    Votes Against
    
    Abstained
    
    Non-votesRatify the
appointment of
Ernst & Young LLP
as the Companys
independent
registered public
accounting firm for
the fiscal year
ending December 28,
2008
    
    
    184,243,614
    
    
    
    2,488,890
    
    
    
    1,909,935
    
    
    
    
 VotesVotes For
    
    Votes Against
    
    Abstained
    
    Non-votesTo consider a
proposal for
majority voting for
directors of the
Company
    
    
    101,953,169
    
    
    
    31,313,021
    
    
    
    1,829,884
    
    
    
    
 
 Item 5. Other Information
  
 Item 6. Exhibits
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SIGNATURES
  SANDISK CORPORATION(Registrant)Dated: August 5, 2008By:
    
    /s/ Judy BrunerJudy BrunerExecutive Vice President, Administration andChief Financial Officer(On behalf of the Registrant and as PrincipalFinancial and Accounting Officer)
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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
    
    3D Collaboration 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 Current Report on Form 8-K filed with the
SEC on June 17, 2008. 81