stockholders letter notice of 2008 annual meeting & …€¦ · notice of annual meeting of...

STOCKHOLDERS LETTERNOTICE OF 2008 ANNUAL MEETING & PROXY STATEMENT

2007 ANNUAL REPORT ON FORM 10-K

To our Stockholders,

While aggressive pricing in 2007 challenged SanDisk and our industry, demand for our products was robust and wesold 75% more units and 190% more megabytes than in 2006. Demand in our target markets was good and saleswere strong particularly for mobile cards and in our international geographies. Our product mix continued todiversify as we grew beyond imaging cards with mobile phone cards becoming our largest product category.Product revenues increased 18% despite an average price decline of 60% per megabyte. Our strong focus on productcost reductions resulted in a 56% lower cost per megabyte, and despite the pricing pressure we were able toconsistently improve our product gross margins throughout the year. Revenues from royalties were $450 million, up36% from 2006 and our patent portfolio grew to more than 860 U.S. patents, 550 foreign patents and 1400U.S. pending patent applications. In the past six years SanDisk’s total revenues grew from $0.5 billion in 2002 to$3.9 billion in 2007, a compound annual growth rate of 48%. While U.S. consumer confidence declined in late2007, I believe we are better positioned than our competition to weather the challenging market conditions in thefirst half of 2008.

Technology and Manufacturing Leadership

World-class Flash technology and high-volume leading edge manufacturing remain our core strengths and they arecrucial to our ability to deliver breakthrough products and lead our markets. Our long standing cooperation withToshiba allowed both companies to introduce the world’s first commercial 3-bits per cell NAND Flash memory, andto be the first to start production of 43-nanometer NAND multilevel cell, both in the first half of 2008. Our captivefab capacity in 2008 is comprised almost entirely of the most advanced 300 millimeter NAND Flash waferscurrently in production anywhere in the world. We continue to invest strategically in advanced memory technol-ogies, including 3 and 4-bits per cell NAND Flash, as well as 3D (three dimensional) rewritable memory whichcarries the promise to complement, and possibly one day replace, today’s NAND Flash.

International Growth

Growth in international product sales was robust in 2007 and almost two-thirds of our sales were outside of theU.S. Retail sales in Japan, Asia/Pacific and Europe all grew in excess of our corporate average. This was achievedby improved sourcing to these regions, more sales people on the ground, localized products and region-specificadvertising. Given that our market share in many international regions is lower than in the U.S., we see this as asignificant upside opportunity, and our plan is to continue to strengthen our international presence in 2008.

2008: Opportunities and Challenges

As we enter 2008, industry-wide excess supply is resulting again in sharp price declines and margin compression.Although we do not participate directly in the Flash memory component commodity business, we are not insulatedfrom the tough pricing environment for Flash memory in 2008. The commoditization of Flash memory componentsis a concern to investors and to ourselves. However, we believe that Flash memory is an enabling technology at theforefront of many young markets that have huge growth potential in the mobile convergence applications space. Inthe mobile handset business alone, we project that more than 500 million handsets will be sold in 2008 with a slot forFlash memory mobile cards. MP3 and video players are now predominantly based on Flash memory. Car navigationsystems have embraced Flash memory for storing street maps. Video camcorders are beginning the switch awayfrom bulky optical disk storage in favor of Flash memory. On the horizon are solid state drives (SSDs) for laptopsand enterprise servers. We believe that these emerging markets all benefit from the relentless drive to achieve lowercosts and higher capacities.

SanDisk’s vision and strategy for long term value creation has been consistent throughout our first 20 years. Ourproducts and technology have transformed entire industries. We are proud of our achievements, and are confident inour ability to continue to innovate and lead in existing and new markets in the years ahead. We have endured anumber of down-cycles in the past 20 years and the current down-cycle, although difficult, is energizing us toimprove our operational and business efficiencies so that we emerge a more nimble, stronger global competitor inthe next industry upturn. I would like to express my deep appreciation to our employees for their continuingdedication and to our customers, strategic partners, suppliers and stockholders for your continuing confidence.

Eli HarariChairman and Chief Executive Officer

SANDISK CORPORATION601 McCarthy BoulevardMilpitas, California 95035

NOTICE OF ANNUAL MEETING OF STOCKHOLDERSTo Be Held May 28, 2008

To Our Stockholders:

You are cordially invited to attend the Annual Meeting of Stockholders (the “Annual Meeting”) of SanDisk Corporation, aDelaware corporation (the “Company”), to be held on May 28, 2008 at 8:00 a.m., local time, at the Company’s headquarters, 601McCarthy Boulevard, Milpitas, California 95035, for the following purposes:

1. To elect seven Directors of the Company (“Directors”) to serve for the ensuing year and until their respectivesuccessors are duly elected and qualified. The nominees are Dr. Eli Harari, Irwin Federman, Steven J. Gomo, Eddy W.Hartenstein, Catherine P. Lego, Michael E. Marks and Dr. James D. Meindl.

2. To ratify the appointment of Ernst & Young LLP as the Company’s independent registered public accounting firmfor the fiscal year ending December 28, 2008.

3. To consider and vote on a stockholder proposal relating to majority voting for Directors, if properly presented at theAnnual Meeting.

4. To transact such other business as may properly come before the Annual Meeting or any adjournment orpostponement thereof.

The foregoing items of business are more fully described in the Proxy Statement that accompanies this Notice. The Board ofDirectors has unanimously approved proposals 1 and 2 above as described in the Proxy Statement and recommends that you vote“FOR” such proposals. The Board of Directors has unanimously rejected proposal 3 above as described in the Proxy Statementand recommends that you vote “AGAINST” such proposal.

Only stockholders of record at the close of business on March 31, 2008 are entitled to notice of and to vote at the AnnualMeeting and at any adjournment or postponement thereof. A list of stockholders entitled to vote at the Annual Meeting will beavailable for inspection at the executive offices of the Company.

All stockholders are cordially invited and encouraged to attend the Annual Meeting. In any event, to ensure yourrepresentation at the Annual Meeting, please carefully read the accompanying Proxy Statement. Regardless of whether you planto attend the Annual Meeting, please vote your shares as soon as possible so that your shares will be voted in accordance withyour instructions. For specific voting instructions, please refer to the instructions on the proxy card or on the Internet website atthe website described on the Notice of Internet Availability of Proxy Materials that was mailed to you. Telephone and Internetvoting are available. If you attend the Annual Meeting and vote by ballot, your proxy will be revoked automatically and onlyyour vote at the Annual Meeting will be counted.

We look forward to seeing you at the Annual Meeting.

By Order of the Board of Directors,

Eli HarariChairman of the Board, Directorand Chief Executive Officer

Milpitas, CaliforniaApril 11, 2008

ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING IN PERSON. INANY EVENT, TO ENSURE YOUR REPRESENTATION AT THE ANNUAL MEETING, WE URGE YOU TO SUBMITYOUR PROXY AS PROMPTLY AS POSSIBLE BY FOLLOWING THE INSTRUCTIONS INCLUDED WITH THENOTICE OF INTERNET AVAILABILITY OF PROXY MATERIALS THAT WAS MAILED TO YOU.

PROXY STATEMENT

FOR THE ANNUAL MEETING OF STOCKHOLDERS OFSANDISK CORPORATIONTO BE HELD MAY 28, 2008

GENERAL

This Proxy Statement is furnished in connection with the solicitation by the Board of Directors (the “Board ofDirectors” or the “Board”) of SanDisk Corporation, a Delaware corporation (the “Company,” “SanDisk,” “we” or“our”), of proxies to be voted at the Company’s Annual Meeting of Stockholders (the “Annual Meeting”) to be heldon May 28, 2008, or at any adjournment or postponement thereof, for the purposes set forth in the accompanyingNotice of Annual Meeting of Stockholders. Stockholders of record at the close of business on March 31, 2008 willbe entitled to vote at the Annual Meeting. The Annual Meeting will be held at 8:00 a.m., local time, at theCompany’s headquarters, 601 McCarthy Boulevard, Milpitas, California 95035.

This Proxy Statement and the proxy card will be made available to stockholders entitled to vote at the AnnualMeeting on or about April 11, 2008.

INTERNET AVAILABILITY OF PROXY MATERIALS AND ANNUAL REPORT

Pursuant to the new rules recently adopted by the Securities and Exchange Commission (the “SEC”), theCompany has elected to provide access to its proxy materials and the Company’s Annual Report on Form 10-K (the“Proxy Materials”) over the Internet. Accordingly, the Company is sending a Notice of Internet Availability ofProxy Materials (the “Notice”) to its stockholders of record and beneficial owners. All stockholders will have theability to access the Proxy Materials on a website referred to in the Notice or request to receive a printed set of theProxy Materials. Instructions on how to access the Proxy Materials over the Internet or to request a printed copymay be found on the Notice. In addition, stockholders may request to receive the Proxy Materials in printed form bymail or electronically by email on an ongoing basis.

The Notice will provide stockholders with instructions regarding how to:

• View the Proxy Materials for the Annual Meeting on the Internet; and

• Instruct the Company to send its future Proxy Materials to stockholders electronically by email.

Choosing to receive the future Proxy Materials by email will save the Company the cost of printing and mailingdocuments to its stockholders and will reduce the impact of the Company’s annual stockholders’ meetings on theenvironment. If a stockholder chooses to receive the future Proxy Materials by email, the stockholder will receive anemail next year with instructions containing a link to those materials and a link to the proxy voting site. Anystockholder’s election to receive the Proxy Materials by email will remain in effect until such stockholderterminates it.

VOTING RIGHTS

The close of business on March 31, 2008 was the record date for stockholders entitled to notice of and to vote atthe Annual Meeting or any adjournment or postponement thereof. At the record date, the Company had approx-imately 224,739,318 shares of Common Stock outstanding and entitled to vote at the Annual Meeting, held byapproximately 495 stockholders of record. Each holder of record at the close of business on March 31, 2008 isentitled to one vote for each share of Common Stock so held. In the election of Directors, however, cumulativevoting is authorized for all stockholders if any stockholder gives notice at the meeting, prior to voting for theelection of Directors, of his, her or its intention to cumulate votes. Under cumulative voting, a stockholder maycumulate votes and give to one nominee a number of votes equal to the number of Directors to be elected (seven atthis meeting) multiplied by the number of votes to which such stockholder is entitled, or may distribute such numberamong any or all of the nominees. The seven candidates receiving the highest number of votes will be elected. The

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Board is soliciting discretionary authority to vote proxies cumulatively in the event a stockholder gives notice of anintent to cumulate votes. A majority of the shares of Common Stock entitled to vote will constitute a quorum for thetransaction of business at the Annual Meeting.

If any stockholder is unable to attend the Annual Meeting, the stockholder may vote by proxy. The proxy issolicited by the Board of Directors and, when the proxy card is properly completed and returned, or the proxy isgranted by telephone or through the Internet, the proxy will be voted as directed by the stockholder. Stockholdersare urged to specify their choices on the proxy card or by the telephone or through the Internet voting process. If yousign and return the proxy card, or grant your proxy by telephone or through the Internet, but do not vote on aproposal, in the absence of contrary instructions, the shares of Common Stock represented by such proxy will bevoted FOR Proposals 1 and 2 and AGAINST Proposal 3, and will be voted in the proxy holders’ discretion as toother matters that may properly come before the Annual Meeting.

The affirmative vote of a plurality of the shares present or represented by proxy at the Annual Meeting andvoting is required for the election of Directors of the Company (Proposal 1). The affirmative vote of a majority of theshares present or represented by proxy at the Annual Meeting and entitled to vote is required for the ratification ofthe appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm(Proposal 2). The affirmative vote of a majority of the shares present or represented by proxy at the AnnualMeeting and entitled to vote is required to approve the stockholder proposal regarding majority voting for Directorsof the Company (Proposal 3). Stockholder votes will be tabulated by a representative of Broadridge FinancialSolutions, Inc. Abstentions and broker non-votes are each included in determining the number of shares present andvoting at the Annual Meeting for purposes of determining the presence or absence of a quorum, and each istabulated separately. Abstentions with respect to any matter other than the election of Directors of the Company(Proposal 1) will be treated as shares present or represented by proxy and entitled to vote on that matter and will thushave the same effect as negative votes. If shares are not voted by the bank, broker or other financial institution whichis the record holder of the shares but which does not receive voting instructions from the beneficial owners of thoseshares, or if shares are not voted in other circumstances in which proxy authority is defective or has been withheldwith respect to any matter, these non-voted shares, or “broker non-votes,” are deemed not to be entitled to vote onthe matter and accordingly are not counted for purposes of determining whether stockholder approval of that matterhas been obtained with respect to Proposals 2 and 3.

REVOCABILITY OF PROXIES

Any person giving a proxy has the power to revoke it at any time before the proxy holder’s exercise. A proxymay be revoked by filing with the Secretary of the Company an instrument of revocation or a duly executed proxybearing a later date, or by attending the Annual Meeting and voting in person.

SOLICITATION OF PROXIES

The Company’s Board of Directors is soliciting proxies for the Annual Meeting. The Company will bear thecost of soliciting proxies. Copies of solicitation materials will be furnished to brokerage houses, fiduciaries andcustodians holding shares in their names that are beneficially owned by others to forward to such beneficial owners.The Company may reimburse such persons for the costs they incur to forward the solicitation material to suchbeneficial owners. The original solicitation of proxies may be supplemented by solicitation by telephone, facsimile,or other means by Directors, officers, employees or agents of the Company. No additional compensation will bepaid to these individuals for these services. The Company has retained a proxy solicitation firm, The Altman Group,Inc., to aid it in the solicitation process. The Company will pay The Altman Group, Inc. a fee equal to $6,000 plusreasonable and customary expenses. Following the availability of the proxy materials and other soliciting materials,the Company will request brokers, custodians, nominees and other record holders to forward proxy materials andother soliciting materials to persons for whom they hold shares and to request authority for the exercise of proxies.In these cases, the Company, upon the request of the record holders, will reimburse these holders for theirreasonable expenses.

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STOCKHOLDER PROPOSALS TO BE PRESENTED AT THE NEXT ANNUAL MEETING

Proposals of stockholders of the Company that are intended to be presented by such stockholders at theCompany’s 2009 Annual Meeting must be received no later than December 12, 2008 in order that they may beincluded in the proxy statement and form of proxy relating to that meeting. In addition, the proxy solicited by theBoard of Directors for the 2009 Annual Meeting will confer discretionary authority to vote on any stockholderproposal presented at that meeting, unless the Company receives notice of such proposal before February 25, 2009.

PROPOSAL NO. 1

ELECTION OF DIRECTORS

The current Board of Directors consists of seven members with one vacancy. The Board of Directors has notnominated an individual to fill the vacancy. It is intended that the proxies will be voted for the seven nomineesnamed below for election to the Company’s Board of Directors unless authority to vote for any such nominee iswithheld. Each of the seven nominees is currently a Director of the Company and was elected to the Board ofDirectors by the stockholders at the last annual meeting. Each of the non-employee nominees is independent asdefined under the SEC and applicable stock exchange rules. Directors elected to the Board of Directors will servefor the ensuing year and until their respective successors are duly elected and qualified. Each nominee has beenrecommended for nomination by the Nominating and Governance Committee, has been nominated by the Board ofDirectors for election and has agreed to serve if elected, and the Board of Directors has no reason to believe that anynominee will be unavailable or will decline to serve. In the event, however, that any nominee is unable or declines toserve as a Director at the time of the Annual Meeting, the proxies will be voted for any nominee who is designatedby the current Board of Directors to fill the vacancy. Unless otherwise instructed, the proxyholders will vote theproxies received by them “FOR” the nominees named below. The seven candidates receiving the highest number ofthe affirmative votes of the shares entitled to vote at the Annual Meeting will be elected Directors of the Company.The proxies solicited by this Proxy Statement may not be voted for more than seven nominees.

NOMINEES

Set forth below is information regarding the nominees to the Board of Directors.

NamePosition(s) withthe Company Age

First Elected/AppointedAs a

Director

Dr. Eli Harari(1) . . . . . . . . . . . . . . . . . . Chairman of the Board, Director andChief Executive Officer

62 1988

Irwin Federman(2)(3) . . . . . . . . . . . . . . Vice Chairman of the Board and LeadIndependent Director

72 1988

Steven J. Gomo(2) . . . . . . . . . . . . . . . . . Director 56 2005

Eddy W. Hartenstein(4) . . . . . . . . . . . . . Director 57 2005

Catherine P. Lego(2)(5) . . . . . . . . . . . . . Director 51 2004

Michael E. Marks(3)(4) . . . . . . . . . . . . . Director 57 2003

Dr. James D. Meindl(3) . . . . . . . . . . . . . Director 74 1989

(1) Member of the Special Option Committee.

(2) Member of the Audit Committee.

(3) Member of the Compensation Committee.

(4) Member of the Nominating and Governance Committee.

(5) Ms. Lego served as a Director of the Company from 1989 to 2002 and returned to the Board of Directors in May2004.

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BUSINESS EXPERIENCE OF NOMINEES FOR ELECTION AS DIRECTORS

Dr. Harari, the founder of SanDisk, has served as Chief Executive Officer and as a Director of SanDisk sinceJune 1988. He was appointed Chairman of the Board in June 2006. Dr. Harari also served as President from June1998 to June 2006. Dr. Harari founded Waferscale Integration, Inc., a privately held semiconductor company, in1983 and was its President and Chief Executive Officer from 1983 to 1986, and Chairman and Chief TechnicalOfficer from 1986 to 1988. From 1973 to 1983, Dr. Harari held various management positions with Honeywell Inc.,Intel Corporation and Hughes Microelectronics Ltd. Dr. Harari holds a Ph.D. in Solid State Sciences from PrincetonUniversity and has more than 100 patents issued in the field of non-volatile memories and storage systems.

Mr. Federman has served as a Director of the Company since September 1988. Mr. Federman has been ageneral partner in U.S. Venture Partners, a venture capital firm, since April 1990. Mr. Federman was President andChief Executive Officer of Monolithic Memories, Inc., a semiconductor company, from 1978 to 1987. Prior toserving as President and Chief Executive Officer, Mr. Federman was the Chief Financial Officer of MonolithicMemories, Inc. Mr. Federman also serves as a director for Check Point Software Technologies Ltd., a securitysoftware company, Mellanox Technologies, Ltd., a semiconductor company, and various private corporations andcharitable trusts. Mr. Federman holds a B.S. in Economics from Brooklyn College and was awarded an HonoraryDoctorate of Engineering from Santa Clara University.

Mr. Gomo has served as a Director of the Company since December 2005. Mr. Gomo serves as Executive VicePresident, Finance and Chief Financial Officer of Network Appliance, Inc. Prior to joining Network Appliance, Inc.in August 2002, Mr. Gomo served as Chief Financial Officer of Gemplus International S.A. from November 2000 toApril 2002, as Chief Financial Officer of Asera, Inc. from February 2000 to November 2000, and as Chief FinancialOfficer of Silicon Graphics, Inc. from February 1998 to February 2000. Previously, Mr. Gomo spent 24 years atHewlett-Packard Company serving in various positions including finance, financial management, manufacturingand general management. Mr. Gomo holds a B.S. in Business Administration from Oregon State University and anM.B.A. from Santa Clara University. Mr. Gomo was a director of Macromedia, Inc. from April 2004 to December2005.

Mr. Hartenstein has served as a Director of the Company since November 2005. Mr. Hartenstein served asChairman, President and Chief Executive Officer of HD Partners Acquisition Corporation from its formation inDecember 2005 through February 2008. Previously, Mr. Hartenstein served as Chairman and Chief ExecutiveOfficer of DIRECTV, Inc., a television service provider, from its inception in 1990 through 2003, when NewsCorporation purchased a controlling interest in the company. He continued as vice chairman of The DIRECTVGroup through 2004 when he retired. Mr. Hartenstein received a B.S. in Aerospace Engineering and Mathematicsfrom California State Polytechnic University, Pomona and he received an M.S. in Applied Mechanics from theCalifornia Institute of Technology. He is a member of the National Academy of Engineering, was inducted into theBroadcasting and Cable Hall of Fame in 2002 and received an Emmy for lifetime achievement from the NationalAcademy of Television Arts and Sciences in 2007. Mr. Hartenstein also serves as a director of XM Satellite RadioHoldings Inc., Thomson S.A. (Thomson Multimedia) and the City of Hope.

Ms. Lego served as a Director of the Company from 1989 to 2002 and returned to the Board in May 2004.Ms. Lego has been a General Partner of The Photonics Fund, an early stage venture fund focused on investing incomponents, modules and systems companies for the fiber optics telecommunications market since December1999. She was a general partner at Oak Investment Partners from 1981 to 1992. Ms. Lego serves as a director andChair of the Audit Committee for WJ Communications, Inc., a public semiconductor company in the wirelesscommunications market. Ms. Lego also serves as a director and member of the Audit Committee for Lam ResearchCorporation, a provider of wafer fabrication equipment and services for the semiconductor industry. She also servesas a director and chairs the Audit Committee of StrataLight Communication, Inc., a private company which sellsoptical transport equipment. Ms. Lego received a B.A. from Williams College and an M.S. in Accounting from theNew York University Graduate School of Business. She has previously practiced as a Certified Public Accountant.

Mr. Marks has served as a Director of the Company since August 2003. Since March 2007, Mr. Marks hasmanaged a private equity fund called Riverwood Capital, LLC (formerly Bigwood Capital) which invests in rapidlygrowing private companies in North America and in emerging markets. From August to November 2007, Mr. Marksheld the position of interim Chief Executive Officer at Tesla Motors, Inc., a company producing electric sports cars.

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Prior to Riverwood, Mr. Marks was a senior adviser of Kohlberg Kravis Roberts & Co., a private equity firm, fromJanuary 2007 to March 2007. From January 2006 until January 2007, Mr. Marks was a member of Kohlberg KravisRoberts & Co. From January 1994 to January 2006, Mr. Marks served as the Chief Executive Officer of Flextronics,Inc., a leading producer of advanced electronic manufacturing services. Mr. Marks served as a director ofFlextronics from 1991 to January 2008. He was appointed Chairman of the Board of Flextronics effective uponhis retirement as Chief Executive Officer on January 1, 2006 until his retirement from the Board of Flextronics inJanuary 2008, and he previously served as Chairman of the Board of Flextronics from 1993 to January 2003. SinceApril 25, 2007, Mr. Marks has served as a director of Sun Microsystems, Inc. and, since August 1, 2007, as amember of its Audit Committee. Mr. Marks also serves as a director of Crocs, Inc., a designer, manufacturer andmarketer of footwear for men, women and children, Schlumberger Limited, an oil services company, and The VFoundation for Cancer Research. Mr. Marks received a B.A. and an M.A. from Oberlin College and an M.B.A. fromHarvard Business School.

Dr. Meindl has served as a Director of the Company since March 1989. Dr. Meindl has been the Joseph M.Pettit Chair Professor of Microelectronics at the Georgia Institute of Technology in Atlanta, Georgia, since 1993.From 1986 to 1993, Dr. Meindl served as Senior Vice President for Academic Affairs and Provost of RensselaerPolytechnic Institute. While at Stanford University from 1967 to 1986, he was the John M. Fluke Professor ofElectrical Engineering and Director of the Stanford Electronics Laboratory and the Center for Integrated Systems.Dr. Meindl serves as a director of Zoran Corporation, a leading provider of digital solutions-on-a-chip forapplications in the consumer electronics and digital imaging markets. He received the 2006 IEEE Medal ofHonor, the highest award presented by IEEE. Dr. Meindl holds a B.S., M.S. and Ph.D. in Electrical Engineeringfrom Carnegie-Mellon University.

BOARD MEETINGS AND COMMITTEES

The Board of Directors held five meetings and acted by unanimous written consent one time during fiscal2007. During fiscal 2007, each member of the Board of Directors attended or participated in seventy-five percent(75%) or more of the aggregate of (i) the total number of meetings of the Board of Directors held during the fiscalyear or the portion thereof following such person’s appointment to the Board and (ii) the total number of meetingsheld by all committees on which such Director served during the past fiscal year or the portion thereof followingsuch person’s appointment to one or more of those committees. There are no family relationships among executiveofficers or Directors of the Company. The Board of Directors has an Audit Committee, a Compensation Committee,a Nominating and Governance Committee, a Special Option Committee and a Secondary Executive Committee.

Communications with the Board

The Company encourages stockholder communications with its Board of Directors. Any stockholder com-munications with the Board of Directors may be submitted either via postal mail or email.

Postal Mail

Postal mail submissions should be directed to the following address:

Board of Directorsc/o Investor RelationsSanDisk Corporation601 McCarthy BoulevardMilpitas, CA 95035

Email

Individuals may also communicate with the Board by submitting an email to the Company’s Board [email protected]. Email submitted to this email address will be relayed to all Directors.

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Communications Intended for Non-Management Directors

Communications that are intended specifically for non-management Directors should be sent to the postal oremail address above to the attention of the Chair of the Nominating and Governance Committee.

Company Policy Regarding Board Member Attendance at Annual Meetings

The Company encourages attendance at its Annual Meeting of Stockholders by each incumbent Director andeach nominee to the Board. All of the incumbent Directors members attended the Company’s 2007 Annual Meetingof Stockholders.

Audit Committee

The Audit Committee of the Board of Directors (the “Audit Committee”) held eight meetings during fiscal2007. The Audit Committee, which consists of Directors Federman, Gomo and Lego, oversees on behalf of theBoard of Directors the integrity of the Company’s financial statements, the appointment, compensation, quali-fications, independence and performance of the Company’s independent registered public accounting firm, theCompany’s compliance with legal and regulatory requirements and the performance of the Company’s internalaccounting, audit and financial controls. The Audit Committee is authorized to conduct investigations, and to retain,at the expense of the Company, independent legal, accounting, or other professional consultants selected by theAudit Committee, for any matters relating to its purposes. The Board of Directors adopted and approved a revisedwritten charter for the Audit Committee in March 2008 that reflects new AICPA standards on non-audit services. Acopy of this charter is available on the Company’s website at www.sandisk.com. The Board of Directors hasdetermined that each of the members of this Committee is an “audit committee financial expert” as defined by theSEC. The Board of Directors has also determined that each member of the Audit Committee is an “independentdirector” as defined in Rule 4200 of the Marketplace Rules of the National Association of Securities Dealers, Inc.and also meets the additional criteria for independence of Audit Committee members set forth in Rule 10A-3(b)(1)under the Securities Exchange Act of 1934, as amended.

Compensation Committee

The Compensation Committee of the Board of Directors (the “Compensation Committee”) held five meetingsduring fiscal 2007. The Compensation Committee, which consists of Directors Federman, Marks and Meindl,establishes the general compensation policies of the Company and reviews and approves compensation of theexecutive officers of the Company. The Board of Directors adopted a charter for the Compensation Committee inFebruary 2003, which was last amended in February 2007. A copy of this charter is available on the Company’swebsite at www.sandisk.com. The charter requires that the Compensation Committee consist of no fewer than twoBoard members who satisfy the independence requirements of NASDAQ and applicable law. At all times duringfiscal 2007, the Compensation Committee consisted of three Board members, each of whom the Board hasaffirmatively determined satisfies these independence requirements.

Pursuant to its charter, the Compensation Committee’s responsibilities include the following:

• review and approve the corporate goals and objectives relevant to the compensation of the Chief ExecutiveOfficer and, in consultation with the Chief Executive Officer, other executive officers;

• evaluate the Chief Executive Officer’s performance (and, in consultation with the Chief Executive Officer,the other executive officers’ performance) in light of such goals and objectives;

• set officers’ compensation levels based on such evaluation and other factors deemed appropriate, includingthe Company’s performance and relative stockholder return, the value of incentive awards to executiveofficers at comparable companies and the awards given to the Company’s officers in past years;

• review and approve significant employment agreements, separation and severance agreements, arrange-ments or transactions with executive officers, including any arrangements having any compensatory effector purpose;

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• review and assist the Board in developing succession plans for executive officers in consultation with theChief Executive Officer, other members of the Board and other appropriate management personnel;

• review and recommend to the Board appropriate director compensation programs for non-employeedirectors, committee chairs and committee members, consistent with any applicable requirements of thelisting standards and applicable laws for independent directors and including consideration of cash andequity components;

• develop and periodically assess the Compensation Committee’s compensation policies applicable to theCompany’s executive officers and Directors, including the relationship of corporate performance toexecutive compensation, and periodically review the Company’s criteria and assess and make recommen-dations to the Board concerning the Company’s stock and incentive compensation plans, including theimpact of stock compensation plans on stockholder value and the impact of dilution from the Company stockplans;

• approve stock option grants and other equity-based or incentive awards under the Company’s stock andincentive compensation plans, including any performance criteria to the plans of awards, and otherwiseassist the Board in administering awards under these plans;

• have sole authority to retain and terminate any compensation consulting firm used to evaluate executive ordirector compensation, including to approve the consulting firm’s fees and other retention terms;

• timely review and approve the disclosures on executive compensation and prepare a report to the Boardrecommending that such disclosure be included in the Company’s annual proxy statement; and

• perform any other activities consistent with the Compensation Committee charter, the bylaws and applicablelisting standards and laws as the Compensation Committee or the Board considers appropriate.

Our Chief Executive Officer recommends to the Compensation Committee salary, annual bonus and long-termcompensation levels for less senior officers, including the other Named Executive Officers (as defined below under“Compensation Discussion and Analysis”), in accordance with the Compensation Committee charter. Our Presidentand Chief Operating Officer assists the Chief Executive Officer in reviewing performance and formulating theserecommendations to the Compensation Committee. Our Chief Financial Officer provides financial and otherinformation to the Compensation Committee to assist in determining appropriate compensation levels. OtherNamed Executive Officers do not currently have any role in determining or recommending the form or amount ofcompensation paid to our Named Executive Officers and our other senior executive officers.

The Board has delegated concurrent authority to the Compensation Committee and the Special OptionCommittee to grant share-based awards (including stock options and stock units) to employees who are not subjectto Section 16 of the Securities Exchange Act of 1934, as amended (“Section 16 officers”). The Special OptionCommittee may not grant share-based awards to Directors. The Special Option Committee may consist of one ormore directors, and currently consists of one director, Dr. Harari. The Special Option Committee took action bywritten consent 44 times during fiscal 2007. The Board has also delegated authority to the Secondary ExecutiveCommittee to grant stock options (but not stock units or other equity awards) to non-Section 16 officers andnon-directors. The Secondary Executive Committee may be comprised of one or more officers of the Company, andis currently comprised of two officers, Sanjay Mehrotra, the Company’s President and Chief Operating Officer, andJudy Bruner, the Company’s Executive Vice President, Administration and Chief Financial Officer. Share-basedawards to Section 16 officers are made by the Compensation Committee. The Secondary Executive Committee tookaction by written consent 26 times during fiscal 2007.

As indicated above, pursuant to its charter, the Compensation Committee has the power, in its discretion, toretain at the Company’s expense, such independent counsel and other advisors and experts as it deems necessary orappropriate to carry out the Compensation Committee’s duties. The Board delegates to the CompensationCommittee the express authority to decide whether to retain a compensation consultant to assist in the evaluationof compensation pursuant to its charter. If the Compensation Committee decides in its discretion to retain such afirm, the Board delegates to the Compensation Committee the sole authority to retain and terminate anycompensation consultant engaged to assist in the evaluation of the compensation of the Company’s senior executive

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officers (including all of the Named Executive Officers). The Compensation Committee has not retained theservices of a compensation consulting firm. From time to time, management has retained and consulted with its ownoutside advisors, including compensation consultants, to assist in analyzing the Company’s peer group andpreparing recommendations to the Compensation Committee regarding compensation programs and levels.

Nominating and Governance Committee

The Nominating and Governance Committee of the Board of Directors (the “Nominating and GovernanceCommittee”) held three meetings during fiscal 2007 and met subsequent to the end of the last fiscal year torecommend to the full Board each of the nominees for election to the Board of Directors, as presented herein. TheNominating and Governance Committee consists of Directors Marks and Hartenstein. The Nominating andGovernance Committee identifies, considers and recommends director nominees to be selected by the Board ofDirectors for submission to vote at the Company’s annual stockholder meetings and to fill vacancies occurringbetween annual stockholder meetings, implements the Board’s criteria for selecting new Directors, develops orreviews and recommends corporate governance policies for the Board, and oversees the Board’s annual evaluationprocess. The Nominating and Governance Committee is also authorized to conduct investigations and to retain, atthe expense of the Company, independent legal, accounting, financial, governance or other professional consultantsselected by the Nominating and Governance Committee, for any matters relating to its purposes. The Board ofDirectors adopted a charter for the Nominating and Governance Committee in February 2003, which was lastamended in February 2007. A copy of this charter is available on the Company’s website at www.sandisk.com. TheBoard of Directors has determined that each of the members of the Nominating and Governance Committee is an“independent director” as defined in Rule 4200 of the Marketplace Rules of the National Association of SecuritiesDealers, Inc.

CONSIDERATION OF DIRECTOR NOMINEES

Stockholder-Recommended Nominees

The policy of the Nominating and Governance Committee is to consider properly submitted stockholderrecommendations for nominees for membership on the Board as described below under “Identifying and EvaluatingNominees for Directors.” In evaluating the recommended nominees, the Nominating and Governance Committeeseeks to achieve a balance of knowledge, experience and capability on the Board and to address the membershipcriteria set forth under “Director Qualifications.”

The Nominating and Governance Committee will consider recommendations for nominees from stockholders.Stockholders may recommend individuals for consideration by submitting the materials set forth below to the Chairof the Nominating and Governance Committee at the Company’s address. If the nominees are intended to beconsidered by the Nominating and Governance Committee for recommendation to the Board for the slate ofDirectors to be voted on at the Company’s annual meeting of stockholders (“Annual Meeting Nominees”), thewritten materials must be submitted within the time permitted for submission of a stockholder proposal forinclusion in the Company’s proxy statement for the subject annual meeting and such submission must also complywith the provisions for stockholder proposals set forth in the Company’s Bylaws. For all other vacancies, the writtenmaterials must be submitted at least 30 days prior to the time that the Nominating and Governance Committee meetsto consider candidates for any vacancy. Stockholder nominees that are not Annual Meeting Nominees shall beconsidered if and when the Board determines to fill any vacancy on the Board.

The written materials must include: (1) all information relating to the individual recommended that is requiredto be disclosed pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including, withrespect to Annual Meeting Nominees, such person’s written consent to being named in the proxy statement as anominee and, with respect to all nominees, such person’s written consent to serving as a Director if elected); (2) thename(s) and address(es) of the stockholder(s) making the recommendation and the amount of the Company’ssecurities owned beneficially and of record by such stockholder(s); (3) appropriate biographical information(including a business address and a telephone number) and a statement as to the individual’s qualifications, with afocus on the criteria described below under “Director Qualifications”; (4) a representation that the stockholder is a

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holder of record of stock of the Company entitled to vote on the date of submission of such written materials; and(5) any material interest of the stockholder in the recommended nomination.

Any stockholder nominations recommended for consideration by the Nominating and Governance Committeeshould be addressed to:

Chair of the Nominating and Governance CommitteeSanDisk Corporation601 McCarthy BoulevardMilpitas, CA 95035

Director Qualifications

The Nominating and Governance Committee has established the following minimum criteria for evaluatingprospective Board candidates:

• Reputation for integrity, strong moral character and adherence to high ethical standards;

• Holds or has held a generally recognized position of leadership in the community and/or chosen field ofendeavor, and has demonstrated high levels of accomplishment;

• Demonstrated business acumen and experience, and ability to exercise sound business judgment in mattersthat relate to the current and long-term objectives of the Company;

• Ability to read and understand basic financial statements and other financial information pertaining to theCompany;

• Commitment to understand the Company and its business, industry and strategic objectives;

• Commitment and ability to regularly attend and participate in meetings of the Board of Directors, BoardCommittees and stockholders, the number of other company boards on which the candidate serves andability to generally fulfill all responsibilities as a Director of the Company;

• Willingness to represent and act in the interests of all stockholders of the Company rather than the interestsof a particular group;

• Good health and ability to serve;

• For prospective non-employee Directors, independence under the SEC and applicable stock exchange rules,and the absence of any conflict of interest (whether due to a business or personal relationship) or legalimpediment to, or restriction on, the nominee serving as a director; and

• Willingness to accept the nomination to serve as a Director of the Company.

Other Factors for Potential Consideration

The Nominating and Governance Committee will also consider the following factors in connection with itsevaluation of each prospective nominee:

• Whether the prospective nominee will foster a diversity of skills and experiences;

• Whether the nominee possesses the requisite education, training and experience to qualify as “financiallyliterate” or as an “audit committee financial expert” under the applicable SEC and stock exchange rules;

• For incumbent Directors standing for re-election, the Nominating and Governance Committee will assessthe incumbent Director’s performance during his or her term, including the number of meetings attended,level of participation, and overall contribution to the Company; the number of other company boards onwhich the individual serves; the composition of the Board at that time; any changed circumstances affectingthe individual Director, which may bear on his or her ability to continue to serve on the Board; and theCompany’s retirement policy for directors, as set forth in its Corporate Governance Principles; and

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• Composition of the Board and whether the prospective nominee will add to or complement the Board’sexisting strengths.

Identifying and Evaluating Nominees for Directors

The Nominating and Governance Committee initiates the process by preparing a slate of potential candidateswho, based on their biographical information and other information available to the Nominating and GovernanceCommittee, appear to meet the criteria specified above and/or who have specific qualities, skills or experience beingsought (based on input from the full Board).

• Outside Advisors. The Nominating and Governance Committee may engage a third-party search firm orother advisors to assist in identifying prospective nominees.

• Nomination of Incumbent Directors. The re-nomination of existing Directors is not automatic, but is basedon continuing qualification under the criteria set forth above and the Corporate Governance Principles of theCompany.

• Management Directors. The number of officers or employees of the Company serving at any time on theBoard should be limited such that, at all times, a majority of the Directors is “independent” under theapplicable SEC and stock exchange rules.

After reviewing appropriate biographical information and qualifications, first-time candidates the Nominatingand Governance Committee proposes to include on the slate of potential candidates described above, includingthose proposed to fill any vacancy, will be interviewed by at least one member of the Nominating and GovernanceCommittee and by the Chief Executive Officer. Upon completion of the above procedures, the Nominating andGovernance Committee shall determine the list of potential candidates to be recommended to the full Board fornomination at the annual meeting or to fill any vacancy on the Board. The Board of Directors will select the slate ofnominees, including any nominee to fill a vacancy, only from candidates identified, screened and approved by theNominating and Governance Committee.

Special Option Committee

The Special Option Committee of the Board of Directors has the authority to grant options and stock unitssolely to employees other than Section 16 officers and Directors. The Special Option Committee, comprised ofDirector Harari, acted by written consent on 44 occasions during fiscal 2007. The Special Option Committee actspursuant to limiting guidelines adopted by the Board of Directors.

Secondary Executive Committee

The Secondary Executive Committee of the Board of Directors has the authority to grant stock options (but notstock units or other share-based awards) to employees other than Section 16 officers and Directors. The SecondaryExecutive Committee may be comprised of one or more officers of the Company and is currently comprised ofMr. Mehrotra and Ms. Bruner. Each of Mr. Mehrotra and Ms. Bruner may act independently on behalf of theSecondary Executive Committee. The Secondary Executive Committee acted by written consent on 26 occasionsduring fiscal 2007. The Secondary Executive Committee acts pursuant to limiting guidelines adopted by the Boardof Directors.

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DIRECTOR COMPENSATION — FISCAL 2007

The following table presents information regarding the compensation paid during fiscal 2007 to individualswho were members of our Board of Directors at any time during fiscal 2007 and who were not also our employees(referred to herein as “Non-Employee Directors”). The compensation paid to any director who was also one of ouremployees during fiscal 2007 is presented below in the Summary Compensation Table — Fiscal 2006 and 2007 andthe related explanatory tables. Such employee-directors are generally not entitled to receive additional compen-sation for their services as directors.

Name(a)

FeesEarned or

Paid inCash($)(b)

StockAwards

($)(1)(2)(3)(c)

OptionAwards

($)(1)(2)(3)(d)

All OtherCompensation

($)(e)

Total($)(f)

Irwin Federman . . . . . . . . . . . . . . . . . . . . . . . 72,000 77,517 192,363 — 341,880

Steven J. Gomo . . . . . . . . . . . . . . . . . . . . . . . 60,000 126,890 168,045 — 354,935

Eddy W. Hartenstein . . . . . . . . . . . . . . . . . . . . 47,500 153,318 309,144 — 509,962

Catherine P. Lego . . . . . . . . . . . . . . . . . . . . . . 70,000 77,517 716,324 — 881,341

Michael E. Marks . . . . . . . . . . . . . . . . . . . . . . 59,500 77,517 663,628 — 800,645

Dr. James D. Meindl . . . . . . . . . . . . . . . . . . . . 47,500 77,517 192,363 — 317,380

(1) The amounts reported in columns (c) and (d) above reflect the aggregate dollar amounts recognized for stockawards and option awards, respectively, for financial statement reporting purposes with respect to fiscal 2007(disregarding any estimate of forfeitures related to service-based vesting conditions). For a discussion of theassumptions and methodologies used to calculate the amounts reported in columns (c) and (d) above, please seethe discussion of stock and option awards contained in Note 8 (“Compensation and Benefits”) to the Company’sConsolidated Financial Statements, included as part of the Company’s 2007 Annual Report filed on Form 10-K,which note is incorporated herein by reference.

(2) As described below, in fiscal 2007 we granted each of our Non-Employee Directors an award of 6,250 stockoptions and 1,842 restricted stock units. Each of the stock option awards had a value (for financial statementreporting purposes) equal to $86,374 on the grant date, and each of the restricted stock unit awards had a value(for financial statement reporting purposes) equal to $77,364 on the grant date. See footnote (1) above for theassumptions used to value these awards.

(3) The following table presents the number of outstanding and unexercised option awards and the number ofunvested stock awards (which term includes restricted stock units for purposes of this Proxy Statement) held byeach of our Non-Employee Directors as of December 31, 2007.

Director

Number of Shares Subject toOutstanding Option Awards

as of 12/31/07

Number of UnvestedShares or

Units as of 12/31/07

Irwin Federman . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,750 8,092

Steven J. Gomo . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,250 23,868

Eddy W. Hartenstein . . . . . . . . . . . . . . . . . . . . . . . . 37,500 23,658

Catherine P. Lego . . . . . . . . . . . . . . . . . . . . . . . . . . 116,750 40,092

Michael E. Marks . . . . . . . . . . . . . . . . . . . . . . . . . . 114,750 8,092Dr. James D. Meindl . . . . . . . . . . . . . . . . . . . . . . . . 82,750 8,092

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Director Compensation

Compensation for Non-Employee Directors during fiscal 2007 generally consisted of an annual retainer,committee membership fees and annual share-based awards.

Annual Retainer and Committee Membership Fees

The following table sets forth the schedule of the annual retainer and committee membership fees for eachNon-Employee Director in effect during fiscal 2007:

Type of Fee Dollar Amount

Annual Board Retainer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $40,000

Additional Annual Fee to Chair of Audit Committee . . . . . . . . . . . . . . . . . . . . . . . . . $30,000

Additional Annual Fee to Chairs of Compensation Committee and Nominating andGovernance Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,000

Additional Annual Fee to non-Chair Member of Audit Committee . . . . . . . . . . . . . . . $20,000

Additional Annual Fee to non-Chair Member of Compensation Committee andNominating and Governance Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,500

All Non-Employee Directors are also reimbursed for out-of-pocket expenses they incur serving as directors.

Share-Based Awards

Under our Non-Employee Director compensation policy as currently in effect, a Non-Employee Director whofirst takes office and who has not been employed by the Company in the preceding twelve months receives, at thetime of his or her election or appointment to the Board, (i) an initial option grant to purchase 25,000 shares of theCompany’s Common Stock (the “Initial Option Grant”), and (ii) an initial restricted stock unit grant for a number ofunits determined by dividing $320,000 by the average closing price per share of Common Stock on the NASDAQGlobal Select Market for the five trading days ended on, and including, the grant date (the “Initial Unit Grant”).Each Non-Employee Director who has served in that capacity for at least six months at the time of grant alsoreceives an annual award consisting of (i) an option grant to purchase 6,250 shares of Common Stock (the “AnnualOption Grant”), and (ii) a restricted stock unit grant for a number of units determined by dividing $80,000 by theaverage closing price per share of Common Stock on the NASDAQ Global Select Market for the five trading daysended on, and including, the grant date (the “Annual Unit Grant”). The initial and annual awards described aboveare granted under, and are subject to, the Company’s 2005 Incentive Plan (the “2005 Plan”).

Initial and Annual Stock Option Grants.

The Initial and Annual Option Grants are granted with a per-share exercise price equal to the fair market valueof a share of the Company’s Common Stock on the grant date. For these purposes, and in accordance with the termsof the 2005 Plan and the Company’s share-based award grant practices, the fair market value is equal to the closingprice of a share of the Company’s Common Stock on the NASDAQ Global Select Market on the grant date.

The stock options granted to Non-Employee Directors are immediately exercisable. However, upon a Non-Employee Director’s cessation of service with the Company, any shares purchased upon exercise of the option thathave not vested (as described below) are subject to repurchase by the Company at the lower of (i) the exercise pricepaid for the shares or (ii) the fair market value of the shares at the time of repurchase (as determined under the 2005Plan). This type of stock option is generally referred to as an “early exercise” stock option because the holder ispermitted to exercise the option prior to the time that the underlying shares vest. Subject to the Non-EmployeeDirector’s continued service, the shares subject to the Initial Option Grant vest, and the Company’s repurchase rightlapses, in four substantially equal annual installments on each of the first through fourth anniversaries of the grantdate. Subject to the Non-Employee Director’s continued service, the shares subject to the Annual Option Grant vest,and the Company’s repurchase right lapses, in one installment on the earlier of (i) first anniversary of the grant dateor (ii) the day immediately preceding the next annual meeting of the Company’s stockholders following the grantdate.

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Once vested, each option will generally remain exercisable for fully vested shares of Common Stock (i.e.,shares which are not subject to the Company’s repurchase right) until its normal expiration date. Each of the optionsgranted to our Non-Employee Directors under the 2005 Plan has a term of seven years. However, vested stockoptions may terminate earlier in connection with a change in control of the Company. Shares subject to the optionthat have not vested will immediately terminate (or be subject to the Company’s repurchase right to the extentalready purchased under the option) upon the cessation of the Non-Employee Director’s service. However, theshares subject to options vest, and the Company’s repurchase right lapses, in full if the Non-Employee Director’scessation of service is as a result of the director’s death or permanent disability. Non-Employee Directors generallyhave twelve months to exercise the vested portion of the option following a cessation of service.

The options granted to Non-Employee Directors do not include any dividend or dividend equivalent rights.However, Non-Employee Directors are entitled to dividends with respect to shares purchased under an option,whether or not such shares have vested under the option, at the same rate as of the Company’s other stockholders.

Initial and Annual Restricted Stock Unit Grants.

Each restricted stock unit awarded to our Non-Employee Directors represents a contractual right to receive oneshare of the Company’s Common Stock if the time-based vesting requirements described below are satisfied.Restricted stock units are credited to a bookkeeping account established by the Company on behalf of each Non-Employee Director.

Subject to the Non-Employee Director’s continued service, the units subject to the Initial Unit Grant vest infour substantially equal annual installments on each of the first through fourth anniversaries of the grant date.Subject to the Non-Employee Director’s continued service, the units subject to the Annual Unit Grant vest in oneinstallment on the earlier of (i) the first anniversary of the grant date or (ii) the day immediately preceding the nextannual meeting of the Company’s stockholders following the grant date. Upon the cessation of the Non-EmployeeDirector’s service, any unvested restricted stock units will generally terminate. However, restricted stock unitsgranted to a Non-Employee Director vest in full if the Non-Employee Director’s cessation of service is as a result ofthe director’s death or permanent disability.

Restricted stock units will generally be paid in an equivalent number of shares of the Company’s CommonStock as they become vested. Non-Employee Directors are not entitled to voting or dividend rights with respect tothe restricted stock units, and the restricted stock units generally may not be transferred, except to the Company orto a beneficiary of the Non-Employee Director upon his or her death. Non-Employee Directors are, however,entitled to the following dividend equivalent rights with respect to the restricted stock units. If the Company pays acash dividend on its Common Stock and the dividend record date occurs after the grant date and before all of therestricted stock units have either been paid or terminated, then the Company will credit the Non-EmployeeDirector’s bookkeeping account with an amount equal to (i) the per-share cash dividend paid by the Company on itsCommon Stock with respect to the dividend record date, multiplied by (ii) the total number of outstanding andunpaid restricted stock units (including any unvested restricted stock units) as of the dividend record date. Thesedividend equivalents will be subject to the same vesting, payment and other terms and conditions as the originalrestricted stock units to which they relate (except that the dividend equivalents may be paid in cash or such otherform as the plan administrator may deem appropriate).

The Board of Directors administers the 2005 Plan as to Non-Employee Director awards and has the ability tointerpret and make all required determinations under the plan, subject to plan limits. This authority includes makingrequired proportionate adjustments to outstanding awards to reflect any impact resulting from various corporateevents such as reorganizations, mergers and stock splits. Pursuant to the terms of the 2005 Plan, stock options andrestricted stock units granted to our Non-Employee Directors may vest on an accelerated basis in connection with achange in control of the Company.

Required Vote

The affirmative vote of the holders of a plurality of the shares present in person or represented by proxy at theAnnual Meeting and entitled to vote on Proposal No. 1 is required for approval of Proposal No. 1.

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Recommendation of the Board of Directors

The Board believes that Proposal No. 1 is in the Company’s best interests and in the best interests of itsstockholders and recommends a vote FOR the election of all of the above nominees.

PROPOSAL NO. 2RATIFICATION OF APPOINTMENT OF INDEPENDENT

REGISTERED PUBLIC ACCOUNTING FIRM

The Audit Committee has appointed Ernst & Young LLP as the Company’s independent registered publicaccounting firm for the fiscal year ending December 28, 2008, and is asking the Company’s stockholders to ratifythis appointment. The affirmative vote of the holders of a majority of the shares present or represented by proxy atthe Annual Meeting and entitled to vote on this Proposal No. 2 will be required to ratify the selection of Ernst &Young LLP.

In the event the stockholders fail to ratify the appointment, the Audit Committee will reconsider itsappointment of Ernst & Young LLP as the Company’s independent registered public accounting firm for thefiscal year ending December 28, 2008. Even if this appointment is ratified, the Audit Committee, in its discretion,may direct the appointment of a different independent registered public accounting firm at any time during the yearif the Audit Committee determines that such a change would be in the best interests of the Company and itsstockholders.

Ernst & Young LLP has audited the Company’s financial statements annually since 1991. Its representativesare expected to be present at the Annual Meeting, will have the opportunity to make a statement if they desire to doso, and will be available to respond to appropriate questions.

Principal Accountant Fees and Services

The following is a summary of the Ernst & Young LLP fees incurred by the Company for professional servicesrendered during the 2007 and 2006 fiscal years:

2007 2006

(a) Audit Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,922,000 $3,424,000

(b) Audit-Related Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219,000 178,000

(c) Tax Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 627,000 474,000

(d) All Other Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,000 6,000

(a) Audit fees consist of professional services provided in connection with the integrated audit of the Company’sfinancial statements and review of the Company’s quarterly financial statements that include professionalservices provided in connection with the annual audit of the Company’s internal control over financialreporting. The fees for fiscal 2007 include professional services provided in connection with the msystems Ltd.acquisition and new and existing statutory audits of subsidiaries or affiliates of the Company.

(b) Audit-related fees consist primarily of accounting consultations, services provided in connection with reg-ulatory filings, technical accounting guidance and other attestation services.

(c) For fiscal years 2007 and 2006, tax fees principally included tax compliance fees, including expatriatecompliance services. Total compliance fees were $407,000 and $302,000 for fiscal 2007 and 2006, respectively.Tax fees also include tax advice and tax planning fees of $220,000 and $172,000 for fiscal 2007 and 2006,respectively.

(d) All other fees includes online research tools, grant funding requests and other services.

All of the 2007 services described above were pre-approved by the Audit Committee to the extent required bySection 10A of the Securities Exchange Act of 1934, as amended, which requires audit committee pre-approval ofaudit and non-audit services provided by the Company’s independent registered public accounting firm. Inaccordance with Section 10A under the Securities Exchange Act of 1934, as amended, the Audit Committeemay delegate to any member of the Audit Committee (referred to as the “Audit Committee Delegate”) the authority

15

to pre-approve services not prohibited by law to be performed by the Company’s independent registered publicaccounting firm. The Audit Committee has appointed Catherine P. Lego as the Audit Committee Delegate and, assuch, Ms. Lego reports any decision to pre-approve permissible services to the full Audit Committee at its nextregular meeting. In addition, from time to time, the Audit Committee has adopted and/or revised a Pre-ApprovalPolicy under which particular services or categories of services are pre-approved, subject to certain specifiedmaximum dollar amounts. Such pre-approval is generally granted for a term of twelve (12) months from the date ofpre-approval and automatically renews at the end of the one-year period unless revoked or revised by the AuditCommittee.

The Audit Committee has concluded that the provision of the audit-related services, tax services and other non-audit services identified above is compatible with the principal accountants’ independence.

Required Vote

The affirmative vote of the holders of a majority of the shares present in person or represented by proxy at theAnnual Meeting and entitled to vote on Proposal No. 2 is required to ratify the appointment of Ernst & Young LLPas the Company’s independent registered public accounting firm for the fiscal year ending December 28, 2008.Should such stockholder approval not be obtained, the Audit Committee will reconsider its appointment of Ernst &Young LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 28,2008.


The Board believes that Proposal No. 2 is in the Company’s best interests and in the best interests of itsstockholders and recommends a vote FOR the ratification of the appointment of Ernst & Young LLP to serveas the Company’s independent registered public accounting firm for the fiscal year ending December 28,2008.

PROPOSAL NO. 3

STOCKHOLDER PROPOSAL REGARDING MAJORITY VOTINGFOR THE ELECTION OF DIRECTORS

The United Brotherhood of Carpenters Pension Fund, 101 Constitution Avenue, N.W., Washington, D.C.20001, a beneficial owner of 3,629 shares of Common Stock, has notified us that it intends to present the followingproposal at the meeting:

Stockholder Proposal

RESOLVED, that the shareholders of the Company hereby request that the Board of Directors initiate theappropriate process to amend the Company’s governance documents (certificate of incorporation or bylaws) toprovide that director’s nominees shall be elected by the affirmative vote of the majority of votes cast at an annualmeeting of shareholders, with a plurality vote standard retained for contested director elections, that is when thenumber of director nominees exceeds the number of board seats.

Supporting Statement

In order to provide shareholders a meaningful role in director elections, our Company’s director election votestandard should be changed to a majority vote standard. A majority vote standard would require that a nomineereceive a majority of the votes cast in order to be elected. The standard is particularly well-suited for the vastmajority of director elections in which only board nominated candidates are on the ballot. We believe that a majorityvote standard in board elections would establish a challenging vote standard for board nominees and improve theperformance of individual directors and entire boards. Our Company presently uses a plurality vote standard in alldirector elections. Under the plurality vote standard, a nominee for the board can be elected with as little as a singleaffirmative vote, even if a substantial majority of the votes cast are “withheld” from the nominee.

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In response to strong shareholder support for a majority vote standard in director elections, an increasingnumber of the nation’s leading companies, including Intel, General Electric, Motorola, Hewlett-Packard, MorganStanley, Wal-Mart, Home Depot, Gannett, Marathon Oil, and recently Pfizer have adopted a majority vote standardin company bylaws or articles of incorporation. Additionally, these companies have adopted director resignationpolicies in their bylaws or corporate governance policies to address post-election issues related to the status ofdirector nominees that fail to win election. Other companies have responded only partially to the call for change bysimply adopting post-election director resignation policies that set procedures for addressing the status of directornominees that receive more “withheld” votes than “for” votes. At the time of this proposal submission, ourCompany and its board had not taken either action.

We believe that a post-election director resignation policy without a majority vote standard in company bylaws orarticles is an inadequate reform. The first critical step in establishing a meaningful majority vote policy is the adoption ofa majority vote standard. With a majority vote standard in place, the board can then consider action on developing post-election procedures to address the status of directors that fail to win election. A majority vote standard combined with apost-election director resignation policy would establish a meaningful right for shareholders to elect directors, andreserve for the board an important post-election role in determining the continued status of an unelected director. We feelthat this combination of the majority vote standard with a post-election policy represents a true majority standard.

SanDisk’s Statement in Opposition to Proposal No. 3

The Board of Directors believes this proposal does not serve the best interests of the Company or itsstockholders and recommends a vote AGAINST it.

This proposal requests that the Company initiate a process to amend its governance documents to provide a majorityvoting standard for director elections so that stockholders have a “meaningful role in director elections.” However, webelieve that our strong corporate governance practices and director election process currently provide stockholders ameaningful and important role in the election of directors. Like most large public companies incorporated in Delaware,we currently use a plurality voting standard, the default standard under Delaware law, which provides that the nomineeswho receive the most affirmative votes are elected to serve as our directors. We also provide stockholders with the abilityto express their preferences in the election of directors by cumulating their votes. As discussed below, cumulative voting,which most public companies do not permit but is widely recognized as a corporate governance mechanism designed toprotect stockholders’ rights, gives our stockholders unique leverage in voting on the election of directors.

Cumulative Voting Provides Stockholders a Meaningful Role in the Director Election Process

Retaining the plurality vote standard is particularly advisable in the Company’s case because our stockholdershave the ability to express their preferences in the election of directors by cumulating their votes. Cumulativevoting, which most public companies do not allow but is universally recognized as protecting stockholders’ rights,gives our stockholders unique leverage in voting on the election of directors. It allows each stockholder to cast all ofhis or her available votes in director elections for a single director nominee, thereby enhancing the voting power ofminority stockholders. While the rules governing director elections are well understood when cumulative votingrights are exercised under a plurality vote standard, cumulative voting under a majority vote standard presentstechnical and legal issues for which there is almost no precedent.

The Company’s voting system must be a reliable process for the election of qualified directors to represent theinterests of all of our stockholders. In the absence of uniform, workable standards that can be consistently applied byall companies and that take into account the special circumstances of companies with cumulative voting, theCompany believes it would be inappropriate to adopt a majority voting standard.

The Proposed Voting Standard is not Tailored to Address the Benefits to the Company’s Stockholders thatResult from Cumulative Voting

The proponent argues that under the plurality vote standard a director could be elected with “a singleaffirmative vote, even if a substantial majority of the votes cast are ’withheld’ from the nominee.” However, thatremote, theoretical possibility does not accurately reflect the actual results experienced by the Company usingcumulative voting and a plurality standard for director elections. In the past three years, the Company’s directorshave, on average, received the affirmative vote of greater than 81% of the shares voted in director elections.

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The proposal takes the position that only one director election standard should be used by all U.S. companies.However, this approach does not take into consideration the unique attributes of the Company’s cumulative votingprovision or our strong corporate governance structure and practices. Under the current standard for electingdirectors, our stockholders have consistently and overwhelmingly elected a board comprised of highly qualifieddirectors from diverse backgrounds. These directors, and the management team selected by them, have deliveredsolid financial performance and stockholder value. The Board of Directors does not believe the proponent’sproposal could improve such performance.

The Potential Uncertainty of a Simple Majority Voting Standard

Under Delaware law, an incumbent director who is not re-elected “holds over” and continues to serve with thesame voting rights and powers until his or her successor is elected and qualified. While this critical aspect of soundcorporate governance practice is noted in the proponent’s supporting statement, the proposed majority votingstandard fails to address the director “hold over” issue. Therefore, even if the proposal were adopted, the Companycould not force a director who failed to receive a majority vote to leave the Board of Directors until his or hersuccessor is elected at a subsequent stockholder meeting.

Moreover, the proposal fails to address vacancies on the Board of Directors that would arise if a director who fails toreceive a majority of the votes cast chooses to resign his or her position. Delaware law and the Company’s Bylaws permitthe Board of Directors to elect a director to fill the vacancy, let the position remain vacant, or call another meeting ofstockholders for the sole purpose of filling the vacancy. In any case, the Board may be left with vacancies for an indefiniteperiod of time, making it difficult to staff key committees and otherwise meet its obligation to oversee the business andaffairs of the Company. This could cause additional uncertainty, disruption, and expense for the Company.

A Task Force of the American Bar Association Committee on Corporate Law studied the benefits anddetriments associated with a majority vote standard for the election of directors, and decided not to recommend amajority voting standard for directors, stating:

“The Committee believes that it is not advisable to alter the existing plurality default rule. Although theCommittee is mindful of the criticisms of plurality voting, the Committee is currently persuaded that thepotential negative consequences of failed elections, combined with the uncertainty of applying an untestedvoting standard as the default rule for public corporations, warrants the retention of the plurality voting rule.”

The Company’s Corporate Governance Practices

The Company’s corporate governance practices, including cumulative voting, have been recognized byRiskMetrics (formerly Institutional Shareholder Services), which has ranked the Company ahead of its peercompanies in the technology hardware and equipment group, as measured by the RiskMetrics Corporate Gov-ernance Quotient. These corporate governance practices are designed to identify and propose director nomineeswho will best serve the interests of the Company and its stockholders. The Board of Directors maintains aNominating and Governance Committee that is composed entirely of independent directors. The Nominating andGovernance Committee applies a robust set of criteria in identifying director nominees and has establishedprocedures to consider and evaluate persons recommended by stockholders, described in detail elsewhere in theproxy statement under the heading “Consideration of Director Nominees.”

The Company’s stockholders have consistently elected highly qualified directors, substantially all of whom,other than the Company’s Chief Executive Officer, have been “independent” within standards adopted by TheNASDAQ Global Select Market. In the past, every director nominee has received the affirmative vote of a strongmajority of the shares voted.

Required Vote

The affirmative vote of a majority of the shares present in person or represented by proxy at the AnnualMeeting and entitled to vote on Proposal No. 3 is required to approve the stockholder proposal regarding majorityvoting for Directors of the Company


For the reasons set forth above, the Board believes that Proposal No. 3 is not in the Company’s bestinterests or the best interests of its stockholders and recommends a vote AGAINST Proposal No. 3.

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SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth certain information regarding the ownership of the Company’s Common Stockas of February 15, 2008 by (i) all persons known by the Company, based solely on inspection of 13G filings madewith the SEC, to be beneficial owners of five percent (5%) or more (as set forth in the Beneficial Ownership Tableincluded below) of its outstanding Common Stock, (ii) each Director of the Company, (iii) the Named ExecutiveOfficers (as defined below under “Compensation Discussion and Analysis”), and (iv) all current executive officersand Directors of the Company as a group. Unless otherwise indicated, the principal address of each of thestockholders below is c/o SanDisk Corporation, 601 McCarthy Boulevard, Milpitas, California 95035.

Unless otherwise indicated and pursuant to applicable community property laws, the persons named in thefollowing table have sole voting and investment power with respect to all shares of Common Stock. The number ofshares beneficially owned includes Common Stock of which such individual has the right to acquire beneficialownership either currently or within 60 days after February 15, 2008, including, but not limited to, upon the exerciseof a stock option.

Percentage of beneficial ownership is based upon 224,590,319 shares of Common Stock outstanding onFebruary 15, 2008. For each individual, this percentage includes Common Stock of which such individual has theright to acquire beneficial ownership either currently or within sixty (60) days after February 15, 2008, including,but not limited to, upon the exercise of a stock option; however, such Common Stock will not be deemedoutstanding for the purpose of computing the percentage owned by any other individual. Such calculation isrequired by General Rule 13d-3(d)(1)(i) under the Securities Exchange Act of 1934, as amended.

Name or Group of Beneficial OwnersNumber of

SharesPercentage Owned

(%)

Amount and Nature of BeneficialOwnership

Entities Controlled by Capital Group International, Inc.(1) . . . . . . . . 32,556,390 14.50

Entities Controlled by ClearBridge Advisors, LLC(2) . . . . . . . . . . . 15,524,956 6.91

Judy Bruner(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 490,533 *

Yoram Cedar(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 520,430 *

Irwin Federman(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94,432 *

Steven J. Gomo(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,528 *

Dr. Eli Harari(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,211,045 2.32

Eddy W. Hartenstein(8). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,906 *

Catherine P. Lego(9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 407,136 *

Michael E. Marks(10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198,088 *

Sanjay Mehrotra(11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 846,288 *

Dr. James D. Meindl(12). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130,677 *

Dr. Randhir Thakur(13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186,029 *

All directors and current executive officers as a group(11 persons)(14) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,161,092 3.63

* Less than 1% of the outstanding Common Stock.

(1) The principal address of Capital Group International, Inc. (“CGII”) is 11100 Santa Monica Blvd., LosAngeles, California 90025. Pursuant to a joint Schedule 13G/A filed with the SEC on February 1, 2008 by andon behalf of CGII, Capital Guardian Trust Company (“CGTC”) and Capital International Limited (“CIL”),CGII reported that it had sole voting power over 27,464,350 shares of Common Stock and sole dispositivepower over 32,556,390 shares of Common Stock, and CIL reported that it had sole voting power over11,912,050 shares of Common Stock and sole dispositive power over 12,950,820 shares of Common Stock.

(2) The principal address of ClearBridge Advisors, LLC (“CA”) is 399 Park Avenue, New York, New York 10022.Pursuant to a joint Schedule 13G/A filed with the SEC February 14, 2008 by and on behalf of CA and Smith

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Barney Fund Management LLC (“SBFM”), CA reported that it had shared voting power over12,607,168 shares of Common Stock and shared dispositive power over 15,524,956 shares of CommonStock, and SBFM reported that it had shared voting and dispositive power over 209,091 shares of CommonStock.

(3) Comprised of 13,346 shares held in the name of a trust for the benefit of Ms. Bruner and her spouse. Alsoincludes 464,687 shares subject to outstanding options and 12,500 restricted stock units granted to Ms. Bruner,which were exercisable, in the case of options, or vested, in the case of restricted stock units, on February 15,2008 or within 60 days after that date. Excludes 25,000 restricted stock units that will not vest on February 15,2008 or within 60 days after that date.

(4) Includes 12,969 shares held in the name of a trust for the benefit of Mr. Cedar and his spouse. Also includes497,625 shares subject to outstanding options and 6,250 restricted stock units granted to Mr. Cedar, whichwere exercisable, in the case of options, or vested, in the case of restricted stock units, on February 15, 2008 orwithin 60 days after that date. Excludes 12,500 restricted stock units that will not vest on February 15, 2008 orwithin 60 days after that date.

(5) Includes 18,750 shares subject to immediately exercisable options granted to Mr. Federman, but some of theshares subject to those options are currently unvested and would, if purchased, be subject to a repurchase rightof the Company that lapses over time. Excludes 1,842 restricted stock units that will not vest on February 15,2008 or within 60 days of that date.

(6) Includes 31,250 shares subject to immediately exercisable options granted to Mr. Gomo, but some of theshares subject to those options are currently unvested and would, if purchased, be subject to a repurchase rightof the Company that lapses over time. Excludes 5,118 shares restricted stock units that will not vest onFebruary 15, 2008 or within 60 days after that date.

(7) Includes 2,861,602 shares held in the name of a trust for the benefit of Dr. Harari and his spouse. Also includes2,206,810 shares subject to outstanding options and 25,000 restricted stock units granted to Dr. Harari, whichwere exercisable, in the case of options, or vested, in the case of restricted stock units, on February 15, 2008, orwithin 60 days after that date. Also includes 100,404 shares held in the name of a trust for the benefit of hischildren. Excludes 50,000 restricted stock units that will not vest on February 15, 2008 or within 60 days afterthat date.

(8) Includes 37,500 shares subject to immediately exercisable options granted to Mr. Hartenstein, but some of theshares subject to those options are currently unvested and would, if purchased, be subject to a repurchase rightof the Company that lapses over time. Excludes 4,908 restricted stock units that will not vest on February 15,2008 or within 60 days after that date.

(9) Includes 283,580 shares held in the name of a trust of which Ms. Lego is the trustee. Also includes116,750 shares subject to immediately exercisable options granted to Ms. Lego, but some of the shares subjectto those options are currently unvested and would, if purchased, be subject to a repurchase right of theCompany that lapses over time. Excludes 1,842 restricted stock units that will not vest on February 15, 2008 orwithin 60 days after that date.

(10) Includes 1,338 shares held in the name of a trust for the benefit of Mr. Marks and his spouse, 70,000 sharesheld by limited liability companies controlled by Mr. Marks, 6,000 shares held in the name of a trust for thebenefit of his son and 6,000 shares held in the name of a trust for the benefit of his daughter. Also includes114,750 shares subject to immediately exercisable options granted to Mr. Marks, but some of the sharessubject to those options would, if exercised, be subject to a repurchase right of the Company that lapses overtime. Excludes 1,842 restricted stock units that will not vest on February 15, 2008 or within 60 days after thatdate.

(11) Includes 69,604 shares held in the name of a trust for the benefit of Mr. Mehrotra and his spouse. Also includes730,434 shares subject to outstanding options and 46,250 restricted stock units granted to Mr. Mehrotra, whichwere exercisable, in the case of options, or vested, in the case of restricted stock units, on February 15, 2008 orwithin 60 days after that date. Excludes 75,000 restricted stock units that will not vest on February 15, 2008 orwithin 60 days after that date.

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(12) Comprised of 47,927 shares held as community property in the name of Dr. Meindl and his spouse and82,750 shares subject to immediately exercisable options granted to Dr. Meindl, but some of the shares subjectto those options are currently unvested and would, if purchased, be subject to a repurchase right of theCompany that lapses over time. Excludes 1,842 restricted stock units that will not vest on February 15, 2008 orwithin 60 days after that date.

(13) Includes 156,250 shares subject to outstanding options granted to Mr. Thakur, which were exercisable onFebruary 15, 2008 or within 60 days after that date.

(14) Includes shares subject to options exercisable as of February 15, 2008, or within 60 days after that date, andrestricted stock units that will be vested as of February 15, 2008 or within 60 days after that date, includingthose identified in notes (3), (4), (5), (6), (7), (8), (9), (10), (11), (12) and (13).

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s Directors,executive officers, and persons who own more than ten percent (10%) of a registered class of the Company’s equitysecurities, to file initial reports of ownership and reports of changes in ownership of Common Stock and other equitysecurities of the Company with the SEC. Officers, Directors and stockholders holding more than ten percent (10%)of the outstanding capital stock of the Company are required by SEC regulations to furnish the Company withcopies of all Section 16(a) reports they file.

Based upon (i) the copies of Section 16(a) reports which the Company received from such persons for their2007 fiscal year transactions in the Common Stock and their Common Stock holdings, and (ii) the writtenrepresentations received from one or more of such persons that no annual Form 5 reports were required to be filed bythem for the 2007 fiscal year, the Company believes that all executive officers, stockholders holding more than 10%of the outstanding capital stock of the Company and Board members complied with all their reporting requirementsunder Section 16(a) for such fiscal year except that a late Form 4 report was filed for each of the independent Boardmembers on June 11, 2007, reporting their annual automatic grants that occurred on May 24, 2007 and a late Form 4report for each of Judy Bruner, Yoram Cedar, Eli Harari and Sanjay Mehrotra was filed on February 22, 2007 for thewithholding shares issued for taxes in connection with the vesting of restricted stock units that occurred onFebruary 16, 2007.

Equity Compensation Information for Plans or Individual Arrangements with Employees and Non-Employees

The following table provides information as of February 15, 2008 with respect to the shares of the Company’sCommon Stock that may be issued under the Company’s existing equity compensation plans. Other than asdescribed in footnote (4) to the following table, there are no assumed plans under which any options to acquire suchshares or other equity-based awards may be granted.

Plan Category

Number ofSecurities to

be IssuedUpon Exerciseof Outstanding

Options andRights

Weighted AverageExercise Priceof Outstanding

Options(1)

Number ofSecurities Remaining

Available forFuture IssuanceUnder Equity

Compensation Plans(Excluding Securities

Reflected inColumn A)

(A)

(B)

(C)

Equity Compensation Plans Approvedby Stockholders(2) . . . . . . . . . . . . . . . 22,878,512(3)(4)(5) $35.49 13,204,190(6)

Equity Compensation Plans NotApproved by Stockholders . . . . . . . . . N/A N/A N/A

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,878,512 $35.49 13,204,190

(1) Weighted average exercise price of outstanding options; excludes restricted stock units.

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(2) Consists solely of the 2005 Plan, including options incorporated from predecessor plans, the 2005 EmployeeStock Purchase Plan and the 2005 International Employee Stock Purchase Plan (together with the 2005Employee Stock Purchase Plan, the “Purchase Plans”).

(3) Excludes purchase rights accruing under the Company’s Purchase Plans, which have a combined stockholder-approved reserve of 10,000,000 shares. Under the Purchase Plans, each eligible employee may purchase up to1,500 shares of Common Stock at the end of each six-month offering period (the last U.S. business day inJanuary and July each year) at a purchase price per share equal to 85% of the lower of (i) the closing sellingprice per share of Common Stock on the employee’s entry date into that six-month offering period or (ii) theclosing selling price per share on the purchase date.

(4) Excludes 3,164,134 shares that are subject to options and other equity compensation awards that wereoriginally granted by Matrix Semiconductor, Inc., or Matrix, and msystems Ltd., or msystems, prior to theiracquisition by SanDisk, as described below:

AcquiredCompany

AwardCategory

Number ofSecuritiesSubject to

Applicable PlanWeighted Average

Exercise Price

Weighted AverageEstimated

Remaining Life

Matrix . . . . . . . . . . . Options 95,570 $ 7.13 6.32

Matrix . . . . . . . . . . . Restricted Stock Units 25,181 N/A N/A

msystems . . . . . . . . . Options 2,452,735 $35.17 7.41

msystems . . . . . . . . . Stock Settled 590,648 $43.74 8.21AppreciationRights

(5) Includes 11,899,178 shares subject to options and 456,021 shares subject to restricted stock units outstandingunder the 2005 Plan. Also includes 10,523,313 shares subject to outstanding options under the Company’s 1995Stock Option Plan and the Company’s 1995 Non-Employee Director Stock Option Plan. The weighted averageestimated remaining life of the outstanding options is 5.49 years.

(6) Consists of shares available for future issuance under the 2005 Plan and the Purchase Plans. As of February 15,2008, 9,149,779 shares of Common Stock were available for issuance under the 2005 Plan and 4,054,411 sharesof Common Stock were available for issuance under the combined share reserve for the Purchase Plans.

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FORM 10-K

The Company filed an Annual Report on Form 10-K with the SEC on February 25, 2008. Stockholdersmay obtain a copy of this report, without charge, by writing to Investor Relations at the Company’s principalexecutive offices located at 601 McCarthy Boulevard, Milpitas, California 95035. The Annual Report onForm 10-K is also available at http://ww3.ics.adp.com/streetlink/SNDK.

AUDIT COMMITTEE REPORT

The information contained in this report shall not be deemed to be “soliciting material” or to be “filed” withthe Securities and Exchange Commission, nor shall such information be incorporated by reference into any futurefilings with the Securities and Exchange Commission, or subject to the liabilities of Section 18 of the SecuritiesExchange Act of 1934, as amended, except to the extent that the Company specifically incorporates it by referenceinto a document filed under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, asamended.

The following is the report of the Audit Committee with respect to the Company’s audited financial statementsfor the fiscal year ended December 30, 2007 included in the Company’s Annual Report on Form 10-K for that year.

The Audit Committee has reviewed and discussed the audited financial statements with management of theCompany.

The Audit Committee has discussed with the Company’s independent registered accounting firm, Ernst &Young LLP, the matters required to be discussed by SAS 61 (“Codification of Statements on Auditing Standards,AU Section 380”), as amended, which include, among other items, matters related to the conduct of the audit of theCompany’s financial statements.

The Audit Committee has received the written disclosures and the letter from Ernst & Young LLP required byIndependence Standards Board Standard No. 1 (“Independence Discussions with Audit Committees”), as amended,and has discussed with Ernst & Young LLP the independence of Ernst & Young LLP from the Company.

Based on the review and discussions referred to above in this report, the Audit Committee recommended to theCompany’s Board of Directors that the audited financial statements be included in the Company’s Annual Report onForm 10-K for the fiscal year ended December 30, 2007 for filing with the Securities and Exchange Commission.

Submitted by the Audit Committeeof the Board of Directors

Catherine P. Lego (Chair)Irwin FedermanSteven J. Gomo

COMPENSATION DISCUSSION AND ANALYSIS

This section contains a discussion of the material elements of compensation awarded to, earned by or paid tothe principal executive officer, principal financial officer of the Company and our three other most highlycompensated individuals who were serving as executive officers as of December 31, 2007. These individualsare referred to as “Named Executive Officers” in this Proxy Statement.

The Company’s current executive compensation programs are determined and approved by the CompensationCommittee of the Board. None of the Named Executive Officers is a member of the Compensation Committee. Ascontemplated by the charter of the Compensation Committee, the Company’s Chief Executive Officer recommendsto the Compensation Committee the base salary, annual bonus and long-term compensation levels for the otherNamed Executive Officers. Our President and Chief Operating Officer assists the Chief Executive Officer inreviewing performance and formulating recommendations to the Compensation Committee. Our other Named

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Executive Officers, including our Chief Financial Officer, provide financial and other information to the Com-pensation Committee to assist in determining appropriate compensation levels. Our other executive officers,including the other Named Executive Officers, do not currently have any role in determining or recommending theform or amount of compensation paid to our Named Executive Officers and our other senior executive officers.

Executive Compensation Program Objectives and Overview

The Company’s current executive compensation programs are intended to achieve three fundamental objec-tives: (1) attract, retain and motivate qualified executives; (2) hold executives accountable for performance; and(3) align executives’ interests with the interests of our stockholders. In structuring our current executive com-pensation programs, we are guided by the following basic philosophies:

• Competition. The Company should provide competitive compensation opportunities so that we can attract,retain and motivate qualified executives.

• Alignment with Stockholder Interests. A substantial portion of compensation should be contingent on theCompany’s performance. As an executive officer’s level of responsibility increases, a greater portion of theofficer’s total compensation should be dependent on the Company’s performance and stock priceappreciation.

• Pay for Performance. A substantial portion of compensation should be tied to Company and individualperformance.

As described in more detail below, the material elements of our current executive compensation program forNamed Executive Officers include a base salary, an annual cash incentive opportunity, a long-term share-basedincentive opportunity, 401(k) retirement benefits and severance protection for certain actual or constructiveterminations of the Named Executive Officers’ employment.

We believe that each element of our executive compensation program helps us to achieve one or more of ourcompensation objectives. The table below lists each material element of our executive compensation program andthe compensation objective or objectives that it is designed to achieve.

Compensation Element Compensation Objectives Designed to be Achieved

Base Salary k Attract, retain and motivate qualified executivesk Hold executives accountable for performancek Align executives’ interests with those of

stockholders

Annual Cash Incentive Opportunity k Attract, retain and motivate qualified executivesk Align executives’ interests with those of

stockholdersk Hold executives accountable for performance

Long-Term Share-Based Incentives k Attract, retain and motivate qualified executives

401(k) Retirement Benefits k Attract, retain and motivate qualified executives

Severance and Other Benefits Upon Termination ofEmployment

k Attract, retain and motivate qualified executives

As illustrated by the table above, base salaries, 401(k) retirement benefits and severance and other terminationbenefits are all primarily intended to attract, retain and motivate qualified executives. These are the elements of ourcurrent executive compensation program where the value of the benefit in any given year is generally not variable.We believe that in order to attract, retain and motivate top-caliber executives, we need to provide executives withpredictable benefit amounts that reward the executive’s continued service. Some of the elements, such as basesalaries, are generally paid out on a short-term or current basis. The other elements are generally paid out on alonger-term basis, such as upon retirement or other termination of employment. We believe that this mix of longer-term and short-term elements allows us to achieve our dual goals of attracting and retaining executives (with thelonger-term benefits geared toward retention and the short-term awards focused on recruitment).

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Our annual cash incentive opportunity is primarily intended to hold Named Executive Officers accountable forperformance, although we also believe it aligns Named Executive Officers’ interests with those of our stockholdersand helps us attract, retain and motivate executives. Our long-term equity incentives are primarily intended to alignNamed Executive Officers’ interests with those of our stockholders, although we also believe they help holdexecutives accountable for performance and help us attract, retain and motivate executives. These are the elementsof our current executive compensation program that are designed to reward performance and the creation ofstockholder value, and therefore the value of these benefits is dependent on performance. Each Named ExecutiveOfficer’s annual bonus opportunity is paid out on an annual short-term basis and is designed to reward performancefor that period. Long-term equity incentives are generally paid out or earned on a longer-term basis and are designedto reward performance over one or more years.

The individual compensation elements are intended to create a total compensation package for each NamedExecutive Officer that we believe achieves our compensation objectives and provides competitive compensationopportunities. From time to time, management has retained Compensia, Inc., an independent compensationconsulting firm, to review and identify our appropriate peer group companies, and to obtain and evaluate currentexecutive compensation data for these companies. We selected the following companies as our peer groupcompanies in fiscal 2007: Adobe Systems Incorporated; Advanced Micro Devices Inc.; Analog Devices, Inc.;Avaya Inc.; Broadcom Corp.; CA Inc.; Electronic Arts Inc.; Juniper Networks, Inc.; LSI Corporation; MarvellTechnology Group Ltd.; Maxim Integrated Products, Inc.; Micron Technology, Inc.; Network Appliance, Inc.;NVIDIA Corp.; Seagate Technology LLC; Symantec Corporation; Xilinx, Inc.; and Yahoo! Inc. We believe thatthese peer group companies, which were selected from within and outside the Company’s industry, are comparablein size and growth pattern with the Company and compete with the Company for executive talent. Although the peergroup differs from the S&P Semiconductor Company Stock Index, and the PHLX Semiconductor Index, which theCompany has selected as the industry indices for purposes of the stock performance graph that appeared in theCompany’s Annual Report on Form 10-K for the fiscal year ended December 30, 2007, we believe these peer groupcompanies provide relevant comparative compensation data for the Company.

Consistent with our compensation philosophies described above, our goal is to provide each Named ExecutiveOfficer with a current executive compensation program that is competitive in light of the compensation paid tocomparable executives at our peer group companies. To that end, we generally target base salaries and long-termincentives at approximately the 50th percentile within our peer group companies. We generally target total cashcompensation at approximately the 60th percentile within our peer group companies; however, we have the abilityto, and do, exercise discretion to set compensation levels that are above or below these benchmarks. As indicated inthe charter of the Compensation Committee, in determining the appropriate levels of compensation to be paid toNamed Executive Officers, the Compensation Committee retains the discretion to consider amounts realized fromprior compensation. However, amounts realized from prior compensation were not a material factor in determining2007 compensation for our Named Executive Officers. Furthermore, amounts realized from prior compensationwere not considered in setting future retirement benefits since the only retirement benefit currently offered by theCompany is the Named Executive Officer’s ability to participate in the Company’s 401(k) plan during his or heremployment with the Company.

Dr. Harari attends each meeting of the Compensation Committee that relates to Company-wide compensationissues and the compensation of his direct reporting officers. At meetings pertaining to officer pay, Dr. Hararipresents compensation recommendations for his direct reports and explains to the Compensation Committee thebasis and rationale for his recommendations. The Compensation Committee understands that in determining hisrecommendations Dr. Harari considers the scope and responsibility of each officer’s position and the individualperformance of each officer and reviews compensation of similarly situated officers in the Company’s peer group, tothe extent that there is a similarly situated officer. With respect to Dr. Harari’s compensation, the Company and itsadvisers collect chief executive officer compensation data from comparable companies, including those in theCompany’s peer group, based on size, location and industry. The Company presents the collected data to theCompensation Committee. The Compensation Committee reviews the data and deliberates to determine anappropriate level of compensation for Dr. Harari based on the Company’s targeted compensation levels. Dr. Hararidoes not participate in the Compensation Committee deliberations that relate to his personal compensation and heexcuses himself from that portion of the Compensation Committee meeting. Dr. Harari and other employees of the

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Company occasionally meet with a compensation consulting firm retained by the Company to discuss broadercompensation issues and trends or to discuss officer pay. Dr. Harari does not meet or consult with the compensationconsulting firm individually nor does Dr. Harari discuss his individual compensation with the consulting firmretained by the Company.

Current Executive Compensation Program Elements

Base Salaries

None of our Named Executive Officers has an employment agreement or other contractual right to receive afixed base salary. The Compensation Committee generally reviews the base salaries for each Named ExecutiveOfficer in the first quarter of each year. In determining the appropriate fiscal 2007 base salary for our NamedExecutive Officers, we considered the base salary levels in effect for comparable executives at our peer groupcompanies (based on their published 2006 fiscal year data), internal comparables and individual performance. Theweighting of these factors by the Compensation Committee is subjective, not formulaic. For example, for positionsthat are easily benchmarked in the market, such as Chief Executive Officer and President, an equal weighting mightbe given to all three factors. For other positions that are somewhat hybrid in nature and not directly comparable topositions at our peer group of Companies, such as Executive Vice President, Technology and Worldwide Operationsand Executive Vice President, Mobile Business Unit and Corporate Engineering, the internal comparables andindividual performance factors may be weighed more heavily than the market data. The Compensation Committeedoes not use a formula for determining compensation.

Based on our review in fiscal 2007, we determined that the appropriate base salary rate was as follows for eachNamed Executive Officer for fiscal 2007: Dr. Harari, $848,000; Mr. Mehrotra, $510,000; Ms. Bruner, $450,000;Dr. Thakur, $385,422 and Mr. Cedar, $385,422. This determination was made after the temporary reduction in basesalaries described below had ended. In line with our target benchmark, the fiscal 2007 compensation level (beforethe reduction described below) for Named Executive Officers ranged from the 50th percentile to the 60th percentileof the base salary levels in effect for comparable executives at our peer group companies (based on their published2006 fiscal year data). In connection with the Company’s overall cost reduction program, the CompensationCommittee approved a base salary reduction for Named Executive Officers of 15% (20% for the Chief ExecutiveOfficer), effective March 5, 2007. The reduction to base salaries continued until August 6, 2007, at which time therates of base salary increased to the amounts specified above for the remainder of fiscal 2007. No payment intendedto offset the temporary reduction to base salaries was made to any Named Executive Officer, and in determining thebase salary amounts set forth above, we did not attempt to compensate the Named Executive Officers for thetemporary reduction in base salaries. The total base salary amounts paid for fiscal 2007, taking into account theseadjustments, is reported for each Named Executive Officer in column (c) of the Summary Compensation Table —Fiscal 2006 and 2007, below.

The Company’s third-party executive compensation consultant compared the Company’s compensation ofNamed Executive Officers with the officer compensation at our peer group of companies, and reported the results ofits analysis to the Compensation Committee in February 2008. Based on the analysis and the subjective factorsdescribed above, in February 2008 the Compensation Committee approved the following increases to the basesalaries of the Named Executive Officers: Dr. Harari, 0%; Mr. Mehrotra, 10%; Ms. Bruner, 8%; Dr. Thakur, 4%; andMr. Cedar, 5%.

Annual Cash Incentive Award

None of our Named Executive Officers has an employment agreement or other contractual right to a fixedactual or target bonus for any given year. Prior to fiscal 2006, the Company utilized a formula based uponachievement of financial targets under the Company’s operating plan to set aside pre-tax net income to fund adiscretionary bonus pool. Each executive officer’s participation in that bonus pool was based upon a target bonus,which generally ranged from 75% to 100% of the officer’s base salary. Actual bonuses paid from the pool werecalculated based upon the Company’s achievement of financial targets under the Company’s operating plan for thefiscal year, the officer’s target bonus and the officer’s individual performance. The Compensation Committee also

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retained discretion to recommend an additional discretionary bonus in recognition of special contributions duringthe fiscal year. Cash bonuses paid to the Company’s executive officers generally were not “performance-based” forpurposes of Section 162(m) of the Internal Revenue Code and were therefore subject to the deductibility limitationsof Section 162(m), as explained in more detail below under “Section 162(m) Policy.”

In fiscal 2006, the Company amended the 2005 Plan to provide for the grant of cash incentive awards intendedto qualify as performance-based under Section 162(m) in lieu of discretionary cash bonuses to Named ExecutiveOfficers. Such an award was made to each Named Executive Officer in fiscal 2007. The Company continued toutilize a bonus formula to fund a bonus pool for fiscal 2007; however, the amount of the pool allocated to NamedExecutive Officers was determined under the cash incentive awards. The remaining portion of the bonus pool wasallocated among other employees in generally the same manner as in years prior to fiscal 2006.

The Named Executive Officers’ cash incentive award for fiscal 2007 contained a target incentive amount,expressed as a percentage of base salary, which was approved by the Compensation Committee. For NamedExecutive Officers other than the Chief Executive Officer, the target incentive amount reflected the recommen-dation of the Chief Executive Officer. The percentage target bonus for each Named Executive Officer was generallydetermined by reference to comparable bonus opportunities at our peer group companies, internal comparabilitywith percentage targets of other executives and the executive’s level of responsibility, experience and knowledge.The target incentive amounts generally increase as an executive’s responsibilities increase, reflecting our com-pensation philosophy that, as an executive officer’s level of responsibility increases, a greater portion of thatofficer’s total compensation should be dependent on the Company’s performance. For fiscal 2007, Dr. Harari’starget bonus was 125% of base salary, Mr. Mehrotra’s target bonus was 95% of base salary, Ms. Bruner’s targetbonus was 85% of base salary, and the remaining Named Executive Officers’ respective target bonuses were 75% oftheir respective base salaries. In each case, the target bonus was based on the Named Executive Officer’s full rate ofbase salary as of December 31, 2007, not taking into account the base salary reduction discussed above under BaseSalaries.

The performance goal for fiscal 2007 under the cash incentive awards was the Company’s earning per share forfiscal 2007 (excluding stock compensation and acquisition- related charges). The decision to utilize the earnings pershare measure for fiscal 2007, rather than the revenue and net income measures as used in prior years, was basedupon the significant pricing downturn being experienced within the NAND flash industry in early fiscal 2007. Inthat environment, the Compensation Committee determined that the most appropriate measure of financialperformance by the Company would be earnings per share. The Compensation Committee also determined thata non-GAAP EPS measure, excluding stock compensation and charges related to acquisition accounting, wouldprovide the most relevant measure of the Company’s performance in comparison to the previous year and incomparison to its annual operating plan. In addition to establishing target incentive amounts for Named ExecutiveOfficers, the Compensation Committee approved a range of potential multipliers of the target incentive amountbased on the Company’s achievement of earnings per share goals. The maximum multiplier was 0% of target forperformance below a threshold level, up to 37.5% of target for performance at the threshold level, and up to 225% oftarget for exceptional performance. The bonus multipliers at the threshold and maximum levels were reduced fromthe multipliers in effect for fiscal 2006, because achievement of the maximum goal in fiscal 2007 would not havebeen as valuable to the Company’s stockholders as achievement of the maximum goals in fiscal 2006. Theprobabilities of achieving the fiscal 2007 goals were not estimated. Achievement of the threshold goal was believedto be attainable, but because of difficult market conditions within the industry in early 2007, its achievement was notbelieved to be certain. It was believed that achievement of the maximum performance goal was possible, but, giventhe prevailing market conditions within the industry, its achievement would have constituted a particularly positiveperformance by the Company.

Based on the Company’s achievement relative to the performance goals in fiscal 2007 and the range ofpotential multipliers, the maximum multiplier for fiscal 2007 was 129% of target. Under the terms of the cashincentive awards, the Compensation Committee may exercise discretion to reduce (but not increase) the amount ofthe bonus otherwise payable to a Named Executive Officer based on such maximum multiplier. For 2007, theCompensation Committee exercised its discretion to pay bonuses at a rate less than the maximum multiplier, andapproved bonuses at 86% of target (as opposed to 129%) for the Named Executive Officers employed by theCompany at year-end, and the 86% multiplier was applied to the target bonus rate multiplied by the base salary rate

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as of December 31, 2007. In exercising this discretion with respect to Named Executive Officers, the CompensationCommittee generally considered a variety of factors, including whether a larger portion of the company-wide bonuspool should be allocated to other employees, the Named Executive Officer’s position and the Named ExecutiveOfficer’s individual performance for the year. No specific weightings were assigned to these factors, and theassessment was subjective rather than formulaic. In addition, the overall bonus pool payout to employees other thanthe Named Executive Officers was 86% of target, and we believed that it was appropriate to set the payout forNamed Executive Officers at this same level. Although our discretionary adjustments represent the means by whichindividual performance is factored into the incentive payout amount, we determined that individual performancesfor 2007 did not warrant differential payout percentages for our Named Executive Officers.

In February 2008, the Compensation Committee reviewed the Company’s performance with respect toearnings per share, certified the level of performance achieved and approved incentive payouts under the cashincentive awards based on that review. The amount of the payout approved by the Compensation Committee undereach Named Executive Officer’s cash incentive awards for fiscal 2007 is presented in column (g) of the SummaryCompensation Table — Fiscal 2006 and 2007 below.

The Company’s third-party executive compensation consultant compared the Company’s compensation ofNamed Executive Officers with the officer compensation at our peer group of companies, and reported the results ofits analysis to the Compensation Committee in February 2008. The analysis indicated that the target total cashcompensation of two of the Company’s officers was lower than our targeted pay position. A recommendation wassubmitted and approved by the Compensation Committee to increase the target bonuses for Mr. Mehrotra andMs. Bruner to conform the individual’s target total cash compensation with the Company’s compensation target,after taking into consideration the market data. The target bonuses for our other Named Executive Officers wereunchanged. As a result, the fiscal 2008 individual bonus targets were established by the Compensation Committeeas the following percentages of base salary: Dr. Harari, 125%; Mr. Mehrotra, 100%; Ms. Bruner, 90%; Mr. Cedar,75%; and Dr. Thakur, 75%.

Long-Term Share-Based Incentive Awards

The Company’s policy is that the Named Executive Officers’ long-term compensation should be directlylinked to the value provided to our stockholders. Therefore, 100% of the Named Executive Officers’ long-termcompensation is currently awarded in the form of share-based instruments that are valued by reference to ourCommon Stock. Prior to fiscal 2006, the Company historically made annual equity incentive grants solely in theform of stock options. In fiscal 2006, the annual awards were granted in the form of stock options and restrictedstock units. In fiscal 2007, the annual awards were granted in the form of stock options, except for a grant ofrestricted stock units to Mr. Mehrotra to reflect his promotion to President and Chief Operating Officer and toreplace previously granted awards that expired in the money but unexercised. The Compensation Committeebelieved that this grant was appropriate in light of Mr. Mehrotra’s significant contributions to the growth of theCompany over the period covered by the expired awards. The number of shares of the Company’s Common Stocksubject to each annual award is intended to create a meaningful opportunity for stock ownership in light of theNamed Executive Officer’s current position with the Company, the economic value of comparable awards tocomparable executives at our peer group companies, the individual’s potential for increased responsibility andpromotion over the award term, and the individual’s personal performance in recent periods. The CompensationCommittee also takes into account the number of unvested equity awards held by the Named Executive Officer inorder to maintain an appropriate level of equity incentive for that individual. However, the CompensationCommittee does not adhere to any specific guidelines as to the relative equity award holdings of the Company’sNamed Executive Officers. Furthermore, as with setting base salaries, weighting of the above factors is subjective,and the Compensation Committee does not use a formula to determine the number or value of share-based incentiveawards granted to any individual officer.

The Compensation Committee typically grants long-term share-based awards in the first quarter of the fiscalyear except for awards to new hires and awards related to the promotion of current employees. However, except asset forth below with respect to grants to new employees and promotions, there is no formal program, plan or policyin place at the Company or in the Compensation Committee’s charter with regards to the timing of long-term share-based incentive awards. The Compensation Committee has complete discretion as to when it awards long-term

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share-based incentives. There is no program, plan or policy related to the timing of grants to its executive officers incoordination with the release of material nonpublic information. Long-term share-based incentive awards grantedto new hires or to promoted employees occur after the new hire has joined the Company or, in the case of a promotedemployee, after the promotion has been approved. For a newly hired or promoted executive officer, the associatedstock award is granted at the next meeting of the Compensation Committee. For a newly hired or promotedemployee who is not an executive officer, the associated stock award is granted by the Company’s Special OptionCommittee, which takes actions every Friday.

Stock Options. The Company makes a portion of its long-term incentive awards to Named Executive Officersin the form of stock options with an exercise price that is equal to the fair market value of the Company’s CommonStock on the grant date. Thus, the Named Executive Officers will only realize value on their stock options if ourstockholders realize value on their shares. The stock options also function as a retention incentive for our executivesas they vest over a four year period following the grant date. In fiscal 2007, the Compensation Committee grantedstock options to each of our Named Executive Officers. The material terms of these options are described belowunder “Grants of Plan-Based Awards.”

Restricted Stock Units. The Company may make a portion of its long-term incentive grants to NamedExecutive Officers in the form of restricted stock units. A restricted stock unit represents a contractual right toreceive one share of the Company’s Common Stock if the applicable vesting requirements are satisfied. TheCompany has determined that it is advisable to grant restricted stock units in addition to stock options (and in lieu oflarger stock option grants) in order to minimize stock expense to the Company and dilution. The restricted stockunits also function as a retention incentive as they vest over a four year period following the grant date. The materialterms of the unit awards are described below under “Grants of Plan-Based Awards.” The Company made grants ofrestricted stock units to Named Executive Officers in fiscal 2006, but (except as discussed above with respect toMr. Mehrotra), did not grant restricted stock units to Named Executive Officers in fiscal 2007. The Companydecided to grant equity awards in 2007 to Named Executive Officers (except as discussed above with respect toMr. Mehrotra) in the form of option grants rather than a mix of restricted stock units and option grants in order tomore directly link the long-term compensation value of the Named Executive Officers with the value provided toour stockholders.

401(k) Retirement Benefits

The Company provides retirement benefits to the Named Executive Officers under the terms of its tax-qualified 401(k) plan. In fiscal 2007, the Company made a discretionary matching contribution on behalf of eachparticipant equal to one-half of the first 6% of compensation contributed to the plan by the participant. TheseCompany contributions function as a retention incentive as they vest ratably over the first four years of service withthe Company (as determined under the plan). The Named Executive Officers participate in the plan on substantiallythe same terms as our other participating employees. The Company does not maintain any deferred compensation,defined benefit or supplemental retirement plans for its Named Executive Officers.

Severance and Other Benefits Upon Termination of Employment or Change in Control

In order to achieve our compensation objective of attracting, retaining and motivating qualified executives, webelieve that we need to provide our Named Executive Officers with severance protections that are consistent withthe severance protections offered by our peer group companies. For Named Executive Officers, our philosophy isthat severance should only be payable upon certain terminations of employment in connection with a change incontrol of the Company. We believe that the occurrence, or potential occurrence, of a change in control transactionwill create uncertainty regarding the continued employment of Named Executive Officers. This uncertainty resultsfrom the fact that many change in control transactions result in significant organizational changes, particularly atthe senior executive level. In order to encourage the Named Executive Officers to remain employed with theCompany during an important time when their prospects for continued employment following the transaction areoften uncertain, we provide Named Executive Officers with severance benefits pursuant to a change in controlbenefits agreement if their employment is terminated by us without cause or by the executive for good reason withintwelve months following a change in control. We believe that a protected period of twelve months following achange in control is in line with the severance protections provided to comparable executives at our peer group

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companies. We also believe that these Named Executive Officers should receive their change in control severancebenefits if their employment is constructively terminated in connection with a change in control. Given that none ofthe Named Executive Officers has an employment agreement that provides for a fixed position or duties, or for afixed base salary or actual or target annual bonus, absent some form of constructive termination severance trigger,potential acquirors could constructively terminate a Named Executive Officer’s employment and avoid payingseverance. For example, following a change in control, an acquiror could materially demote a Named ExecutiveOfficer, reduce significantly his or her salary and/or eliminate his or her annual bonus opportunity to force theNamed Executive Officer to terminate his or her own employment and thereby avoid paying severance. Because webelieve that constructive terminations in connection with a change in control are conceptually the same as actualterminations, and because we believe that acquirors would otherwise have an incentive to constructively terminateNamed Executive Officers to avoid paying severance, the change in control agreements we have entered into withour Named Executive Officers permit the Named Executive Officers to terminate their employment in connectionwith a change in control for certain “good reasons” that we believe result in the constructive termination of theNamed Executive Officers’ employment. In the event the employment of a Named Executive Officer is terminatedunder the circumstances described above, we believe that providing these Named Executive Officers with a changein control agreement with cash severance benefits based on one (1) times (two (2) times for the Chief ExecutiveOfficer) salary and bonus levels is consistent with our peer group companies and provides them with financialsecurity during a period of time when they are likely to be unemployed and seeking new employment.

In the event that a Named Executive Officer becomes entitled to severance under the principles describedabove, in addition to cash severance benefits, we believe that it is also appropriate to provide Named ExecutiveOfficers with other severance protections, such as (1) continued medical insurance coverage for 24 monthsfollowing termination; (2) accelerated vesting of outstanding equity awards (with accelerated options to remainexercisable for twelve months following termination, subject to the maximum term of the option); and (3) executiveoutplacement benefits for twelve months following termination (including resume assistance, career evaluation andassessment, individual career counseling, financial counseling, access to one or more on-line employmentdatabases, private office and office support). Similar to cash severance benefits, we believe these other severancebenefits are consistent with the severance arrangements of our peer group companies and provide the NamedExecutive Officers with financial and personal security during a period of time when they are likely to beunemployed.

As part of their severance benefits under a change in control agreement, the Named Executive Officers are alsoreimbursed for the full amount of any excise taxes imposed on their severance payments and any other paymentsunder Section 4999 of the Internal Revenue Code. We provide the Named Executive Officers with a “gross-up” forany parachute payment excise taxes that may be imposed because we have determined the appropriate level ofseverance protections for each Named Executive Officer without factoring in the adverse tax effects on the NamedExecutive Officers that may result under Section 4999 of the Internal Revenue Code. The excise tax gross-up isintended to make the Named Executive Officers whole for any adverse tax consequences they may become subjectto under Section 4999 of the Internal Revenue Code, and to preserve the level of severance protections that we havedetermined to be appropriate.

We generally do not believe that Named Executive Officers should be entitled to severance benefits merelybecause a change in control transaction occurs. The payment of severance benefits is generally only triggered by anactual or constructive termination of employment in connection with a change in control. However, we determinedthat it was advisable to provide for one year of accelerated vesting of equity awards in the event of a change incontrol pursuant to the change in control agreements. In addition, under the terms of our stock incentive plans, ifthere is a liquidation, sale of all or substantially all of our assets, or merger or reorganization that results in a changein control of the Company, and such outstanding awards will not be continued or assumed following the transaction,then, like all other employees, the Named Executive Officers may receive immediate vesting and/or payout of theiroutstanding long-term incentive compensation awards. Although this vesting will occur whether or not a NamedExecutive Officer’s employment terminates, we believe it is appropriate to fully vest share-based awards in thesechange in control situations because such a transaction may effectively end the Named Executive Officers’ ability torealize any further value with respect to the share-based awards.

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Please see the “Potential Payments Upon Termination or Change in Control” section below for a description ofthe potential payments that may be made to the Named Executive Officers in connection with their termination ofemployment or a change in control.

Stock Ownership Guidelines

Each Director and executive officer (as defined in Section 16 of the Securities Exchange Act of 1934, asamended) is required to own the Company’s Common Stock. The ownership requirement is satisfied by beneficialownership as defined under Rule 13d-3 under the Securities Exchange Act of 1934, as amended. Each Director andnamed executive officer (as defined in Section 16 of the Securities Exchange Act of 1934, as amended) should ownno less than 1,000 shares of the Company’s Common Stock on the first anniversary of his or her service, and own anadditional 1,000 shares for each subsequent year until he or she is required to own 5,000 shares after 5 years ofservice, at which point there is no requirement to own additional shares.

Section 162(m) Policy

Section 162(m) of the Internal Revenue Code disallows a tax deduction to publicly-held companies forcompensation paid to certain executive officers, to the extent that compensation exceeds $1,000,000 per officer inany year. The limitation applies only to compensation which is not considered to be performance-based, eitherbecause it is not tied to the attainment of performance milestones or because it is not paid pursuant to a stockholder-approved plan. The Compensation Committee believes that in establishing the cash and equity incentive com-pensation programs for the Company’s executive officers, the potential deductibility of the compensation payableunder those programs should be only one of a number of relevant factors taken into consideration, and not the solegoverning factor. Accordingly, the Compensation Committee may provide one or more executive officers with theopportunity to earn incentive compensation, whether through cash bonus programs tied to the Company’s financialperformance or share-based awards in the form of restricted stock or restricted stock units, which may be in excessof the amount deductible by reason of Section 162(m) or other provisions of the Internal Revenue Code. TheCompensation Committee believes it is important to maintain incentive compensation at the requisite level to attractand retain the executive officers essential to the Company’s financial success, even if all or part of thatcompensation may not be deductible by reason of the Section 162(m) limitation.

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COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

The information contained in this report shall not be deemed to be “soliciting material” or to be “filed” withthe Securities and Exchange Commission, nor shall such information be incorporated by reference into any futurefilings with the Securities and Exchange Commission, or subject to the liabilities of Section 18 of the SecuritiesExchange Act of 1934, as amended, except to the extent that the Company specifically incorporates it by referenceinto a document filed under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, asamended.

The Compensation Committee has certain duties and powers as described in its Charter. The CompensationCommittee is currently composed of the three Non-Employee Directors named at the end of this report each ofwhom is independent as defined by the NASDAQ Global Select Market listing standards.

The Compensation Committee has reviewed and discussed with management the disclosures contained in theCompensation Discussion and Analysis section of this proxy statement. Based upon this review and our discussions,the Compensation Committee has recommended to our Board of Directors that this Compensation Discussion andAnalysis section be included in the Company’s 2007 Annual Report on Form 10-K filed with the SEC.

Compensation Committee of the Board of Directors

Irwin Federman (Chair)Michael E. Marks

Dr. James D. Meindl

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Of the Compensation Committee members whose names appear on the Compensation Committee Reportabove, all were committee members during all of fiscal 2007. No current member of the Compensation Committeeis a current or former executive officer or employee of the Company or had any relationships requiring disclosure bythe Company under the SEC’s rules requiring disclosure of certain relationships and related-party transactions.None of the Company’s executive officers served as a director or a member of a compensation committee (or othercommittee serving an equivalent function) of any other entity, the executive officers of which served as a director ormember of the Compensation Committee during the fiscal year ended December 30, 2007.

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SUMMARY COMPENSATION TABLE — FISCAL 2006 and 2007

The following table presents information regarding compensation of our Named Executive Officers forservices rendered during fiscal 2006 and 2007.

Name and Principal Position(a)

Year(b)

Salary($)(c)

Bonus($)(d)

StockAwards($)(1)

(e)

OptionAwards($)(1)

(f)

Non-EquityIncentive

PlanCompensation

($)(2)(g)

Change inPension Value

andNonqualified

DeferredCompensation

Earnings(h)

All OtherCompensation

($)(3)(i)

Total($)(j)

Dr. Eli Harari, . . . . . . . . . . . . . 2007 763,493 — 1,571,369 7,272,781 911,600 — 6,750 10,525,993Chief Executive Officer andChairman of the Board

2006 800,419 — 949,729 7,012,742 1,200,000 — 6,600 9,969,490

Judy Bruner, . . . . . . . . . . . . . . . 2007 395,888 — 785,685 2,881,702 328,950 — — 4,392,225Executive Vice President,Administration & ChiefFinancial Officer

2006 397,425 474,864 2,518,586 451,530 — — 3,842,405

Sanjay Mehrotra, . . . . . . . . . . . . 2007 459,750 — 2,076,822 4,072,913 416,670 — 3,481 7,029,636President and Chief OperatingOfficer

2006 469,623 712,296 4,006,202 605,660 — 6,600 5,800,381

Yoram Cedar, . . . . . . . . . . . . . . 2007 352,033 — 392,842 2,362,381 248,597 — 6,750 3,362,603Executive Vice President,Mobile Business Unit &Corporate Engineering

2006 367,414 237,432 2,196,894 375,875 — 6,600 3,184,215

Dr. Randhir Thakur,. . . . . . . . . . 2007 350,150 — 1,224,055 1,301,608 248,597 — 2,605 3,127,015Executive Vice President,Technology & WorldwideOperations

2006 365,863 1,675,023 931,013 375,882 — — 3,347,781

(1) The amounts reported in columns (e) and (f) above reflect the aggregate dollar amounts recognized for stockawards and option awards, respectively, for financial statement reporting purposes with respect to fiscal 2007and 2006 (disregarding any estimate of forfeitures related to service-based vesting conditions). Detailedinformation about the amount recognized for specific awards is reported in the table under “Outstanding EquityAwards at Fiscal 2007 Year-End” below. For a discussion of the assumptions and methodologies used tocalculate the amounts reported in columns (e) and (f), please see the discussion of equity incentive awardsgranted during fiscal 2007 contained in Note 8 (“Compensation and Benefits”) to the Company’s ConsolidatedFinancial Statements, included as part of the Company’s 2007 Annual Report on Form 10-K filed with the SEC,which note is incorporated herein by reference and the discussion of equity incentive awards granted duringfiscal 2006 contained in Note 5 (“Compensation and Benefits”) to the Company’s Consolidated FinancialStatements, included as part of the Company’s 2006 Annual Report on Form 10-K filed with the SEC.

(2) The amounts reported in column (g) above reflect the aggregate dollar amounts paid to Named ExecutiveOfficers under the terms of the fiscal 2007 and 2006 cash incentive awards granted under the 2005 Plan. Thepayouts were made in March 2008 for the 2007 awards and March 2007 for the 2006 awards. The non-equityincentive plan compensation was calculated using each Named Executive Officer’s base salary rate as ofDecember 31, 2007. The material terms of cash incentive awards granted in fiscal 2007 are further describedbelow under “Description of Plan-Based Awards” and the material terms of cash incentive awards granted infiscal 2006 are described in the Company’s 2006 Annual Report on Form 10-K filed with the SEC.

(3) Amounts shown in column (i) include matching contributions to the Company’s 401(k) Plan on behalf ofcertain Named Executive Officers up to an amount of $6,750 in fiscal 2007 and $6,600 in fiscal 2006.

Dr. Harari is the Chairman of the Board of Directors. As an employee-director, Dr. Harari does not receiveadditional compensation for his services as a director.

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Compensation of Named Executive Officers

The Summary Compensation Table — Fiscal 2006 and 2007 above quantifies the value of the different formsof compensation earned by or awarded to our Named Executive Officers in fiscal years 2006 and 2007. The primaryelements of each Named Executive Officer’s total compensation reported in the table are base salary, an annualbonus and long-term equity incentives consisting of stock options and restricted stock units. The Named ExecutiveOfficers also earned or were paid the other benefits listed in column (i) of the Summary Compensation Table —Fiscal 2006 and 2007, as further described in footnote (4) to the table.

The Summary Compensation Table — Fiscal 2006 and 2007 should be read in conjunction with the tables andnarrative descriptions that follow. A description of the material terms of each Named Executive Officer’s base salaryand annual bonus is provided immediately following this paragraph. The Grants of Plan-Based Awards in Fiscal2007 table, and the description of the material terms of the stock options and restricted stock units granted in fiscal2007 that follows it, provides information regarding the long-term equity incentives awarded to the NamedExecutive Officers in fiscal 2007. The Outstanding Equity Awards at Fiscal 2007 Year-End and Option Exercisesand Stock Vested in Fiscal 2007 tables provide further information on the Named Executive Officers’ potentialrealizable value and actual value realized with respect to their equity awards. The discussion of the potentialpayments due upon a termination of employment or change in control that follows is intended to further explain thepotential future payments that are, or may become, payable to our Named Executive Officers under certaincircumstances.

Description of Employment Agreements, Salary and Bonus Amounts

As indicated above, none of the Named Executive Officers is employed pursuant to an employment agreement.As a result, their base salary and bonus opportunities are not fixed by contract. Instead, in the first quarter of eachfiscal year, the Compensation Committee establishes the base salary level for each of our Named Executive Officersfor the year. In making its determination, the Compensation Committee considers the factors discussed above under“Current Executive Compensation Program Elements — Base Salaries.” In fiscal 2007, instead of grantingdiscretionary cash bonuses, the Company granted Named Executive Officers a cash incentive award under the2005 Plan. In determining the terms of such awards, the Compensation Committee considered the factors discussedabove under “Current Executive Compensation Program Elements — Annual Cash Incentive Award.” The materialterms of the cash incentive awards granted to each Named Executive Officer in fiscal 2007 are described belowunder “Description of Plan-Based Awards.”

Consistent with the Company’s philosophy that a substantial portion of compensation should be contingent onthe Company’s performance, base salary for Named Executive Officers in fiscal 2007 comprised a relatively lowpercentage (generally between 7% and 12%) of total compensation. Equity and non-equity incentive compensationfor Named Executive Officers in fiscal 2007, the value of which, as described below under “Description of Plan-Based Awards”, is significantly dependent upon on Company performance, comprised a much larger percentage(generally between 88% and 93%) of total compensation. The Company believes this allocation of base salary andincentive compensation in proportion to total compensation is appropriate to balance the Company’s dual goals ofaligning the interests of executives and stockholders and providing predictable benefit amounts that reward anexecutive’s continued service.

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GRANTS OF PLAN-BASED AWARDS IN FISCAL 2007

The following table presents information regarding the equity and non-equity incentive awards granted to theNamed Executive Officers during fiscal 2007 under the 2005 Plan. The material terms of each grant are describedbelow under “Description of Plan-Based Awards.”

Name(a)

GrantDate(b)

Threshold($)(1)(2)

(c)

Target($)(2)

(d)

Maximum($)(2)

(e)

All StockAwards:

Number ofShares of Stock

or Units(#)(f)

All OptionAwards:

Number ofSecurities

UnderlyingOptions

(#)(g)

Exerciseor BasePrice ofOptionAwards($/Sh)

(h)

Grant DateFair Value of

Stock andOptionAwards

($)(i)

Estimated Possible Payouts UnderNon-Equity Incentive Plan Awards

Dr. Eli Harari . . . . . . . . . . . 2/15/07 397,500 1,590,000 2,385,000 — — — —3/20/07 — — — 220,000 41.91 4,538,116

Judy Bruner . . . . . . . . . . . . 2/15/07 143,438 573,750 860,625 — — — —3/20/07 — — — 125,000 41.91 1,899,788

Sanjay Mehrotra . . . . . . . . . 2/15/07 181,688 726,750 1,090,125 — — — —3/20/07 — — — 15,000 — — 628,6503/20/07 — — — 50,000 — — 2,095,5003/20/07 — — — — 125,000 41.91 1,899,788

Yoram Cedar . . . . . . . . . . . 2/15/07 108,400 433,600 650,400 — — — —3/20/07 — — — — 100,000 41.91 1,519,830

Dr. Randhir Thakur . . . . . . . 2/15/07 108,400 433,600 650,400 — — — —3/20/07 — — — — 125,000 41.91 1,899,788

(1) The amount set forth in column (c) represents the minimum amount payable under the Named ExecutiveOfficer’s non-equity incentive plan award for a minimum level of performance with respect to the performancemeasure subject to the award. If this minimum level of performance with respect to the performance measureshad not been achieved, no amount would have been payable under the award.

(2) The amounts set forth in column (c), (d) and (e) were calculated by multiplying the annual salary of each NamedExecutive Officer as of December 31, 2007 by (i) each Named Executive Officer’s target bonus rate as apercentage of his or her salary (125% for Dr. Harari, 95% for Mr. Mehrotra, 85% for Ms. Bruner and 75% forDr. Thakur and Mr. Cedar) and (ii) a maximum multiplier at each of the threshold, target and maximum levels of37.5%, 150% and 225%, respectively. The target bonus rates and multiplier percentages for certain levels ofperformance were determined by the Compensation Committee at its meeting on February 15, 2007.

Description of Plan-Based Awards

During fiscal 2007, each Named Executive Officer was awarded a time-based stock option award andMr. Mehrotra was awarded time-based restricted stock unit awards. In addition, each Named Executive Officer wasgranted a cash incentive award. Each of these awards was granted under, and is subject to the terms of, the 2005Plan. The plan is administered by the Compensation Committee. The Compensation Committee has authority tointerpret the plan provisions and make all required determinations under the plan. This authority includes makingrequired proportionate adjustments to outstanding awards upon the occurrence of certain corporate events such asreorganizations, mergers and stock splits, and making provision to ensure that any tax withholding obligationsincurred in respect of awards are satisfied. Awards granted under the plan are generally only transferable to abeneficiary of a Named Executive Officer upon his or her death. However, the Compensation Committee mayestablish procedures for the transfer of awards to other persons or entities, provided that such transfers comply withapplicable securities laws and, with limited exceptions set forth in the plan document, are not made for value.

Under the terms of the 2005 Plan, if there is a change in control of the Company, each Named ExecutiveOfficer’s outstanding share-based awards granted under the plan will generally become fully vested and, in the caseof options, exercisable to the extent such outstanding awards are not substituted or assumed in connection with thetransaction. Any options that become vested in connection with a change in control generally must be exercisedprior to the change in control, or they will be canceled in exchange for the right to receive a cash payment inconnection with the change in control transaction. In addition, if there is a change in control of the Company, theCompensation Committee may terminate the performance period applicable to the cash incentive award and pro-

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rate (based on the number of days during the performance period prior to the transaction) the bonus andperformance targets based on year-to-date performance.

Stock Options

Each stock option reported in column (g) of the table above was granted with a per-share exercise price equal tothe fair market value of a share of the Company’s Common Stock on the grant date. For these purposes, and inaccordance with the terms of the 2005 Plan and the Company’s option grant practices, the fair market value is equalto the closing price of a share of Common Stock on the NASDAQ Global Select Market on the applicable grant date.

Each stock option granted to our Named Executive Officers in fiscal 2007 is subject to a four year vestingschedule, with 25% of the option vesting on March 20, 2008, and the remaining 75% of the option vesting in twelvesubstantially equal installments on each successive three month anniversary of March 20, 2008. Once vested, eachstock option will generally remain exercisable until its normal expiration date. Each of the stock options granted toour Named Executive Officers in fiscal 2007 has a term of seven years. Outstanding options, however, mayterminate earlier in connection with a change in control transaction or a termination of the Named ExecutiveOfficer’s employment. Subject to any accelerated vesting that may apply, the unvested portion of the stock optionwill immediately terminate upon a termination of the Named Executive Officer’s employment. The NamedExecutive Officer will generally have three months to exercise the vested portion of the stock option following atermination of employment. This period is extended to twelve months if the termination is on account of the NamedExecutive Officer’s death or permanent disability. However, if a Named Executive Officer’s employment isterminated by the Company for “misconduct” (as determined under the plan), outstanding stock options (whethervested or unvested) will immediately terminate.

The stock options granted to the Named Executive Officers during fiscal 2007 do not include any dividend ordividend equivalent rights.

Restricted Stock Units

Each restricted stock unit awarded to our Named Executive Officers in fiscal 2007 represents a contractualright to receive one share of the Company’s Common Stock if the time-based vesting requirements described beloware satisfied. Restricted stock units are credited to a bookkeeping account established by the Company on behalf ofeach Named Executive Officer.

Mr. Mehrotra’s restricted stock unit award consisting of 50,000 shares is subject to a four year vestingschedule, with 25% of the restricted stock unit vesting on March 20, 2008, and the remaining 75% of the restrictedstock unit vesting in three substantially equal installments on each successive one year anniversary of March 20,2008. Mr. Mehrotra’s restricted stock unit award consisting of 15,000 shares is subject to a one year vestingschedule, with 100% of the restricted stock vesting on March 20, 2008. Subject to any accelerated vesting that mayapply, upon the termination of a Named Executive Officer’s employment, any then-unvested restricted stock unitswill generally terminate.

Restricted stock units will generally be paid in an equivalent number of shares of the Company’s CommonStock as they become vested. Named Executive Officers are not entitled to voting or dividend rights with respect tothe restricted stock units. Non-Employee Directors are, however, entitled to the following dividend equivalent rightswith respect to the restricted stock units. If the Company pays a cash dividend on its Common Stock and thedividend record date occurs after the grant date and before all of the restricted stock units have either been paid orterminated, then the Company will credit the Named Executive Officer’s bookkeeping account with an amountequal to (i) the per-share cash dividend paid by the Company on its Common Stock with respect to the dividendrecord date, multiplied by (ii) the total number of outstanding and unpaid restricted stock units (including anyunvested restricted stock units) as of the dividend record date. These dividend equivalents will be subject to thesame vesting, payment and other terms and conditions as the original restricted stock units to which they relate(except that the dividend equivalents may be paid in cash or such other form as the plan administrator may deemappropriate).

36

Non-Equity Incentive Plan Award

Each non-equity incentive plan award granted to our Named Executive Officers in fiscal 2007 consisted of anannual cash incentive opportunity under the 2005 Plan. The award provided for the payment of a cash bonus basedon the Company’s performance for fiscal 2007 in the area of earnings per share.

The amount of each Named Executive Officer’s award (before any application of the CompensationCommittee’s discretion to reduce the payout under any award) is (i) the Named Executive Officer’s target incentiveamount times (ii) a multiplier determined based on the Company’s performance. The target incentive amount isexpressed as a percentage of the Named Executive Officer’s rate of base salary as of December 31, 2007. The targetincentive amounts for the Named Executive Officers were 125% of base salary for Dr. Harari, 95% of base salary forMr. Mehrotra 85% of base salary for Ms. Bruner and 75% of base salary for the remaining Named ExecutiveOfficers. In addition to establishing target incentive amounts, the Compensation Committee approved a range ofmultipliers of the target amount based on the level of the Company’s achievement of the earnings per shareperformance goal. The maximum multiplier ranged from 0% of target for performance below a threshold level,37.5% of target for performance at a threshold level, 150% of target at the achievement of the target performancelevel and a maximum of 225% of target for exceptional performance. Based on the Company’s achievement of theperformance goals in fiscal 2007 and the range of multipliers established by the Compensation Committee, themaximum multiplier for fiscal 2007 was 129% of target. Under the terms of the cash incentive awards, theCompensation Committee may exercise discretion to reduce (but not increase) the amount of the bonus otherwisepayable to a Named Executive Officer based on the formula described above. For fiscal 2007, the CompensationCommittee exercised its discretion to pay bonuses at a rate less than the maximum multiplier based on theCompany’s fiscal 2007 performance. Specifically, for fiscal 2007, the Compensation Committee approved bonusesat 86% of target for the Named Executive Officers employed by the Company at year-end. In determining whetherto exercise this discretion, the Compensation Committee considered the factors discussed above under “CurrentExecutive Compensation Program Elements — Annual Cash Incentive Award” in the Compensation Discussionand Analysis section.

In February 2008, the Compensation Committee reviewed the Company’s performance with respect toearnings per share for fiscal 2007, certified the level of performance achieved and approved incentive payouts underthe awards based on its review. The amount of the payout approved by the Compensation Committee under eachNamed Executive Officer’s incentive award for fiscal 2007 is presented in column (g) of the Summary Compen-sation Table — Fiscal 2006 and 2007 above.

37

OUTSTANDING EQUITY AWARDS AT FISCAL 2007 YEAR-END

The following table presents information regarding the outstanding share-based awards held by each NamedExecutive Officer as of December 31, 2007, including the vesting dates for the portions of these awards that had notvested as of that date. This table also includes the amounts recognized for each of these awards for financialstatement reporting purposes for fiscal 2007 as reflected in the Summary Compensation Table — Fiscal 2006 and2007 above. For purposes of clarity, awards that were granted prior to December 31, 2007 but that were notoutstanding as of December 31, 2007 (for example, because the awards were forfeited, exercised, paid or otherwisesettled prior to December 31, 2007) are also included in the table below if a charge was recognized for financialstatement reporting purposes for fiscal 2007 with respect to the award. Additional information regarding theseawards is presented in the footnotes below and in the table below under “Option Exercises and Stock Vested inFiscal 2007.”

Name(a)

Number ofSecurities

UnderlyingUnexercised

Options(#)

Exercisable(b)

Number ofSecurities

UnderlyingUnexercised

Options(#)

Unexercisable(c)

OptionExercise

Price($)(d)

OptionGrantDate(e)

OptionExpiration

Date(f)

AllocableFinancialCharge

Recognizedfor Fiscal

2007($)(g)

Number ofShares orUnits of

Stock ThatHave Not

Vested(#)(h)

StockAwardGrantDate

(i)

MarketValue of

Shares orUnits of

Stock ThatHave Not

Vested($)(3)

(j)

AllocableFinancialCharge

Recognizedfor Fiscal

2007($)(k)

Option Awards(1) Stock Awards(2)

Dr. Eli Harari . . . . . . . 143,000 — 3.13 12/15/98 12/14/08 — 75,000(13) 5/25/06 2,487,750 1,571,369368,776 — 6.41 1/22/02 1/21/12 —400,000 — 6.13 6/27/02 6/26/12 —600,000 — 8.875 1/21/03 1/20/13 56,828288,814 37,500(4) 34.59 1/16/04 1/15/14 3,724,266137,500 62,500(5) 24.18 1/3/05 1/2/15 1,194,985125,000 75,000(6) 26.09 5/27/05 5/26/12 620,728

65,625 84,375(7) 58.84 5/25/06 5/24/13 1,399,314— 220,000(12) 41.91 3/20/07 3/19/14 885,259

Totals . . . . . . . . . . . 2,128,715 479,375 7,272,781 75,000 2,487,750 1,571,369

Judy Bruner . . . . . . . . 263,750 56,250(9) 20.12 6/21/04 6/20/14 1,618,436 37,500(13) 5/25/06 1,243,875 785,68585,937 39,063(5) 24.18 1/3/05 1/2/15 366,49135,000 45,000(8) 59.04 2/16/06 2/15/13 526,179

— 125,000(12) 41.91 3/20/07 3/19/14 370,595

Totals . . . . . . . . . . . 384,687 265,313 2,881,701 37,500 1,243,875 785,685

Sanjay Mehrotra . . . . . 8,750 — 2.50 8/21/98 8/20/08 — 56,250(13) 5/25/06 1,865,813 1,178,52760,060 — 3.13 12/15/98 12/14/08 — 50,000(14) 3/20/07 1,658,500 408,773

254,748 — 5.41 9/21/01 9/20/11 — 15,000(15) 3/20/07 497,550 489,52346,876 — 8.875 1/21/03 1/20/13 23,67897,500 18,750(4) 34.59 1/16/04 1/15/14 1,862,13332,813 14,063(10) 21.19 8/12/04 8/11/14 279,204

112,500 93,750(5) 24.18 1/3/05 1/2/15 879,57943,750 56,250(8) 59.04 2/16/06 2/15/13 657,724

— 125,000(12) 41.91 3/20/07 3/19/14 370,595

Totals . . . . . . . . . . . 656,997 307,813 4,072,913 121,250 4,021,863 2,076,823

Yoram Cedar . . . . . . . 40,000 — 17.906 12/14/99 12/13/09 — 18,750(13) 5/25/06 621,938 392,84240,000 — 17.188 12/21/00 12/20/10 —20,000 — 10.95 6/20/01 6/19/11 —2,500 — 5.41 9/21/01 9/20/11 —4,500 — 6.41 1/22/02 1/21/12 —

15,000 — 6.13 6/27/02 6/26/12 —50,000 — 8.87 1/21/03 1/20/13 1,01565,625 9,376(4) 34.59 1/16/04 1/15/14 931,06640,625 9,375(10) 21.19 8/12/04 8/11/14 186,136

103,125 46,875(5) 24.18 1/3/05 1/2/15 439,79045,000 35,000(11) 44.79 9/23/05 9/22/12 376,3548,750 11,250(8) 59.04 2/16/06 2/15/13 131,545

— 100,000(12) 41.91 3/20/07 3/19/14 296,476

Totals . . . . . . . . . . . 435,125 211,876 2,362,382 18,750 621,938 392,842

Dr. Randhir Thakur . . . 112,500 87,500(11) 44.32 9/23/05 9/22/12 931,013 — — 1,224,055— 125,000(12) 41.91 3/20/07 3/19/14 370,595

Totals . . . . . . . . . . . 112,500 212,500 1,301,608 — — 1,224,055

(1) Each stock option grant reported in the table above with a grant date before May 27, 2005 was granted under,and is subject to, the Company’s 1995 Stock Option Plan. Each stock option grant reported in the table abovewith a grant date on or after May 27, 2005 was granted under, and is subject to, the 2005 Plan. The optionexpiration date shown in column (f) above is the normal expiration date, and the latest date that the options

38

may be exercised. The options may terminate earlier in certain circumstances described below. For eachNamed Executive Officer, the unexercisable options shown in column (c) above are also unvested and willgenerally terminate if the Named Executive Officer’s employment terminates.

The exercisable options shown in column (b) above, and any unexercisable options shown in column (c) abovethat subsequently become exercisable, will generally expire earlier than the normal expiration date if theNamed Executive Officer’s employment terminates. Unless exercised, exercisable stock options will gen-erally terminate within three months after the date of termination of employment. However, if a NamedExecutive Officer dies or becomes totally disabled while employed with the Company, or if their employmentis terminated by us without cause or by the executive for good reason with twelve (12) months following achange in control, exercisable stock options will generally remain exercisable for twelve months following theNamed Executive Officer’s death, disability or termination. In addition, the stock options (whether exercisableor not) will immediately terminate if a Named Executive Officer’s employment is terminated by the Companyfor “misconduct” (as determined under the plan). The options may become fully vested and may terminateearlier than the normal expiration date if there is a change in control of the Company.

(2) The stock awards held by our Named Executive Officers are subject to accelerated vesting in connection withcertain changes in control of the Company and upon certain terminations of employment in connection with achange in control of the Company, as described in more detail above under “Grants of Plan-Based Awards”and below under “Potential Payments Upon Termination or Change in Control.” Except as otherwise indicatedin those sections, unvested stock awards will generally be forfeited if a Named Executive Officer’semployment terminates.

(3) The market or payout value of stock awards reported in column (j) is computed by multiplying the number ofshares or units of stock reported in column (h) by $33.17, the closing market price of our common stock onDecember 31, 2007, the last trading day of 2007.

(4) The unvested portions of these option awards were scheduled to vest in full on January 16, 2008.

(5) The unvested portions of these option awards were scheduled to vest in five substantially equal installments onJanuary 3, 2008 and each successive three month anniversary of January 3, 2008.

(6) The unvested portion of this option award was scheduled to vest in six substantially equal installments onFebruary 27, 2008 and each successive three month anniversary of February 27, 2008.

(7) The unvested portion of this option award was scheduled to vest in nine substantially equal installments onFebruary 16, 2008 and each successive three month anniversary of February 16, 2008.

(8) The unvested portions of these option awards were scheduled to vest in nine substantially equal installmentson February 16, 2008 and each successive three month anniversary of February 16, 2008.

(9) The unvested portion of this option award was scheduled to vest in two substantially equal installments onMarch 21, 2008 and June 21, 2008.

(10) The unvested portions of these option awards were scheduled to vest in three substantially equal installmentson February 12, 2008, May 12, 2008 and August 12, 2008.

(11) The unvested portions of these option awards were scheduled to vest in seven substantially equal installmentson March 23, 2008 and each successive three month anniversary of March 23, 2008.

(12) Of the unvested portions of these option awards, 25% of the options were scheduled to vest on March 20, 2008.The remaining 75% of the options are scheduled to vest in twelve substantially equal installments on eachsuccessive three month anniversary of March 20, 2008.

(13) The unvested portions of these stock awards were scheduled to vest in three substantially equal installments onFebruary 16, 2008, February 16, 2009 and February 16, 2010.

(14) The unvested portion of this stock award was scheduled to vest in four substantially equal installments onMarch 20 2008, March 20, 2009, March 20, 2010 and March 20, 2011.

(15) The unvested portion of this stock award was scheduled to vest in full on March 20, 2008.

39

OPTION EXERCISES AND STOCK VESTED IN FISCAL 2007

The following table presents information regarding the exercise of stock options by Named Executive Officersduring fiscal 2007, and on the vesting during fiscal 2007 of stock awards previously granted to the Named ExecutiveOfficers.

Name(a)

Number of SharesAcquired on

Exercise(#)(b)

Value Realized onExercise

($)(1)(c)

Number of SharesAcquired on

Vesting(#)(d)

Value Realized onVesting($)(1)

(e)

Option Awards Stock Awards

Dr. Eli Harari . . . . . . . . . . . . . . . . . 225,000 10,677,125 25,000 1,003,250

Judy Bruner . . . . . . . . . . . . . . . . . . 30,000 1,207,338 12,500 501,625

Sanjay Mehrotra . . . . . . . . . . . . . . . 95,000 3,968,800 18,750 752,438

Yoram Cedar. . . . . . . . . . . . . . . . . . 20,000 763,074 6,250 250,813

Dr. Randhir Thakur . . . . . . . . . . . . . — — 37,500 2,008,500

(1) The dollar amounts shown in column (c) above for option awards are determined by multiplying (i) the numberof shares of the Company’s Common Stock to which the exercise of the option related, by (ii) the differencebetween the per-share closing price of our Common Stock on the date of exercise and the exercise price of theoptions. The dollar amounts shown in column (e) above for stock awards are determined by multiplying thenumber of shares or units, as applicable, that vested by the per-share closing price of the Company’s CommonStock on the vesting date.

POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL

The following section describes the benefits that may become payable to Named Executive Officers inconnection with certain terminations of their employment with the Company and/or a change in control of theCompany. As prescribed by the SEC’s disclosure rules, in calculating the amount of any potential payments to theseNamed Executive Officers, we have assumed that the applicable triggering event (i.e., termination of employmentor change in control) occurred on December 31, 2007 and that the price per share of the Company’s Common Stockis equal to the closing price per share on December 31, 2007, the last trading day in 2007.

In addition to the change in control and termination benefits described below, outstanding share-based awardsheld by our Named Executive Officers may also be subject to accelerated vesting in connection with certain changesin control of the Company under the terms of our equity incentive plans as noted under “Grants of Plan-BasedAwards” and “Outstanding Equity Awards at Fiscal 2007 Year-End” above. The estimated value of acceleratedvesting under the Company’s equity incentive plans is covered below under the description of these NamedExecutive Officers’ severance arrangements.

As described below, if the benefits payable to a Named Executive Officer in connection with a change incontrol of the Company would be subject to the excise tax imposed under Section 280G of the Internal RevenueCode of 1986 (“Section 280G”), the Company will make an additional payment (a “gross-up payment”) to theexecutive so that the net amount of such payment (after taxes) he or she receives is sufficient to pay the excise taxdue. For purposes of calculating the Section 280G excise tax, we have assumed that the Named Executive Officer’soutstanding equity awards would be accelerated and terminated in exchange for a cash payment upon the change incontrol. Based on this assumption, and as indicated in the chart below, had the Named Executive Officers terminatedemployment under their respective change in control agreements on December 31, 2007, the Company estimatesthat no gross-up payment would have been payable to the Named Executive Officers. The value of this accelerationof vesting would be higher if the accelerated awards were assumed by the acquiring company rather than terminatedupon the transaction; however, the Company estimates that this increase in value would not have been significantenough to trigger a gross-up payment. For purposes other than calculating the Section 280G excise tax, we havecalculated the value of any option or stock award that may be accelerated in connection with a change in control ofthe Company to be the full value of such award (i.e., the full “spread” value for option awards and the full price pershare of Common Stock for stock awards).

40

Change of Control Benefits Agreements with Named Executive Officers

As indicated above, the Company has entered into a change of control agreement with each Named ExecutiveOfficer. The agreements are substantially identical (except as noted below with respect to Dr. Harari) and providefor certain benefits to be paid to the Named Executive Officer in connection with a change of control and/ortermination of employment with the Company under the circumstances described below.

Change of Control Benefits. Upon a “Change of Control” (as defined in the change in control agreement) ofthe Company, for purposes of the Named Executive Officer’s vesting in then outstanding and unvested equityawards, the Named Executive Officer will be treated as having completed one additional year of vesting service asof the date of the Change of Control. The remaining unvested portions of the equity awards will continue to vest inaccordance with their normal terms, but subject to the Named Executive Officer’s additional year of deemed vestingservice. If a Change in Control of the Company had occurred on December 31, 2007, the Company estimates thatthe value of the one year acceleration of equity awards for each Named Executive Officer with a change in controlagreement would have been as follows: Dr. Harari ($1,632,750), Ms. Bruner ($1,429,625), Mr. Mehrotra($2,376,837), Dr. Thakur ($0) and Mr. Cedar ($656,750). The Company estimates that this acceleration of vestingby itself would not trigger excise taxes under Section 280G for any Named Executive Officer.

Severance Benefits — Termination of Employment in Connection with Change in Control. In the event aNamed Executive Officer’s employment is terminated by the Company (or a successor) without “Cause” (and noton account of the Named Executive Officer’s death or disability) or by the Named Executive Officer for “GoodReason” (as those terms are defined in the change in control agreement) within twelve months following a Changeof Control of the Company, the Named Executive Officer will be entitled to severance pay that includes: (i) a lumpsum cash payment equal to one (1) times (two (2) times for Dr. Harari) the sum of (A) the Named ExecutiveOfficer’s annual base salary as of the Change of Control or termination of employment, whichever is greater, plus(B) the Named Executive Officer’s target annual bonus for the year of termination; (ii) for a period of 24 monthsfollowing the termination date, continuation of the same or equivalent life, health, disability, vision, dental and otherinsurance coverage for the Named Executive Officer and his or her spouse and eligible dependents as the NamedExecutive Officer was receiving immediately prior to the Change of Control; (iii) accelerated vesting of the NamedExecutive Officer’s equity awards to the extent outstanding on the termination date and not otherwise vested, withaccelerated options to remain exercisable for twelve months following the termination (subject to the maximumterm of the option); (iv) for a period of twelve months following the termination, executive-level outplacementbenefits (which shall include at least resume assistance, career evaluation and assessment, individual careercounseling, financial counseling, access to one or more on-line employment databases, private office and officesupport); and (v) in the event that the Named Executive Officer’s benefits are subject to the excise tax imposedunder Section 280G, a gross-up payment so that the net amount of such payment (after taxes) he or she receives issufficient to pay the excise tax due.

The following table lists the Named Executive Officers and the estimated amounts they would have becomeentitled to under their change of control agreement had their employment with the Company terminated onDecember 31, 2007 under circumstances described above.

Name(a)

Estimated TotalValue of Cash

Payment($)(b)

Estimated TotalValue of Health

CoverageContinuation

($)(c)

Estimated TotalValue of Equity

Acceleration($)(d)

Estimated Value ofOutplacement

Benefits($)(e)

Estimated TotalValue of Excise Tax

“Gross-Up”($)(f)

Dr. Eli Harari . . . . . . . . . . . . . . 3,816,000 23,100 3,580,625 50,000 —

Sanjay Mehrotra . . . . . . . . . . . . 994,500 32,500 5,033,150 50,000 —

Judy Bruner . . . . . . . . . . . . . . . 832,500 32,500 2,329,114 50,000 —

Dr. Randhir Thakur . . . . . . . . . . 674,888 32,500 0 50,000 —

Yoram Cedar . . . . . . . . . . . . . . 674,888 32,500 1,155,656 50,000 —

41

CERTAIN TRANSACTIONS AND RELATIONSHIPS

The Audit Committee is responsible for review, approval, or ratification of “related-person transactions”between the Company or its subsidiaries and related persons. Under the SEC rules, a related person is a director,officer, nominee for director, or 5% stockholder of the company since the beginning of the last fiscal year and theirimmediate family members. The Company has adopted written policies and procedures that apply to anytransaction or series of transactions in which the Company or a subsidiary is a participant, the amount involvedexceeds $120,000, and a related person has a direct or indirect material interest. The Audit Committee hasdetermined that, barring additional facts or circumstances, a related person does not have a direct or indirectmaterial interest in the following categories of transactions:

• any transaction with another company for which a related person’s only relationship is as an employee (otherthan an executive officer), director, or beneficial owner of less than 5% of that company’s shares, if theamount involved does not exceed the greater of $200,000, or 2% of that company’s total annual revenue;

• compensation to executive officers determined by the Compensation Committee;

• compensation to directors determined by the Board;

• transactions in which all security holders receive proportional benefits; and

• banking-related services involving a bank depository of funds, transfer agent, registrar, trustee under a trustindenture, or similar service.

Transactions involving related persons that are not included in one of the above categories are generallyreviewed by the Company’s legal department. The legal department determines whether a related person could havea significant interest in such a transaction, and any such transaction is forwarded to the Audit Committee for review.The Audit Committee determines whether the related person has a material interest in a transaction and mayapprove, ratify, rescind, or take other action with respect to the transaction in its discretion.

Irwin Federman, the Company’s Vice Chairman of the Board of Directors, Lead Independent Director and amember of the Company’s Compensation and Audit Committees, is a general partner of U.S. Venture Partners, aventure capital firm. One of U.S. Venture Partners’ funds holds a 13% interest in Intermolecular, Inc, a privatelyheld company. Mr. Federman also serves on Intermolecular’s board of directors. In August 2006, the Companyentered into an agreement with Intermolecular pursuant to which Intermolecular agreed to provide research anddevelopment services to the Company. In 2006 and 2007, the Company paid Intermolecular $1.5 and $5.0 million,respectively, for services rendered. In light of the relationship between Mr. Federman and Intermolecular, Inc., theAudit Committee reviewed and approved the Company’s transactions with Intermolecular, Inc.

42

CERTAIN TRANSACTIONS

The Company’s Amended and Restated Certificate of Incorporation, as amended (the “Certificate”) authorizesthe Company to provide indemnification of the Company’s Directors and officers, and the Company’s RestatedBylaws (the “Bylaws”) require the Company to indemnify its Directors and officers, to the fullest extent permittedby the Delaware General Corporation Law (the “DGCL”). In addition, each of the Company’s current Directors andexecutive officers has entered into a separate indemnification agreement with the Company. Finally, the Certificateand Bylaws limit the liability of Directors to the Company or its stockholders to the fullest extent permitted by theDGCL.

The Company intends that all future transactions between the Company and its officers, Directors, principalstockholders and their affiliates be approved by the Audit Committee, and be on terms no less favorable to theCompany than could be obtained from unaffiliated third parties.

OTHER BUSINESS

The Board of Directors knows of no other business that will be presented for consideration at the AnnualMeeting. If other matters are properly brought before the Annual Meeting, however, it is the intention of the personsnamed in the accompanying proxy to vote the shares represented thereby on such matters in accordance with theirbest judgment.

BY ORDER OF THE BOARD OF DIRECTORS,

Eli HarariChairman of the Board, Directorand Chief Executive Officer

April 11, 2008

43

UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

Form 10-K¥ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 30, 2007

orn TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to

Commission file number: 0000-26734

SANDISK CORPORATION(Exact name of registrant as specified in its charter)

Delaware 77-0191793(State or other jurisdiction of (I.R.S. Employerincorporation or organization) Identification No.)

601 McCarthy Blvd.Milpitas, California

95035(Zip Code)

(Address of principal executive offices)

(408) 801-1000(Registrant’s telephone number, including area code)

Title of each class Name of each exchange on which registered

Common Stock, $0.001 par value;Rights to Purchase Series A

Junior Participating Preferred Stock

NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act:None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the SecuritiesAct. Yes ¥ No n

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the ExchangeAct. Yes n No ¥

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¥ No n

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, andwill not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by referencein Part III of this Form 10-K or any amendment to this Form 10-K. n

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” inRule 12b-2 of the Exchange Act. (Check one):Large accelerated filer ¥ Accelerated filer n Non-accelerated filer n Smaller reporting company n

(Do not check if a smaller reporting company)Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange

Act). Yes n No ¥

As of June 29, 2007, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was$3,674,024,078 based on the closing sale price as reported on the NASDAQ Global Select Market.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.Class Outstanding at January 31, 2008

Common Stock, $0.001 par value per share 224,260,481 shares

DOCUMENTS INCORPORATED BY REFERENCEDocument Parts Into Which Incorporated

Annual Report to Stockholders for the Fiscal Year EndedDecember 30, 2007 (Annual Report)

Parts I, II, and IV

Proxy Statement for the Annual Meeting of Stockholders tobe held May 28, 2008 (Proxy Statement)

Part III

SANDISK CORPORATION

Table of Contents

PageNo.

PART IItem 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

PART IIItem 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases

of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation . . . . 37

Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . 47

Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . 47

Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

PART IIIItem 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related StockholderMatters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . 49

Item 14. Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

PART IVItem 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

OTHERIndex To Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1

Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1

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PART I

ITEM 1. BUSINESS

Statements in this report, which are not historical facts, are forward-looking statements within the meaning ofthe 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 risks and uncertainties. Our actual results may differ materially from the resultsdiscussed in these forward-looking statements. Factors that could cause our actual results to differ materiallyinclude, but are not limited to, those discussed in “Risk Factors” in Item 1A of this report, and elsewhere in thisreport. Our business, financial condition or results of operations could be materially adversely affected by any ofthese factors. We undertake no obligation to revise or update any forward-looking statements to reflect any event orcircumstance that arises after the date of this report. References in this report to “SanDisk»,” “we,” “our,” and“us,” collectively refer to SanDisk Corporation, a Delaware corporation, and its subsidiaries. All references toyears or annual periods are references to our fiscal years, which consisted of 52 weeks in 2007, 2006 and 2005.

Overview

Who We Are. SanDisk Corporation, a S&P 500 company, is the inventor of and worldwide leader in NAND-based flash storage cards. Flash storage technology allows data to be stored using limited power in a durable,compact format that retains the data after the power has been turned off. Our mission is to provide simple, reliableand affordable storage for consumer use in portable devices. We sell SanDisk branded products for consumerelectronics through broad global retail and original equipment manufacturer, or OEM, distribution channels.

We design, develop and manufacture products and solutions in a variety of form factors using our flashmemory, controller and firmware technologies. We source the vast majority of our flash memory supply through oursignificant flash venture relationships with Toshiba Corporation, or Toshiba, which provide us with leading edgelow-cost memory wafers. Our cards are used in a wide range of consumer electronics devices such as mobilephones, digital cameras, gaming devices and laptop computers. We also produce Universal Serial Bus, or USB,drives, MP3 players and other flash storage products that are embedded in a variety of systems for the enterprise,industrial, military and other markets.

Our Strategy. Our strategy is to be an industry-leading low cost supplier of flash storage solutions and todevelop large scale high-growth markets for flash storage products. We maintain our technology leadership byinvesting in flash memory fabrication capacity and advanced technologies in order to produce leading-edge, lowcost flash memory for use in end-products that we design. We are a one-stop-shop for our retail and OEMcustomers, selling all major flash storage card formats for our target markets in high volumes.

Our revenues are driven by the sale of our products and the licensing of our intellectual property. We believethe market for flash storage is price elastic. From fiscal years 2006 to 2007, we increased the number of megabytessold by 190% in large measure due to a decrease of 60% in our average selling price per megabyte over the sameperiod. This price decline is largely enabled by rapid technology innovation which significantly reduces our cost permegabyte. Our management team believes that more applications for flash storage will be created through thecontinued increase in the number of megabytes a consumer can purchase at a given price point. Price declines thatdrove increased volume resulted, in part, in an increase in our product revenues from $2.9 billion in fiscal year 2006to $3.4 billion in fiscal year 2007. In addition, our license revenue increased from $331 million in fiscal year 2006 to$450 million in fiscal year 2007 as a result of continued adoption of flash technologies and increased sales by ourlicensees.

We enable new markets for NAND flash memory through a variety of embedded and removable card formfactors, and we are founders or co-founders of most major form factors of flash storage cards in the market today.We pioneered the Secure Digital, or SDTM, card, together with a subsidiary of Toshiba and Matsushita ElectricIndustries, Ltd., or Matsushita, which owns the Panasonic brand. The SD card is currently the most popular formfactor of flash storage cards used in digital cameras. Subsequent to pioneering the SD card, we worked with mobilenetwork operators and handset manufacturers to develop the miniSDTM card and microSDTM card to satisfy the needfor even smaller form factor memory cards. The microSD card has become the leading card format for mobile

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phones. With Sony Corporation, or Sony, we co-own the Memory Stick PROTM format and co-developed the SxSmemory card specification for high capacity, high speed file transfer in professional camcorders. We also workedwith Canon, Inc. to co-found the CompactFlash», or CF, standard. Through our internal development andtechnology obtained through acquisitions, we also hold key intellectual property for USB drives. We plan tocontinue to work with leading mobile communications and digital consumer device companies to discover newmarkets for flash storage products.

Our team has a deep understanding of flash memory technology and we develop and own leading-edgetechnology and patents for the design, manufacture and operation of flash memory and data storage cards. One ofthe key technologies that we have patented and successfully commercialized is multi-level cell technology, or MLC,which allows a flash memory cell to be programmed to store two or more bits of data in approximately the same areaof silicon that is typically required to store one bit of data. We have an extensive patent portfolio that has beenlicensed by several leading semiconductor companies. Our cumulative license and royalty revenues over the lastthree fiscal years were more than $1.02 billion.

We continue to invest with Toshiba in high volume, state-of-the-art flash manufacturing facilities in Japan. Ourcommitment takes the form of capital investments and loans to the flash ventures with Toshiba, credit enhancementsof these ventures’ leases of semiconductor manufacturing equipment, commitments, on a take-or-pay basis, topurchase 50% of the output of these flash ventures with Toshiba at manufacturing cost plus a mark-up and sharing inthe cost of SanDisk-Toshiba joint research and development activities related to flash memory. We supplement oursourcing of flash memory from the flash ventures with Toshiba with purchases of memory on favorable termsprimarily from Samsung Electronics Co., Ltd., or Samsung, and Toshiba. Additionally, we design in-house andfabricate at third-party foundries the controllers that interface between flash memory and digital consumer devices.Our flash memory products are assembled in our in-house assembly and test facility in Shanghai, China, andthrough our network of contract manufacturers.

We sell our products globally to retail and OEM customers. We continue to expand our retail customer base tonew geographic regions as well as to new outlets such as mobile storefronts, supermarkets and drug stores. In NorthAmerica, we sell our products principally through retailers such as Best Buy Co., Inc., or Best Buy, Circuit CityStores, Inc., Costco Wholesale Corporation and Wal-Mart Stores, Inc. In Europe and Asia, some of our keycustomers include Duttenhofer GmbH & Co. KG, Hama GmbH & Co. KG, Nokia Corporation, Sony EricssonMobile Communications AB, Twinmos Technologies Inc. and Zenitron Corporation. There are now more than222,000 worldwide retail storefronts offering SanDisk products. We also sell directly and through distributors toOEM customers, which include mobile phone and digital camera manufacturers, that include our products withtheir products when sold to end users. This strategy allows us to leverage the market position, geographic footprintand brand strength of our customers to achieve broad market penetration for our products.

Additional Information. We were incorporated in Delaware in June 1988 under the name SunDiskCorporation and changed our name to SanDisk Corporation in August 1995. We file reports and other informationwith the Securities and Exchange Commission, or SEC, including annual reports on Form 10-K, quarterly reportson Form 10-Q, current reports on Form 8-K and proxy or information statements. Those reports and statements andall amendments to those documents filed or furnished pursuant to Section 13(a) or 15(d) of the Securities ExchangeAct (1) may be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549,(2) are available at the SEC’s internet site (http://www.sec.gov), which contains reports, proxy and informationstatements and other information regarding issuers that file electronically with the SEC and (3) are available free ofcharge through our website as soon as reasonably practicable after electronic filing with, or furnishing to, the SEC.Information regarding the operation of the SEC’s Public Reference Room may be obtained by calling the SEC at1-800-SEC-0330. Our website address is www.sandisk.com. Information on our website is not incorporated byreference nor otherwise included in this report. Our principal executive offices are located at 601 McCarthy Blvd.,Milpitas, CA 95035 and our telephone number is (408) 801-1000. SanDisk is a trademark of SanDisk Corporation,and is registered in the United States, or U.S., and other countries. Other brand names mentioned herein are foridentification purposes only and may be the trademarks of their respective holder(s).

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Description of Our Business

Industry Background. We operate in the digital electronics industry, which encompasses traditional personalcomputers, or PCs, consumer electronics, communications and industrial products. Our products use flash memoryto store digital information for devices such as mobile phones, digital cameras, digital video camcorders, gamingdevices, portable digital audio/video players, PCs, blade servers and global positioning system, or GPS, devices.These applications require storage that is small in form factor, portable and removable, highly reliable, highcapacity, low in power consumption, and capable of withstanding high levels of shock vibration and temperaturefluctuations.

The flash memory market is primarily comprised of NOR and NAND technologies. NOR is traditionally usedfor code storage and is characterized by fast read speeds. NOR generally costs more per megabyte and has lowerstorage capacities than NAND. NAND flash memory is traditionally used for embedded and removable data storageand is characterized by fast write speeds and high capacities. We internally develop flash memory technologies,produce the flash memory primarily through the flash ventures with Toshiba and utilize this production output inproducts that we design and sell to our various end markets.

Our Primary Markets. We currently focus on four primary markets:

• Consumer. We make and sell flash storage products that address multiple consumer markets. Certain flashstorage cards are used as the film for all major brands of digital cameras. Our cards are also used to storevideo in solid-state digital camcorders and to store digital data in many other devices, such as maps in GPSdevices. In addition, portable game devices now include advanced features that require high capacitymemory storage cards and we provide SD cards, Memory Stick PRO DuoTM cards and Cruzer» CrossFireTM

line of USB drives that are all specifically packaged for the gaming market. Primary card formats forconsumer devices include CF, SD, Memory Stick» and xD-Picture CardTM.

• Mobile Phones. We provide embedded, semi-removable and removable storage for mobile phones. We area leading supplier of microSD, SD and the Memory Stick product line of removable storage cards used inmobile phones. Multimedia features in mobile phones, such as camera functionality, audio/MP3, games,video or internet access, have been increasing in popularity. These features require additional storagecapacity in the mobile phone and transferability of data between devices.

• Digital Audio and Video Players. Digital media players allow consumers to download, store and playmusic and video. We sell a broad line of digital media players with both embedded and removable memoryunder our Sansa» brand with varying combinations of audio and video capabilities.

• Computing. We provide multiple flash storage devices and solutions for a variety of computing, industrialand enterprise markets. USB flash drives allow consumers to store computer files on keychain-sized devicesand then quickly and easily transfer these files between laptops, desktops and other devices. USB flashdrives are fast, easy to use, have replaced floppy disks and other types of external storage media, and areevolving into intelligent storage devices. In addition, we sell solid state drives that are flash-based storagedevices with capacities currently up to 72 gigabytes. We believe solid state drives will become a majormarket for flash memory over the next several years as the solid state drives increasingly replace hard diskdrives in personal computer and enterprise server products.

Our Sales Channels. Our products are delivered to end-users through more than 222,000 worldwide retailstorefronts and also by bundling data storage cards with host products or by embedding our data storage products inhost devices sold by our OEM customers.

Our sales are made through the following channels:

• Retail. We ship SanDisk brand products directly to consumer electronics stores, office superstores, photoretailers, mobile phone stores, mass merchants, catalog and mail order companies, internet and e-commerceretailers, drug stores, supermarkets and convenience stores. We also sell our products to smaller or regionalretailers through distributors.

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We have a separate distribution network focused on the mobile phone market. Our distributors provide usaccess to mobile network operator branded storefronts as well as other retailers with significant mobilecommunications offerings.

We support our retail sales channels with both direct sales representatives and independent manufacturers’representatives. We have organized our sales activities into four regional territories: Americas, Europe,Middle East and Africa, or EMEA, Asia Pacific, or APAC, and Japan.

• OEM. Our OEM customers include manufacturers of mobile phones, digital cameras, PCs, GPS and otherdigital consumer devices, such as personal computers and gaming devices. Our products are sold directly toOEMs and through distributors. We support our OEM customers through our direct sales representatives aswell as through independent manufacturers’ representatives.

As of the end of fiscal years 2007 and 2006, our backlog was $224 million and $177 million, respectively. Dueto industry practice that allows customers to change or cancel orders with limited advance notice prior to shipment,we do not believe that backlog, as of any particular date, is indicative of future sales.

Our revenues are seasonally higher in our fourth quarter due to the holiday buying season. Our first and thirdquarters have sometimes been seasonally lower than the preceding quarters.

Our Customers. In fiscal years 2007, 2006 and 2005, revenues from our top 10 customers and licenseesaccounted for approximately 46%, 52% and 50% of our total revenues, respectively. In fiscal years 2007 and 2006,no single customer or licensee accounted for greater than 10% of our total revenues. In fiscal year 2005, Best Buyaccounted for 11% of our total revenues. The composition of our major customer base has changed over time, andwe expect this pattern to continue as our markets and strategies evolve. Sales to our customers are generally madepursuant to purchase orders rather than long-term contracts.

Our Products. Our products are sold under the SanDisk brand in a wide variety of form factors and includethe following:

• Removable Cards. Our removable data storage solutions are available in almost every major form factor inour primary markets. For example, our CompactFlash removable cards, available in capacities up to 16gigabytes, are well-suited for a range of consumer applications, including digital cameras. Our professionalproducts include the SanDisk Ultra» and SanDisk Extreme» product lines which are designed withadditional performance and reliability. Our ultra-small microSD removable cards, available in capacitiesup to 8 gigabytes, are designed for use in mobile phones.

• USB Drives. Our Cruzer» line of USB drives, available in capacities up to 8 gigabytes, are highly-reliableand high-performance devices. USB Flash Drives, or UFDs, are used in the computing and consumermarkets. A number of our Cruzers ship with U3TM Smart Technology, which gives the user the ability to carryfiles and application software on a secure USB drive. Also, our Cruzer Crossfire UFDs are speciallydesigned to make the console or PC gaming experience portable. Our Professional and Enterprise line ofUFDs are geared towards the corporate user and are specifically designed to support secure and authorizedaccess to corporate information.

• Embedded. Our embedded products are a set of reliable, high-capacity, high performance and cost-effective embedded flash memory drive solutions for both data and code storage. Our iNANDTM embeddedflash product line, with capacities up to 16 gigabytes, are designed to respond to the increasing demand forembedded storage for mobile phones and other portable devices. We also offer high-capacity solid-statedrives targeted for the personal computing and network server markets in capacities up to 72 gigabytes.

• Digital Media Players. Sansa is our branded line of flash-based digital media players for the digital audioand video player market. Many of our Sansa models offer a removable card slot for easy transportability ofmusic between devices and storage capacity expansion. Features within our Sansa line of products includeFM radio, voice recording and support for a variety of audio and video music download and subscriptionservices. Sansa media players are available in capacities up to 32 gigabytes.

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Technology. Since our inception, we have focused our research, development and standardization efforts ondeveloping highly reliable, high-performance, cost-effective flash memory storage products in small form factors toaddress a variety of emerging markets. We have been actively involved in all aspects of this development, includingflash memory process development, module integration, chip design, controller development and system-levelintegration, to help ensure the creation of fully-integrated, broadly interoperable products that are compatible withboth existing and newly developed system platforms. We intend to start limited production on 3-bits/celltechnology, or X3, in fiscal year 2008 and we are also investing in the development of 4-bits/cell, or X4, storagetechnologies. In addition, we are investing in the development of three-dimensional, or 3D, memory architecturewith multiple read-write capabilities. We have also initiated, defined and developed standards to meet new marketneeds and to promote wide acceptance of these standards through interoperability and ease-of-use. We believe ourcore technical competencies are in:

• high-density flash memory process, module integration, device design and reliability;

• securing data on a flash memory device;

• controller design;

• system-level integration;

• compact packaging; and

• low-cost system testing.

To achieve compatibility with various electronic platforms regardless of the host processors or operatingsystems used, we developed new capabilities in flash memory chip design and created intelligent controllers. Wealso developed an architecture that can leverage advances in process technology designed for scaleable, high-yielding, cost-effective and highly reliable manufacturing processes. We design our products to be compatible withindustry-standard interfaces used in standard operating systems for personal computers, mobile phones, gamingdevices, digital media players and other consumer and industrial products.

Our patented intelligent controller technology, with its advanced defect management system, permits our flashstorage card products to achieve a high level of reliability and longevity. Each one of our flash devices containsmillions of flash memory cells. For example, our 4 gigabyte cards may contain as many as 35 billion storage cells. Afailure in any one of these cells can result in loss of data such as picture files, and this can occur several years into thelife of a flash storage card. The controller chip inside our cards is designed to detect such defects and recover dataunder most standard conditions.

Patents and Licenses. We rely on a combination of patents, trademarks, copyright and trade secret laws,confidentiality procedures and licensing arrangements to protect our intellectual property rights. See Item 1A,“Risk Factors.”

As of the end of fiscal year 2007, we owned, or had rights to, more than 860 United States patents and morethan 550 foreign patents. We had more than 1,440 patent applications pending in the United States, and had foreigncounterparts pending on many of the applications in multiple jurisdictions. We continually seek additionalinternational and United States patents on our technology.

We have various patent licenses with several companies including, among others, Hynix Semiconductor, Inc.,or Hynix, Intel Corporation, or Intel, Lexar Media, Inc., or Lexar, a subsidiary of Micron Technology, Inc., orMicron, Matsushita, Renesas Technology Corporation, or Renesas, Samsung, Sharp Electronics KK, or Sharp, Sonyand Toshiba. From time-to-time, we have also entered into discussions with other companies regarding potentiallicense agreements for our patents.

Trade secrets and other confidential information are also important to our business. We protect our tradesecrets through confidentiality and invention assignment agreements.

Supply Chain. Our supply chain is an important competitive advantage.

• Silicon Sourcing. All of our flash memory card products require silicon chips for the memory andcontroller components. The majority of our memory is supplied from the flash ventures with Toshiba and our

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Toshiba foundry relationship. This represents captive memory supply, and we are obligated to take theoutput from the flash ventures with Toshiba. See “Ventures with Toshiba.” We also purchase non-captiveNAND memory supply primarily from Samsung and Hynix, and source our 3D one-time programmable, orOTP, memory on a foundry basis at Taiwan Semiconductor Manufacturing Corporation, or TSMC. We areguaranteed a certain amount of the total output from Samsung and Hynix, but we are not obligated to use theguaranteed supply until we give them an order for future purchases. Our controller wafers are currentlysupplied by Semiconductor Manufacturing International Corporation, or SMIC, TSMC, Tower Semicon-ductor Ltd., or Tower, and United Microelectronics Corporation, or UMC. We have a foundry agreementwith Tower on a purchase order basis. See Item 1A, “Risk Factors.”

• Assembly and Testing. We sort and test our wafers at Toshiba in Yokkaichi, Japan, and ArdentecCorporation in Taiwan. Our flash memory products are assembled in both our in-house assembly and testfacility in Shanghai, China, and through our network of contract manufacturers, including StatsChipPACLtd., or StatsChipPAC, in China, and Silicon Precision Industries Co., Ltd., or SPIL, in Taiwan. Ourpackaged memory final test, card assembly and card test is performed at our in-house facility and atsubcontractors such as SPIL and United Test and Assembly Center, in Taiwan, and Beautiful Enterprise Co.,Ltd., Flextronics International, Ltd., or Flextronics, Global Brands Manufacturing Ltd. and StatsChipPAC,in China. We believe the use of our in-house assembly and test facility as well as subcontractors reduces thecost of our operations and gives us access to increased production capacity.

Ventures with Toshiba

We and Toshiba have entered into several business ventures. In May 2000, we formed FlashVision Ltd., orFlashVision, which produces 200-millimeter NAND flash memory wafers. In September 2004, we and Toshibaformed Flash Partners Ltd., or Flash Partners, or Fab 3, which produces 300-millimeter NAND flash wafers andramped to a full production capacity of approximately 150,000 wafers per month during fiscal year 2007. InJuly 2006, we and Toshiba formed Flash Alliance Ltd., or Flash Alliance, or Fab 4, a new 300-millimeter waferfabrication facility which began initial production in the third quarter of fiscal year 2007 and is expected to expandto approximately 110,000 wafers per month by mid-fiscal year 2008. Full capacity is expected to reach approx-imately 210,000 wafers per month, with the timeframe to reach this capacity to be mutually agreed upon by theparties. We are in preliminary discussions with Toshiba regarding the potential wind-down of the 200-millimeterFlashVision venture. We and Toshiba have also signed a non-binding memorandum of understanding to form a newmemory wafer fab in Japan. See Note 19 “Subsequent Events” to our consolidated financial statements included inItem 8 of this report.

With the FlashVision, Flash Partners and Flash Alliance ventures located at Toshiba’s Yokkaichi Japanoperations, we and Toshiba collaborate in the development and manufacture of NAND flash memory products usingthe semiconductor manufacturing equipment owned or leased by each venture entity. We hold a 49.9% ownershipposition in each of the current Toshiba and SanDisk venture entities. Each venture entity purchases wafers fromToshiba at cost and then resells those wafers to us and Toshiba at cost plus a mark-up. We are committed topurchase, and entitled to, half of each venture’s NAND wafer supply and are committed to fund 49.9% of eachventure’s costs to the extent that the venture’s revenues from wafer sales to us and Toshiba are insufficient to coverthese costs. The investments in each venture entity are shared equally between us and Toshiba. In addition, wepurchase wafers from Toshiba on a foundry basis.

Competition

We face competition from numerous semiconductor manufacturers and manufacturers and resellers of flashmemory cards, USB drives, digital audio players and other consumer electronic devices. We also face competitionfrom manufacturers of hard disk drives and from new technologies. See Item 1A, “Risk Factors.”

Key Competitive Advantages. Our key competitive advantages are:

• we have a tradition of innovation and standards creation which enables us to grow the overall market for flashmemory;

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• our intellectual property ownership, in particular our patent claims and MLC manufacturing know-how,provides us certain cost advantages;

• our flash ventures with Toshiba provide us with a favorable cost structure;

• we market and sell a broader range of card formats than any of our competitors, which gives us an advantagein obtaining strong retail and OEM distribution;

• we have global retail distribution of our products through over 222,000 worldwide retail storefronts; and

• we have worldwide leading market share in removable flash cards and USB flash drives.

Semiconductor Manufacturers. Our primary semiconductor competitors currently include Hynix, IM FlashTechnologies LLC, or IM Flash (a company formed by Micron and Intel), Micron, Samsung, STMicroelectronicsN.V., or STMicro, and Toshiba.

Flash Memory Card and USB Drive Manufacturers. Our primary card and USB drive competitors currentlyinclude, among others, A-Data Technology Co., Ltd., or A-Data, Buffalo Technology, Inc., or Buffalo, Chips andMore GmbH, or CN Memory, Dane-Elec Memory, or Dane-Elec, Elecom Co., Ltd., or Elecom, FUJIFILMCorporation, or FUJI, Hagiwara Sys-Com Co., Ltd., or Hagiwara, Hama Corporation, Inc., or Hama, ImationCorporation, or Imation, and its division Memorex Products, Inc., or Memorex, I/O Data Device, Inc., or I/O Data,Kingmax, Inc., or KingMax, Kingston Technology Company, Inc., or Kingston, Eastman Kodak Company, orKodak, Lexar Media, Inc., or Lexar, Matsushita Electric Industrial Co., Ltd. which owns the Panasonic brands, orPanasonic, Netac Technology Co., or Netac, PNY Technologies, Inc., or PNY, RITEK Corporation, or RITEK,Samsung, Sony, Toshiba, Tradebrands International, or Tradebrands, Transcend Information, Inc., or Transcend,and Verbatim Corporation, or Verbatim.

Digital Audio/Video Player Manufacturers. Our digital audio/video players face strong competition fromproducts offered by other companies, including Apple Inc., or Apple, ARCHOS Technology, or ARCHOS, CreativeTechnologies, Ltd., or Creative, Microsoft Corporation, or Microsoft, Samsung and Sony.

Other Technologies. Other technologies compete with our product offerings and many companies areattempting to develop memory cells that use different designs and materials in order to reduce memory costs. Thesepotential competitive technologies include phase-change technology, charge-trap flash and millipedes/probes.

Employees

As of December 30, 2007, we had 3,172 full-time employees, including 1,255 in research and development,506 in sales and marketing, 470 in general and administration, and 941 in operations. None of our employees arerepresented by a collective bargaining agreement and we have never experienced any work stoppage. We believethat our employee relations are satisfactory.

Executive Officers

Our executive officers, who are elected by and serve at the discretion of our board of directors, are as follows(all ages are as of February 15, 2008):

Name Age Position

Eli Harari . . . . . . . . . . . . . . . . . . . . . . . 62 Chairman of the Board and Chief Executive Officer

Sanjay Mehrotra . . . . . . . . . . . . . . . . . . 49 President and Chief Operating Officer

Judy Bruner. . . . . . . . . . . . . . . . . . . . . . 49 Executive Vice President, Administration and ChiefFinancial Officer

Randhir Thakur . . . . . . . . . . . . . . . . . . . 45 Executive Vice President, Technology andWorldwide Operations

Yoram Cedar . . . . . . . . . . . . . . . . . . . . . 55 Executive Vice President, Mobile Business Unit andCorporate Engineering

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Dr. Eli Harari, the founder of SanDisk, has served as Chief Executive Officer and as a director of SanDisk sinceJune 1988. He was appointed Chairman of the Board in June 2006. Dr. Harari also served as President from June1988 to June 2006. Dr. Harari founded Waferscale Integration, Inc., a privately held semiconductor company, in1983 and was its President and Chief Executive Officer from 1983 to 1986, and Chairman and Chief TechnicalOfficer from 1986 to 1988. From 1973 to 1983, Dr. Harari held various management positions with Honeywell Inc.,Intel Corporation and Hughes Microelectronics Ltd. Dr. Harari holds a Ph.D. in Solid State Sciences from PrincetonUniversity and has more than 100 patents issued in the field of non-volatile memories and storage systems.Dr. Harari is a board member of Tower.

Sanjay Mehrotra co-founded SanDisk in 1988 and has been our President since June 2006. He continues toserve as our Chief Operating Officer, a position he has held since 2001, and he has previously served as ourExecutive Vice President, Vice President of Engineering, Vice President of Product Development, and Director ofMemory Design and Product Engineering. Mr. Mehrotra has more than 25 years of experience in the non-volatilesemiconductor memory industry including engineering and engineering management positions at IntelCorporation, Seeq Technology, Integrated Device Technology and Atmel Corporation. Mr. Mehrotra earnedB.S. and M.S. degrees in Electrical Engineering and Computer Sciences from the University of California,Berkeley. He also holds several patents and has published articles in the area of non-volatile memory design andflash memory systems.

Judy Bruner has been our Chief Financial Officer and Executive Vice President Administration since June2004. She served as a member of our board of directors from July 2002 to July 2004. Ms. Bruner has over 25 years offinancial management experience, including serving as Senior Vice President and Chief Financial Officer of Palm,Inc., a provider of handheld computing and communications solutions, from September 1999 until June 2004. Priorto Palm, Inc., Ms. Bruner held financial management positions with 3Com Corporation, Ridge Computers andHewlett-Packard Company. Ms. Bruner also serves on the board of directors of Vermillion, Inc. Ms. Bruner holds aB.A. degree in Economics from the University of California, Los Angeles and an M.B.A. degree from Santa ClaraUniversity.

Dr. Randhir Thakur has been our Executive Vice President, Technology and Worldwide Operations sinceSeptember 2005. Prior to joining us, Dr. Thakur was group Vice President and General Manager of the Front EndProducts Group at Applied Materials, Inc. He joined Applied Materials in 2000 as Chief Technical Officer of theTransistor and Capacitor Products Business Group. Previously, from 1997 to 2000, Dr. Thakur was Vice Presidentof Research and Development at AG Associates and Chief Technology Officer and General Manager at SteagElectronic Systems after its acquisition of AG Associates. He also held various technical and management positionsat Micron Technology from 1991 to 1997. Dr. Thakur has extensive experience in semiconductor manufacturing,holds more than 250 patents and has published more than 200 technical publications. Dr. Thakur received his B.S.degree (honors) in Electronics and Telecommunications Engineering from the Regional Engineering College,Kurukshetra, India, and an M.S. degree in Electrical Engineering from the University of Saskatchewan, Canada.Dr. Thakur received his Ph.D. in Electrical Engineering from the University of Oklahoma.

Yoram Cedar is our Executive Vice President, Mobile Business and Corporate Engineering. Prior toOctober 2005, Mr. Cedar served as our Senior Vice President of Engineering and Emerging Market BusinessDevelopment. Mr. Cedar began his career at SanDisk in 1998 when he joined as Vice President of SystemsEngineering. He has extensive experience working in product definition, marketing and development of systemsand embedded flash-based semiconductors. Prior to SanDisk, he was the Vice President of New BusinessDevelopment at Waferscale Integration and has more than 27 years of experience in design and engineeringmanagement of electronic systems. Mr. Cedar earned B.S. and M.S. degrees in Electrical Engineering andComputer Architecture from Technion, Israel Institute of Technology, Haifa, Israel.

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Item 1A. RISK FACTORS

Our operating results may fluctuate significantly, which may adversely affect our financial condition and our stockprice. Our quarterly and annual operating results have fluctuated significantly in the past and we expect that they willcontinue to fluctuate in the future. This fluctuation could result from a variety of factors, including, among others:

• average selling prices, net of promotions, declining at a faster rate than cost reductions for our products dueto industry or SanDisk excess supply and competitive pricing pressures;

• reduction in price elasticity of demand related to pricing changes for some of our markets and products;

• our license and royalty revenues may decline significantly in the future as our existing license agreementsand key patents expire or if licensees fail to perform on a portion or all of their contractual obligations, whichmay also lead to increased patent litigation costs;

• unexpected difficulties in developing, or inability to develop, X3, X4, 3D, or other advanced, alternativetechnologies or difficulty in bringing advanced technologies into volume production at cost competitivelevels;

• increased purchases of non-captive flash memory, which typically costs more than captive flash memory andmay be of less consistent quality;

• insufficient assembly and test capacity from our contract manufacturers or our Shanghai facility;

• excess supply from captive sources due to output increasing faster than the growth in demand resulting inexcess inventory;

• unpredictable or changing demand for our products, particularly demand for certain types or capacities ofour products or demand for our products in certain markets or geographies;

• addition of new competitors, expansion of supply from existing competitors and ourselves creating excessmarket supply, which could cause our average selling prices to decline faster than our costs decline;

• difficulty in forecasting and managing inventory levels, particularly due to noncancelable contractualobligations to purchase materials such as custom non-memory materials, and the need to build finishedproduct in advance of customer purchase orders;

• timing, volume and cost of wafer production from the flash ventures with Toshiba as impacted by fabstart-up delays and costs, technology transitions, yields or production interruptions;

• disruption in the manufacturing operations of suppliers, including suppliers of sole-sourced components;

• increased memory component and other costs as a result of exchange rate fluctuations to the U.S. dollar,particularly with respect to the Japanese yen;

• potential delays in the emergence of new markets and products for NAND flash memory and acceptance ofour 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 controllercomponents, 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 other challenges related to our acquisitions of msystems Ltd. and MatrixSemiconductor, Inc.;

• estimates used in calculating share-based compensation expense;

• reduced sales to our retail customers if consumer confidence declines or due to economic declines in theUnited States, Europe or other geographies; and

• other factors described under “Risk Factors” and elsewhere in this report.

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Our average selling prices, net of promotions, may decline faster than cost reductions due to industry orSanDisk excess supply, competitive pricing pressures or strategic price reductions initiated by us or our compet-itors. The market for NAND flash products is competitive and characterized by rapid price declines. As anexample, our average selling price per megabyte for product revenues declined 60% in fiscal year 2007 compared tofiscal year 2006. Price declines may be influenced by, among other factors, supply in excess of demand, technologytransitions, including adoption of MLC technology by other competitors, conversion of industry DRAM capacity toNAND and new technologies or other strategic actions by competitors to gain market share. If our technologytransitions take longer or are more costly than anticipated to complete, or our cost reductions fail to keep pace withthe rate of price declines, our gross margins and operating results will be negatively impacted, which could generatequarterly or annual net losses. Over our history, price decreases have generally been more than offset by increasedunit demand and demand for products with increased storage capacity. However, in the recent past, price declineshave outpaced growth in demand for higher capacities for some products resulting in reduced revenue growth. Therecan be no assurance that current and future price reductions will result in sufficient demand for increased productcapacity or unit sales, which could harm our margins and revenue growth.

Sales to a small number of customers represent a significant portion of our revenues, and if we were to lose oneof our major licensees or customers or experience any material reduction in orders from any of our customers, ourrevenues and operating results would suffer. In fiscal years 2007, 2006 and 2005, revenues from our top 10customers and licensees accounted for approximately 46%, 52% and 50% of our total revenues, respectively. Infiscal years 2007 and 2006, no single customer or licensee accounted for greater than 10% of our total revenues. Infiscal year 2005, Best Buy accounted for 11% of our total revenues. The composition of our major customer basehas changed over time, and we expect this pattern to continue as our markets and strategies evolve. If we were to loseone of our major customers or licensees, or experience any material reduction in orders from any of our customers orin sales of licensed products by our licensees, our revenues and operating results would suffer. Additionally, ourlicense and royalty revenues may decline significantly in the future as our existing license agreements and keypatents expire or if licensees fail to perform on a portion or all of their contractual obligations. Our sales aregenerally made from standard purchase orders rather than long-term contracts. Accordingly, our customers maygenerally terminate or reduce their purchases from us at any time without notice or penalty. In addition, thecomposition of our major customer base changes from year-to-year as we enter new markets, making our revenuesfrom these major customers less predictable from year-to-year.

Our business depends significantly upon sales through retailers and distributors, and if our retailers anddistributors are not successful, we could experience substantial product returns, which would negatively impact ourbusiness, financial condition and results of operations. A significant portion of our sales are made throughretailers, either directly or through distributors. Sales through these channels typically include rights to returnunsold inventory and protection against price declines. As a result, we do not recognize revenue until after theproduct has been sold through to the end user, in the case of sales to retailers, or to our distributors’ customers, in thecase of sales to distributors. If our retailers and distributors are not successful, due to, for example, the negativeimpact on consumer retail demand caused by a decline in consumer confidence, economic weakness, or otherfactors, we could experience reduced sales as well as substantial product returns or price protection claims, whichwould harm our business, financial condition and results of operations. Availability of sell-through data variesthroughout the retail channel, which makes it difficult for us to forecast retail product revenues. Our arrangementswith our retailers and distributors also provide them price protection against declines in our recommended sellingprices, which has the effect of reducing our deferred revenues and eventually our revenues. Except in limitedcircumstances, we do not have exclusive relationships with our retailers or distributors, and therefore, must rely onthem to effectively sell our products over those of our competitors.

Our revenues depend in part on the success of products sold by our OEM customers. A significant portion ofour sales are to OEMs, which either bundle or embed our flash memory products with their products, such as mobilephones, GPS devices and computers. Our sales to these customers are dependent upon the OEMs choosing ourproducts over those of our competitors and on the OEMs’ ability to create, introduce, market and sell their productssuccessfully in their markets. Should our OEM customers be unsuccessful in selling their current or future productsthat include our products, or should they decide to discontinue utilizing our products, our results of operation andfinancial condition could be harmed.

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The continued growth of our business depends on development and performance of new markets and productsfor NAND flash. Our growth will be increasingly dependent on development of new markets, new applicationsand new products for NAND flash memory. Historically, the digital camera market provided the majority of ourrevenues, but it is now a more mature market representing a declining percentage of our total revenues, and themobile handset market has emerged as the largest segment of our revenues and driver of growth. Other markets forflash memory include digital audio and video players, USB drives and solid state drives. There can be no assurancethat the use of flash memory in mobile handsets or other existing markets and products will continue to develop andgrow fast enough, or that new markets will adopt NAND flash technologies in general or our products in particular,to enable us to continue our growth. In addition, there can be no assurance that the increase in average productcapacity and unit demand in response to price reductions will generate revenue growth for us as it has in the past.

Our growth is also dependent on continued geographic expansion and we may face difficulties entering ormaintaining sales in international markets. Recently, our international sales have grown faster than in NorthAmerica and we have gained international market share. Some international markets are subject to a higher degreeof commodity pricing than in North America, subjecting us to increased risk of pricing and margin pressure.

Our strategy of investing in captive manufacturing sources could harm us if our competitors are able toproduce products at lower costs or if industry supply exceeds demand. We secure captive sources of NANDthrough our significant investments in manufacturing capacity. We believe that by investing in captive sources ofNAND, we are able to develop and obtain supply at the lowest cost and access supply during periods of highdemand. Our significant investments in manufacturing capacity may require us to obtain and guarantee capitalequipment leases and use available cash, which could be used for other corporate purposes. To the extent we securemanufacturing capacity and supply that is in excess of demand, or our cost is not competitive with other NANDsuppliers, we may not achieve an adequate return on our significant investments and our revenues, gross marginsand related market share may be negatively impacted. We may also incur increased inventory or impairment chargesrelated to our captive manufacturing investments and may not be able to exit those investments without significantcost to us. In addition, if we finance these manufacturing investments with debt, our return may not be sufficient tofinance the related debt payments or we may need to raise additional funding, which could be difficult to obtain ormay only be available at rates and other terms that are unfavorable.

We continually seek to develop new applications, products, technologies and standards, which may not bewidely adopted by consumers or, if adopted, may reduce demand by consumers for our older products; and ourcompetitors seek to develop new standards which could reduce demand for our products. We continually devotesignificant resources to the development of new applications, products and standards and the enhancement ofexisting products and standards with higher memory capacities and other enhanced features. Any new applications,products, technologies, standards or enhancements we develop may not be commercially successful. The success ofnew product introductions is dependent on a number of factors, including market acceptance, our ability to managerisks associated with new products and production ramp issues. New applications, such as the adoption of flash-based solid state drives, or SSDs, that are designed to replace hard disk drives in devices such as computers andservers, can take several years to develop. We cannot guarantee that manufacturers will adopt SSDs or that thismarket will grow as we anticipate. For the SSD market to become sizeable, the cost of flash memory must declinesignificantly so that the cost to consumers is competitive with the cost of hard disk drives, and we believe that wewill need to implement MLC technology into our SSDs, which will require us to develop new controllers. There canbe no assurance that our MLC-based SSDs will be able to meet the specifications required to gain customerqualification and acceptance. Other new products, such as the Sansa ConnectTM, Sansa Clip, Sansa View, SansaShakerTM, TakeTVTM and pre-recorded flash memory cards may not gain market acceptance, and we may not besuccessful in penetrating the new markets that we target. New applications such as our FanfareTM content gateway,which represents our first significant content initiative, may require significant up-front investment with noassurance of long-term commercial success or profitability. The content we provide may be supplied by third partiesand to the extent that the third parties do not deliver as expected or disputes arise related to, among other things,third-party royalties from the distribution of content, our product offerings may be negatively impacted. Unau-thorized distribution of third-party content that we host could restrict us from continuing to provide content or limitaccess to new content. As we introduce new standards or technologies, it can take time for these new standards or

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technologies to be adopted, for consumers to accept and transition to these new standards or technologies and forsignificant sales to be generated from these new standards or technologies, if this happens at all.

Competitors or other market participants could seek to develop new standards for flash memory productswhich, if accepted by device manufacturers or consumers, could reduce demand for our products. For example,certain handset manufacturers and flash memory chip producers are currently advocating the development of a newstandard, referred to as Universal Flash Storage, or UFS, for flash memory cards used in mobile phones. Intel andMicron have also developed a new specification for a NAND flash interface, called ONFI, which would be usedprimarily in computing devices. Broad acceptance of new standards, technologies or products may reduce demandfor some of our products. If this decreased demand is not offset by increased demand for new form factors orproducts that we offer, our results of operations could be harmed.

Alternative storage solutions such as high bandwidth wireless or internet-based storage could reduce the needfor physical flash storage within electronic devices. These alternative technologies could negatively impact theoverall market for flash-based products, which could seriously harm our results of operations.

Consumer devices that use NAND flash memory do so in either a removable card or an embedded format. Weoffer NAND flash memory products in both categories; however, our market share is strongest for removable flashmemory products. If designers and manufacturers of consumer devices, including mobile phones, increase theirusage of embedded flash memory, we may not be able to sustain our market share. In addition, if NAND flashmemory is used in an embedded format, we would have less opportunity to influence the capacity of the NANDflash products and we would not have the opportunity for additional after-market retail sales related to theseconsumer devices or mobile phones. Any loss of market share or reduction in the average capacity of our productsales or any loss in our retail after-market opportunity could harm our operating results and business condition.

We are developing the next generations of MLC technology, including 3-bits per cell, or X3, and 4-bits per cell,or X4. We believe the successful introduction of X3 and X4 technology may be required in order to achieve the levelof future cost reductions for the further adoption of flash memory in consumer applications. The performance,reliability, yields and time-to-market of X3 and X4 technologies are uncertain, and there can be no assurance of thecommercial success of these technologies.

In addition, we are investing in future alternative technologies, such as our three-dimensional semiconductormemory, which currently is limited to one-time programmable applications. We are investing significant resourcesto develop this technology for multiple read-write applications; however, there can be no assurance that we will besuccessful in developing these alternative technologies or that we will be able to achieve the yields, quality orcapacity required for this technology to be cost competitive with new or other alternative memory technologies.

We face competition from numerous manufacturers and marketers of products using flash memory, as well asfrom manufacturers of new and alternative technologies, and if we cannot compete effectively, our results ofoperations and financial condition will suffer. Our competitors include many large companies that may havegreater advanced wafer manufacturing capacity and substantially greater financial, technical, marketing and otherresources than we do, which allows them to produce flash memory chips in high volumes at low costs and to sellthese flash memory chips themselves or to our flash card competitors at a low cost. Some of our competitors maysell their flash memory chips at or below their true manufacturing costs to gain market share and to cover their fixedcosts. Such practices occurred in the DRAM industry during periods of excess supply and resulted in substantiallosses in the DRAM industry. Our primary semiconductor competitors include Hynix, IM Flash, Micron, Samsung,STMicro and Toshiba. We, along with Hynix, IM Flash, Samsung and Toshiba, are aggressively increasing NANDoutput and are expected to continue to produce significant NAND output in the future. In addition, current andfuture competitors produce or could produce alternative flash or other memory technologies that compete againstour NAND flash memory technology or our alternative technologies, which may reduce demand or accelerate pricedeclines for NAND. Furthermore, the future rate of scaling of the NAND flash technology design that we employmay slow down significantly, which would slow down cost reductions that are fundamental to the adoption of flashmemory technology in new applications. If the scaling of NAND slows down or alternative technologies prove to bemore economical, the investments in our captive fabrication facilities could be impaired and our results ofoperations and financial condition will suffer. We also compete with flash memory card manufacturers andresellers. These companies purchase or have a captive supply of flash memory components and assemble memory

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cards. Our primary competitors currently include, among others, A-Data, Buffalo, CN Memory, Dane-Elec,Elecom, FUJI, Hagiwara, Hama, Imation, I/O Data, Kingmax, Kingston, Kodak, Lexar, Memorex, Netac,Panasonic, PNY, RITEK, Samsung, Sony, Toshiba, Tradebrands, Transcend and Verbatim.

Some of our competitors have substantially greater resources than we do, have well recognized brand names orhave the ability to operate their business on lower margins than we do. The success of our competitors mayadversely affect our future revenues or margins and may result in the loss of our key customers. For example,Toshiba and other manufacturers have increased their market share of flash memory cards for mobile phones,including the microSD card, which have been a significant driver of our growth. In the digital audio market, we facecompetition from well established companies such as Apple, ARCHOS, Creative, Microsoft, Samsung and Sony. Inthe USB flash drive market, we face competition from a large number of competitors, including Imation, Kingston,Lexar, Memorex, PNY, Sony, Trek 2000 International Ltd. and Verbatim. In the market for solid state drives, wemay face competition from large NAND flash producers such as Samsung and Intel, as well as from hard drivemanufacturers, such as Seagate Technology, Hitachi, Ltd., and others, who have established relationships withcomputer manufacturers.

Furthermore, many companies are pursuing new or alternative technologies or alternative forms of NAND,such as phase-change technology, charge-trap flash and millipedes/probes, which may compete with flash memory.For example, our competitors are developing new technologies such as charge-trap flash and three-dimensionaltechnology which if successful and if we are unable to scale our technology on an equivalent basis, could provide anadvantage to these competitors.

These new or alternative technologies may enable products that are smaller size, higher capacity, lower cost,lower power consumption or have other advantages. If we cannot compete effectively, our results of operations andfinancial condition will suffer.

We believe that our ability to compete successfully depends on a number of factors, including:

• 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.

While we believe we are well-positioned to compete in the marketplace based on the foregoing factors, therecan be no assurance that we will be able to compete successfully in the future.

The semiconductor industry is subject to significant downturns that have harmed our business, financialcondition and results of operations in the past and may do so in the future. The semiconductor industry is highlycyclical and is characterized by constant and rapid technological change, rapid product obsolescence and pricedeclines, evolving standards, short product life cycles and wide fluctuations in product supply and demand. Theindustry has experienced significant downturns, often in connection with, or in anticipation of, maturing productcycles of both semiconductor companies’ and their customers’ products and declines in general economicconditions. These downturns have been characterized by reduced product demand, production overcapacity, highinventory levels and accelerated declines in selling prices. For example, the flash memory industry experiencedexcess supply and a rapid decline in prices in the first half of fiscal year 2007 and industry analysts expect this to

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occur again in the first quarter of fiscal year 2008. We have experienced these conditions in our business in the pastand may experience such downturns in the future.

Our business and the markets we address are subject to significant fluctuations in supply and demand and ourcommitments to our flash ventures with Toshiba may result in periods of significant excess inventory. The start ofproduction at Fab 4 at the end of fiscal year 2007 has further increased our captive supply. Our obligation topurchase 50% of the supply from the flash ventures with Toshiba could harm our business and results of operationsif our committed supply exceeds demand for our products. The adverse effects could include, among other things,significant decreases in our product prices, and significant excess, obsolete or lower of cost or market inventorywrite-downs, which would harm our gross margins and could result in the impairment of our investments in the flashventures with Toshiba. These effects could be magnified if the new memory wafer fab with Toshiba is completedand commences production. For example, product gross margin decreased to 21.8% for the year endedDecember 30, 2007 compared to 31.0% for the year ended December 31, 2006, in part due to significant decreasesin our product prices. Any future excess supply or price declines in excess of cost declines could have a materialadverse effect on our business, financial condition and results of operations.

We depend on third-party foundries for silicon supply and any disruption or shortage in our supply from thesesources will reduce our revenues, earnings and gross margins. All of our flash memory products require siliconsupply for the memory and controller components. The substantial majority of our flash memory is currentlysupplied by the flash ventures with Toshiba and to a lesser extent by Samsung and Hynix. Any disruption or shortagein supply of flash memory from our captive or non-captive sources would harm our operating results. The risks ofsupply disruption are magnified at Toshiba’s Yokkaichi, Japan operations, where the flash ventures with Toshiba areoperated and Toshiba’s foundry capacity is located. Earthquakes and power outages have resulted in production linestoppage and loss of wafers in Yokkaichi and similar stoppages and losses may occur in the future. For example, inthe first quarter of fiscal year 2006, a brief power outage occurred at Fab 3, which resulted in a loss of wafers andsignificant costs associated with bringing the fab back on line. In addition, the Yokkaichi location is often subject toearthquakes, which could result in production stoppage, a loss of wafers and the incurrence of significant costs.Moreover, Toshiba’s employees that produce the flash ventures with Toshiba’s products are covered by collectivebargaining agreements and any strike or other job action by those employees could interrupt our wafer supply forthe flash ventures with Toshiba. Furthermore, if the Fab 4 production ramp is delayed or not completed, we fail toenter into definitive agreements for the new memory wafer fab with Toshiba, fail to commence production at thenew memory wafer fab as planned, we fail to make timely investments in future capacity additions, or our non-captive sources fail to supply wafers in the amounts and at the times we expect, we may not have sufficient supply tomeet demand and our operating results could be harmed.

Currently, our controller wafers are manufactured by Tower, UMC, TSMC and SMIC. The Tower fabricationfacility, from which we source controller wafers, is continuing to face financial challenges and is located in Israel,an area of political and military turmoil. Any disruption in the manufacturing operations of Tower or one of ourother controller wafer vendors would result in delivery delays, adversely affect our ability to make timely shipmentsof our products and harm our operating results until we could qualify an alternate source of supply for our controllerwafers, which could take several quarters to complete. In times of significant growth in global demand for flashmemory, demand from our customers may outstrip the supply of flash memory and controllers available to us fromour current sources. If our silicon vendors are unable to satisfy our requirements on competitive terms or at all, wemay lose potential sales and our business, financial condition and operating results may suffer. Any disruption ordelay in supply from our silicon sources could significantly harm our business, financial condition and results ofoperations.

If actual manufacturing yields are lower than our expectations, this may result in increased costs and productshortages. The fabrication of our products requires wafers to be produced in a highly controlled and ultra cleanenvironment. Semiconductor manufacturing yields and product reliability are a function of both design technologyand manufacturing process technology and production delays may be caused by equipment malfunctions, fab-rication facility accidents or human errors. Yield problems may not be identified or improved until an actual productis made and can be tested. As a result, yield problems may not be identified until the wafers are well into theproduction process. We have from time-to-time experienced yields that have adversely affected our business andresults of operations. We have experienced adverse yields on more than one occasion when we have transitioned to

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new generations of products. If actual yields are low, we will experience higher costs and reduced product supply,which could harm our business, financial condition and results of operations. For example, if the production rampand/or yield of 56-nanometer X3 technology wafers and 43-nanometer X2 technology wafers do not increase asexpected in fiscal year 2008, we may not have enough supply to meet demand and our cost competitiveness,business, financial condition and results of operations will be harmed.

We depend on our third-party subcontractors and our business could be harmed if our subcontractors do notperform as planned. We rely on third-party subcontractors for much of our wafer testing, IC assembly, packagedtesting, product assembly, product testing and order fulfillment. From time-to-time, our subcontractors haveexperienced difficulty meeting our requirements. If we are unable to increase the capacity of our currentsubcontractors or qualify and engage additional subcontractors, we may not be able to meet demand for ourproducts. We do not have long-term contracts with our existing subcontractors nor do we expect to have long-termcontracts with any new subcontract suppliers. We do not have exclusive relationships with any of our subcon-tractors, and therefore, cannot guarantee that they will devote sufficient resources to manufacturing our products.We are not able to directly control product delivery schedules. Furthermore, we manufacture on a turnkey basis withsome of our subcontract suppliers. In these arrangements, we do not have visibility and control of their inventoriesof purchased parts necessary to build our products or of the progress of our products through their assembly line.Any significant problems that occur at our subcontractors, or their failure to perform at the level we expect, couldlead to product shortages or quality assurance problems, either of which would have adverse effects on ouroperating results.

We have commenced production at a captive assembly and test manufacturing facility in China. Wecommenced production at our captive assembly and test manufacturing facility in the Zizhu Science-Based Parknear Shanghai, China in the third quarter of fiscal year 2007. We expect to continue to depend on our third-partysubcontractors for the majority of our test and assembly needs; however, any delays or interruptions in theproduction ramp or targeted yields or any quality issues at our captive facility could harm our results of operationsand financial condition.

In transitioning to new processes, products and silicon sources, we face production and market acceptancerisks that may cause significant product delays, cost overruns or performance issues that could harm our business.Successive generations of our products have incorporated semiconductors with greater memory capacity per chip.The transition to new generations of products, such as products containing 43-nanometer X2 technology or56-nanometer X3 technology, is highly complex and requires new controllers, new test procedures and modifi-cations of numerous aspects of manufacturing, as well as extensive qualification of the new products by both us andour OEM customers. There can be no assurance that this transition or future technology transitions will occur onschedule or at the yields or costs that we anticipate. If Flash Partners or Flash Alliance encounters difficulties intransitioning to new technologies, our cost per megabyte may not remain competitive with the costs achieved byother flash memory producers. Any material delay in a development or qualification schedule could delay deliveriesand adversely impact our operating results. We periodically have experienced significant delays in the developmentand volume production ramp-up of our products. Similar delays could occur in the future and could harm ourbusiness, financial condition and results of operations.

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 warrantyclaims and litigation. Our products are complex, must meet stringent user requirements, may contain errors ordefects and the majority of our products are warrantied for one to five years. Errors or defects in our products may becaused by, among other things, errors or defects in the memory or controller components, including components weprocure from non-captive sources. In addition, in fiscal year 2007, approximately 95% of our NAND memorypurchases were from our captive flash ventures with Toshiba and if the wafers contain errors or defects, our overallsupply could be adversely affected. These factors could result in the rejection of our products, damage to ourreputation, lost revenues, diverted development resources, increased customer service and support costs andwarranty claims and litigation. We record an allowance for warranty and similar costs in connection with sales ofour products, but actual warranty and similar costs may be significantly higher than our recorded estimate and resultin an adverse effect on our results of operations and financial condition.

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Our new products have from time-to-time been introduced with design and production errors at a rate higherthan the error rate in our established products. We must estimate warranty and similar costs for new productswithout historical information and actual costs may significantly exceed our recorded estimates. Underestimationof our warranty and similar costs would have an adverse effect on our results of operations and financial condition.

We and Toshiba plan to continue to expand the wafer fabrication capacity of the Flash Alliance businessventure as well as form a new venture, for which we will make substantial capital investments, which couldadversely impact our operating results. We and Toshiba commenced manufacturing at Fab 4 in September 2007,and together we intend to continue to make substantial investments in new capital assets to expand the waferfabrication capacity of Fab 4 to 210,000 wafers per month. We expect to invest over $4 billion for our share inequipping and expanding Fab 4. In addition, we and Toshiba signed a non-binding memorandum of understandingfor a new memory wafer fab in Japan and target production start-up in 2010. Our significant investments inmanufacturing capacity may require us to obtain and guarantee capital equipment leases and use available cash,which could otherwise be used for other corporate purposes. Moreover, each time that we and Toshiba addsubstantial new wafer fabrication capacity, we will experience significant initial design and development andstart-up costs as a result of the delay between the time of the investment and the time qualified products aremanufactured and sold in volume quantities. For several quarters, we will incur initial design and development costsand start-up costs which will increase our expenses and reduce our gross margins. In addition, if we are ultimatelyunable to utilize our full share of the expanded output, we would be faced with excess inventory and potentialimpairment of our investments. Any excess inventory or investment impairment would negatively impact our grossmargins, results of operations and financial condition.

We have an investment of approximately $159 million in 200-millimeter wafer manufacturing assets that weexpect will no longer be cost effective in fiscal year 2008. Through the FlashVision venture with Toshiba, we havean investment of approximately $159 million in 200-millimeter wafer manufacturing assets. We believe that infiscal year 2008, NAND produced on 200-millimeter wafers will no longer be cost effective for our products and, asa result, we expect to dispose of our 200-millimeter wafer manufacturing assets during fiscal year 2008. In thefourth quarter of fiscal year 2007, we recorded a $10 million impairment charge related to our equity investment inFlashVision. We are currently in negotiations with Toshiba regarding the future of the FlashVision venture whichmay include Toshiba purchasing our shares, sale and distribution of the venture’s equipment and underlying assetsor a combination thereof. The impairment charge is based upon the expected outcome of these negotiations andrelated cash flows. There can be no assurance of a positive outcome to these negotiations and we may be required torecord additional impairment charges.

We have a contingent indemnification obligation and guarantee obligations related to the flash ventures withToshiba. Toshiba has guaranteed FlashVision’s lease arrangement with third-party lessors. The total minimumremaining lease payments as of December 30, 2007 were 3.6 billion Japanese yen, or approximately $32 millionbased upon the exchange rate at December 30, 2007. If Toshiba makes payments under its guarantee, we haveagreed to indemnify Toshiba for 49.9% of its costs, subject to certain limitations and exclusions.

From fiscal year 2004 through December 30, 2007, Flash Partners entered into and drew down five equipmentmaster lease facilities totaling approximately 275.0 billion Japanese yen, or approximately $2.44 billion based uponthe exchange rate at December 30, 2007, of which 220.0 billion Japanese yen, or approximately $1.95 billion basedupon the exchange rate at December 30, 2007, net of accumulated lease payments, were outstanding at Decem-ber 30, 2007. As of December 30, 2007, our cumulative guarantee under these equipment leases, net of cumulativelease payments, was approximately 110.0 billion Japanese yen, or approximately $974 million based on theexchange rate at December 30, 2007.

In fiscal year 2007, Flash Alliance entered into an equipment master lease facility totaling approximately100.0 billion Japanese yen, or approximately $886 million based upon the exchange rate at December 30, 2007, ofwhich 30.0 billion Japanese yen, or approximately $266 million based upon the exchange rate at December 30,2007, was drawn and outstanding at December 30, 2007. As of December 30, 2007, our cumulative guarantee underthis equipment lease was approximately 15.0 billion Japanese yen, or approximately $133 million based on theexchange rate at December 30, 2007. In addition, on February 19, 2008, Flash Alliance drew down on the 100 billionJapanese yen master lease agreement an additional 30 billion Japanese yen, or approximately $133 million based on

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the exchange rate at December 30, 2007. These leases contain numerous default clauses which, if triggered, couldcause us to repay the amounts due under our guarantees.

We and Toshiba have also agreed to mutually contribute to, and indemnify each other, Flash Partners and FlashAlliance for environmental remediation costs or liability resulting from Flash Partners’ and Flash Alliance’smanufacturing operations in certain circumstances. In addition, we and Toshiba entered into a Patent Indemni-fication Agreement under which in certain cases we may share in the expenses associated with the defense and costof settlement associated with such claims. This agreement provides limited protection for us against third-partyclaims that NAND flash memory products manufactured and sold by Flash Partners or Flash Alliance infringe third-party patents.

None of the foregoing obligations are reflected as liabilities on our Consolidated Balance Sheets. If we have toperform our obligations under these agreements, our business will be harmed and our financial condition and resultsof operations will be adversely affected.

Seasonality in our business may result in our inability to accurately forecast our product purchase require-ments. Sales of our products in the consumer electronics market are subject to seasonality. For example, sales havetypically increased significantly in the fourth quarter of each fiscal year, sometimes followed by significant declinesin the first quarter of the following fiscal year. This seasonality was particularly pronounced in the fourth quarter offiscal year 2006 and the first quarter of fiscal year 2007 during which we experienced a larger than averagesequential increase in retail unit sales in the fourth quarter of fiscal year 2006, followed by a larger than averagesequential decrease in retail unit sales in the first quarter of fiscal year 2007. We may experience the sameseasonality between the fourth quarter of fiscal year 2007 and the first quarter of fiscal year 2008. This seasonalitymay become even more pronounced if we increase the mix of our sales coming from consumer products such as ourSansa digital audio players. This seasonality makes it more difficult for us to forecast our business. If our forecastsare inaccurate, we may lose market share or procure excess inventory or inappropriately increase or decrease ouroperating expenses, any of which could harm our business, financial condition and results of operations. Thisseasonality also may lead to higher volatility in our stock price, the need for significant working capital investmentsin receivables and inventory and our need to build inventory levels in advance of our most active selling seasons.

From time-to-time, we overestimate our requirements and build excess inventory, or underestimate ourrequirements and have a shortage of supply, either of which harm our financial results. The majority of ourproducts are sold into consumer markets, which are difficult to accurately forecast. Also, a substantial majority ofour quarterly sales are from orders received and fulfilled in that quarter. Additionally, we depend upon timelyreporting from our retail and distributor customers as to their inventory levels and sales of our products in order toforecast demand for our products. We have in the past significantly over-forecasted or under-forecasted actualdemand for our products. The failure to accurately forecast demand for our products will result in lost sales orexcess inventory, both of which will have an adverse effect on our business, financial condition and results ofoperations. In addition, at times inventory may increase in anticipation of increased demand or as captive wafercapacity ramps. If demand does not materialize, we may be forced to write-down excess inventory which may harmour financial condition and results of operations.

Under conditions of tight flash memory supply, we may be unable to adequately increase our productionvolumes or secure sufficient supply in order to maintain our market share. If we are unable to maintain market share,our results of operations and financial condition could be harmed. Conversely, during periods of excess supply in themarket for our flash memory products, we may lose market share to competitors who aggressively lower their pricesand we may be forced to write-down inventory, which is in excess of forecasted demand or must be sold below cost.If we lose market share due to price competition or we must write-down inventory, our results of operations andfinancial condition could be harmed.

Our ability to respond to changes in market conditions from our forecast is limited by our purchasingarrangements with our silicon sources. Some of these arrangements provide that the first three months of our rollingsix-month projected supply requirements are fixed and we may make only limited percentage changes in the secondthree months of the period covered by our supply requirement projections.

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We have some non-silicon components which have long lead times requiring us to place orders several monthsin advance of our anticipated demand. The extended period of time to secure these long lead time parts increases ourrisk that forecasts will vary substantially from actual demand, which could lead to excess inventory or loss of sales.

We are sole-sourced for a number of our critical components and the absence of a back-up supplier exposes oursupply chain to unanticipated disruptions. We rely on our vendors, some of which are a sole source of supply, formany of our critical components, such as certain controllers for our CompactFlash and USB products. We do nothave long-term supply agreements with most of these vendors. Our business, financial condition and operatingresults could be significantly harmed by delays or reductions in shipments if we are unable to obtain sufficientquantities of these components or develop alternative sources of supply.

Our global operations and operations at the flash ventures with Toshiba and third-party subcontractors aresubject to risks for which we may not be adequately insured. Our global operations are subject to many risksincluding errors and omissions, infrastructure disruptions, such as large-scale outages or interruptions of servicefrom utilities or telecommunications providers, supply chain interruptions, third-party liabilities and fires or naturaldisasters. No assurance can be given that we will not incur losses beyond the limits of, or outside the scope of,coverage of our insurance policies. From time-to-time, various types of insurance have not been available oncommercially acceptable terms or, in some cases, have been unavailable. We cannot assure you that in the future wewill be able to maintain existing insurance coverage or that premiums will not increase substantially. We maintainlimited insurance coverage and in some cases no coverage for natural disasters and sudden and accidentalenvironmental damages as these types of insurance are sometimes not available or available only at a prohibitivecost. Accordingly, we may be subject to an uninsured or under-insured loss in such situations. We depend uponToshiba to obtain and maintain sufficient property, business interruption and other insurance for the flash ventureswith Toshiba. If Toshiba fails to do so, we could suffer significant unreimbursable losses, and such failure could alsoput the flash ventures with Toshiba in breach of various financing covenants. In addition, we insure against propertyloss and business interruption resulting from the risks incurred at our third-party subcontractors; however, we havelimited control as to how those sub-contractors run their operations and manage their risks, and as a result we maynot be adequately insured.

We are exposed to significant risk from foreign currency fluctuations. Our purchases of NAND flash memoryfrom the flash ventures with Toshiba and our investments in, and other transactions related to, those ventures aredenominated in Japanese yen. In recent months, the Japanese yen has appreciated relative to the U.S. dollar and thiswill increase our costs of NAND flash wafers. Further, most of our products are manufactured in China andsignificant fluctuations in Chinese renminbi, or RMB, could increase our product costs. We expect over time toincrease the percentage of our sales denominated in currencies other than the U.S. dollar. Management of foreignexchange exposures is complex and we do not currently hedge many of these exposures. If we do not successfullymanage our foreign exchange exposures, our business, results of operations and financial condition could beharmed.

We may be unable to protect our intellectual property rights, which would harm our business, financialcondition and results of operations. We rely on a combination of patents, trademarks, copyright and trade secretlaws, confidentiality procedures and licensing arrangements to protect our intellectual property rights. In the past,we have been involved in significant and expensive disputes regarding our intellectual property rights and those ofothers, including claims that we may be infringing third-parties’ patents, trademarks and other intellectual propertyrights. We expect that we may be involved in similar disputes in the future.

We cannot assure you that:

• 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 rightsand potential commercial advantage; or

• any of our products or technologies do not infringe on the patents of other companies.

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In addition, our competitors may be able to design their products around our patents and other proprietaryrights. We also have patent cross-license agreements with several of our leading competitors. Under theseagreements, we have enabled competitors to manufacture and sell products that incorporate technology coveredby our patents. While we obtain license and royalty revenue or other consideration for these licenses, if we continueto license our patents to our competitors, competition may increase and may harm our business, financial conditionand results of operations.

There are both flash memory producers and flash memory card manufacturers who we believe may require alicense from us. Enforcement of our rights often requires litigation. If we bring a patent infringement action and arenot successful, our competitors would be able to use similar technology to compete with us. Moreover, thedefendant in such an action may successfully countersue us for infringement of their patents or assert a counterclaimthat our patents are invalid or unenforceable. If we do not prevail in the defense of patent infringement claims, wecould be required to pay substantial damages, cease the manufacture, use and sale of infringing products, expendsignificant resources to develop non-infringing technology, discontinue the use of specific processes or obtainlicenses to the infringing technology.

On October 24, 2007, we initiated two patent infringement actions in the United States District Court for theWestern District of Wisconsin and one action in the United States International Trade Commission against25 companies that manufacture, sell and import USB flash drives, CompactFlash cards, multimedia cards, MP3/media players and/or other removable flash storage products. There can be no assurance that we will be successfulin this litigation or that we will not face counterclaims of the nature described above.

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 usfrom selling products. If we incorporate third-party technology into our products or if we are found to infringeothers’ intellectual property, we could be required to license intellectual property from a third party. We may alsoneed to license some of our intellectual property to others in order to enable us to obtain important cross-licenses tothird-party patents. We cannot be certain that licenses will be offered when we need them, that the terms offered willbe acceptable, or that these licenses will help our business. If we do obtain licenses from third parties, we may berequired to pay license fees or royalty payments. In addition, if we are unable to obtain a license that is necessary tomanufacture our products, we could be required to suspend the manufacture of products or stop our productsuppliers from using processes that may infringe the rights of third parties. We may not be successful in redesigningour products, or the necessary licenses may not be available under reasonable terms. Our license and royaltyrevenues comprise the majority of our cash provided by operating activities. For the year ended December 30, 2007license revenue was $450 million, or approximately 12% of our total revenue. If our existing licensees do not renewtheir licenses upon expiration and we are not successful in signing new licensees in the future, our license revenue,profitability, and cash provided by operating activities would be adversely impacted. For example, our currentlicense agreement with Samsung expires in August 2009, and to the extent that we are unable to renew thisagreement under similar terms or if we are unable to renew at all, our financial results may be adversely impacted,and we may incur additional patent litigation costs to renew Samsung as a licensee.

We are currently and may in the future be involved in litigation, including litigation regarding our intellectualproperty rights or those of third parties, which may be costly, may divert the efforts of our key personnel and couldresult in adverse court rulings, which could materially harm our business. We are involved in a number oflawsuits, including among others, several cases involving our patents and the patents of third parties. We are theplaintiff in some of these actions and the defendant in other of these actions. Some of the actions seek injunctionsagainst the sale of our products and/or substantial monetary damages, which if granted or awarded, could have amaterial adverse effect on our business, financial condition and results of operations.

We and other companies have been sued in the United States District Court of the Northern District ofCalifornia in purported consumer class actions alleging a conspiracy to fix, raise, maintain or stabilize the pricing offlash memory, and concealment thereof, in violation of state and federal laws. The lawsuits purport to be on behalfof classes of purchasers of flash memory. The lawsuits seek restitution, injunction and damages, including trebledamages, in an unspecified amount.

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In addition, in September 2007, we and Dr. Eli Harari, our founder, chairman and chief executive officer,received grand jury subpoenas issued from the United States District Court for the Northern District of Californiaindicating a Department of Justice investigation into possible antitrust violations in the NAND flash memoryindustry. We also received a notice from the Canadian Competition Bureau that the Bureau has commenced anindustry-wide investigation with respect to alleged anti-competitive activity regarding the conduct of companiesengaged in the supply of NAND flash memory chips to Canada and requesting that we preserve any records relevantto such investigation. We intend to cooperate in these investigations. We are unable to predict the outcome of theselawsuits and investigations. The cost of discovery and defense in these actions as well as the final resolution of thesealleged violations of antitrust laws could result in significant liability and may harm our business, financialcondition and results of operations. For additional information concerning these proceedings, see Item 3, “LegalProceedings.”

Litigation is subject to inherent risks and uncertainties that may cause actual results to differ materially fromour expectations. Factors that could cause litigation results to differ include, but are not limited to, the discovery ofpreviously unknown facts, changes in the law or in the interpretation of laws, and uncertainties associated with thejudicial decision-making process. If we receive an adverse judgment in any litigation, we could be required to paysubstantial damages and/or cease the manufacture, use and sale of products. Litigation, including intellectualproperty litigation, can be complex, can extend for a protracted period of time, and can be very expensive. Litigationinitiated by us could also result in counter-claims against us, which could increase the costs associated with thelitigation and result in our payment of damages or other judgments against us. In addition, litigation may divert theefforts and attention of some of our key personnel.

We have been, and expect to continue to be, subject to claims and legal proceedings regarding allegedinfringement by us of the patents, trademarks and other intellectual property rights of third parties. Fromtime-to-time we have sued, and may in the future sue, third parties in order to protect our intellectual propertyrights. Parties that we have sued and that we may sue for patent infringement may countersue us for infringing theirpatents. If we are held to infringe the intellectual property of others, we may need to spend significant resources todevelop non-infringing technology or obtain licenses from third parties, but we may not be able to develop suchtechnology or acquire such licenses on terms acceptable to us or at all. We may also be required to pay significantdamages and/or discontinue the use of certain manufacturing or design processes. In addition, we or our supplierscould be enjoined from selling some or all of our respective products in one or more geographic locations. If we orour suppliers are enjoined from selling any of our respective products or if we are required to develop newtechnologies or pay significant monetary damages or are required to make substantial royalty payments, ourbusiness would be harmed.

We may be obligated to indemnify our current or former directors or employees, or former directors oremployees of companies that we have acquired, in connection with litigation or regulatory or Department of Justiceinvestigations. These liabilities could be substantial and may include, among other things, the costs of defendinglawsuits against these individuals; the cost of defending any shareholder derivative suits; the cost of governmental,law enforcement or regulatory investigations; civil or criminal fines and penalties; legal and other expenses; andexpenses associated with the remedial measures, if any, which may be imposed.

Moreover, from time-to-time we agree to indemnify certain of our suppliers and customers for alleged patentinfringement. The scope of such indemnity varies but generally includes indemnification for direct and conse-quential damages and expenses, including attorneys’ fees. We may from time-to-time be engaged in litigation as aresult of these indemnification obligations. Third-party claims for patent infringement are excluded from coverageunder our insurance policies. A future obligation to indemnify our customers or suppliers may have a materialadverse effect on our business, financial condition and results of operations. For additional information concerninglegal proceedings, see Item 3, “Legal Proceedings.”

Because of our international business and operations, we must comply with numerous international laws andregulations, and we are vulnerable to political instability and other risks related to international operations.Currently, a large portion of our revenues is derived from our international operations, and all of our products areproduced overseas in China, Israel, Japan, South Korea and Taiwan. We are, therefore, affected by the political,economic, labor, environmental, public health and military conditions in these countries.

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For example, China does not currently have a comprehensive and highly developed legal system, particularlywith respect to the protection of intellectual property rights. This results, among other things, in the prevalence ofcounterfeit goods in China. The enforcement of existing and future laws and contracts remains uncertain, and theimplementation and interpretation of such laws may be inconsistent. Such inconsistency could lead to piracy anddegradation of our intellectual property protection. Although we engage in efforts to prevent counterfeit productsfrom entering the market, those efforts may not be successful. Our results of operations and financial conditioncould be harmed by the sale of counterfeit products.

Our international business activities could also be limited or disrupted by any of the following factors:

• the need to comply with foreign government regulation;

• changes in diplomatic and trade relationships;

• reduced sales to our customers or interruption to our manufacturing processes in the Pacific Rim that mayarise from regional issues in Asia;

• imposition of regulatory requirements, tariffs, import and export restrictions and other barriers andrestrictions;

• 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. Tower supplies a significant portion of ourcontroller wafers from its Fab 2 facility and is currently a sole source of supply for some of our controllers.Tower’s Fab 2 is operational and in the process of expanding capacity and our ability to continue to obtain sufficientsupply on a cost-effective basis may be dependent upon completion of this capacity expansion. Tower’s continuedexpansion of Fab 2 requires sufficient funds to operate in the short-term and raising the funds required to implementthe current ramp-up plan. If Tower fails to comply with the financial ratios and covenants contained in the amendedcredit facility agreement with its banks, fails to attract additional customers, fails to operate its Fab 2 facility in acost-effective manner, fails to secure additional financing, fails to meet the conditions to receive government grantsand tax benefits approved for Fab 2, or fails to obtain the approval of the Israeli Investment Center for a newexpansion program, Tower’s continued operations could be at risk. If this occurs, we will be forced to source ourcontrollers from another supplier and our business, financial condition and results of operations may be harmed.Specifically, our ability to supply a number of products would be disrupted until we were able to transitionmanufacturing and qualify a new foundry with respect to controllers that are currently sole sourced at Tower, whichcould take three or more quarters to complete.

As of December 30, 2007, we have recognized cumulative losses of approximately $55.4 million as a result ofthe other-than-temporary decline in the value of our investment in Tower ordinary shares, $12.2 million as a result ofthe impairment in value on our prepaid wafer credits and $1.3 million of losses on our warrant to purchase Towerordinary shares. We are subject to certain regulations or restrictions on the transfer of our approximately14.1 million Tower ordinary shares. It is possible that we will record further write-downs of our investment,which was carried on our consolidated balance sheet at $20.1 million at December 30, 2007, which would harm ourresults of operations and financial condition.

Our stock price has been, and may continue to be, volatile, which could result in investors losing all or part oftheir investments. The market price of our stock has fluctuated significantly in the past and may continue tofluctuate in the future. We believe that such fluctuations will continue as a result of many factors, including futureannouncements concerning us, our competitors or our principal customers regarding financial results or expec-tations, technological innovations, industry supply or demand dynamics, new product introductions, governmental

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regulations, the commencement or results of litigation or changes in earnings estimates by analysts. In addition, inrecent years the stock market has experienced significant price and volume fluctuations and the market prices of thesecurities of high technology and semiconductor companies have been especially volatile, often for reasons outsidethe control of the particular companies. These fluctuations as well as general economic, political and marketconditions may have an adverse affect on the market price of our common stock as well as the price of ouroutstanding convertible notes and could impact the likelihood of those notes being converted into our commonstock, which would cause further dilution to our stockholders.

We may engage in business combinations that are dilutive to existing stockholders, result in unanticipatedaccounting charges or otherwise adversely affect our results of operations, and result in difficulties in assimilatingand integrating the operations, personnel, technologies, products and information systems of acquired companiesor businesses. We continually evaluate and explore strategic opportunities as they arise, including businesscombinations, strategic partnerships, collaborations, capital investments and the purchase, licensing or sale ofassets. If we issue equity securities in connection with an acquisition, the issuance may be dilutive to our existingstockholders. Alternatively, acquisitions made entirely or partially for cash would reduce our cash reserves.

Acquisitions may require significant capital infusions, typically entail many risks and could result indifficulties in assimilating and integrating the operations, personnel, technologies, products and informationsystems of acquired companies. We may experience delays in the timing and successful integration of acquiredtechnologies and product development through volume production, unanticipated costs and expenditures, changingrelationships with customers, suppliers and strategic partners, or contractual, intellectual property or employmentissues. In addition, key personnel of an acquired company may decide not to work for us. The acquisition of anothercompany or its products and technologies may also result in our entering into a geographic or business market inwhich we have little or no prior experience. These challenges could disrupt our ongoing business, distract ourmanagement and employees, harm our reputation, subject us to an increased risk of intellectual property and otherlitigation and increase our expenses. These challenges are magnified as the size of the acquisition increases, and wecannot assure you that we will realize the intended benefits of any acquisition. Acquisitions may require large one-time charges and can result in increased debt or contingent liabilities, adverse tax consequences, substantialdepreciation or deferred compensation charges, the amortization of identifiable purchased intangible assets orimpairment of goodwill, any of which could have a material adverse effect on our business, financial condition orresults of operations.

Mergers and acquisitions of high-technology companies are inherently risky and subject to many factorsoutside of our control, and no assurance can be given that our previous or future acquisitions will be successful andwill not materially adversely affect our business, operating results, or financial condition. Failure to manage andsuccessfully integrate acquisitions could materially harm our business and operating results. Even when an acquiredcompany has already developed and marketed products, there can be no assurance that such products will besuccessful after the closing, will not cannibalize sales of our existing products, that product enhancements will bemade in a timely fashion or that pre-acquisition due diligence will have identified all possible issues that might arisewith respect to such company. Failed business combinations, or the efforts to create a business combination, canalso result in litigation.

Our success depends on our key personnel, including our executive officers, the loss of whom could disrupt ourbusiness. Our success greatly depends on the continued contributions of our senior management and other keyresearch and development, sales, marketing and operations personnel, including Dr. Eli Harari, our founder,chairman and chief executive officer. We do not have employment agreements with any of our executive officersand they are free to terminate their employment with us at any time. Our success will also depend on our ability torecruit additional highly skilled personnel. We may not be successful in hiring or retaining key personnel.

Terrorist attacks, war, threats of war and government responses thereto may negatively impact our operations,revenues, costs and stock price. Terrorist attacks, U.S. military responses to these attacks, war, threats of war andany corresponding decline in consumer confidence could have a negative impact on consumer retail demand, whichis the largest channel for our products. Any of these events may disrupt our operations or those of our customers andsuppliers and may affect the availability of materials needed to manufacture our products or the means to transportthose materials to manufacturing facilities and finished products to customers. Any of these events could also

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increase volatility in the United States and world financial markets, which could harm our stock price and may limitthe capital resources available to us and our customers or suppliers, or adversely affect consumer confidence. Wehave substantial operations in Israel including a development center in Northern Israel, near the border withLebanon, areas that have recently experienced significant violence and political unrest. Tower, which supplies asignificant portion of our controller wafers, is also located in Israel. Continued turmoil and unrest in Israel or theMiddle East could cause delays in the development or production of our products. This could harm our business andresults of operations.

Natural disasters or epidemics in the countries in which we or our suppliers or subcontractors operate couldnegatively impact our operations. Our operations, including those of our suppliers and subcontractors, areconcentrated in Milpitas, California; Yokkaichi, Japan; Hsinchu and Taichung, Taiwan; and Dongguan, Shanghaiand Shenzen, China. In the past, these areas have been affected by natural disasters such as earthquakes, tsunamis,floods and typhoons, and some areas have been affected by epidemics, such as avian flu. If a natural disaster orepidemic were to occur in one or more of these areas, our operations could be significantly impaired and ourbusiness may be harmed. This is magnified by the fact that we do not have insurance for most natural disasters,including earthquakes. This could harm our business and results of operations.

To manage our growth, we may need to improve our systems, controls, processes and procedures. We haveexperienced and may continue to experience rapid growth, which has placed, and could continue to place asignificant strain on our managerial, financial and operations resources and personnel. Our business and numberof employees have increased significantly over the last several years. We must continually enhance our operational,accounting and financial systems to accommodate the growth and increasing complexity of our business. Forexample, we have recently decided to replace our enterprise resource planning, or ERP, system. This project willrequire significant investment, the re-engineering of many processes used to run our business, and the attention ofmany employees and managers who would otherwise be focused on other aspects of our business. The design andimplementation of the new ERP system could also take longer than anticipated and put further strain on our abilityto run our business on the older, existing ERP system. Any design flaws or delays in the new ERP system or anydistraction of our workforce from competing business requirements could harm our business or results ofoperations. We must also continue to enhance our controls and procedures and workforce training. If we donot manage our growth effectively or adapt our systems, processes and procedures to our growing business andorganization, our business and results of operations could be harmed.

We may need to raise additional financing, which could be difficult to obtain, and which if not obtained insatisfactory amounts may prevent us from funding flash ventures with Toshiba or other third parties, increasing ourwafer supply, developing or enhancing our products, taking advantage of future opportunities, growing ourbusiness or responding to competitive pressures or unanticipated industry changes, any of which could harm ourbusiness. We currently believe that we have sufficient cash resources to fund our operations as well as ouranticipated investments in ventures with third parties for at least the next twelve months; however, we may in thefuture raise additional funds, including funds to meet our obligations with respect to Flash Partners and FlashAlliance, or with respect to the potential new memory wafer fab, and we cannot be certain that we will be able toobtain additional financing on favorable terms, if at all. From time-to-time, we may decide to raise additional fundsthrough public or private debt, equity or lease financings. If we issue additional equity securities, our stockholderswill experience dilution and the new equity securities may have rights, preferences or privileges senior to those ofexisting holders of common stock. If we raise funds through debt or lease financing, we will have to pay interest andmay be subject to restrictive covenants, which could harm our business. If our corporate rating is significantlydowngraded by any rating agency, it may impair the ability of our flash ventures with Toshiba to obtain futureequipment lease financings on terms consistent with current leases and would cause a default under certain currentleases, either of which could harm our business and financial condition. If we cannot raise funds on acceptableterms, if and when needed, we may not be able to develop or enhance our products, fulfill our obligations to FlashPartners and Flash Alliance, take advantage of future opportunities, grow our business or respond to competitivepressures or unanticipated industry changes, any of which could have a negative impact on our business.

Anti-takeover provisions in our charter documents, stockholder rights plan and in Delaware law coulddiscourage or delay a change in control and, as a result, negatively impact our stockholders. We have taken anumber of actions that could have the effect of discouraging a takeover attempt. For example, we have a

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stockholders’ rights plan that would cause substantial dilution to a stockholder, and substantially increase the costpaid by a stockholder, who attempts to acquire us on terms not approved by our board of directors. This coulddiscourage an acquisition of us. In addition, our certificate of incorporation grants our board of directors theauthority to fix the rights, preferences and privileges of and issue up to 4,000,000 shares of preferred stock withoutstockholder action (2,000,000 of which have already been reserved under our stockholder rights plan). Issuingpreferred stock could have the effect of making it more difficult and less attractive for a third party to acquire amajority of our outstanding voting stock. Preferred stock may also have other rights, including economic rightssenior to our common stock that could have a material adverse effect on the market value of our common stock. Inaddition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law.This section provides that a corporation may not engage in any business combination with any interestedstockholder during the three-year period following the time that a stockholder became an interested stockholder.This provision could have the effect of delaying or discouraging a change of control of SanDisk.

Unanticipated changes in our tax provisions or exposure to additional income tax liabilities could affect ourprofitability. We are subject to income tax in the United States and numerous foreign jurisdictions. Our taxliabilities are affected by the amounts we charge for inventory, services, licenses, funding and other items inintercompany transactions. We are subject to ongoing tax audits in various jurisdictions. Tax authorities maydisagree with our intercompany charges or other matters and assess additional taxes. We regularly assess the likelyoutcomes of these audits in order to determine the appropriateness of our tax provision. However, there can be noassurance that we will accurately predict the outcomes of these audits, and the actual outcomes of these audits couldhave a material impact on our net income or financial condition. In addition, our effective tax rate in the future couldbe adversely affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in thevaluation of deferred tax assets and liabilities, changes in tax laws, and the discovery of new information in thecourse of our tax return preparation process. In particular, the carrying value of deferred tax assets, which arepredominantly in the United States, is dependent on our ability to generate future taxable income in theUnited States. Any of these changes could affect our profitability. Declining product margins can cause reducedprofits in our manufacturing entities which are primarily located in relatively low tax rate jurisdictions. Continuedproduct margin declines could have a material adverse impact on our effective tax rate. Furthermore, our taxprovisions could be adversely affected as a result of any further interpretative accounting guidance related toaccounting for uncertain tax positions.

We may be subject to risks associated with environmental regulations. Production and marketing of productsin certain states and countries may subject us to environmental and other regulations including, in some instances,the responsibility for environmentally safe disposal or recycling. Such laws and regulations have recently beenpassed in several jurisdictions in which we operate, including Japan and certain states within the United States.Although we do not anticipate any material adverse effects in the future based on the nature of our operations andthe focus of such laws, there is no assurance such existing laws or future laws will not have a material adverse effecton our financial condition, liquidity or results of operations.

In the event we are unable to satisfy regulatory requirements relating to internal controls, or if our internalcontrols over financial reporting are not effective, our business could suffer. In connection with our certificationprocess under Section 404 of Sarbanes-Oxley, we have identified in the past and will from time-to-time identifydeficiencies in our internal control over financial reporting. We cannot assure you that individually or in theaggregate these deficiencies would not be deemed to be a material weakness. Furthermore, we may not be able toimplement enhancements on a timely basis, including any enhancements necessary to integrate msystemsoperations, in order to prevent a failure of our internal controls or enable us to furnish future unqualifiedcertifications. A material weakness or deficiency in internal control over financial reporting could materiallyimpact our reported financial results and the market price of our stock could significantly decline. Additionally,adverse publicity related to the disclosure of a material weakness or deficiency in internal controls could have anegative impact on our reputation, business and stock price. Any internal control or procedure, no matter how welldesigned and operated, can only provide reasonable assurance of achieving desired control objectives and cannotprevent intentional misconduct or fraud.

Our debt service obligations may adversely affect our cash flow. While the 1% Senior Convertible Notes due2013 and the 1% Convertible Notes due 2035 are outstanding, we are obligated to pay to the holders thereof

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approximately $12.3 million per year in interest. If we issue other debt securities in the future, our debt serviceobligations will increase. If we are unable to generate sufficient cash to meet these obligations and must instead useour existing cash or investments, we may have to reduce, curtail or terminate other business activities. We intend tofulfill our debt service obligations from cash generated by our operations, if any, and from our existing cash andinvestments. Our indebtedness could have significant negative consequences.

For example, it could:

• increase our vulnerability to general adverse economic and industry conditions;

• limit our ability to obtain additional financing;

• require the dedication of a substantial portion of any cash flow from operations to the payment of principalof, and interest on, our indebtedness, thereby reducing the availability of such cash flow to fund our growthstrategy, 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% SeniorConvertible Notes due 2013 may be subject to change. The Financial Accounting Standards Board, or FASB,issued a proposed FASB Staff Position (“FSP”) No. APB 14-a, Accounting for Convertible Debt Instruments ThatMay Be Settled in Cash Upon Conversion (Including Partial Cash Settlement). The proposed accounting method fornet share settled convertible securities would be to bifurcate and account for the net settled convertible securities asif they were a separate debt and equity security. In November 2007, the FASB announced it is expected to begin itsredeliberations of the proposed FSP in February 2008. Therefore, final guidance will not be issued until at least theend of the first quarter of 2008, and earlier application would not be permitted. The guidance in the proposed FSPwould be applied retrospectively to all periods presented. While the proposed FSP has not yet been finalized by theFASB, our initial estimate based upon the current interpretations by the FASB, is that we would be required to reportan additional before tax, non-cash interest expense of approximately $400 million over the life of the 1% SeniorConvertible Notes due 2013, including approximately $50 million to $55 million in fiscal 2008. However, theseamounts are subject to material changes based upon finalization of the proposed FSP. These impacts couldadversely affect our financial results, the trading price of our common stock and negatively impact the trading priceof the notes.

We have significant financial obligations related to our flash ventures with Toshiba, which could impact ourability to comply with our obligations under our 1% Senior Convertible Notes due 2013 and our 1% ConvertibleNotes due 2035. We have entered into agreements to guarantee, indemnify or provide financial support withrespect to lease and certain other obligations of the flash ventures with Toshiba in which we have a 49.9% ownershipinterest. In addition, we may enter into future agreements to increase manufacturing capacity, including theexpansion of Fab 4. As of December 30, 2007, we had indemnification and guarantee obligations for these venturesof approximately $1.14 billion. As of December 30, 2007, we had unfunded commitments of approximately$1.8 billion to fund our various obligations under the Flash Partners and Flash Alliance ventures with Toshiba. Dueto these and our other commitments, we may not have sufficient funds to make payments under or repurchase thenotes.

The net share settlement feature of the 1% Senior Convertible Notes due 2013 may have adverse consequences.The 1% Senior Convertible Notes due 2013 are subject to net share settlement, which means that we will satisfy ourconversion obligation to holders by paying cash in settlement of the lesser of the principal amount and theconversion value of the 1% Senior Convertible Notes due 2013 and by delivering shares of our common stock insettlement of any and all conversion obligations in excess of the daily conversion values.

Our failure to convert the 1% Senior Convertible Notes due 2013 into cash or a combination of cash andcommon stock upon exercise of a holder’s conversion right in accordance with the provisions of the indenture wouldconstitute a default under the indenture. We may not have the financial resources or be able to arrange for financingto pay such principal amount in connection with the surrender of the 1% Senior Convertible Notes due 2013 forconversion. While we currently only have debt related to the 1% Senior Convertible Notes due 2013 and the

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1% Convertible Notes due 2035 and we do not have other agreements that would restrict our ability to pay theprincipal amount of the 1% Senior Convertible Notes due 2013 in cash, we may enter into such an agreement in thefuture, which may limit or prohibit our ability to make any such payment. In addition, a default under the indenturecould lead to a default under existing and future agreements governing our indebtedness. If, due to a default, therepayment of related indebtedness were to be accelerated after any applicable notice or grace periods, we may nothave sufficient funds to repay such indebtedness and amounts owing in respect of the conversion of any 1% SeniorConvertible Notes due 2013.

The convertible note hedge transactions and the warrant option transactions may affect the value of the notesand our common stock. We have entered into convertible note hedge transactions with Morgan Stanley & Co.International Limited and Goldman, Sachs & Co., or the dealers. These transactions are expected to reduce thepotential dilution upon conversion of the 1% Senior Convertible Notes due 2013. We used approximately$67.3 million of the net proceeds of funds received from the 1% Senior Convertible Notes due 2013 to pay thenet cost of the convertible note hedge in excess of the warrant transactions. These transactions were accounted for asan adjustment to our stockholders’ equity. In connection with hedging these transactions, the dealers or theiraffiliates:

• have entered into various over-the-counter cash-settled derivative transactions with respect to our commonstock, 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 commonstock in secondary market transactions following the pricing of the notes, including during any observationperiod related to a conversion of notes.

The dealers or their affiliates are likely to modify their hedge positions from time-to-time prior to conversion ormaturity of the notes by purchasing and selling shares of our common stock, our securities or other instruments theymay wish to use in connection with such hedging. In particular, such hedging modification may occur during anyobservation period for a conversion of the 1% Senior Convertible Notes due 2013, which may have a negative effecton the value of the consideration received in relation to the conversion of those notes. In addition, we intend toexercise options we hold under the convertible note hedge transactions whenever notes are converted. To unwindtheir hedge positions with respect to those exercised options, the dealers or their affiliates expect to sell shares of ourcommon stock in secondary market transactions or unwind various over-the-counter derivative transactions withrespect to our common stock during the observation period, if any, for the converted notes.

The effect, if any, of any of these transactions and activities on the market price of our common stock or the1% Senior Convertible Notes due 2013 will depend in part on market conditions and cannot be ascertained at thistime, but any of these activities could adversely affect the value of our common stock and the value of the 1% SeniorConvertible Notes due 2013 and, as a result, the amount of cash and the number of shares of common stock, if any,holders will receive upon the conversion of the notes.

There is pending litigation. Actions purporting to be class and derivative actions on behalf of msystems andits shareholders were filed against us and msystems prior to the closing of the merger. See Item 3, “LegalProceedings.” We may be required to expend significant resources, including management time, to defend theseactions and could be subject to damages or settlement costs related to these actions. We are responsible for liabilitiesassociated with these and any other class and derivative actions, including indemnification of directors and certainmembers of management of msystems.

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2. PROPERTIES

Our principal facilities are located in Milpitas, California. We lease four adjacent buildings comprisingapproximately 444,000 square feet. These facilities house our corporate offices, the majority of our engineeringteam, as well as a portion of our sales, marketing, operations and corporate services organizations. We occupy thisspace under lease agreements that expire in 2011 and 2013. In addition, we own two buildings comprising

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approximately 157,000 square feet located in Kfar Saba, Israel, that house administrative offices, research,development and manufacturing facilities, and we also own a vacant land plot of approximately 70,000 squarefeet adjacent to our property located in Kfar Saba, Israel, which is reserved for further expansion.

Our subsidiary, Microelectronica Espanola S.L.U., leases office and manufacturing space of approximately8,800 square feet and manufacturing space of approximately 7,000 square feet in Madrid, Spain.

In December 2006, we acquired a 50-year land lease in Shanghai, China, of approximately 653,000 square feeton which we built our advanced testing and assembly facility of approximately 363,000 square feet.

We also lease sales and marketing offices in the United States, China, France, Germany, India, Ireland, Israel,Japan, Korea, Scotland, Singapore, Spain, Sweden and Taiwan; operation support offices in Taichung, Taiwan;Hong Kong, Shanghai and Shenzhen, China; Bangalore, India; and design centers in Omer and Tefen, Israel;Edinburgh, Scotland and Madrid, Spain.

ITEM 3. LEGAL PROCEEDINGS

From time-to-time, it has been and may continue to be necessary to initiate or defend litigation against thirdparties. These and other parties could bring suit against us. In each case listed below where we are the defendant, weintend to vigorously defend the action. At this time, the Company does not believe it is reasonably possible thatlosses related to the litigation described below have occurred beyond the amounts, if any, that have been accrued.

On October 31, 2001, the Company filed a complaint for patent infringement in the United States DistrictCourt for the Northern District of California against Memorex Products, Inc. (“Memorex”), Pretec ElectronicsCorporation (“Pretec”), RITEK Corporation (“RITEK”), and Power Quotient International Co., Ltd (“PQI”). In thesuit, captioned SanDisk Corp. v. Memorex Products, Inc., et al., Civil Case No. CV 01 4063 VRW, the Companyseeks damages and injunctions against these companies from making, selling, importing or using flash memorycards that infringe its U.S. Patent No. 5,602,987. On May 6, 2003, the District Court entered a stipulated consentjudgment against PQI. The District Court granted summary judgment of non-infringement in favor of defendantsRITEK, Pretec and Memorex and entered judgment on May 17, 2004. On June 2, 2004, the Company filed a noticeof appeal of the summary judgment rulings to the United States Court of Appeals for the Federal Circuit. On July 8,2005, the Federal Circuit held in favor of the Company, vacating the judgment of non-infringement and remandingthe case back to the District Court. The District Court issued an order on claim construction on February 22, 2007.On June 29, 2007, defendant RITEK entered into a settlement agreement and cross-license with the Company. Inlight of the agreement, the Company agreed to dismiss all current patent infringement litigation against RITEK. Astipulated dismissal with prejudice between the Company and RITEK was entered on July 23, 2007. On August 30,2007, the Company entered into a settlement agreement with Memorex regarding the accused products. OnSeptember 7, 2007, in light of the settlement between the Company and Memorex, the Court entered a stipulationdismissing the Company’s claims against Memorex. On October 25, 2007, the Court Clerk entered a default againstPretec. On January 14, 2008, the Company filed a motion for default judgment against Pretec. The Court scheduleda hearing regarding the Company’s motion for April 3, 2008.

On February 20, 2004, the Company and a number of other manufacturers of flash memory products were suedin the Superior Court of the State of California for the City and County of San Francisco in a purported consumerclass action captioned Willem Vroegh et al. v. Dane-Electric Corp. USA, et al., Civil Case No. GCG 04 428953,alleging false advertising, unfair business practices, breach of contract, fraud, deceit, misrepresentation andviolation of the California Consumers Legal Remedy Act. The lawsuit purports to be on behalf of a class ofpurchasers of flash memory products and claims that the defendants overstated the size of the memory storagecapabilities of such products. The lawsuit seeks restitution, injunction and damages in an unspecified amount. Theparties have reached a settlement of the case, which received final approval from the Court on November 20, 2006.Four objectors to the settlement filed appeals from the Court’s order granting final approval. On November 30,2007, the First District of the California Court of Appeal affirmed in full the trial court’s judgment and finalapproval of the settlement. The objectors then filed petitions for the Court of Appeal to rehear the matter en banc,which petitions were denied on December 21, 2007. The objectors have now filed petitions with the CaliforniaSupreme Court, currently pending in Case No. S159760, asking the Supreme Court to review of the decision of theCourt of Appeal.

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On October 15, 2004, the Company filed a complaint for patent infringement and declaratory judgment of non-infringement and patent invalidity against STMicroelectronics N.V. and STMicroelectronics, Inc. (collectively,“ST”) in the United States District Court for the Northern District of California, captioned SanDisk Corporation v.STMicroelectronics, Inc., et al., Civil Case No. C 04 04379 JF. The complaint alleges that ST’s products infringeone of the Company’s U.S. patents, U.S. Patent No. 5,172,338 (the “’338 patent”), and also alleges that several ofST’s patents are invalid and not infringed. On June 18, 2007, the Company filed an amended complaint, removingseveral of the Company’s declaratory judgment claims. A case management conference was conducted on June 29,2007. At that conference, the parties agreed that the remaining declaratory judgment claims will be dismissed,pursuant to a settlement agreement in two matters being litigated in the Eastern District of Texas (Civil CaseNo. 4:05CV44 and Civil Case No. 4:05CV45, discussed below). The parties also agreed that the ’338 patent and asecond Company patent, presently at issue in Civil Case No. C0505021 JF (discussed below), will be litigatedtogether in this case. ST filed an answer and counterclaims on September 6, 2007. ST’s counterclaims includedassertions of antitrust violations. On October 19, 2007, the Company filed a motion to dismiss ST’s antitrustcounterclaims. On December 20, 2007, the Court entered a stipulated order staying all procedural deadlines untilthe Court resolves the Company’s motion to dismiss. On January 25, 2008, the Court held a hearing on theCompany’s motion. At the hearing, the Court converted the Company’s Motion to Dismiss into a Motion forSummary Judgment. The Court scheduled a hearing on the Company’s Motion for Summary Judgment for May 30,2008. The trial is currently scheduled for summer of 2008. This trial date, however, may be moved depending on theCourt’s ruling on the Company’s Motion for Summary Judgment.

On October 14, 2005, STMicro filed a complaint against the Company and the Company’s CEO, Dr. Eli Harari,in the Superior Court of the State of California for the County of Alameda, captioned STMicroelectronics, Inc. v.Harari, Case No. HG 05237216 (the “Harari Matter”). The complaint alleges that STMicro, as the successor toWafer Scale Integration, Inc.’s (“WSI”) legal rights, has an ownership interest in several Company patents that wereissued from applications filed by Dr. Harari, a former WSI employee. The complaint seeks the assignment or co-ownership of certain inventions and patents conceived of by Dr. Harari, including some of the patents asserted by theCompany in its litigations against STMicro, as well as damages in an unspecified amount. On November 15, 2005,Dr. Harari and the Company removed the case to the U.S. District Court for the Northern District of California,where it was assigned case number C05-04691. On December 13, 2005, STMicro filed a motion to remand the caseback to the Superior Court of Alameda County. The case was remanded to the Superior Court of Alameda County onJuly 18, 2006, after briefing and oral argument on a motion by STMicro for reconsideration of an earlier orderdenying STMicro’s request for remand. Due to the remand, the District Court did not rule upon a summaryjudgment motion previously filed by the Company. In the Superior Court of Alameda County, the Company filed aMotion to Transfer Venue to Santa Clara County on August 10, 2006, which was denied on September 12, 2006. OnOctober 6, 2006, the Company filed a Petition for Writ of Mandate with the First District Court of Appeal, whichasks that the Superior Court’s September 12, 2006 Order be vacated, and the case transferred to Santa Clara County.On October 20, 2006, the Court of Appeal requested briefing on the Company’s petition for a writ of mandate andstayed the action during the pendency of the writ proceedings. On January 17, 2007, the Court of Appeal issued analternative writ directing the Superior Court to issue a new order granting the Company’s venue transfer motion or toshow cause why a writ of mandate should not issue compelling such an order. On January 23, 2007, the SuperiorCourt of Alameda transferred the case to Santa Clara County as a result of the writ proceeding at the Court ofAppeal. The Company also filed a special motion to strike STMicro’s unfair competition claim, which the SuperiorCourt denied on September 11, 2006. The Company has appealed the denial of that motion, and the proceedings atthe Superior Court were stayed during the pendency of the appeal. On August 7, 2007, the First District Court ofAppeal affirmed the Superior Court’s decision. The California Supreme Court subsequently denied the Company’spetition for review of the Court of Appeal’s decision. The Superior Court scheduled a case management conferencefor April 10, 2008.

On December 6, 2005, the Company filed a complaint for patent infringement in the United States DistrictCourt for the Northern District of California against ST (Case No. C0505021 JF). In the suit, the Company seeksdamages and injunctions against ST from making, selling, importing or using flash memory chips or products thatinfringe the Company’s U.S. Patent No. 5,991,517 (the “’517 patent”). As discussed above, the ’517 patent will belitigated together with the ’338 patent in Civil Case No. C 04 04379JF.

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On August 7, 2006, two purported shareholder class and derivative actions, captioned Capovilla v. SanDiskCorp., No. 106 CV 068760, and Dashiell v. SanDisk Corp., No. 106 CV 068759, were filed in the Superior Court ofCalifornia in Santa Clara County, California. On August 9, 2006 and August 17, 2006, respectively, two additionalpurported shareholder class and derivative actions, captioned Lopiccolo v. SanDisk Corp., No. 106 CV 068946, andSachs v. SanDisk Corp., No. 106 CV 069534, were filed in that court. These four lawsuits were subsequentlyconsolidated under the caption In re msystems Ltd. Shareholder Litigation, No. 106 CV 068759 and on October 27,2006, a consolidated amended complaint was filed that superseded the four original complaints. The lawsuit wasbrought by purported shareholders of msystems Ltd. (“msystems”), and named as defendants the Company andeach of msystems’ former directors, including its President and Chief Executive Officer, and its former ChiefFinancial Officer, and named msystems as a nominal defendant. The lawsuit asserted purported class action andderivative claims. The alleged derivative claims asserted, among other things, breach of fiduciary duties, abuse ofcontrol, constructive fraud, corporate waste, unjust enrichment and gross mismanagement with respect to past stockoption grants. The alleged class and derivative claims also asserted claims for breach of fiduciary duty by msystems’board, which the Company was alleged to have aided and abetted, with respect to allegedly inadequate consid-eration for the merger, and allegedly false or misleading disclosures in proxy materials relating to the merger. Thecomplaints sought, among other things, equitable relief, including enjoining the proposed merger, and compen-satory and punitive damages. In January 2008, the court granted, without prejudice, the Company’s and msystems’motion to dismiss.

On September 11, 2006, Mr. Rabbi, a shareholder of msystems filed a derivative action and a motion to permithim to file the derivative action against four directors of msystems and msystems, arguing that options wereallegedly allocated to officers and employees of msystems in violation of applicable law. Mr. Rabbi claimed that theaforementioned actions allegedly caused damage to msystems. On January 25, 2007, msystems filed a motion todismiss the motion to seek leave to file the derivative action and the derivative action on the grounds, inter alia, thatMr. Rabbi ceased to be a shareholder of msystems after the merger between msystems and the Company. msystemsreceived an extension to file its comprehensive response to the motion, to be submitted 30 days after the decision ofthe court in its motion to dismiss.

On February 16, 2007, Texas MP3 Technologies, Ltd. (“Texas MP3”) filed suit against the Company, SamsungElectronics Co., Ltd., Samsung Electronics America, Inc. and Apple Inc., Case No. 2:07-CV-52, in the EasternDistrict of Texas, Marshall Division, alleging infringement of U.S. Patent 7,065,417 (the “’417 patent”). On June 19,2007, the Company filed an answer and counterclaim: (a) denying infringement; (b) seeking a declaratory judgmentthat the ’417 patent is invalid, unenforceable and not infringed by the Company. On July 31, 2007, Texas MP3 filedan amended complaint against the Company and the other parties named in the original complaint, alleginginfringement of the ’417 patent. On August 1, 2007, defendant Apple, Inc. filed a motion to stay the litigationpending completion of an inter-partes reexamination of the ’417 patent by the U.S. Patent and Trademark Office.That motion was denied. On August 10, 2007, the Company filed an answer to the amended complaint and acounterclaim: (a) denying infringement; (b) seeking a declaratory judgment that the ’417 patent is invalid,unenforceable and not infringed by the Company. A status conference in the case was held on November 2,2007. A Markman hearing has been scheduled for March 12, 2009 and jury selection for July 6, 2009. Discovery isproceeding.

On or about May 11, 2007, the Company received written notice from Alcatel-Lucent, S.A., (“Lucent”),alleging that the Company’s digital music players require a license to U.S. Patent No. 5,341,457 (the “’457 patent”)and U.S. Patent No. RE 39,080 (the “’080 patent”). On July 13, 2007, the Company filed a complaint for adeclaratory judgment of non-infringement and patent invalidity against Lucent Technologies Inc. and Lucent in theUnited States District Court for the Northern District of California, captioned SanDisk Corporation v. LucentTechnologies Inc., et al., Civil Case No. C 07 03618. The complaint seeks a declaratory judgment that the Companydoes not infringe the two patents asserted by Lucent against the Company’s digital music players. The complaintfurther seeks a judicial determination and declaration that Lucent’s patents are invalid. Defendants have answeredand defendant Lucent has asserted a counterclaim of infringement in connection with the ’080 patent. Defendantshave also moved to dismiss the case without prejudice and/or stay the case pending their appeal of a judgmentinvolving the same patents in suit entered by the United States District Court for the Southern District of California.The Company has moved for summary judgment on its claims for declaratory relief, and has moved to dismiss

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defendant Lucent’s counterclaim for infringement of the ’080 patent as a matter of law. All motions are presentlypending before the Court.

On August 10, 2007, Lonestar Invention, L.P. (“Lonestar”) filed suit against the Company in the EasternDistrict of Texas, Civil Action No. 6:07-CV-00374-LED. The complaint alleges that a memory controller used inthe Company’s flash memory devices infringes U.S. Patent No. 5,208,725. Lonestar is seeking a permanentinjunction, actual damages, treble damages for willful infringement, and costs and attorney fees. The Company hasanswered Lonestar’s complaint, denying Lonestar’s allegations.

On September 11, 2007 the Company and the Company’s CEO, Dr. Eli Harari, received grand jury subpoenasissued from the United States District Court for the Northern District of California indicating a Department ofJustice investigation into possible antitrust violations in the NAND flash memory industry. The Company alsoreceived a notice from the Canadian Competition Bureau (“Bureau”) that the Bureau has commenced an industry-wide investigation with respect to alleged anti-competitive activity regarding the conduct of companies engaged inthe supply of NAND flash memory chips to Canada and requesting that the Company preserve any records relevantto such investigation. The Company is cooperating in these investigations.

On September 11, 2007, Premier International Associates LLC (“Premier”) filed suit against the Company and19 other named defendants, including Microsoft Corporation, Verizon Communications Inc. and AT&T Inc., in theUnited States District Court for the Eastern District of Texas (Marshall Division). The suit, Case No. 2-07-CV-396,alleges infringement of Premier’s U.S. Patents 6,243,725 (the “’725”) and 6,763,345 (the “’345”) by certain of theCompany’s portable digital music players, and seeks an injunction and damages in an unspecified amount. OnDecember 10, 2007, an amended complaint was filed. On February 5, 2008, the Company filed an answer to theamended complaint and counterclaims: (a) denying infringement; (b) seeking a declaratory judgment that the ’725and ’345 patents are invalid, unenforceable and not infringed by the Company. On February 5, 2008, the Company(along with the other defendants in the action) filed a motion to stay the litigation pending completion ofreexaminations of the ’725 and ’345 patents by the U.S. Patent and Trademark Office. This motion is pending. Atrial date has not been set.

On October 24, 2007, the Company filed a complaint under Section 337 of the Tariff Act of 1930 (as amended)(Inv. No. 337-TA-619) titled, “In the matter of flash memory controllers, drives, memory cards, and media playersand products containing same” in the ITC (hereinafter, “the 619 Investigation”), naming the following companies asrespondents: Phison Electronics Corp. (“Phison”); Silicon Motion Technology Corporation, Silicon Motion, Inc.(located in Taiwan), Silicon Motion, Inc. (located in California), and Silicon Motion International, Inc. (collec-tively, “Silicon Motion”); USBest Technology, Inc. (“USBest”); Skymedi Corporation (“Skymedi”); ChipsbrandMicroelectronics (HK) Co., Ltd., Chipsbank Technology (Shenzhen) Co., Ltd., and Chipsbank MicroelectronicsCo., Ltd., (collectively, “Chipsbank”); Zotek Electronic Co., Ltd., dba Zodata Technology Ltd. (collectively,“Zotek”); Infotech Logistic LLC (“Infotech”), Power Quotient International Co., Ltd., and PQI Corp. (collectively,“PQI”); Power Quotient International (HK) Co., Ltd.; Syscom Development Co. Ltd.; PNY Technologies, Inc.(“PNY”); Kingston Technology Co., Inc., Kingston Technology Corp., Payton Technology Corp., and MemoSun,Inc. (collectively, “Kingston”); Buffalo, Inc., Melco Holdings, Inc., and Buffalo Technology (USA), Inc. (collec-tively, “Buffalo”); Verbatim Corp. (“Verbatim”); Transcend Information Inc. (located in Taiwan), TranscendInformation Inc. (located in California), and Transcend Information Maryland, Inc., (collectively, “Transcend”);Imation; Add-On Computer Peripherals, Inc., Add-On Computer Peripherals, LLC, and Add-On Technology Co.(collectively, “Add-On”); A-Data Technology Co., Ltd., and A-Data Technology (USA) Co., Ltd., (collectively, “A-DATA”); Apacer Technology Inc. and Apacer Memory America, Inc. (collectively, “Apacer”); Acer, Inc. (“Acer”);Behavior Tech Computer Corp. and Behavior Tech Computer (USA) Corp. (collectively, “Behavior”); EmprexTechnologies Corp.; Corsair Memory, Inc. (“Corsair”); Dane-Elec Memory S.A., and Dane-Elec Corp. USA,(collectively, “Dane-Elec”); Deantusaiocht Dane-Elec TEO; EDGE Tech Corp. (“EDGE”); Interactive Media Corp,(“Interactive”); Kaser Corporation (“Kaser”); LG Electronics, Inc., and LG Electronics U.S.A., Inc., (collectively,“LG”); TSR Silicon Resources Inc. (“TSR”); and Welldone Co. (“Welldone”). In the complaint, the Companyalleges that respondents’ flash memory products, such as USB flash drives, Compact Flash cards, and flash mediaplayers, infringe the following: U.S. Patent No. 5,719,808 (the “’808 patent”); U.S. Patent No. 6,763,424 (the “’424patent”); U.S. Patent No. 6,426,893 (the “’893 patent”); U.S. Patent No. 6,947,332 (the “’332 patent”); andU.S. Patent No. 7,137,011 (the “’011 patent”). The Company seeks an order excluding the respondents’ flash

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memory controllers, drives, memory cards, and media players from entry into the United States as well as apermanent cease and desist order against the respondents. On December 6, 2007, the Commission instituted aninvestigation based on the Company’s complaint. The target date for completing the investigation was originally setfor March 12, 2009. Since filing its complaint, the Company has reached settlement agreements with Add-OnComputer Peripherals, Inc., Add-On Computer Peripherals, LLC, EDGE, Infotech, Interactive, Kaser, PNY, TSR,and Welldone. The parties’ moved to terminate the investigation as to these respondents in light of the settlementagreements. Most of the respondents that have not settled with the Company have responded to the complaint.Among other things, these respondents deny infringement or that the Company has a domestic industry in theasserted patents. In responding to the complaint, these respondents have also raised several affirmative defensesincluding, among others, invalidity, unenforceability, express license, implied license, patent exhaustion, waiver,acquiescence, latches, estoppel and unclean hands. On January 23, 2008, the Administrative Law Judge issued aninitial determination extending the target date by three months to June 12, 2009, proposing a Markman hearing forMay 6-7, 2008 and tentatively scheduling the evidentiary hearing to begin on October 27, 2008.

On October 24, 2007, the Company filed a complaint for patent infringement in the United States DistrictCourt for the Western District of Wisconsin against the following defendants: Phison, Silicon Motion, SynergisticSales, Inc. (“Synergistic”), USBest, Skymedi, Chipsbank, Infotech, Zotek, PQI, PNY, Kingston, Buffalo, Verbatim,Transcend, Imation, Add-On, A-DATA, Apacer, Behavior, Corsair, Dane-Elec, EDGE, Interative, LG, TSR andWelldone. In this action, Case No. 07-C-0607-C, the Company asserts that the defendants infringe the ’808 patent,the ’424 patent, the ’893 patent, the ’332 patent and the ’011 patent. The Company seeks damages and injunctiverelief. In light of the above mentioned settlement agreements, the Company dismissed its claims against Add-OnComputer Peripherals, Inc., Add-On Computer Peripherals, LLC, EDGE, Infotech, Interactive, PNY, TSR, andWelldone. The Company also voluntarily dismissed its claims against Acer and Synergistic without prejudice. OnNovember 21, 2007, defendant Kingston filed a motion to stay this action. Several defendants joined in Kingston’smotion. On December 19, 2007, the Court issued an order staying the case in its entirety until the 619 Investigationbecomes final. On January 14, 2008, the Court issued an order clarifying that the entire case is stayed for all parties.

On October 24, 2007, the Company filed a complaint for patent infringement in the United States District Courtfor the Western District of Wisconsin against the following defendants: Phison, Silicon Motion, Synergistic, USBest,Skymedi, Zotek, Infortech, PQI, PNY, Kingston, Buffalo, Verbatim, Transcend, Imation, A-DATA, Apacer, Behavior,and Dane-Elec. In this action, Case No. 07-C-0605-C, the Company asserts that the defendants infringe U.S. PatentNo. 6,149,316 (the “’316 patent”) and U.S. Patent No. 6,757,842 (the “’842 patent”). The Company seeks damagesand injunctive relief. In light of above mentioned settlement agreements, the Company dismissed its claims againstInfotech and PNY. The Company also voluntarily dismissed its claims against Acer and Synergistic without prejudice.On November 21, 2007, defendant Kingston filed a motion to consolidate and stay this action. Several defendantsjoined in Kingston’s motion. On December 17, 2007, the Company filed an opposition to Kingston’s motion. Thatsame day, several defendants filed another motion to stay this action. On January 7, 2008, the Company opposed thedefendants’ second motion to stay. On January 22, 2008, defendants Phison, Skymedi and Behavior filed motions todismiss the Company’s complaint for lack of personal jurisdiction. That same day, defendants Phison, Silicon Motion,USBest, Skymedi, PQI, Kingston, Buffalo, Verbatim, Transcend, A-DATA, Apacer, and Dane-Elec answered theCompany’s complaint denying infringement and raising several affirmative defenses. These defenses included, amongothers, lack of personal jurisdiction, improper venue, lack of standing, invalidity, unenforceability, express license,implied license, patent exhaustion, waiver, latches, and estoppel. On January 24, 2008, Silicon Motion filed a motionto dismiss the Company’s complaint for lack of personal jurisdiction. On January 25, 2008, Dane-Elec also filed amotion to dismiss the Company’s complaint for lack of personal jurisdiction. On January 28, 2008, the Court issued anorder staying the case in its entirety with respect to all parties until the proceeding in the 619 Investigation becomefinal. In its order, the Court also consolidated this action (Case Nos. 07-C-0605-C) with the action discussed in thepreceding paragraph (07-C-0607-C).

Between August 31, 2007 and December 14, 2007, the Company (along with a number of other manufacturersof flash memory products) was sued in the Northern District of California, in eight purported class actioncomplaints. On February 7, 2008 all of the civil complaints were consolidated into two complaints, one on behalf ofdirect purchasers and one on behalf of indirect purchasers, in the Northern District of California in a purported classaction captioned In re Flash Memory Antitrust Litigation, Civil Case No. C07-0086. Plaintiffs allege the Company

33

and a number of other manufacturers of flash memory products conspired to fix, raise, maintain, and stabilize theprice of NAND flash memory in violation of state and federal laws. The lawsuits purport to be on behalf ofpurchasers of flash memory between January 1, 1999 through the present. The lawsuits seek an injunction,damages, restitution, fees, costs, and disgorgement of profits.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth quarter of fiscal year 2007.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERSAND ISSUER PURCHASES OF EQUITY SECURITIES

Market For Our Common Stock. Our common stock is traded on the NASDAQ Global Select Market underthe symbol “SNDK.” The following table summarizes the high and low sale prices for our common stock as reportedby the NASDAQ Global Select Market.

High Low

2006First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $79.80 $52.15Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $66.20 $49.16Third quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $60.94 $37.34Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $62.24 $42.00

2007First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $46.24 $35.82Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $49.61 $41.48Third quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $59.75 $47.14Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $55.98 $33.15

Holders. As of January 31, 2008, we had approximately 500 stockholders of record.

Dividends. We have never declared or paid any cash dividends on our common stock and do not expect to paycash dividends on our common stock in the foreseeable future.

Issuer Purchases of Equity Securities. The table below summarizes information about our purchases ofequity securities registered pursuant to Section 12 of the Exchange Act during the three months ended December 30,2007.

PeriodTotal Number of

Shares Purchased(1)Average Price Paid

per Share(2)

Total Number ofShares Purchasedas Part of Publicly

Announced Plans orPrograms(1)

Approximate DollarValue of Shares that

May Yet BePurchased Under

the Plans orPrograms(2)

October 1, 2007 toOctober 28, 2007. . . . . . . . — $ — — $202,596,251

October 29, 2007 toNovember 25, 2007 . . . . . . 1,734,805 41.76 1,734,805 130,158,615

November 26, 2007 toDecember 30, 2007 . . . . . . 3,473,200 37.33 3,473,200 510,673

Total . . . . . . . . . . . . . . . . . . . 5,208,005 38.80 5,208,005

(1) In December 2006, we announced our intention to repurchase up to $300.0 million of our common stock in theopen market over the two years following the date of authorization.

(2) Does not include amounts paid for commissions.

34

Stock Performance Graph *

Five-Year Stockholder Return Comparison. The following graph compares the cumulative total stockholderreturn on our common stock with that of the Standard & Poors (“S&P”) 500 Stock Index, a broad market indexpublished by S&P, a selected S&P Semiconductor Company stock index compiled by Morgan Stanley & Co.Incorporated and the Philadelphia Semiconductor Index for the five-year period ended December 30, 2007. Theseindices, which reflect formulas for dividend reinvestment and weighting of individual stocks, do not necessarilyreflect returns that could be achieved by an individual investor.

The comparison for each of the periods assumes that $100 was invested on December 27, 2002 in our commonstock, the stocks included in the S&P 500 Stock Index, the stocks included in the S&P Semiconductor CompanyStock Index and the stocks included in the PHLX Semiconductor Sector, and assumes all dividends are reinvested.For each reported year, our reported dates are the last trading dates of our fiscal year (which ends on the Sundayclosest to December 31), and the S&P 500 Stock Index, S&P Semiconductor Company Stock Index andPhiladelphia Semiconductor Index the dates are the last trading dates of December.

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

$550

$600

$650

2002 2003 2004 2005 2006 2007

SanDisk Corporation S&P 500 Index S&P Semiconductor Sector PHLX Semiconductor Sector

2002 2003 2004 2005 2006 2007

SanDisk Corporation . . . . . . . . . . . . . . . . . . . . . $100.00 $289.67 $236.68 $595.45 $407.87 $317.91S&P 500 Index . . . . . . . . . . . . . . . . . . . . . . . . . 100.00 125.19 138.44 142.60 162.02 168.89S&P Semiconductor Stock Index . . . . . . . . . . . . 100.00 185.15 148.90 165.54 149.07 165.31PHLX Semiconductor Index . . . . . . . . . . . . . . . 100.00 168.20 146.15 161.72 157.82 138.28

* The material in this report is not deemed “filed” with the SEC and is not to be incorporated by reference into anyof our filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before orafter the date hereof and irrespective of any general incorporation language in any such filing.

35

ITEM 6. SELECTED FINANCIAL DATA

SANDISK CORPORATION SELECTED FINANCIAL DATA

December 30,2007(1)

December 31,2006(2)

January 1,2006(3)

January 2,2005(4)

December 28,2003(5)

Fiscal Years Ended

(In thousands, except per share data)

Revenues

Product . . . . . . . . . . . . . . . . . . . . $3,446,125 $2,926,472 $2,066,607 $1,602,836 $ 982,341

License and royalty . . . . . . . . . . . . 450,241 331,053 239,462 174,219 97,460

Total revenues . . . . . . . . . . . . . . 3,896,366 3,257,525 2,306,069 1,777,055 1,079,801Cost of product revenues . . . . . . . . . 2,693,647 2,018,052 1,333,335 1,091,350 641,189

Gross profit . . . . . . . . . . . . . . . . . . . 1,202,719 1,239,473 972,734 685,705 438,612

Operating income . . . . . . . . . . . . . . . 276,514 326,334 576,582 418,591 257,038

Net income . . . . . . . . . . . . . . . . . . . $ 218,357 $ 198,896 $ 386,384 $ 266,616 $ 168,859

Net income per share:

Basic . . . . . . . . . . . . . . . . . . . . $ 0.96 $ 1.00 $ 2.11 $ 1.63 $ 1.17

Diluted . . . . . . . . . . . . . . . . . . . $ 0.93 $ 0.96 $ 2.00 $ 1.44 $ 1.02

Shares used in per share calculations:

Basic . . . . . . . . . . . . . . . . . . . . 227,744 198,929 183,008 164,065 144,781

Diluted . . . . . . . . . . . . . . . . . . . 235,857 207,451 193,016 188,837 171,616

December 30,2007

December 31,2006

January 1,2006

January 2,2005

December 28,2003

At

(In thousands)

Working capital . . . . . . . . . . . . . . . . $2,385,774 $3,345,414 $2,004,598 $1,526,674 $1,378,070

Total assets . . . . . . . . . . . . . . . . . . . 7,234,819 6,967,783 3,120,187 2,320,180 2,040,156

Long-term convertible notes . . . . . . . 1,225,000 1,225,000 — — 150,000

Total stockholders’ equity . . . . . . . . . $4,959,617 $4,768,134 $2,523,791 $1,940,150 $1,515,872

(1) Includes share-based compensation of ($133.0) million and amortization of acquisition-related intangibleassets of ($90.1) million. Also includes other-than-temporary impairment charges of ($10.0) million related toour investment in FlashVision.

(2) Includes acquired in-process technology charges of ($225.6) million related to acquisitions of Matrix Semi-conductor Inc. in January 2006 and msystems Ltd. in November 2006, share-based compensation of($100.6) million and amortization of acquisition-related intangible assets of ($27.8) million.

(3) Includes other-than-temporary impairment charges of ($10.1) million related to our investment in Tower.

(4) Includes other-than-temporary impairment charges of ($11.8) million related to our investment in Tower, and again from a settlement of $6.2 million from a third-party brokerage firm related to the fiscal 2003 unauthorizeddisposition of our investment in UMC.

(5) Includes a loss of approximately ($18.3) million as a result of the unauthorized sale of approximately127.8 million shares of UMC stock, a gain of approximately $7.0 million related to the sale of 35 millionshares of UMC stock, and write-downs related to the recoverability of our Tower wafer credits of ($3.9) million.

36

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATION

Overview

December 30,2007

% ofRevenue

December 31,2006

% ofRevenue

January 1,2006

% ofRevenue

Fiscal Years Ended

(In thousands, except percentages)

Product revenues . . . . . . . . . . . . . $3,446,125 88.4% $2,926,472 89.8% $2,066,607 89.6%

License and royalty revenues . . . . 450,241 11.6% 331,053 10.2% 239,462 10.4%

Total revenues. . . . . . . . . . . . . . 3,896,366 100.0% 3,257,525 100.0% 2,306,069 100.0%

Cost of product revenues . . . . . . . 2,693,647 69.1% 2,018,052 62.0% 1,333,335 57.8%

Gross profit . . . . . . . . . . . . . . . . . 1,202,719 30.9% 1,239,473 38.0% 972,734 42.2%Operating expenses

Research and development . . . . 418,066 10.7% 306,866 9.4% 194,810 8.5%

Sales and marketing . . . . . . . . . 294,594 7.6% 203,406 6.3% 122,232 5.3%

General and administrative . . . . 181,509 4.7% 159,835 4.9% 79,110 3.4%

Write-off of acquired in-processtechnology . . . . . . . . . . . . . . — — 225,600 6.9% — —

Restructuring . . . . . . . . . . . . . . 6,728 0.2% — — — —

Amortization of acquisition-related intangible assets . . . . . 25,308 0.6% 17,432 0.5% — —

Total operating expenses . . . . 926,205 23.8% 913,139 28.0% 396,152 17.2%

Operating income . . . . . . . . . . . . . 276,514 7.1% 326,334 10.0% 576,582 25.0%

Other income . . . . . . . . . . . . . . . . 121,902 3.1% 104,374 3.2% 36,725 1.6%

Income before taxes . . . . . . . . . . . 398,416 10.2% 430,708 13.2% 613,307 26.6%

Provision for income taxes . . . . . . 174,848 4.5% 230,193 7.1% 226,923 9.8%

Minority interest . . . . . . . . . . . . . . 5,211 0.1% 1,619 — — —

Net income . . . . . . . . . . . . . . . . . $ 218,357 5.6% $ 198,896 6.1% $ 386,384 16.8%

General

We are the inventor of and worldwide leader in NAND-based flash storage cards. Our mission is to providesimple, reliable and affordable storage for consumer use in portable devices. We sell SanDisk branded products forconsumer electronics through broad global retail and original equipment manufacturer, or OEM, distributionchannels.

We design, develop and manufacture products and solutions in a variety of form factors using our flashmemory, controller and firmware technologies. We source the vast majority of our flash memory supply through oursignificant venture relationships with Toshiba Corporation, or Toshiba, which provide us with leading edge low-costmemory wafers. Our cards are used in a wide range of consumer electronics devices such as mobile phones, digitalcameras, gaming devices and laptop computers. We also produce Universal Serial Bus, or USB, drives, MP3 playersand other flash storage products that are embedded in a variety of systems for the enterprise, industrial, military andother markets.

Our results are primarily driven by worldwide demand for flash storage devices, which in turn depends on end-user demand for electronic products. We believe the market for flash storage is price elastic. Accordingly, we expectthat as we reduce the price of our flash devices, consumers will demand an increasing number of megabytes and/orunits of memory and that over time, new markets will emerge. In order to profitably capitalize on price elasticity ofdemand in the market for flash storage products, we must reduce our cost per megabyte at a rate similar to the

37

change in selling price per megabyte to the consumer and the average capacity of our products must grow enough tooffset price declines. We seek to achieve these cost reductions through technology improvements primarily byincreasing the amount of memory stored in a given area of silicon.

We adopted Financial Accounting Standards Board, or FASB, Interpretation No. 48, or FIN 48, Accounting forUncertainty in Income Taxes, an interpretation of FASB Statement No. 109, at the beginning of fiscal year 2007.FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance onderecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.Adoption of FIN 48 did not have a significant impact on our financial position and result of operations. Forfurther discussion on adoption of FIN 48, please refer to Note 10, “Income Taxes,” to our consolidated financialstatements included in Item 8 of this report.

Critical Accounting Policies & Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our consolidatedfinancial statements, which have been prepared in accordance with accounting principles generally accepted in theUnited States, or U.S. GAAP.

Use of Estimates. The preparation of these financial statements requires us to make estimates and judgmentsthat affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingentliabilities. On an ongoing basis, we evaluate our estimates, including, among others, those related to customerprograms and incentives, product returns, bad debts, inventories and related reserves, investments, income taxes,warranty obligations, stock compensation, contingencies and litigation. We base our estimates on historicalexperience and on other assumptions that we believe are reasonable under the circumstances, the results of whichform the basis for our judgments about the carrying values of assets and liabilities when those values are not readilyapparent from other sources. Estimates have historically approximated actual results. However, future results willdiffer from these estimates under different assumptions and conditions.

Revenue Recognition, Sales Returns and Allowances and Sales Incentive Programs. We recognize revenueswhen the earnings process is complete, as evidenced by an agreement with the customer, transfer of title andacceptance, if applicable, fixed pricing and reasonable assurance of realization. Sales made to distributors andretailers are generally under agreements allowing price protection and/or right of return and, therefore, the sales andrelated costs of these transactions are deferred until the retailers or distributors sell the merchandise to their endcustomer, or the rights of return expire. At December 30, 2007 and December 31, 2006, deferred income from salesto distributors and retailers was $167.3 million and $169.9 million, respectively. Estimated sales returns areprovided for as a reduction to product revenue and deferred revenue and were not material for any period presentedin our consolidated financial statements.

We record estimated reductions to revenue or to deferred revenue for customer and distributor incentiveprograms and offerings, including price protection, promotions, co-op advertising, and other volume-basedincentives and expected returns. Additionally, we have incentive programs that require us to estimate, based onhistorical experience, the number of customers who will actually redeem the incentive. All sales incentive programsare recorded as an offset to product revenues or deferred revenues. In calculating the value of sales incentiveprograms, actual and estimated activity is used based upon reported weekly sell-through data from our customers.The timing and resolution of these claims could materially impact product revenues or deferred revenues. However,actual returns and rebates in any future period could differ from our estimates, which could impact the revenue wereport.

Inventories and Inventory Valuation. Inventories are stated at the lower of cost (first-in, first-out) or market.Market value is based upon an estimated average selling price reduced by estimated costs of disposal. Thedetermination of market value involves numerous judgments including estimating average selling prices basedupon recent sales volumes, industry trends, existing customer orders, current contract prices, industry analysis ofsupply and demand and seasonal factors. Should actual market conditions differ from our estimates, our futureresults of operations could be materially affected. The valuation of inventory also requires us to estimate obsolete orexcess inventory. The determination of obsolete or excess inventory requires us to estimate the future demand for

38

our products within specific time horizons, generally six to twelve months. To the extent our demand forecast forspecific products is less than our product on hand and our noncancelable orders, we could be required to recordadditional inventory reserves, which would have a negative impact on our gross margin.

Accounting for Variable Interest Entities. We evaluate whether entities in which we have invested arevariable interest entities within the definition of the Financial Accounting Standards Board, or FASB, InterpretationNo. 46R, or FIN 46R, Accounting for Variable Interest Entities. If those entities are variable interest entities, orVIEs, we then determine whether we are the primary beneficiary of that entity by reference to our contractual andbusiness arrangements with respect to expected gains and losses. The assessment of the primary beneficiaryincludes an analysis of the forecast and contractual stipulations of the VIE. Determining whether we wouldconsolidate or apply the equity method to a particular VIE requires review of the VIE’s forecast, which involvesanalysis of company specific data, industry data, known trends and uncertainties, which are inherently subjective.Consolidating a VIE under FIN 46R rather than using the equity method can materially impact revenue, grossmargin and operating income trends.

Deferred Tax Assets. We must make certain estimates in determining income tax expense for financialstatement purposes. These estimates occur in the calculation of certain tax assets and liabilities, which arise fromdifferences in the timing of recognition of revenue and expense for tax and financial statement purposes. Indetermining the need for and amount of our valuation allowance, we assess the likelihood that we will be able torecover our deferred tax assets using historical levels of income, estimates of future income and tax planningstrategies. While we have been profitable over the last several years, we compete in an industry with recurringaverage selling price declines. These price declines require us to apply judgment related to our forecast of futureprofitability and our recoverability of net deferred tax assets. Unanticipated downturns, alternative technologies orother negative factors in a continually changing high technology industry could result in declining futureprofitability and have an adverse impact on the recoverability of deferred tax assets.

Our estimates for tax uncertainties require substantial judgment based upon the period of occurrence,complexity of the matter, available federal tax case law, interpretation of foreign laws and regulations and otherestimates. There is no assurance that domestic or international tax authorities will agree with the tax positions wehave taken which could materially impact future results.

Share-Based Compensation — Employee Incentive Plans and Employee Stock Purchase Plans. Accountingfor share-based compensation awards and accounting for Employee Stock Purchase Plan, or ESPP, shares are basedupon the provisions of Statement of Financial Accounting Standards No. 123(R), or SFAS 123(R), Share-BasedPayments, which requires the recognition of the fair value of share-based compensation. The fair value of share-based awards and ESPP shares was estimated using a Black-Scholes-Merton closed-form option valuation model.The Black-Scholes-Merton model requires the input of assumptions in implementing SFAS 123(R), includingexpected stock price volatility, expected term and estimated forfeitures of each award. The parameters used in themodel are reviewed and adjusted on a quarterly basis. We recognized compensation expense for the fair values ofthese awards, which have graded vesting, on a straight-line basis over the requisite service period of each of theseawards, net of estimated forfeitures at a rate of 7.59%. We make quarterly assessments of the adequacy of the APICcredit pool generated by previous share-based compensation excess tax benefits to determine if there are any taxdeficiencies which require recognition in the consolidated statements of income. The fair value of restricted stockunits was calculated based upon the fair market value of our common stock on the date of grant.

Business Combinations. In accordance with the provisions of Statement of Financial Accounting StandardsNo. 141, or SFAS 141, Business Combinations, we allocate the purchase price of acquired companies to the tangibleand intangible assets acquired, liabilities assumed, and in-process research and development based on theirestimated fair values. Management makes significant estimates and assumptions, which are believed to bereasonable, in determining the fair values of certain assets acquired and liabilities assumed, especially withrespect to intangible assets. These estimates are based on historical experience and information obtained from themanagement of the acquired companies and are inherently uncertain. Critical estimates in valuing certain of theintangible assets include but are not limited to future expected cash flows from product sales, customer relation-ships, acquired developed technologies and patents, expected costs to develop the in-process research anddevelopment into commercially viable products and estimated cash flows from the projects when completed,

39

expected life of the core technology and discount rates. Unanticipated events and circumstances may occur whichmay affect the accuracy or validity of such assumptions, estimates or actual results.

Results of Operations

Product Revenues.

FY 2007PercentChange FY 2006

PercentChange FY 2005

(In millions, except percentages)

Retail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,162.5 9% $1,975.5 22% $1,621.0

OEM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,283.6 35% 951.0 113% 445.6

Product revenues. . . . . . . . . . . . . . . . . . . . . . $3,446.1 18% $2,926.5 42% $2,066.6

The increase in our fiscal year 2007 product revenues was comprised of a 190% increase in the number ofmegabytes sold, partially offset by a 60% reduction in average selling price per megabyte. Our unit sales increased75% compared to fiscal year 2006 with the strongest unit growth coming from cards for mobile phones. OEMrevenue particularly benefited from higher sales of mobile cards and embedded products to mobile handset vendors.Retail revenue growth benefited from the growing market for cards for mobile phones as well as increased sales ofUSB flash drives.

The increase in our fiscal year 2006 product revenues was comprised of a 246% increase in the number ofmegabytes sold, partially offset by a 59% reduction in our average selling price per megabyte. The markets that wesell to have experienced price elasticity of demand. In fiscal year 2006, as the price per megabyte decreased, theaverage memory density of our products sold increased by 67%. Our unit sales also increased by 106% with thegrowth in our unit sales primarily attributable to growth in sales of cards for mobile phones and flash-based digitalaudio players. OEM revenues particularly benefited from higher sales of mobile cards to mobile phone manu-facturers, 3D gaming cards and from our acquisition of msystems Ltd., or msystems, which accounted for anadditional $115 million of revenue. Retail revenue growth benefited primarily from higher sales of mobile cards,flash-based digital audio players and USB flash drives.

Geographical Product Revenues.

RevenuePercent of

Total RevenuePercent of

Total RevenuePercent of

Total

FY 2007 FY 2006 FY 2005


United States . . . . . . . . . . . . $1,193.6 35% $1,259.8 43% $ 978.0 47%

Japan. . . . . . . . . . . . . . . . . . 283.8 8% 194.0 7% 104.4 5%EMEA. . . . . . . . . . . . . . . . . 889.7 26% 728.4 25% 501.0 24%

APAC and other foreigncountries . . . . . . . . . . . . . 1,079.0 31% 744.3 25% 483.2 24%

Product revenues . . . . . . . . . $3,446.1 100% $2,926.5 100% $2,066.6 100%

In fiscal year 2007, revenue growth was strong in both APAC and EMEA primarily as a result of increasedsales to OEM mobile handset vendors and the growth of mobile card and USB sales in international retail channels.Japan revenue increased from fiscal year 2006 to fiscal year 2007 primarily as a result of product revenue from ourmsystems acquisition in November 2006. Unit sales in United States increased 41% over fiscal year 2006; howevertotal revenues in United States were lower by 2% due primarily to aggressive price reductions in fiscal year 2007.

In fiscal year 2006, on an absolute basis, revenues in all regions increased year-over-year. Revenue from otherforeign countries, which is primarily Asia, increased the most, primarily reflecting increased sales to mobile phonemanufacturers and their related contract manufacturers. Sales in Japan increased primarily from higher sales of 3Dgaming cards from our acquisition of Matrix Semiconductor, Inc., or Matrix. The increase in sales in United Stateswas due primarily to sales of our flash-based digital audio players, sales of cards for mobile phones and USB drives.

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License and Royalty Revenues.




License and royalty revenues . . . . . . . . . . . . . . . . $450.2 36% $331.1 38% $239.5

The increase in our fiscal year 2007 license and royalty revenues was primarily due to new license agreementsas well as increased royalty-bearing sales by our existing licensees.

The increase in our fiscal year 2006 license and royalty revenues was primarily due to increased royalty-bearing sales by our licensees.

Gross Margins.




Product gross profit . . . . . . . . . . . . . . . . . . . . . . . $752.5 (17)% $908.4 24% $733.3

Product gross margins (as a percent of productrevenue) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.8% 31.0% 35.5%

Total gross margins (as a percent of totalrevenue) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30.9% 38.0% 42.2%

Product gross margins in fiscal year 2007 decreased 9.2 percentage points compared to fiscal year 2006 due toexcess industry supply which led to price per megabyte declining faster than cost per megabyte and also led tolower-of-cost-or-market inventory charges. Gross margin was also negatively impacted by charges for excessinventory of certain products and Flash Alliance venture costs, partially offset by insurance proceeds related toclaims on a fab power outage that occurred in the first quarter of fiscal year 2006. In addition, cost of productincreased due to amortization of acquisition-related intangible assets of $65 million, which accounted forapproximately 1.4 percentage points.

The fiscal year 2006 product gross margin decreased from fiscal year 2005 by 4.5 percentage points.Approximately 2.9 percentage points of the gross margin decline was due to average selling prices declining at afaster rate than our product cost. In addition, our margins were negatively impacted by approximately 0.8% due tothe acquisition of msystems, whose business in the fourth quarter was primarily based on non-captive memorysupply. In addition, cost of product increased due to amortization of acquisition-related intangible assets of$28 million and share-based compensation expense related to implementation of SFAS 123(R) of $8 million, whichcombined accounted for approximately 0.8% of the decrease in the product gross margins over fiscal year 2005.

Research and Development.




Research and development. . . . . . . . . . . . . . . . . . $418.1 36% $306.9 58% $194.8

Percent of revenue. . . . . . . . . . . . . . . . . . . . . . . . 10.7% 9.4% 8.5%

Our fiscal year 2007 research and development expense growth was primarily due to an increase in payroll andpayroll-related expenses of $43 million associated with headcount growth and our acquisition of msystems, higherconsultant and outside service costs of $17 million, higher non-recurring engineering and material costs of$11 million and share-based compensation expense of $8 million related to increased headcount. In addition, infiscal year 2007, we recognized Flash Alliance start-up costs of $18 million.

Our fiscal year 2006 research and development expense growth was primarily due to an increase in payroll,payroll-related expenses and facility-related expenses of approximately $57 million associated with headcountgrowth. Share-based compensation expense related to implementation of SFAS 123(R) accounted for $41 million ofthe research and development expense growth. In addition, research and development expense growth includedinitial design and development of 56-nanometer technology.

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Sales and Marketing.




Sales and marketing . . . . . . . . . . . . . . . . . . . . . . $294.6 45% $203.4 66% $122.2

Percent of revenue. . . . . . . . . . . . . . . . . . . . . . . . 7.6% 6.3% 5.3%

Our fiscal year 2007 sales and marketing expense growth included increased advertising and promotional costson a worldwide basis of approximately $41 million. In addition, payroll and payroll-related expenses increased$31 million and share-based compensation expense increased $9 million, both related to full-year increasedheadcount and our acquisition of msystems.

Our fiscal year 2006 sales and marketing expense growth was primarily related to increased payroll andpayroll-related expenses of approximately $22 million associated with headcount growth, share-based compen-sation expense related to implementation of SFAS 123(R) of $22 million, increased merchandising on a worldwidebasis of approximately $17 million and increased marketing efforts, all in support of our higher revenue base.

General and Administrative.




General and administrative . . . . . . . . . . . . . . . . . $181.5 14% $159.8 102% $79.1Percent of revenue. . . . . . . . . . . . . . . . . . . . . . . . 4.7% 4.9% 3.4%

Our fiscal year 2007 general and administrative expense increases were primarily related to increased payroll,payroll-related expenses and share-based compensation expense associated with headcount increases including ouracquisition of msystems in November 2006.

Our fiscal year 2006 general and administrative expense increases were primarily related to increased payrolland payroll-related expenses of approximately $22 million associated with headcount increases, share-basedcompensation expense related to SFAS 123(R) of $30 million, higher legal expenses associated with litigation todefend our intellectual property and consulting expenses related to our acquisition of Matrix and msystems.

Write-off of Acquired In-process Technology.




Write-off of acquired in-process technology . . . . . n/a — $225.6 — n/a

Percent of revenue. . . . . . . . . . . . . . . . . . . . . . . . n/a 6.9% n/a

As part of the Matrix acquisition in the first quarter of fiscal year 2006 and the msystems acquisition in thefourth quarter of fiscal year 2006, a portion of each purchase price was allocated to acquired in-process technology,which was determined through established valuation techniques in the high-technology industry and written-off atthe date of acquisition because technological feasibility had not been established and no alternative future usesexisted. The value was determined by estimating the net cash flows and discounting forecasted net cash flows totheir present values. As of December 30, 2007, it was estimated that the remaining in-process projects related to themsystems acquisition would be completed over the next three years at an estimated total cost of $14 million. Forfurther discussion on write-off of acquired in-process technology, please refer to Note 14, “Business Acquisitions”to our consolidated financial statements included in Item 8 of this report.

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Amortization of Acquisition-Related Intangible Assets.




Amortization of acquisition-related intangibleassets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $25.3 45% $17.4 — n/a

Percent of revenue. . . . . . . . . . . . . . . . . . . . . . . . 0.6% 0.5% n/a

The increase of amortization of acquisition-related intangible assets for the year ended December 31, 2007 wasdirectly related to twelve months of amortization in fiscal year 2007 from our acquisition of msystems compared toless than two months of amortization in fiscal year 2006.

Our expense from the amortization of acquisition-related intangible assets for the year ended December 31,2006 was directly related to our acquisition of Matrix in January 2006 and msystems in November 2006.

Restructuring.




Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . $6.7 100% n/a — n/a

Percent of revenue. . . . . . . . . . . . . . . . . . . . . . . . 0.2% n/a n/a

During the first quarter of fiscal year 2007, we implemented a restructuring plan which included reductions ofour workforce in all functions of the organization worldwide and closure of redundant facilities in order to reduceour cost structure. A restructuring charge of $7 million was recorded, of which $6 million related to severance andbenefits to 149 terminated employees and the remaining was primarily for excess lease obligations. Thisrestructuring resulted in a reduction to our annual expenses of approximately $22 million in operations, researchand development, sales and marketing, and general and administrative expense. We do not expect additionalcharges relating to this restructuring plan. For further discussion on our restructuring plans, please refer to Note 9,“Restructuring,” to our consolidated financial statements included in Item 8 of this report.

Other Income.




Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . $133.4 32% $101.1 136% $42.8

Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . (16.9) 59% (10.6) 1667% (0.6)

Income (loss) in equity investments . . . . . . . . . . . (9.9) (248)% 6.7 186% (7.8)

Other income, net . . . . . . . . . . . . . . . . . . . . . . . . 15.3 113% 7.2 213% 2.3

Total other income, net . . . . . . . . . . . . . . . . . . . . $121.9 17% $104.4 184% $36.7

The increase in other income from fiscal year 2006 to fiscal year 2007 was primarily due to interest income of$133 million offset by full year interest expense of ($17) million resulting from our $1.15 billion debt offering inMay 2006 and the acquired msystems’ $75 million debt offering, and an impairment charge of ($10) million to ourFlashVision investment included in “Income (loss) in equity investments.”

Other income for fiscal year 2006 was comprised primarily of interest income of $101 million offset by interestexpense of ($11) million resulting from our $1.15 billion debt offering in May 2006. See Note 5, “FinancingArrangements,” to our consolidated financial statements included in Item 8 of this report.

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Provision for Income Taxes.



Provision for income taxes . . . . . . . . . . . . . . . . . $174.8 (24)% $230.2 1% $226.9

Effective tax rates . . . . . . . . . . . . . . . . . . . . . . . . 43.9% 53.5% 37.0%

Our fiscal year 2007 effective tax rate decreased from fiscal year 2006 primarily due to the fiscal year 2006write-off of acquired in-process technology and higher tax-exempt interest income in fiscal year 2007. Thisdecrease was partially offset by foreign losses not benefited and non-deductible share-based compensationexpenses.

We adopted FIN 48 at the beginning of fiscal year 2007. As a result of the adoption, we recognizedapproximately a $1 million increase in the liability for unrecognized tax benefits, which was accounted for as areduction to retained earnings as of January 1, 2007. See Note 10, “Income Taxes,” to our consolidated financialstatements included in Item 8 of this report for further discussion on the impact of FIN 48.

Our fiscal year 2006 effective tax rate increased over fiscal year 2005 primarily due to the write-off of acquiredin-process technology and non-deductible share-based compensation expenses, which was partially offset byforeign earnings at other than U.S. rates.

Liquidity and Capital Resources

Cash Flows. Operating activities generated $652.9 million of cash during the fiscal year ended December 30,2007. The primary sources of operating cash flow for the fiscal year ended December 30, 2007 were: (1) net income,adjusted to exclude the effect of non-cash charges including depreciation, amortization, share-based compensation,loss on equity investments and deferred taxes, and (2) changes in balance sheet accounts including a decrease inaccounts receivable and increases in accounts payable trade and accounts payable to related parties, which werepartially offset by increases in inventory and other assets and a decrease in other liabilities.

Operating activities generated $598.1 million of cash during the fiscal year ended December 31, 2006. Theprimary sources of operating cash flow for the fiscal year ended December 31, 2006 were: (1) net income, adjustedto exclude the effect of non-cash charges including depreciation, amortization, share-based compensation andwrite-off of acquired in-process technology, which were partially offset by lower deferred taxes and gain oninvestment in foundries, and (2) increases in accounts payable to related parties and other liabilities, which werepartially offset by increases in accounts receivables, inventory and other assets and decreases in accounts payabletrade.

We used $1.22 billion for investing activities during the fiscal year ended December 30, 2007. Purchases ofshort and long-term investments, net of proceeds from sales and maturities of short-term investments, totaled$318.3 million. Capital expenditures for the year were $259.0 million and investments and notes to the flashventures with Toshiba were $613.3 million, net of repayments.

We used $978.1 million for investing activities during the fiscal year ended December 31, 2006. Purchases ofshort and long-term investments, net of proceeds from sales and maturities of short-term investments, totaled$638.9 million. Capital expenditures totaling $176.5 million and investments and notes to the flash ventures withToshiba of $204.1 million, net of repayments was partially offset by cash acquired of $51.8 million as a result of ouracquisition of Matrix and msystems.

We used $181.0 million of cash for financing activities during the fiscal year ended December 30, 2007comprised primarily of $299.6 million to purchase treasury shares pursuant to our share repurchase program,partially offset by cash received from exercises of share-based awards of $100.3 million. Additionally, during thefiscal year ended December 30, 2007, we received a tax benefit of $18.4 million on employee stock programs.

In fiscal year 2006, we generated $1.20 billion of cash from financing activities including $1.13 billion fromthe issuance of the 1% Convertible Senior Notes, net of issuance costs, partially offset by the purchase of theconvertible bond hedge of $386.1 million. We received $308.7 million from the issuance of warrants and

44

$96.3 million from exercises of share-based awards. Additionally, during the fiscal year ended December 31, 2006,we received a tax benefit of $57.4 million on employee stock programs.

Liquid Assets. At December 30, 2007, we had cash, cash equivalents and short-term investments of$1.84 billion.

Short-Term Liquidity. As of December 30, 2007, our working capital balance was $2.39 billion. We do notexpect any liquidity constraints over the next twelve months. We expect our loans and investments in the flashventures with Toshiba as well as our investments in property, plant and equipment to be approximately $1.0 billionin fiscal year 2008.

Long-Term Requirements. Depending on the demand for our products, we may decide to make additionalinvestments, which could be substantial, in wafer fabrication foundry capacity and assembly and test manufacturingequipment to support our business in the future. We may also make equity investments in other companies or engagein merger or acquisition transactions. These activities may require us to raise additional financing, which could bedifficult to obtain, and which if not obtained in satisfactory amounts may prevent us from funding the flash ventureswith Toshiba; increasing our wafer supply; developing or enhancing our products; taking advantage of futureopportunities; engaging in investments in or acquisitions of companies; growing our business or responding tocompetitive pressures or unanticipated industry changes; any of which could harm our business.

Financing Arrangements. In May 2006, we issued and sold $1.15 billion in aggregate principal amount of1% Notes due 2013. The 1% Notes were issued at par and pay interest at a rate of 1% per annum. The 1% Notes maybe converted into our common stock, under certain circumstances, based on an initial conversion rate of12.1426 shares per $1,000 principal amount of notes (which represents an initial conversion price of approximately$82.36 per share). The conversion price will be subject to adjustment in some events but will not be adjusted foraccrued interest. The net proceeds to us from the offering of the 1% Notes were $1.13 billion. Concurrently with theissuance of the 1% Notes, we purchased a convertible bond hedge and sold warrants. The separate convertible bondhedge and warrant transactions are structured to reduce the potential future economic dilution associated with theconversion of the 1% Notes and to increase the initial conversion price to $95.03 per share.

In November 2006, we assumed through our acquisition of msystems, their $75 million in aggregate principalamount of 1% Convertible Senior Notes due 2035, or the 1% Notes due 2035. The 1% Notes due 2035 pay interest ata rate of 1% per annum. The 1% Notes due 2035 may be converted into our common stock, under certaincircumstances, based on an initial conversion rate of 26.8302 shares of common stock per $1,000 principal amountof notes (which represents an initial conversion price of approximately $37.27 per share). The conversion price willbe subject to adjustment in some events but will not be adjusted for accrued interest. See Note 5, “FinancingArrangements,” to our consolidated financial statements in Item 8 of this report.

Toshiba Ventures. We are a 49.9% percent owner in FlashVision, Flash Partners and Flash Alliance, orcollectively referred to as Flash Ventures, our business ventures with Toshiba to develop and manufacture NANDflash memory products. These NAND flash memory products are manufactured by Toshiba at Toshiba’s Yokkaichi,Japan operations using the semiconductor manufacturing equipment owned or leased by Flash Ventures. Thisequipment is funded or will be funded by investments in or loans to the ventures from us and Toshiba. FlashVentures purchase wafers from Toshiba at cost and then resells those wafers to us and Toshiba at cost plus a markup.We are contractually obligated to purchase half of Flash Ventures’ NAND wafer supply. We are not able to estimateour total wafer purchase obligations beyond our rolling three month purchase commitment because the price isdetermined by reference to the future cost to produce the semiconductor wafers. In addition to the semiconductorassets owned or leased by Flash Ventures, we directly own certain semiconductor manufacturing equipment inToshiba’s Yokkaichi, Japan operations from which we receive 100% of the output. See Note 13, “Related Partiesand Strategic Investments,” to our consolidated financial statements in Item 8 of this report.

From time-to-time, we and Toshiba mutually approve increases in the wafer supply capacity of Flash Venturesthat may contractually obligate us to increase capital funding. As of December 30, 2007, Flash Partners’ Fab 3 hadreached full capacity of approximately 150,000 wafers per month; however, we expect to continue to invest in FlashPartners in order to convert to the next technology node. The capacity of Flash Alliance’s Fab 4 at full expansion isexpected to be approximately 210,000 wafers per month, and the timeframe to reach full capacity is to be mutually

45

agreed upon by both parties. In fiscal year 2008, we expect to invest approximately $2 billion in Flash Ventures,which we expect will be funded through additional investments, loans, lease guarantees and working capitalcontributions to Flash Ventures. On February 19, 2008, we signed a non-binding memorandum of understandingwith Toshiba for a new memory wafer fab in Japan. No specific investment amount has been determined by theparties. However, we expect in fiscal year 2009 and beyond to be required to make investments, loans andguarantees related to our portion of the equipment and start-up costs, should a definitive agreement be signed. SeeNote 12, “Commitments, Contingencies and Guarantees,” to our consolidated financial statements in Item 8 of thisreport.

The cost of the wafers we purchase from Flash Ventures is recorded in inventory and ultimately cost of sales.Flash Ventures are variable interest entities, and we are not the primary beneficiary of these ventures because we areentitled to less than a majority of expected gains and losses with respect to each venture. Accordingly, we accountfor our investments under the equity method and do not consolidate.

Under Flash Ventures’ agreements, we agreed to share in Toshiba’s costs associated with NAND productdevelopment and its common semiconductor research and development activities. As of December 30, 2007, wehad accrued liabilities related to those expenses of $8.0 million. Our common research and development obligationrelated to Flash Ventures is variable but capped at fixed quarterly amounts through fiscal year 2008. In addition togeneral NAND product development and common semiconductor research performed by Toshiba, both partiesperform direct research and development activities specific to Flash Ventures, and our contribution is based on avariable computation. We and Toshiba each pay the cost of our own design teams and 50% of the wafer processingand similar costs associated with this direct design and development of flash memory.

For semiconductor fixed assets that are leased by Flash Ventures, we and/or Toshiba guaranteed, in whole or inpart, a portion of the outstanding lease payments under each of those leases through various methods. Theseobligations are denominated in Japanese yen and are noncancelable. Under the terms of the FlashVision lease,Toshiba guaranteed these commitments on behalf of FlashVision and we agreed to indemnify Toshiba for certainliabilities Toshiba incurs as a result of its guarantee of the FlashVision equipment lease arrangement. As ofDecember 30, 2007, the maximum amount of our contingent indemnification obligation, which reflects paymentsand any lease adjustments, was approximately 3.6 billion Japanese yen, or approximately $32 million based uponthe exchange rate at December 30, 2007. Under the terms of Flash Partners and Flash Alliance leases, we guaranteedon an unsecured and several basis 50% of Flash Partners and Flash Alliance’s lease obligations under master leaseagreements entered into from December 2004 through November 2007. Our total lease obligation guarantee, net oflease payments as of December 30, 2007, was 125.0 billion Japanese yen, or approximately $1.11 billion basedupon the exchange rate at December 30, 2007.

Contractual Obligations and Off-Balance Sheet Arrangements

Our contractual obligations and off-balance sheet arrangements at December 30, 2007, and the effect thosecontractual obligations are expected to have on our liquidity and cash flow over the next five years is presented intextual and tabular format in Note 12, “Commitments, Contingencies and Guarantees,” to our consolidated financialstatements included in Item 8 of this report.

Impact of Currency Exchange Rates

Exchange rate fluctuations could have a material adverse effect on our business, financial condition and resultsof operations. We have not used financial instruments to hedge our economic exposures related to costs or revenuedenominated in currencies other than the U.S. dollar. Our most significant foreign currency exposure is to theJapanese yen in which we purchase the vast majority of our NAND flash wafers. In addition, we also havesignificant expenses denominated in the Chinese renminbi, or RMB, and the Israeli New Israel shekel, or ILS. Wedo not enter into derivatives for speculative or trading purposes. In fiscal years 2007 and 2006, we used foreigncurrency forward contracts to mitigate transaction gains and losses generated by certain monetary assets andliabilities denominated in currencies other than the U.S. dollar. Our derivative instruments are recorded at fair valuewith changes recorded in other income (expense) or accumulated other income. See Note 12, “Commitments,Contingencies and Guarantees” to our consolidated financial statements included in Item 8 of this report.

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

Recent Accounting Pronouncements

See Note 2, “Recent Accounting Pronouncements” to our consolidated financial statements included in Item 8of this report.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to financial market risks, including changes in interest rates, foreign currency exchange ratesand marketable equity security prices.

Interest Rate Risk. Our exposure to market risk for changes in interest rates relates primarily to ourinvestment portfolio. The primary objective of our investment activities is to preserve principal while maximizingyields without significantly increasing risk. This is accomplished by investing in widely diversified marketablesecurities, consisting primarily of investment grade securities. As of December 30, 2007, a hypothetical 50 basispoint increase in interest rates would result in an approximate $12.7 million decline (less than 0.49%) in the fairvalue of our available-for-sale debt securities.

Foreign Currency Risk. A substantial majority of our revenue, expense and capital purchasing activity istransacted in U.S. dollars. However, we do enter into transactions in other currencies, primarily the Japanese yen.Movements in currency exchange rates, especially the Japanese yen, could cause variability in our revenues,expenses, or other income (expense), net. We had net forward exchange contracts in place to sell the U.S. dollarequivalent of approximately $538 million in foreign currencies based upon the exchange rate at December 30, 2007and approximately $72 million as of December 31, 2006. The effect of an immediate 10% adverse change inexchange rates on forward exchange contracts would result in an approximate $64 million loss. However, as weutilize foreign currency instruments for mitigating anticipated balance sheet exposures, a loss in fair value for thoseinstruments is generally offset by increases in the functional currency value of the underlying non-functionalcurrency-denominated monetary assets and liabilities. See Item 1A, “Risk Factors” and Note 12, “Commitments,Contingencies and Guarantees,” to our consolidated financial statements included in Item 8 of this report.

Market Risk. We also hold available-for-sale equity securities in semiconductor wafer manufacturingcompanies. As of December 30, 2007, a reduction in prices of 10% of these marketable equity securities wouldresult in a decrease in the fair value of our investments in marketable equity securities of approximately $2 million.

All of the potential changes noted above are based on sensitivity analysis performed on our financial position atDecember 30, 2007. Actual results may differ materially.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this item is set forth beginning at page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURE

Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. Under the supervision and with the participation of ourmanagement, including our principal executive officer and principal financial officer, we conducted an evaluationof the effectiveness of the design and operation of our disclosure controls and procedures, as defined inRules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as of the end of the period coveredby this report (the “Evaluation Date”). Based upon the evaluation, our principal executive officer and principalfinancial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective.Disclosure controls are controls and procedures designed to reasonably ensure that information required to bedisclosed in our reports filed under the Exchange Act, such as this report, is recorded, processed, summarized and

47

reported within the time periods specified in the SEC’s rules and forms. Disclosure controls include controls andprocedures designed to reasonably ensure that such information is accumulated and communicated to ourmanagement, including our chief executive officer and chief financial officer, as appropriate to allow timelydecisions regarding required disclosure. Our quarterly evaluation of disclosure controls and procedures includes anevaluation of some components of our internal control over financial reporting, and internal control over financialreporting is also separately evaluated on an annual basis for purposes of providing the management report which isset forth below.

Report of Management on Internal Control Over Financial Reporting. Our management is responsible forestablishing and maintaining a comprehensive system of internal control over financial reporting to providereasonable assurance of the proper authorization of transactions, the safeguarding of assets and the reliability of thefinancial records. Our internal control system was designed to provide reasonable assurance to our management andboard of directors regarding the preparation and fair presentation of published financial statements. The system ofinternal control over financial reporting provides for appropriate division of responsibility and is documented bywritten policies and procedures that are communicated to employees. The framework upon which managementrelied in evaluating the effectiveness of our internal control over financial reporting was set forth in InternalControls — Integrated Framework published by the Committee of Sponsoring Organizations of the TreadwayCommission.

Based on the results of our evaluation, our management concluded that our internal control over financialreporting was effective as of December 30, 2007.

However, projections of any evaluation of effectiveness to future periods are subject to the risk that controlsmay become inadequate because of changes in our business or other conditions, or that the degree of compliancewith our policies or procedures may deteriorate.

Our independent registered public accounting firm has audited the financial statements included in Item 8 ofthis report and has issued an attestation report on the Company’s internal control over financial reporting which isincluded at page F-3.

Inherent Limitations of Disclosure Controls and Procedures and Internal Control over Financial Reporting.It should be noted that any system of controls, however well designed and operated, can provide only reasonable,and not absolute, assurance that the objectives of the system will be met. In addition, the design of any controlsystem is based in part upon certain assumptions about the likelihood of future events.

Changes in Internal Control over Financial Reporting. There were no changes in our internal control overfinancial reporting (as defined in Exchange Act Rule 13a-15(f)) during the quarter ended December 30, 2007 thathave materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

Not applicable.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this item is set forth under “Business-Executive Officers” in this report and under“Election of Directors” and “Compliance with Section 16(a) of the Securities Exchange Act of 1934” in our ProxyStatement for our 2008 Annual Meeting of Stockholders, and is incorporated herein by reference.

We have adopted a code of ethics that applies to our principal executive officer and principal financial andaccounting officer. This code of ethics, which consists of the “SanDisk Code of Ethics for Financial Executives”

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section of our code of ethics that applies to employees generally, is posted on our website, www.sandisk.com. Ourcode of ethics may be found on our website as follows:

• From our main Web page, first click on “Corporate” and then on scroll down and click on “Business Conductand Ethics.”

• Next, click on “SanDisk’s Worldwide Code of Business Conduct and Ethics Policy.”

• Finally, scroll down to Part IV, “SanDisk Code of Ethics for Financial Executives.”

We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, orwaiver from, a provision of this code of ethics by posting the required information on our website, at the address andlocation specified above.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is set forth under “Director Compensation - Fiscal 2007,” “Report of theCompensation Committee,” “Compensation Discussion and Analysis,” “Summary Compensation Table - Fiscal2007,” “Outstanding Equity Awards at Fiscal 2007 Year-End” and “Option Exercises and Stock Vested in Fiscal2007” in our Proxy Statement for our 2008 Annual Meeting of Stockholders, and is incorporated herein byreference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTAND RELATED STOCKHOLDER MATTERS

The information required by this item is set forth under “Security Ownership of Certain Beneficial Owners andManagement and Related Stockholder Matters” and “Equity Compensation Information for Plans or IndividualArrangements with Employees and Non-Employees” in our Proxy Statement for our 2008 Annual Meeting ofStockholders, and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, DIRECTORINDEPENDENCE

The information required by this item is set forth under “Compensation Committee Interlocks and InsiderParticipation,” “Certain Transactions and Relationships,” and under “Election of Directors” in our Proxy Statementfor our 2008 Annual Meeting of Stockholders, and is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is set forth under the caption “Principal Accountant Fees and Services”and “Report of the Audit Committee” in our Proxy Statement for our 2008 Annual Meeting of Stockholders, and isincorporated herein by reference.

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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Documents filed as part of this report

1) All financial statements

Index to Financial Statements Page

Reports of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2

Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4

Consolidated Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5

Consolidated Statements of Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6

Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7

Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-8

All other schedules have been omitted because the required information is not present or not present inamounts sufficient to require submission of the schedules, or because the information required is included in theconsolidated financial statements or notes thereto.

2) Exhibits required by Item 601 of Regulation S-K

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

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SANDISK CORPORATION

INDEX TO FINANCIAL STATEMENTSPage

Reports of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2

Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4

Consolidated Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5

Consolidated Statements of Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6

Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7

Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-8

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders ofSanDisk Corporation

We have audited the accompanying consolidated balance sheets of SanDisk Corporation as of December 30,2007 and December 31, 2006, and the related consolidated statements of income, stockholders’ equity, and cashflows for each of the three years in the period ended December 30, 2007. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, theconsolidated financial position of SanDisk Corporation at December 30, 2007 and December 31, 2006, and theconsolidated results of their operations and their cash flows for each of the three years in the period endedDecember 30, 2007, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 8 to the consolidated financial statements, on January 2, 2006, SanDisk Corporationadopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share Based Payment. As discussedin Note 10 to the consolidated financial statements, on January 1, 2007, SanDisk Corporation adopted FASBInterpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, an interpretation of FASB StatementNo. 109.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of SanDisk Corporation’s internal control over financial reporting as ofDecember 30, 2007, based on criteria established in Internal Control — Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”) and our report, datedFebruary 19, 2008, expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

San Jose, CaliforniaFebruary 19, 2008

F-2

REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders ofSanDisk Corporation

We have audited SanDisk Corporation’s internal control over financial reporting as of December 30, 2007,based on criteria established in Internal Control — Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (the “COSO criteria”). SanDisk Corporation’s management isresponsible for maintaining effective internal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting included in the accompanying Report of Managementon Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internalcontrol over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance aboutwhether effective internal control over financial reporting was maintained in all material respects. Our auditincluded obtaining an understanding of internal control over financial reporting, assessing the risk that a materialweakness exists, testing and evaluating the design and operating effectiveness of internal control based on theassessed risk, and performing such other procedures as we considered necessary in the circumstances. We believethat our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles. A company’s internal control over financial reportingincludes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation of financial statements in accordancewith generally accepted accounting principles, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of the company; and (3) provide reasonableassurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’sassets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detectmisstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

In our opinion, SanDisk Corporation maintained, in all material respects, effective internal control overfinancial reporting as of December 30, 2007, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated balance sheets of SanDisk Corporation as of December 30, 2007 and December 31,2006, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the threeyears in the period ended December 30, 2007 of SanDisk Corporation and our report dated February 19, 2008expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

San Jose, CaliforniaFebruary 19, 2008

F-3

SANDISK CORPORATION

CONSOLIDATED BALANCE SHEETS

December 30,2007

December 31,2006

(In thousands, except for shareand per share amounts)

ASSETSCurrent assets:

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 833,749 $1,580,700Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,001,641 1,251,493Accounts receivable from product revenues, net of allowance for doubtful

accounts of $13,790 in fiscal year 2007 and $11,452 in fiscal year 2006 . . . . 462,983 611,740Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 555,077 495,984Deferred taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212,255 176,007Other current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233,952 125,937

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,299,657 4,241,861Long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,060,393 457,184Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 422,895 317,965Notes receivable and investments in flash ventures with Toshiba . . . . . . . . . . . . . 1,108,905 462,307Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117,130 102,100Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 840,870 910,254Intangibles, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 322,023 389,078Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,946 87,034

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7,234,819 $6,967,783

LIABILITIES AND STOCKHOLDERS’ EQUITYCurrent liabilities:

Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 285,711 $ 261,870Accounts payable to related parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158,443 139,627Other current accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 286,850 311,000Deferred income on shipments to distributors and retailers and deferred

revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182,879 183,950

Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 913,883 896,447Convertible long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,225,000 1,225,000Non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135,252 72,226

Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,274,135 2,193,673

Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,067 5,976Commitments and contingenciesStockholders’ equity:

Preferred stock, $0.001 par value, Authorized shares:4,000,000, Issued and outstanding: none. . . . . . . . . . . . . . . . . . . . . . . . . . . . — —Common stock, $0.001 par value; Authorized shares:800,000,000; Issued and outstanding: 224,166,707 in fiscal year 2007 and

226,518,283 in fiscal year 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224 226Capital in excess of par value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,796,849 3,656,895Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,130,069 1,105,520Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . 32,475 5,493

Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,959,617 4,768,134

Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . $7,234,819 $6,967,783

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

F-4

SANDISK CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

December 30,2007

December 31,2006

January 1,2006

Fiscal Years Ended

(In thousands, except per share amounts)

Revenues:

Product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,446,125 $2,926,472 $2,066,607

License and royalty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 450,241 331,053 239,462

Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,896,366 3,257,525 2,306,069

Cost of product revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,628,838 2,007,684 1,333,335

Amortization of acquisition-related intangible assets . . . . . . . . . . . 64,809 10,368 —

Total cost of product revenues . . . . . . . . . . . . . . . . . . . . . . . . 2,693,647 2,018,052 1,333,335

Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,202,719 1,239,473 972,734

Operating expenses:

Research and development. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 418,066 306,866 194,810

Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 294,594 203,406 122,232

General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181,509 159,835 79,110

Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,728 — —

Write-off of acquired in-process technology . . . . . . . . . . . . . . . . — 225,600 —

Amortization of acquisition-related intangible assets . . . . . . . . . . 25,308 17,432 —

Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 926,205 913,139 396,152

Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 276,514 326,334 576,582

Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133,355 101,088 42,835

Income (loss) in equity investments . . . . . . . . . . . . . . . . . . . . . . . . (9,949) 6,678 (7,847)

Interest (expense) and other income (expense), net . . . . . . . . . . . . . (1,504) (3,392) 1,737

Total other income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121,902 104,374 36,725

Income before provision for income taxes . . . . . . . . . . . . . . . . . . . 398,416 430,708 613,307

Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174,848 230,193 226,923

Income after taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223,568 200,515 386,384Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,211 1,619 —

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 218,357 $ 198,896 $ 386,384


Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.96 $ 1.00 $ 2.11

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.93 $ 0.96 $ 2.00

Shares used in computing net income per share:

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227,744 198,929 183,008

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235,857 207,451 193,016


F-5

SANDISK CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

CommonStock

Shares

CommonStock

Par Value

Capital inExcess of

ParValue

RetainedEarnings

AccumulatedOther

ComprehensiveIncome(Loss)

DeferredCompensation

TotalStockholders’

Equity

(In thousands)

Balance at January 2, 2005. . . . . . . . . . . . . 179,964 $180 $1,406,373 $ 520,240 $ 18,893 $(5,536) $1,940,150

Net income . . . . . . . . . . . . . . . . . . . . . . 386,384 386,384Unrealized loss on available for sale

securities . . . . . . . . . . . . . . . . . . . . . . (1,901) (1,901)Unrealized loss on investments in foundries . . (840) (840)Foreign currency translation . . . . . . . . . . . . (13,517) (13,517)

Comprehensive income . . . . . . . . . . . . . . . 370,126

Issuance of shares pursuant to equity plans. . . 7,937 8 108,686 108,694Issuance of stock pursuant to employee stock

purchase plan. . . . . . . . . . . . . . . . . . . . 321 6,704 6,704Deferred compensation . . . . . . . . . . . . . . . 4,438 (4,438) —Amortization of deferred compensation . . . . . 2,499 2,499Income tax benefit from stock options

exercised . . . . . . . . . . . . . . . . . . . . . . 95,618 95,618

Balance at January 1, 2006. . . . . . . . . . . . . 188,222 188 1,621,819 906,624 2,635 (7,475) 2,523,791

Net income . . . . . . . . . . . . . . . . . . . . . . 198,896 198,896Unrealized income on available for sale

securities . . . . . . . . . . . . . . . . . . . . . . 2,315 2,315Unrealized loss on investments in foundries . . (227) (227)Foreign currency translation . . . . . . . . . . . . 770 770



purchase plan. . . . . . . . . . . . . . . . . . . . 264 9,250 9,250Issuance of restricted stock . . . . . . . . . . . . . 63 —Income tax benefit from stock options

exercised . . . . . . . . . . . . . . . . . . . . . . 61,453 61,453Share-based compensation expense and

reversal of deferred compensation . . . . . . . 96,415 7,475 103,890Purchased calls . . . . . . . . . . . . . . . . . . . . (386,090) (386,090)Sold Warrants . . . . . . . . . . . . . . . . . . . . . 308,672 308,672Tax benefit on purchased calls . . . . . . . . . . 145,556 145,556Issuance of stock and equity awards related to

acquisitions . . . . . . . . . . . . . . . . . . . . . 33,108 33 1,686,356 1,686,389Reclass of premium on assumed msystems

convertible debt . . . . . . . . . . . . . . . . . . 26,415 26,415

Balance at December 31, 2006 . . . . . . . . . . 226,518 226 3,656,895 1,105,520 5,493 — 4,768,134

Net income . . . . . . . . . . . . . . . . . . . . . . 218,357 218,357Unrealized income on available for sale

investments . . . . . . . . . . . . . . . . . . . . . 11,185 11,185Foreign currency translation . . . . . . . . . . . . 15,797 15,797



purchase plan. . . . . . . . . . . . . . . . . . . . 386 — 13,296 13,296Income tax benefit from stock options

exercised . . . . . . . . . . . . . . . . . . . . . . 18,442 18,442Shared-based compensation expense . . . . . . . 132,647 132,647Cumulative effect to prior year related to

unrecognized tax benefits upon adoption ofFIN 48 . . . . . . . . . . . . . . . . . . . . . . . . (4,756) (993) (5,749)

Share repurchases . . . . . . . . . . . . . . . . . . (7,461) (7) (106,785) (192,815) (299,607)Consolidated venture capital contributions . . . 100 100

Balance at December 30, 2007 . . . . . . . . . . 224,167 $224 $3,796,849 $1,130,069 $ 32,475 $ — $4,959,617


F-6

SANDISK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

December 30,2007

December 31,2006

January 1,2006

Fiscal Years Ended

(In thousands)Cash flows from operating activities:Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 218,357 $ 198,896 $ 386,384Adjustments to reconcile net income to net cash provided by operating activities:

Deferred and other taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (35,188) (25,636) (1,538)(Gain) loss on equity investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,844 (2,480) 8,480Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255,743 135,585 65,774Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,530 3,316 (272)FlashVision wafer cost adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — (2,263)Share-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133,010 100,641 —Excess tax benefit from share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . (18,375) (57,393) —Write-off of acquired in-process technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 225,600 —Other non-cash charges (income) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,877 (313) 9,833Changes in operating assets and liabilities:

Accounts receivable from product revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145,657 (115,061) (134,207)Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (57,586) (23,660) (135,162)Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (34,789) (12,094) (31,148)Accounts payable trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,772 (64,228) 148,234Accounts payable to related parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,966 24,617 24,657Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14,891) 210,273 142,083

Total adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 434,570 399,167 94,471

Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 652,927 598,063 480,855

Cash flows from investing activities:Purchases of short and long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,717,897) (2,135,973) (807,467)Proceeds from sale and maturities of short and long-term investments . . . . . . . . . . . . . . . . 3,399,583 1,497,120 722,986Notes receivable from Matrix Semiconductor, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — (20,000)Acquisition of property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (258,954) (176,474) (134,477)Notes receivable proceeds (issuance), FlashVision Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . 37,512 23,538 (34,249)Notes receivable from Flash Partners Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (525,252) (95,445) —Notes receivable from Tower Semiconductor Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (9,705) —Investment in Flash Partners Ltd. and Flash Alliance Ltd. . . . . . . . . . . . . . . . . . . . . . . . (125,547) (132,209) (21,790)Purchased technology and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (27,803) — (4,500)Cash acquired in business combinations, net of acquisition costs . . . . . . . . . . . . . . . . . . . . — 51,087 —

Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,218,358) (978,061) (299,497)

Cash flows from financing activities:Proceeds from issuance of convertible senior notes, net of issuance costs. . . . . . . . . . . . . . . — 1,125,500 —Proceeds from employee stock programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,311 96,304 115,398Proceeds from debt financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,803 — —Purchase of convertible bond hedge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (386,090) —Proceeds from issuance of warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 308,672 —Distribution to minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,880) (4,491) —Excess tax benefit from share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,375 57,393 —Share repurchase programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (299,607) — —

Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (180,998) 1,197,288 115,398

Effect of changes in foreign currency exchange rates on cash . . . . . . . . . . . . . . . . . . . . . . . (522) 1,352 1,507

Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . (746,951) 818,642 298,263Cash and cash equivalents at beginning of the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,580,700 762,058 463,795

Cash and cash equivalents at end of the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 833,749 $ 1,580,700 $ 762,058

Supplemental disclosure of cash flow information:Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (193,300) $ (81,100) $ (164,345)

Cash paid for interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (15,168) $ (6,965) $ (17)

Non-cash financing and investing activities:Issuance of shares in a business combination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ 1,607,450 $ —


F-7

Notes to Consolidated Financial Statements

Note 1: Organization and Summary of Significant Accounting Policies

Organization and Nature of Operations. SanDisk Corporation (together with its subsidiaries, the “Com-pany”) was incorporated in Delaware on June 1, 1988. The Company designs, develops, markets and manufacturesflash storage card products used in a wide variety of consumer electronics products. The Company operates in onesegment, flash memory storage products.

Basis of Presentation. The Company’s fiscal year ends on the Sunday closest to December 31. Fiscal years2007, 2006 and 2005 each consisted of 52 weeks.

Principles of Consolidation. The consolidated financial statements include the accounts of the Company andits majority-owned subsidiaries. All intercompany balances and transactions have been eliminated. Minorityinterest represents the minority shareholders’ proportionate share of the net assets and results of operations of theCompany’s majority-owned subsidiaries. The consolidated financial statements also include the results of com-panies acquired by the Company from the date of each acquisition.

Reclassification. Certain prior period amounts have been reclassified to conform to the current periodpresentation, including the reclassification of publicly traded unrestricted equity securities from other current assetsto short-term investments.

Use of Estimates. The preparation of financial statements in conformity with generally accepted accountingprinciples in the United States (“U.S. GAAP”), requires management to make estimates and assumptions that affectthe amounts reported in the financial statements and accompanying notes. The estimates and judgments affect thereported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On anongoing basis, the Company evaluates its estimates, including those related to customer programs and incentives,product returns, bad debts, inventories and related impairment, investments, income taxes, warranty obligations,restructuring and contingencies, share-based compensation and litigation. The Company bases estimates onhistorical experience and on other assumptions that its management believes are reasonable under the circum-stances. These estimates form the basis for making judgments about the carrying values of assets and liabilitieswhen those values are not readily apparent from other sources. Actual results could differ from these estimates.

Revenue Recognition, Sales Returns and Allowances and Sales Incentive Programs. The Company recog-nizes revenues when the earnings process is complete, as evidenced by an agreement with the customer, transfer oftitle and acceptance, if applicable, fixed or determinable pricing and reasonable assurance of realization. Salesmade to distributors and retailers are generally under agreements allowing price protection and/or a right of returnand, therefore, the revenues and related costs of these transactions are deferred until the retailers or distributors sell-through the merchandise to their end customer, or the rights of return expire. Estimated sales returns are providedfor as a reduction to product revenue and were not material for any period presented in the accompanyingconsolidated financial statements. The cost of shipping products to customers is included in cost of productrevenues. The Company recognizes expenses related to sales commissions in the period in which they are earned.

Revenue from patent licensing arrangements is recognized when earned and estimable. The timing of revenuerecognition is dependent on the terms of each license agreement and on the timing of sales of licensed products. TheCompany generally recognizes royalty revenue when it is reported to the Company by its licensees, which isgenerally one quarter in arrears from the licensees’ sales. For licensing fees that are not determined by the number oflicensed units sold, the Company recognizes license fee revenue on a straight-line basis over the life of the license.

The Company records estimated reductions of revenue for customer and distributor incentive programs andofferings, including price protection, promotions, co-op advertising and other volume-based incentives andexpected returns. Additionally, the Company has incentive programs that require it to estimate, based on historicalexperience, the number of customers who will actually redeem the incentive. All sales incentive programs arerecorded as an offset to product revenues or deferred revenues. Marketing development programs are recorded as areduction to revenue in compliance with Emerging Issues Task Force No. 01-9, (“EITF 01-9”), Accounting forConsideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products).

F-8

Accounts Receivable and Allowance for Doubtful Accounts. Accounts receivable include amounts owed bygeographically dispersed distributors, retailers and OEM customers. No collateral is required. Provisions areprovided for sales returns and credit losses.

The Company estimates the collectibility of its accounts receivable based on a combination of factors. Incircumstances where the Company is aware of a specific customer’s inability to meet its financial obligations to theCompany (e.g., bankruptcy filings or substantial down-grading of credit ratings), the Company provides allowancefor bad debts against amounts due to reduce the net recognized receivable to the amount it reasonably believes willbe collected.

Income Taxes. The Company accounts for income taxes using an asset and liability approach, which requiresrecognition of deferred tax assets and liabilities for the expected future tax consequences of events that have beenrecognized in the Company’s consolidated financial statements, but have not been reflected in the Company’staxable income. A valuation allowance is established to reduce deferred tax assets to their estimated realizablevalue. Therefore, the Company provides a valuation allowance to the extent that the Company does not believe it ismore likely than not that it will generate sufficient taxable income in future periods to realize the benefit of itsdeferred tax assets.

In July 2006 the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48 (“FIN 48”),Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109. FIN 48 providesdetailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positionsrecognized in an enterprise’s financial statements in accordance with SFAS 109. Income tax positions must meet amore-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and insubsequent periods. The Company adopted FIN 48 effective January 1, 2007 and the provisions of FIN 48 have beenapplied to all income tax positions commencing from that date. The Company recognizes interest and penaltiesrelated to unrecognized tax benefits in income tax expense. The cumulative effect of applying the provisions ofFIN 48 has been reported as an adjustment to the opening balance of our retained earnings as of January 1, 2007.

Foreign Currency. The Company determines the functional currency for its parent company and each of itssubsidiaries by reviewing the currencies in which their respective operating activities occur. Transaction gains andlosses arising from activities in other than the applicable functional currency are calculated using average exchangerates for the applicable period and reported in net income as a non-operating item in each period. Non-monetarybalance sheet items denominated in a currency other than the applicable functional currency are translated using theexchange rate in effect on the balance sheet date and any gains and losses are included in cumulative translationadjustment. The Company continuously evaluates its foreign currency exposures and may continue to enter intohedges or other risk mitigating arrangements in the future. Aggregate gross foreign currency transaction gain (loss)prior to corresponding foreign exchange hedge offset recorded to net income was $15.6 million, ($2.5) million and($5.1) million in fiscal years 2007, 2006 and 2005, respectively.

Cash Equivalents, Short and Long-Term Investments. Cash equivalents consist of short-term, highly liquidfinancial instruments with insignificant interest rate risk that are readily convertible to cash and have maturities ofthree months or less from the date of purchase. Short and long-term fixed income investments consist of commercialpaper, United States (“U.S.”) government and agency obligations, corporate/municipal notes and bonds, auctionrate securities and variable rate demand notes, all with high-credit quality. Both short and long-term investmentsalso include investments in certain equity securities. The fair market value, based on quoted market prices, of cashequivalents, short and long-term investments at December 30, 2007 approximated their carrying value. Cost ofsecurities sold is based on a first-in, first-out method.

In determining if and when a decline in market value below cost of these investments is other-than-temporary,the Company evaluates both quantitative and qualitative information including the market conditions, offeringprices, trends of earnings, price multiples and other key measures. When such a decline in value is deemed to beother-than-temporary, the Company recognizes an impairment loss in the current period operating results to theextent of the decline.

F-9

Notes to Consolidated Financial Statements — (Continued)

Property and Equipment. Property, plant and equipment are carried at cost less accumulated depreciation,estimated residual value, if any, and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets or the remaining lease term, whichever is shorter, rangingfrom two to twenty-five years.

Variable Interest Entities. The Company evaluates its equity method investments to determine whether anyinvestee is a variable interest entity within the meaning of the FASB Interpretation No. 46R, (“FIN 46R”),Accounting for Variable Interest Entities. If the Company concludes that an investee is a variable interest entity, theCompany evaluates its expected gains and losses of such investee to determine whether the Company is the primarybeneficiary of the investee. If the Company is the primary beneficiary of a variable interest entity, the Companyconsolidates such entity and reflects the minority interest of other beneficiaries of that entity. If the Companyconcludes that an investee is not a variable interest entity, the Company does not consolidate the investee.

Equity Investments. The Company accounts for investments in equity securities of other entities, includingvariable interest entities that are not consolidated, under the cost method of accounting if investments in votingequity interests of the investee is less than 20%. The equity method of accounting is used if its investment in votingstock is greater than or equal to 20% but less than a majority. In considering the accounting method for investmentsless than 20%, the Company also considers other factors such as its ability to exercise significant influence overoperating and financial policies of the investee. If certain factors are present, the Company could account forinvestments for which it has less than a 20% ownership under the equity method of accounting. Certain of theCompany’s investments carry restrictions on immediate disposition. Investments in public companies withrestrictions of less than one year are classified as available-for-sale and are adjusted to their fair market valuewith unrealized gains and losses recorded as a component of accumulated other comprehensive income. Invest-ments in public companies with restrictions greater than one year are carried at cost. Investments in public and non-public companies are reviewed on a quarterly basis to determine if their value has been impaired and adjustmentsare recorded as necessary. Upon disposition of these investments, the specific identification method is used todetermine the cost basis in computing realized gains or losses. Declines in value that are judged to be other-than-temporary are reported in other income (expense) in the accompanying Consolidated Statements of Income.

Inventories and Inventory Valuation. Inventories are stated at the lower of cost (first-in, first-out) or market.Market value is based upon an estimated average selling price reduced by estimated costs of disposal. Should actualmarket conditions differ from the Company’s estimates, the Company’s future results of operations could bematerially affected. Reductions in inventory valuation are included in cost of product revenues in the accompanyingConsolidated Statements of Income. The Company’s inventory impairment charges permanently establish a newcost basis and are not subsequently reversed to income even if circumstances later suggest that increased carryingamounts are recoverable. Rather these amounts are reversed into income only if, as and when the inventory is sold.

The Company reduces the carrying value of its inventory to a new basis for estimated obsolescence orunmarketable inventory by an amount equal to the difference between the cost of the inventory and the estimatedmarket value based upon assumptions about future demand and market conditions, including assumptions aboutchanges in average selling prices. If actual market conditions are less favorable than those projected by manage-ment, additional reductions in inventory valuation may be required.

The Company’s finished goods inventory includes consigned inventory held at customer locations as well as atthird-party fulfillment centers and subcontractors.

Other Long-Lived Assets. Intangible assets with definite useful lives and other long-lived assets are tested forimpairment in accordance with Statement of Financial Accounting Standards No. 144 (“SFAS 144”), Accountingfor Impairment of Disposal of Long-Lived Assets. The Company assesses the carrying value of long-lived assets,whenever events or changes in circumstances indicate that the carrying value of these long-lived assets may not berecoverable. Factors the Company considers important which could result in an impairment review include(1) significant under-performance relative to the historical or projected future operating results, (2) significantchanges in the manner of use of assets, (3) significant negative industry or economic trends, and (4) significantchanges in the Company’s market capitalization relative to net book value. Any changes in key assumptions about

F-10


the business or prospects, or changes in market conditions, could result in an impairment charge and such a chargecould have a material adverse effect on the Company’s consolidated results of operations.

Fair Value of Financial Instruments. For certain of the Company’s financial instruments, including accountsreceivable, short-term investments and accounts payable, the carrying amounts approximate fair market value dueto their short maturities. For those financial instruments where the carrying amounts differ from fair market value,the following table represents the related cost basis and the estimated fair values, which are based on quoted marketprices (in millions):

CarryingValue

Estimated FairValue

CarryingValue

Estimated FairValue

As of December 30, 2007 As of December 31, 2006

1% Convertible senior notes due 2013 . . . . . . . $1,150 $913 $1,150 $995

1% Convertible notes due 2035 . . . . . . . . . . . . 75 85 75 98

Restricted long-term securities . . . . . . . . . . . . . — — 10 15

Advertising Expenses. Marketing co-op development programs, where the Company receives, or willreceive, an identifiable benefit (goods or services) in exchange for the amount paid to its customer and theCompany can reasonably estimate the fair value of the benefit it receives for the customer incentive payment, areclassified, when granted, as marketing expense. Advertising expenses not meeting this criteria are classified as areduction to product revenue. Any other advertising expenses not meeting these conditions are expensed asincurred. Advertising expenses were $35.5 million, $24.8 million and $15.2 million in fiscal years 2007, 2006 and2005, respectively.

Research and Development Expenses. Research and development expenditures are expensed as incurred.

Note 2: Recent Accounting Pronouncements

SFAS No. 160. In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160(“SFAS 160”), Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51. Thestandard changes the accounting for noncontrolling (minority) interests in consolidated financial statementsincluding the requirements to classify noncontrolling interests as a component of consolidated stockholders’equity, to identify earnings attributable to noncontrolling interests reported as part of consolidated earnings, and tomeasure gain or loss on the deconsolidated subsidiary based upon the fair value of the noncontrolling equityinvestment. Additionally, SFAS 160 revises the accounting for both increases and decreases in a parent’s controllingownership interest. SFAS 160 is effective for fiscal years beginning after December 15, 2008, with early adoptionprohibited. The Company is assessing the impact of SFAS 160 to its consolidated results of operations and financialposition.

SFAS No. 141 (revised). In December 2007, the FASB issued Statement of Financial Accounting StandardsNo. 141 (revised) (“SFAS 141(R)”), Business Combinations. The standard changes the accounting for businesscombinations by requiring that an acquiring entity measure and recognize identifiable assets acquired and liabilitiesassumed at the acquisition date fair value with limited exceptions. The changes include the treatment of acquisition-related transaction costs, the valuation of any noncontrolling interest at acquisition date fair value, the recording ofacquired contingent liabilities at acquisition date fair value and the subsequent re-measurement of such liabilitiesafter the acquisition date, the recognition of capitalized in-process research and development, the accounting foracquisition-related restructuring cost accruals subsequent to the acquisition date, and the recognition of changes inthe acquirer’s income tax valuation allowance. SFAS 141(R) is effective for fiscal years beginning after Decem-ber 15, 2008, with early adoption prohibited. The accounting treatment related to pre-acquisition uncertain taxpositions will change when SFAS 141(R) becomes effective, which will be in the first quarter of the Company’sfiscal year 2009. At such time, any changes to the recognition or measurement of uncertain tax positions related topre-acquisition periods will be recorded through income tax expense, whereas currently the accounting treatmentwould require any adjustment to be recognized through the purchase price. The Company expects SFAS 141(R) willhave an impact on its consolidated financial statements when effective, but the nature and magnitude of the specific

F-11


effects will depend upon the nature, terms and size of the acquisitions the Company consummates after the effectivedate. The Company is assessing the impact of SFAS 141(R) to its future consolidated financial statements.

SFAS No. 157. In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157(“SFAS 157”), Fair Value Measurements. SFAS 157 defines fair value, establishes a market-based framework orhierarchy for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 is applicablewhenever another accounting pronouncement requires or permits assets and liabilities to be measured at fair value.SFAS 157 does not expand or require any new fair value measures. The provisions of SFAS 157 are to be appliedprospectively and are effective for financial statements issued for fiscal years beginning after November 15, 2007.The Company will adopt SFAS 157 beginning in the first quarter of fiscal year 2008 and does not expect theadoption of SFAS 157 to have a material impact to its consolidated results of operations and financial position.

In February 2008, the FASB issued Staff Position No. FAS 157-1 (“FSP FAS 157-1”), Application of FASBStatement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair ValueMeasurements for Purposes of Lease Classification or Measurement Under Statement 13 and Staff PositionNo. FAS 157-2 (“FSP FAS 157-2”), Effective Date of FASB Statement No. 157. FSP FAS 157-1 excludes Statementof Financial Accounting Standards No. 13 (“SFAS 13”), Accounting for Leases, as well as other accountingpronouncements that address fair value measurements on lease classification or measurement under SFAS 13 fromthe scope of SFAS 157. FSP FAS 157-2 delays the effective date of SFAS 157 for all nonrecurring fair valuemeasurements of nonfinancial assets and nonfinancial liabilities until fiscal years beginning after November 15,2008. Both FSP FAS 157-1 and FSP FAS 157-2 are effective upon an entity’s initial adoption of SFAS 157, which isthe Company’s first quarter of fiscal year 2008.

SFAS No. 159. In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159(“SFAS 159”), Establishing the Fair Value Option for Financial Assets and Liabilities. The FASB has issuedSFAS 159 to permit all entities to elect, at specified election dates, to measure eligible financial instruments at fairvalue. An entity shall report unrealized gains and losses on items for which the fair value option has been elected inearnings at each subsequent reporting date, and recognize upfront costs and fees related to those items in earnings asincurred and not deferred. SFAS 159 applies to fiscal years beginning after November 15, 2007, with early adoptionpermitted for an entity that has also elected to apply the provisions of SFAS 157. An entity is prohibited fromretrospectively applying SFAS 159, unless it chooses early adoption. SFAS 159 also applies to eligible itemsexisting at November 15, 2007 (or early adoption date). The Company will adopt SFAS 159 beginning in the firstquarter of fiscal year 2008 and does not expect SFAS 159 to have a material impact to its consolidated results ofoperations and financial condition.

EITF Issue No. 07-3. In the June 2007 meeting, the Emerging Issues Task Force (“EITF”), reached a finalconsensus on EITF Issue No. 07-3 (“EITF 07-3”), Accounting for Advance Payments for Goods or Services to beReceived for Use in Future Research and Development Activities. The consensus requires companies to defer andcapitalize prepaid, nonrefundable research and development payments to third parties over the period that theresearch and development activities are performed or the services are provided, subject to an assessment ofrecoverability. EITF 07-3 is effective for new contracts entered into in fiscal years beginning after December 15,2007, including interim periods within those fiscal years. The Company will adopt this pronouncement beginning inthe first quarter of fiscal year 2008 and does not expect the adoption of EITF 07-3 to have a material impact on itsconsolidated results of operations and financial condition.

FSP No. APB 14-a. The FASB issued a proposed FASB Staff Position (“FSP”) No. APB 14-a, Accounting forConvertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement).The proposed FSP would require the issuer to separately account for the liability and equity components of theinstrument in a manner that reflects the issuer’s economic interest cost. Further, the proposed FSP would requirebifurcation of a component of the debt, classification of that component to equity, and then accretion of the resultingdiscount on the debt to result in the “economic interest cost” being reflected in the statement of operations. InNovember 2007, the FASB announced it is expected to begin its redeliberations of the proposed FSP in February2008. Therefore, final guidance will not be issued until at least the end of the first quarter of 2008, and earlier

F-12


application would not be permitted. The guidance in the proposed FSP would be applied retrospectively to allperiods presented. While the proposed FSP has not yet been finalized by the FASB, the Company’s initial estimatebased upon the current interpretations by the FASB, is that the Company would be required to report an additionalbefore tax, non-cash interest expense of approximately $400 million over the life of the 1% Senior ConvertibleNotes due 2013, including approximately $50 million to $55 million in fiscal year 2008. However, these amountsare subject to material change based upon finalization of the proposed FSP.

Note 3: Balance Sheet Information

Available-for-Sale Investments. Available-for-sale investments for the fiscal years ended December 30, 2007and December 31, 2006 were as follows (in thousands):

Book Value

GrossUnrealized

Gains

GrossUnrealized

LossesMarketValue Book Value

GrossUnrealized

Gains

GrossUnrealized

LossesMarketValue

December 30, 2007 December 31, 2006

U.S. Treasury and agency securities . . $ 142,667 $ 269 $ — $ 142,936 $ 846,560 $ 257 $ (962) $ 845,855

U.S. Corporate notes and bonds. . . . . 340,458 11 — 340,469 975,597 — (423) 975,174

Municipal notes and bonds . . . . . . . 2,094,585 12,203 (109) 2,106,679 1,207,611 224 (200) 1,207,635

Equity investments . . . . . . . . . . . . 89,678 6,266 (10,965) 84,979 90,350 14,528 (4,938) 99,940

Total available-for-sale investments . . $2,667,388 $ 18,749 $ (11,074) $2,675,063 $3,120,118 $ 15,009 $ (6,523) $3,128,604

A summary of the carrying values and balance sheet classification for the fiscal years ended December 30,2007 and December 31, 2006 were as follows (in thousands):

December 30,2007

December 31,2006

Cash on hand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 220,720 $ 160,773

Cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 613,029 1,419,927

Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,001,641 1,251,493

Long-term investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,060,393 457,184

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,895,783 $3,289,377

The following table summarizes at December 30, 2007, those securities that have been in an unrealized lossposition, the fair value and gross unrealized losses on the available-for-sale investments aggregated by type ofinvestment instrument, and the length of time that individual securities have been in a continuous unrealized lossposition. All unrealized losses on available-for-sale securities have been in a continuous unrealized loss position forless than 12 months. Available-for-sale securities that were in an unrealized gain position have been excluded fromthe table (in thousands):

Market Value

GrossUnrealized

Losses

Less than 12 Months

U.S. Treasury and agency securities . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 39,859 $ —

Municipal notes and bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66,034 (109)

Equity investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,436 (10,965)

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 166,329 $ (11,074)

The gross unrealized losses related to fixed income securities were primarily due to changes in interest rates.The gross unrealized loss related to publicly traded equity securities were due to changes in market prices. Grossunrealized losses on all available-for-sale securities at December 30, 2007 are considered temporary in nature.Factors considered in determining whether a loss is temporary include the length of time and extent to which fair

F-13


value has been less than the cost basis, the financial condition and near-term prospects of the investee, and theCompany’s intent and ability to hold an investment for a period of time sufficient to allow for any anticipatedrecovery in market value.

Gross realized gains and losses on sales of available-for-sale securities during the fiscal year endedDecember 30, 2007 were immaterial.

Debt securities at December 30, 2007 by contractual maturity are shown below (in thousands). Actualmaturities may differ from contractual maturities because issuers of the securities may have the right to prepayobligations.

CostEstimatedFair Value

Short and long-term investments:

Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 980,157 $ 981,513

Due after one year through five years . . . . . . . . . . . . . . . . . . . . . . . 984,536 995,541

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,964,693 $1,977,054

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

December 30,2007

December 31,2006

Trade accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,027,588 $1,056,616

Related party accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,725 41,708

Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13,790) (11,452)

Price protection, promotions and other activities . . . . . . . . . . . . . . . . . (555,540) (475,132)

Total accounts receivable from product revenues, net . . . . . . . . . . . . $ 462,983 $ 611,740

See Note 13, “Related Parties and Strategic Investments,” for additional information on related party accountsreceivable.

Allowance for Doubtful Accounts. The activity in the allowance for doubtful accounts was as follows (inthousands):

December 30,2007

December 31,2006

January 1,2006

Balance, beginning of period . . . . . . . . . . . . . . . . . . . . . $ 11,452 $ 8,050 $ 8,462

Additions charged to costs and expenses . . . . . . . . . . . . . 3,519 6,142 376

Deductions (write-offs) . . . . . . . . . . . . . . . . . . . . . . . . . . (1,181) (2,740) (788)

Balance, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,790 $ 11,452 $ 8,050

Inventory. Inventories, net of reserves, were as follows (in thousands):

December 30,2007

December 31,2006

Raw material . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 197,077 $ 157,163

Work-in-process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94,283 64,009

Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 263,717 274,812

Total inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 555,077 $ 495,984

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

December 30,2007

December 31,2006

Royalty and other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 103,802 $ 97,130

Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,874 22,276

Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108,276 6,531

Total other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 233,952 $ 125,937

Property and Equipment. Property and equipment consisted of the following (in thousands):

December 30,2007

December 31,2006

Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 649,075 $ 483,134

Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68,664 54,411

Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,972 24,148

Capital land lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,272 3,197

Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,382 5,604

Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,419 13,957

Property and equipment, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 797,784 584,451

Accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . (374,889) (266,486)

Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 422,895 $ 317,965

Depreciation expense of property, plant and equipment totaled $146.8 million, $102.5 million and$63.1 million in fiscal years 2007, 2006 and 2005, respectively.

Notes Receivable and Investments in the Flash Ventures with Toshiba. Notes receivable and investments inthe flash ventures with Toshiba were as follows (in thousands):

December 30,2007

December 31,2006

Notes receivable, FlashVision Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ 38,229

Notes receivable, Flash Partners Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . 639,834 92,421

Investment in FlashVision Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159,146 159,144

Investment in Flash Partners Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177,529 168,210

Investment in Flash Alliance Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132,396 4,303

Total notes receivable and investments in the flash ventures withToshiba . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,108,905 $ 462,307

In the fourth quarter of fiscal year 2007, the Company recorded a $10.0 million impairment charge related to itsequity investment in FlashVision. The Company is currently in negotiations with Toshiba regarding the future of theFlashVision venture which may include Toshiba purchasing the Company’s shares, sale and distribution of theventure’s equipment and underlying assets or a combination thereof. The impairment charge is based upon theexpected outcome of these negotiations and related cash flows. There can be no assurance of a positive outcome tothese negotiations which could lead to additional impairment charges.

F-15


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

December 30,2007

December 31,2006

Accrued payroll and related expenses . . . . . . . . . . . . . . . . . . . . . . . . . . $ 94,220 $ 61,050

Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,945 110,009

Research and development liability, related party. . . . . . . . . . . . . . . . . . 8,000 5,850

Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127,685 134,091

Total other current accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . $286,850 $311,000

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

December 30,2007

December 31,2006

Deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,479 $ 27,257

Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79,608 —

Accrued restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,891 13,799

Other non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,274 31,170

Total non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $135,252 $ 72,226

Warranties. Liability for warranty expense is included in other accrued liabilities in the accompanyingconsolidated balance sheets and the activity was as follows (in thousands):

December 30,2007

December 31,2006

January 1,2006

Balance, beginning of period . . . . . . . . . . . . . . . . . . . . . $ 15,338 $ 11,257 $ 11,380

Additions and adjustments to cost of product revenues . . 8,303 6,606 6,033

Usage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,979) (2,525) (6,156)

Balance, end of period . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,662 $ 15,338 $ 11,257

The majority of the Company’s products have a warranty ranging from one to five years. A provision for theestimated future cost related to warranty expense is recorded at the time of customer invoice. The Company’swarranty liability is affected by customer and consumer returns, product failures and repair or replacement costsincurred. Should actual product failure rates, or repair or replacement costs differ from the Company’s estimates,increases or decreases to its warranty liability would be required.

Accumulated Other Comprehensive Income. Accumulated other comprehensive income presented in theaccompanying consolidated balance sheets consists of the foreign currency translation and unrealized gains andlosses on available-for-sale investments, net of taxes, for all periods presented (in thousands):

December 30,2007

December 31,2006

Accumulated net unrealized gain (loss) on:

Available-for-sale investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,657 $ (2,528)

Foreign currency translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,818 8,021

Total accumulated other comprehensive income . . . . . . . . . . . . . . . . . . $ 32,475 $ 5,493

The amount of income tax expense allocated to unrealized gain (loss) on available-for-sale investments wasimmaterial at December 30, 2007 and December 31, 2006, respectively.

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Note 4: Goodwill and Other Intangible Assets

Goodwill. Goodwill balance is presented below (in thousands):

Balance at December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $910,254

Goodwill adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (69,384)

Balance at December 30, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $840,870

The goodwill adjustment for the year ended December 30, 2007 was primarily the result of purchase priceadjustments related to the msystems Ltd. (“msystems”) acquisition and to a lesser extent from the MatrixSemiconductor, Inc. (“Matrix”) acquisition. See Note 14, “Business Acquisitions.”

In accordance with Statement of Financial Accounting Standards No. 142, (“SFAS 142”), Goodwill and OtherIntangible Assets, goodwill is not amortized, but instead is reviewed and tested for impairment at least annually andwhenever events or circumstances occur which indicate that goodwill might be impaired. Impairment of goodwill istested at the Company’s reporting unit level by comparing the carrying amount, including goodwill, to the fairvalue. In performing the analysis, the Company uses the best information available, including reasonable andsupportable assumptions and projections. If the carrying amount of the Company exceeds its implied fair value,goodwill is considered impaired and a second step is performed to measure the amount of impairment loss, if any.The Company performs an annual goodwill impairment test with an effective date of the first day of the fourth fiscalquarter.

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

GrossCarryingAmount

AccumulatedAmortization

NetCarryingAmount

GrossCarryingAmount

AccumulatedAmortization

NetCarryingAmount

December 30, 2007 December 31, 2006

Core technology . . . . . . $311,801 $ (78,863) $232,938 $311,801 $(18,135) $293,666

Developed producttechnology . . . . . . . . 12,900 (4,689) 8,211 12,900 (2,103) 10,797

Trademarks . . . . . . . . . 4,000 (4,000) — 4,000 (911) 3,089

Backlog . . . . . . . . . . . . 5,000 (5,000) — 5,000 (1,139) 3,861

Supply agreement . . . . . 2,000 (2,000) — 2,000 (46) 1,954

Customerrelationships . . . . . . . 80,100 (23,907) 56,193 80,100 (6,008) 74,092

Acquisition-relatedintangible assets . . . . 415,801 (118,459) 297,342 415,801 (28,342) 387,459

Technology licenses andpatents . . . . . . . . . . . 39,243 (14,562) 24,681 7,388 (5,769) 1,619

Total . . . . . . . . . . . . . . $455,044 $(133,021) $322,023 $423,189 $(34,111) $389,078

Other intangible assets increased by $31.9 million in the fiscal year ended December 30, 2007, primarily due totechnology licenses and patents purchased from third parties. Amortization expense of intangible assets totaled$98.9 million, $29.8 million and $2.7 million in fiscal years 2007, 2006 and 2005, respectively.

F-17


The annual expected amortization expense of other intangible assets as of December 30, 2007 is presentedbelow:

Fiscal periodsAcquisition-relatedIntangible Assets

TechnologyLicenses and

Patents

Estimated Amortization Expenses

(In thousands)

2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 76,229 $ 6,824

2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71,724 6,199

2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71,529 4,875

2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,809 3,023

2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,529 2,375

2013 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 522 1,385

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $297,342 $ 24,681

Note 5: Financing Arrangements

The following table reflects the carrying value of our long-term borrowings as of December 30, 2007 andDecember 31, 2006:

December 30,2007

December 31,2006

(In millions)

1% Convertible Senior Notes due 2013 . . . . . . . . . . . . . . . . . . $1,150 $1,150

1% Convertible Notes due 2035 . . . . . . . . . . . . . . . . . . . . . . . $ 75 $ 75

1% Convertible Senior Notes Due 2013. In May 2006, the Company issued and sold $1.15 billion inaggregate principal amount of 1% Convertible Senior Notes due 2013 (the “1% Notes due 2013”) at par. The1% Notes due 2013 may be converted, under certain circumstances described below, based on an initial conversionrate of 12.1426 shares of common stock per $1,000 principal amount of notes (which represents an initialconversion price of approximately $82.36 per share). The net proceeds to the Company from the offering of the1% Notes due 2013 were $1.13 billion.

The 1% Notes due 2013 may be converted prior to the close of business on the scheduled trading dayimmediately preceding February 15, 2013, in multiples of $1,000 principal amount at the option of the holder underany of the following circumstances: 1) during the five business-day period after any five consecutive trading-dayperiod (the “measurement period”) in which the trading price per note for each day of such measurement period wasless than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rateon each such day; 2) during any calendar quarter after the calendar quarter ending June 30, 2006, if the last reportedsale price of the Company’s common stock for 20 or more trading days in a period of 30 consecutive trading daysending on the last trading day of the immediately preceding calendar quarter exceeds 120% of the applicableconversion price in effect on the last trading day of the immediately preceding calendar quarter; or 3) upon theoccurrence of specified corporate transactions. On and after February 15, 2013 until the close of business on thescheduled trading day immediately preceding the maturity date of May 15, 2013, holders may convert their notes atany time, regardless of the foregoing circumstances.

Upon conversion, a holder will receive the conversion value of the 1% Notes due 2013 to be converted equal tothe conversion rate multiplied by the volume weighted average price of the Company’s common stock during aspecified period following the conversion date. The conversion value of each 1% Notes due 2013 will be paid in:1) cash equal to the lesser of the principal amount of the note or the conversion value, as defined, and 2) to the extentthe conversion value exceeds the principal amount of the note, a combination of common stock and cash. Theconversion price will be subject to adjustment in some events but will not be adjusted for accrued interest. Inaddition, upon a fundamental change at any time, as defined, the holders may require the Company to repurchase for

F-18


cash all or a portion of their notes upon a “designated event” at a price equal to 100% of the principal amount of thenotes being repurchased plus accrued and unpaid interest, if any.

The Company will pay cash interest at an annual rate of 1%, payable semi-annually on May 15 and November15 of each year, beginning November 15, 2006. Debt issuance costs of approximately $24.5 million are beingamortized to interest expense over the term of the 1% Notes due 2013.

Concurrently with the issuance of the 1% Notes due 2013, the Company purchased a convertible bond hedgeand sold warrants. The separate convertible bond hedge and warrant transactions are structured to reduce thepotential future economic dilution associated with the conversion of the 1% Notes due 2013 and to increase theinitial conversion price to $95.03 per share. Each of these components are discussed separately below:

• Convertible Bond Hedge. Counterparties agreed to sell to the Company up to approximately 14 millionshares of the Company’s common stock, which is the number of shares initially issuable upon conversion ofthe 1% Notes due 2013 in full, at a price of $82.36 per share. The convertible bond hedge transaction will besettled in net shares and will terminate upon the earlier of the maturity date of the 1% Notes due 2013 or thefirst day none of the 1% Notes due 2013 remains outstanding due to conversion or otherwise. Settlement ofthe convertible bond hedge in net shares, based on the number of shares issued upon conversion of the1% Notes due 2013, on the expiration date would result in the Company receiving net shares equivalent tothe number of shares issuable by the Company upon conversion of the 1% Notes due 2013. Should there bean early unwind of the convertible bond hedge transaction, the number of net shares potentially received bythe Company will depend upon 1) the then existing overall market conditions, 2) the Company’s stock price,3) the volatility of the Company’s stock, and 4) the amount of time remaining before expiration of theconvertible bond hedge. The convertible bond hedge transaction cost of $386.1 million has been accountedfor as an equity transaction in accordance with Emerging Issues Task Force No. 00-19, (“EITF 00-19”),Accounting for Derivative Financial Statements Indexed to, and Potentially Settled in, a Company’s OwnStock. The Company recorded a tax benefit of approximately $145.6 million in stockholders’ equity from thedeferred tax asset related to the convertible bond hedge.

• Sold Warrants. The Company received $308.7 million from the same counterparties from the sale ofwarrants to purchase up to approximately 14 million shares of the Company’s common stock at an exerciseprice of $95.03 per share. The warrants have an expected life of 5.5 years and expire in August 2013. Atexpiration, the Company may, at its option, elect to settle the warrants on a net share basis. As ofDecember 30, 2007, the warrants had not been exercised and remained outstanding. The value of thewarrants has been classified as equity because they meet all the equity classification criteria of EITF 00-19.

1% Convertible Notes Due 2035. In November 2006, the Company assumed the aggregate principal amountof $75.0 million 1% Convertible Senior Notes due March 2035 (the “1% Notes due 2035”) from msystems. TheCompany is obligated to pay interest on the 1% Notes due 2035 semi-annually on March 15 and September 15commencing March 15, 2007.

The 1% Notes due 2035 are convertible, at the option of the holders at any time before the maturity date, intoshares of the Company at a conversion rate of 26.8302 shares per one thousand dollars principal amount of the1% Notes due 2035, representing a conversion price of approximately $37.27 per share.

Beginning on March 15, 2008 and until March 14, 2010, the Company may redeem for cash the notes, in wholeor in part at any time at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plusaccrued but unpaid interest, if any, to but excluding the redemption date, if the last reported sales price of theCompany ordinary shares has exceeded 130% of the conversion price for at least 20 trading days in any consecutive30-day trading period ending on the trading day prior to the date of mailing of the notice of redemption.

At any time on or after March 15, 2010, the Company may redeem the notes in whole or in part at a redemptionprice equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest, if any, tobut excluding the optional redemption date.

F-19


Holders of the notes have the right to require the Company to purchase all or a portion of their notes onMarch 15, 2010, March 15, 2015, March 15, 2020, March 15, 2025 and March 15, 2030. The purchase price payablewill be equal to 100% of the principal amount of the notes to be purchased, plus accrued and unpaid interest, if any,to but excluding the purchase date.

In accordance with Accounting Principle Board Opinion No. 14, (“APBO 14”), Accounting for ConvertibleDebt and Debt Issued with Stock Purchase Warrants, the Company determined the existence of a substantialpremium over par value for the 1% Notes due 2035 based upon quoted market prices at the msystems acquisitiondate and recorded the notes at par value with the resulting excess of fair value over par (the substantial premium)recorded in Capital in excess of par value in Shareholders’ Equity in the amount of $26.4 million.

Note 6: Share Repurchase Program

During the fourth quarter of fiscal 2006, the Company’s board of directors authorized the repurchase of up to$300 million of the Company’s common stock in the open market over two years following the date ofauthorization. During the year ended December 30, 2007, the Company repurchased 7.5 million shares, for anaggregate purchase price of approximately $300 million, all of which are held as treasury stock and accounted forusing the cost method. At December 30, 2007, the Company had completed the share repurchase program asauthorized by the Company’s board of directors.

Note 7: Concentrations of Risk and Segment Information

Geographic Information and Major Customers. The Company markets and sells flash-based memoryproducts in the United States and in foreign countries through its sales personnel, dealers, distributors, retailersand subsidiaries. The Company’s Chief Operating Decision Maker, the President and Chief Operating Officer,evaluates performance of the Company and makes decisions regarding allocation of resources based on totalCompany results. Since the Company operates in one segment, all financial segment information can be found in theaccompanying consolidated financial statements.

Other than sales in the United States, Japan, Europe, Middle East and Africa, or EMEA, and Asia Pacific, orAPAC, international sales were not material individually in any other international locality. Intercompany salesbetween geographic areas have been eliminated.

Information regarding geographic areas for fiscal years 2007, 2006 and 2005 are as follows (in thousands):

December 30,2007

December 31,2006

January 1,2006

Fiscal Years Ended

Revenues:

United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,227,303 $1,272,927 $ 986,529Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 301,970 231,835 138,507

EMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 890,340 728,355 500,998

APAC and other foreign countries . . . . . . . . . . . . . . . . 1,476,753 1,024,408 680,035

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,896,366 $3,257,525 $2,306,069

F-20


December 30,2007

December 31,2006

January 1,2006

As of

Long-Lived Assets:

United States. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $227,630 $182,749 $126,346

Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 375,398 397,011 286,859

China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116,936 24,149 240

Israel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173,613 50,355 8,868

Other foreign countries . . . . . . . . . . . . . . . . . . . . . . . . . 3,981 5,555 368

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $897,558 $659,819 $422,681

Revenues are attributed to countries based on the geographic location of the customers. Long-lived assets areattributed to the geographic location in which they are located. The Company includes in long-lived assets, propertyplant and equipment, long-term investment in foundry, and equity investments and attributes those investments tothe location of the investee’s primary operations.

Customer and Supplier Concentrations. A limited number of customers or licensees have accounted for asubstantial portion of the Company’s revenues. Revenues from the Company’s top 10 customers or licenseesaccounted for approximately 46%, 52% and 50% of the Company’s revenues for the fiscal years ended Decem-ber 30, 2007, December 31, 2006 and January 1, 2006, respectively. All customers were less than 10% of theCompany’s total revenues in fiscal years 2007 and 2006. In 2005, Best Buy Co., Inc., accounted for 11% of theCompany’s revenues and all other customers were less than 10% of the Company’s revenues.

All of the Company’s flash memory card products require silicon wafers for the memory components and thecontroller components. The substantial majority of the Company’s memory wafers or components are currentlysupplied from FlashVision Ltd., or FlashVision, Flash Partners Ltd., or Flash Partners, and Flash Alliance Ltd., orFlash Alliance, (collectively “Flash Ventures”) and to a lesser extent by Samsung and Hynix Semiconductor, Inc.The Company’s controller wafers are primarily manufactured by Semiconductor Manufacturing InternationalCorporation, Taiwan Semiconductor Manufacturing Corporation, Tower Semiconductor Ltd. (“Tower”) and UnitedMicroelectronics Corp. (“UMC”), or controller chips are purchased from other third party suppliers. The failure ofany of these sources to deliver silicon wafers could have a material adverse effect on the Company’s business,financial condition and results of operations. Moreover, Toshiba’s employees that produce Flash Ventures’ productsare covered by collective bargaining agreements and any strike or other job action by those employees couldinterrupt the Company’s wafer supply from Toshiba’s Yokkaichi, Japan operations.

In addition, key components are purchased from single source vendors for which alternative sources arecurrently not available. Shortages could occur in these essential materials due to an interruption of supply orincreased demand in the industry. If the Company were unable to procure certain of such materials, it would berequired to reduce its manufacturing operations, which could have a material adverse effect upon its results ofoperations. The Company also relies on third-party subcontractors to assemble and test its products. The Companyhas no long-term contracts with these subcontractors and cannot directly control product delivery schedules. Thiscould lead to product shortages or quality assurance problems that could increase the manufacturing costs of itsproducts and have material adverse effects on the Company’s operating results.

Concentration of Credit Risk. The Company’s concentration of credit risk consists principally of cash, cashequivalents, short and long-term investments and trade receivables. The Company’s investment policy restrictsinvestments to high-credit quality investments and limits the amounts invested with any one issuer. The Companysells to original equipment manufacturers, retailers and distributors in the United States, Japan, EMEA and non-Japan Asia-Pacific, performs ongoing credit evaluations of its customers’ financial condition, and generallyrequires no collateral.

F-21


Off-Balance Sheet Risk. The Company has off-balance sheet financial obligations. See Note 12, “Com-mitments, Contingencies and Guarantees.”

Note 8: Compensation and Benefits

Share-Based Benefit Plans

2005 Incentive Plan. In May 2005, the Company’s board of directors adopted the 2005 Stock Incentive Plan,which was amended in May 2006 and renamed the 2005 Incentive Plan (“2005 Plan”). Shares of the Company’scommon stock may be issued under the 2005 Plan pursuant to three separate equity incentive programs: (i) thediscretionary grant program under which stock options and stock appreciation rights may be granted to officers andother employees, non-employee board members and independent consultants, (ii) the stock issuance program underwhich shares may be awarded to such individuals through restricted stock or restricted stock unit awards or as astock bonus for services rendered to the Company, and (iii) an automatic grant program for the non-employee boardmembers pursuant to which such individuals will receive option grants or other stock awards at designated intervalsover their period of board service. The 2005 Plan also includes a performance-based cash bonus awards program foremployees classified under Section 16. Grants and awards under the discretionary grant program generally vest asfollows: 25% of the shares will vest on the first anniversary of the vesting commencement date and the remaining75% will vest proportionately each quarter over the next 36 months of continued service. Awards under the stockissuance program generally vest in equal annual installments over a 4-year period. Grants under the automatic grantprogram will vest in accordance with the specific vesting provisions set forth in that program. A total of21,850,877 shares of the Company’s common stock have been reserved for issuance under this plan. The sharereserve may increase by up to an additional 10,000,000 shares of common stock to the extent that outstandingoptions under the 1995 Stock Option Plan and the 1995 Non-Employee Directors Stock Option Plan expire orterminate unexercised, of which as of December 30, 2007, 1,150,877 shares of common stock has been added to the2005 Plan reserve. All options granted under the 2005 Plan were granted with an exercise price equal to the fairmarket value of the common stock on the date of grant and will expire seven years from the date of grant. ThroughDecember 30, 2007, awards to purchase a total of 12,526,531 shares of common stock were granted to employeesunder the 2005 Plan, net of cancellations. For years ended December 30, 2007 and December 31, 2006, awards of4,738,804 and 6,103,534 shares of common stock, respectively, were granted to employees under the 2005 Plan, netof cancellations.

1995 Stock Option Plan and 1995 Non-Employee Directors Stock Option Plan. Both of these plansterminated on May 27, 2005, and no further option grants were made under the plans after that date. However,options that were outstanding under these plans on May 27, 2005 will continue to be governed by their existingterms and may be exercised for shares of the Company’s common stock at any time prior to the expiration of the ten-year option term or any earlier termination of those options in connection with the optionee’s cessation of servicewith the Company. Grants and awards under these plans generally vest as follows: 25% of the shares will vest on thefirst anniversary of the vesting commencement date and the remaining 75% will vest proportionately each quarterover the next 36 months of continued service. As of December 30, 2007, options had been granted, net ofcancellations, to purchase 37,947,162 and 1,616,000 shares of common stock under the 1995 Stock Option Plan andthe 1995 Non-Employee Directors Stock Option Plan, respectively.

2005 Employee Stock Purchase Plan. The 2005 Employee Stock Purchase Plan (“ESPP”), was approved bythe stockholders on May 27, 2005. The ESPP plan consists of two components: a component for employees residingin the United States and an international component for employees who are non-United States residents. The ESPPplan allows eligible employees to purchase shares of the Company’s common stock at the end of each six-monthoffering period at a purchase price equal to 85% of the lower of the fair market value per share on the start date of theoffering period or the fair market value per share on the purchase date. The ESPP plan had an original authorizationof 5,000,000 shares to be issued, of which 4,349,035 shares were available to be issued as of December 30, 2007. Inthe fiscal years ended December 30, 2007 and December 31, 2006, a total of 385,989 and 264,976 shares ofcommon stock, respectively, have been issued under this plan.

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msystems Ltd. 1996 Section 102 Stock Option/Stock Purchase Plan and 2003 Stock Option and RestrictedStock Incentive Plan. The msystems Ltd. 1996 Section 102 Stock Option/Stock Purchase Plan and 2003 StockOption and Restricted Stock Incentive Plan acquired through the Company’s acquisition of msystems Ltd.(“msystems”), were terminated on November 19, 2006, and no further grants were made under these plans afterthat date. However, awards grants that were outstanding under these plans on November 19, 2006 will continue to begoverned by their existing terms and may be exercised for shares of the Company’s common stock at any time priorto the expiration of the ten-year option term or any earlier termination of those options in connection with theoptionee’s cessation of service with the Company. Awards granted under these plans generally vest as follows: 50%of the shares will vest on the second anniversary of the vesting commencement date and the remaining 50% will vestproportionately each quarter over the next 24 months of continued service. As of December 30, 2007, there wereequity awards outstanding to purchase 312,868 and 4,558,268 shares of common stock under the msystems 1996Section 102 Stock Option/Stock Purchase Plan and 2003 Stock Option and Restricted Stock Incentive Plan,respectively.

Matrix Semiconductor, Inc. 2005 Stock Incentive Plan, 1999 Stock Plan and 1998 Long-term Incentive Plan.The Matrix Semiconductor, Inc. 2005 Stock Incentive Plan, 1999 Stock Plan and the Rhombus, Inc. 1998 Long-termIncentive Plan (“Matrix Stock Plans”), acquired through SanDisk’s acquisition of Matrix Semiconductor, Inc.(“Matrix”), were terminated on January 13, 2006, and no further option grants were made under these plans after thatdate. However, award grants that were outstanding under these plans on January 13, 2006 will continue to be governedby their existing terms and may be exercised for shares of the Company’s common stock at any time prior to theexpiration of the ten-year option term or any earlier termination of those options in connection with the optionee’scessation of service with the Company. Awards granted under these plans generally vest as follows: 1/48 of the shareswill vest proportionately each month over the next 48 months of continued service or 1/60 of the shares will vestproportionately each month over the next 60 months of continued service. As of December 30, 2007, there were equityawards outstanding to purchase 539,486 shares of common stock under the Matrix Stock Plans.

Adoption of SFAS 123(R)

Effective January 2, 2006, the Company adopted the fair value recognition provisions of Statement ofFinancial Accounting Standards No. 123(R) (“SFAS 123(R)”), Share-Based Payment, using the modified-pro-spective transition method, and therefore, has not restated its financial statements for prior periods. For awardsexpected to vest, compensation cost recognized in the year ended December 30, 2007 includes the following:(a) compensation cost, based on the grant-date estimated fair value and expense attribution method under Statementof Financial Accounting Standards No. 123 (“SFAS 123”), Accounting for Stock-Based Compensation, related toany share-based awards granted through, but not yet vested as of January 1, 2006, and (b) compensation cost for anyshare-based awards granted on or subsequent to January 2, 2006, based on the grant-date fair value estimated inaccordance with the provisions of SFAS 123(R). The Company recognizes compensation expense for the fair valuesof these awards, which have graded vesting, on a straight-line basis over the requisite service period of each of theseawards, net of estimated forfeitures. Prior to the implementation of SFAS 123(R), the Company accounted for stockawards and ESPP shares under the provisions of Accounting Principles Board Opinion No. 25, Accounting for StockIssued to Employees, and made pro forma footnote disclosures as required by Statement of Financial AccountingStandards No. 148 (“SFAS 148”), Accounting For Stock-Based Compensation — Transition and Disclosure, whichamended Statement of Financial Accounting Standards No. 123, Accounting For Stock-Based Compensation. Proforma net income and pro forma net income per share disclosed in the footnotes to the consolidated financialstatements were estimated using a Black-Scholes-Merton closed-form option valuation model to determine theestimated fair value and by attributing such fair value over the requisite service period on a straight-line basis forthose awards that actually vested.

The Company estimates the fair value of stock options granted using the Black-Scholes-Merton option-pricingformula and a single-option award approach. The Company’s expected term represents the period that theCompany’s share-based awards are expected to be outstanding and was determined based on historical experienceregarding similar awards, giving consideration to the contractual terms of the share-based awards. The Company’s

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expected volatility is based on the implied volatility of its traded options in accordance with the guidance providedby the United States Securities and Exchange Commission’s Staff Accounting Bulletin No. 107 to place exclusivereliance on implied volatilities to estimate the Company’s stock volatility over the expected term of its awards. TheCompany has historically not paid dividends and has no foreseeable plans to issue dividends. The risk-free interestrate is based on the yield from U.S. Treasury zero-coupon bonds with an equivalent term.

Valuation Assumptions. The fair value of the Company’s stock options granted to employees, officers andnon-employee board members and Employee Stock Purchase Plans (“ESPP”) shares granted to employees for theyears ended December 30, 2007, December 31, 2006 and January 1, 2006 was estimated using the followingweighted average assumptions:

December 30,2007

December 31,2006

January 1,2006

Option Plan SharesDividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . None None None

Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.44 0.52 0.52

Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . 4.44% 4.63% 3.94%

Expected lives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 years 3.7 years 4.5 years

Estimated annual forfeiture rate . . . . . . . . . . . . . . . . . . 7.59% 7.74% —

Weighted average fair value at grant date . . . . . . . . . . . $ 15.84 $ 25.44 $ 13.03

Employee Stock Purchase Plan SharesDividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . None None None

Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.43 0.52 0.47

Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . 5.08% 4.96% 2.69%

Expected lives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1⁄2 year 1⁄2 year 1⁄2 year

Weighted average fair value at exercise date . . . . . . . . . $ 12.75 $ 16.73 $ 7.60

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Stock Options and SARs. A summary of option and stock appreciation rights (“SARs”) activity under all ofthe Company’s share-based compensation plans as of December 30, 2007 and changes during the fiscal year endedDecember 30, 2007 is presented below:

Shares

WeightedAverage

Exercise Price

WeightedAverage

RemainingContractual

Term (Years)Aggregate

Intrinsic Value(In thousands, except exercise price and contractual term)

Options outstanding at January 2, 2005 . . . . . 22,656 $17.02

Granted . . . . . . . . . . . . . . . . . . . . . . . . . . 6,367 28.37

Exercised . . . . . . . . . . . . . . . . . . . . . . . . . (7,940) 13.75

Forfeited. . . . . . . . . . . . . . . . . . . . . . . . . . (767) 24.37

Options outstanding at January 1, 2006 . . . . . 20,316 21.57 $260,187

Granted . . . . . . . . . . . . . . . . . . . . . . . . . . 6,021 58.41

Exercised . . . . . . . . . . . . . . . . . . . . . . . . . (4,861) 17.91 $205,618

Forfeited. . . . . . . . . . . . . . . . . . . . . . . . . . (851) 41.05

Expired . . . . . . . . . . . . . . . . . . . . . . . . . . (40) 40.29

Options and SARs assumed throughacquisition . . . . . . . . . . . . . . . . . . . . . . 5,807 30.57

Options and SARs outstanding atDecember 31, 2006 . . . . . . . . . . . . . . . . . . 26,392 31.97 6.7 $392,469Granted . . . . . . . . . . . . . . . . . . . . . . . . . . 5,848 43.65

Exercised . . . . . . . . . . . . . . . . . . . . . . . . . (4,678) 20.24 $124,816

Forfeited. . . . . . . . . . . . . . . . . . . . . . . . . . (1,728) 45.99

Expired . . . . . . . . . . . . . . . . . . . . . . . . . . (277) 56.03

Options and SARs outstanding atDecember 30, 2007 . . . . . . . . . . . . . . . . . . 25,557 35.59 5.8 $165,185

Options and SARs vested and expected tovest after December 30, 2007, net offorfeitures . . . . . . . . . . . . . . . . . . . . . . . . . 23,870 34.91 5.8 $163,723

Options and SARs exercisable atDecember 30, 2007 . . . . . . . . . . . . . . . . . . 12,901 $27.12 5.2 $147,722

At December 30, 2007, the total compensation cost related to options and SARs granted to employees underthe Company’s share-based compensation plans but not yet recognized was approximately $200.7 million, net ofestimated forfeitures. This cost will be amortized on a straight-line basis over a weighted average period ofapproximately 2.6 years. Options and SARs valuation assumptions related to Matrix and msystems acquisitions arediscussed in Note 14, “Business Acquisitions.”

Restricted Stock Units. Restricted stock units (“RSUs”), are converted into shares of the Company’scommon stock upon vesting on a one-for-one basis. Typically, vesting of RSUs is subject to the employee’scontinuing service to the Company. The cost of these awards is determined using the fair value of the Company’scommon stock on the date of the grant, and compensation is recognized on a straight-line basis over the requisitevesting period.

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A summary of the changes in RSUs outstanding under the Company’s share-based compensation plan duringthe fiscal year ended December 30, 2007 is presented below (in thousands, except for weighted average grant datefair value):

Shares

Weighted AverageGrant Date Fair

ValueAggregate

Intrinsic Value

Non-vested share units at January 2, 2005 . . . . . . . . . . . . — $ — $ —

Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 42.19

Non-vested share units at January 1, 2006 . . . . . . . . . . . . 105 42.19 3,489

Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 516 57.69

Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (97) 52.21 4,865

Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (65) 63.85

Restricted stock units assumed through acquisition . . . . 139 72.83

Non-vested share units at December 31, 2006 . . . . . . . . . 598 58.71 25,740

Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 44.86

Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (184) 56.21 8,136

Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (47) 67.10

Non-vested share units at December 30, 2007 . . . . . . . . . 499 $55.20 $16,735

As of December 30, 2007, the Company had $21.5 million of total unrecognized compensation expense, net ofestimated forfeitures, related to RSUs, which will be recognized over a weighted average estimated remaining lifeof 2.3 years.

Employee Stock Purchase Plans. At December 30, 2007, there was $0.4 million of total unrecognizedcompensation cost related to the ESPP that is expected to be recognized over a period of approximately 0.1 years.

Share-Based Compensation Expense. The Company recorded $133.0 million and $100.6 million of share-based compensation for the fiscal years ended December 30, 2007 and December 31, 2006, respectively, thatincluded the following:

December 30,2007

December 31,2006

(In thousands)

Share-based compensation expense by caption:

Cost of product sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,743 $ 7,991

Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,194 40,999

Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,722 21,617

General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,351 30,034

Total share-based compensation expense . . . . . . . . . . . . . . . . . . . . $133,010 $100,641

Share-based compensation expense by type of award:

Stock options and SARs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $111,360 $ 85,862

Restricted stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,674 11,181

ESPP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,976 3,598

Total share-based compensation expense . . . . . . . . . . . . . . . . . . . . $133,010 $100,641

Share-based compensation expense of $3.7 million and $3.2 million related to manufacturing personnel wascapitalized into inventory as of December 30, 2007 and December 31, 2006, respectively.

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Pro Forma Disclosures

Prior to fiscal year 2006, the Company followed the disclosure-only provisions of SFAS 123, as amended. Thefollowing table illustrates the effect on net income and earnings per share for the year ended January 1, 2006, if thefair value recognition provisions of SFAS 123, as amended, had been applied to options granted under theCompany’s share-based compensation plans. For purposes of this pro forma disclosure, the estimated value of theshare-based compensation is recognized over the vesting periods. If the Company had recognized the expense ofshare-based compensation in the consolidated statement of income, capital in excess of par would have increased bya corresponding amount, net of applicable taxes.

January 1, 2006(In thousands, except per

share amounts

Net income, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $386,384

Fair value method expense, net of related tax . . . . . . . . . . . . . . . . . . . . . . . (52,629)

Pro forma net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $333,755

Earnings per share as reported:

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.11

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.00

Pro forma earnings per share:

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.82

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.73

Note 9: Restructuring

During the first quarter of fiscal year 2007, the Company implemented a restructuring plan which includedreductions in workforce in all functions of the organization worldwide and closures of redundant facilities in orderto reduce the Company’s cost structure. A restructuring charge of $6.7 million was recorded during the year endedDecember 30, 2007, of which $6.0 million related to severance and benefits to 149 terminated employees and theremaining was primarily for excess lease obligations. All expenses, including adjustments, associated with theCompany’s restructuring plans are included in “Restructuring” in the Consolidated Statements of Income.

The following table sets forth an analysis of the components of the restructuring charge and payments madeagainst the reserve for the year ended December 30, 2007 (in thousands):

Severance andBenefits

LeaseObligations andOther Charges Total

Restructuring provision . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,970 $ 758 $ 6,728

Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (56) — (56)

Cash paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,631) (423) (6,054)

Accrual balance at December 30, 2007. . . . . . . . . . . . . . . $ 283 $ 335 $ 618

The Company anticipates that the remaining restructuring reserve balance will be paid out in cash through thefirst quarter of fiscal year 2010 in connection with long-term facility leases.

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Note 10: Income Taxes

The provision for income taxes consists of the following (in thousands):

December 30,2007

December 31,2006

January 1,2006

Fiscal Years Ended

Current:

Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $108,636 $174,320 $159,147

State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,958 27,788 24,592

Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81,442 63,841 32,323

210,036 265,949 216,062

Deferred:

Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (22,670) (22,623) 15,663

State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (654) (9,585) (3,413)

Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (11,864) (3,548) (1,389)

(35,188) (35,756) 10,861

Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . $174,848 $230,193 $226,923

Current foreign income taxes includes $66.5 million, $59.2 million and $28.3 million of taxes withheld onroyalties received for the fiscal years ended December 30, 2007, December 31, 2006 and January 1, 2006,respectively.

Income before provision for income taxes consisted of the following (in thousands):

December 30,2007

December 31,2006

January 1,2006

Fiscal Years Ended

United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $454,147 $193,845 $500,727

International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (55,731) 236,863 112,580

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $398,416 $430,708 $613,307

The Company’s provision for income taxes differs from the amount computed by applying the federal statutoryrates to income before taxes as follows:

December 30,2007

December 31,2006

January 1,2006

Fiscal Years Ended

U.S. federal statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . 35.0% 35.0% 35.0%

State taxes, net of federal benefit . . . . . . . . . . . . . . . . . . . . 3.7 3.1 2.2

Non-deductible share-based compensation expense . . . . . . . 5.0 2.9 —

Write-off of acquired in-process technology . . . . . . . . . . . . — 18.3 —

Tax-exempt interest income . . . . . . . . . . . . . . . . . . . . . . . . (5.7) (2.7) (0.8)

Foreign earnings at other than U.S. rates . . . . . . . . . . . . . . (4.0) (2.9) —

Foreign losses not benefited. . . . . . . . . . . . . . . . . . . . . . . . 7.8 0.6 —

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 (0.8) 0.6

43.9% 53.5% 37.0%

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts ofassets and liabilities for financial reporting purposes and the amounts used for income tax return reporting purposes.

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Significant components of the Company’s deferred tax assets as of December 30, 2007 and December 31, 2006were as follows (in thousands):

December 30,2007

December 31,2006

Deferred tax assets:

Deferred revenue recognized for tax purposes . . . . . . . . . . . . . . . . . . $ 48,932 $ 57,435

Accruals and reserves not currently deductible. . . . . . . . . . . . . . . . . . 170,279 148,427

Depreciation and amortization not currently deductible . . . . . . . . . . . 56,967 44,807

Deductible original issue discount . . . . . . . . . . . . . . . . . . . . . . . . . . . 119,358 136,715

Deductible share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . 37,959 19,840

Net operating loss and tax credit carryforwards . . . . . . . . . . . . . . . . . 48,731 53,018

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,709 27,995

Valuation allowance on deferred tax assets . . . . . . . . . . . . . . . . . . . . (67,354) (60,119)

Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 443,581 $ 428,118

Deferred tax liabilities:

Acquired intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (42,477) $ (63,772)

Unrealized gain on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (23,553) (28,285)

U.S. taxes provided on unremitted earnings of foreign subsidiaries . . . (62,647) (88,590)

Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (128,677) (180,647)

Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 314,904 $ 247,471

Valuation allowance of $67.4 million and $60.1 million was provided on gross deferred tax assets atDecember 30, 2007 and December 31, 2006, respectively, based upon available evidence that it is more likelythan not that some of the deferred tax assets may not be realized. The valuation allowance increased $7.3 million infiscal year 2007 from fiscal year 2006, primarily due to tax credits and net operating losses in jurisdictions whererealization is not “more likely than not.” Should the Company have the ability to benefit from the valuationallowance in future periods, approximately $48 million would be credited to goodwill while the remainder wouldbenefit the provision for income taxes.

The Company has federal, state before federal benefit, and foreign net operating loss carryforwards ofapproximately $83 million, $28 million and $50 million, respectively. Some net operating losses will begin toexpire in fiscal year 2010, if not utilized. The Company also has federal and state research credit carryforwards ofapproximately $9 million and $10 million before federal benefit, respectively. Some credit carryforwards will beginto expire in fiscal year 2008, if not utilized. Some of these carryforwards are subject to annual limitations, includingSection 382 of the Internal Revenue Code of 1986, as amended, for United States tax purposes and similar stateprovisions.

No provision has been made for United States income taxes or foreign withholding taxes on approximately$95 million of cumulative unremitted earnings of certain foreign subsidiaries as of December 30, 2007, since theCompany intends to indefinitely reinvest these earnings outside the United States. If these earnings were distributedto the United States, the Company would be subject to additional United States income taxes and foreignwithholding taxes (subject to adjustment for foreign tax credits). As of December 30, 2007, the unrecognizeddeferred tax liability for these earnings was approximately $31 million.

The Company adopted FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes,an interpretation of FASB Statement No. 109, on January 1, 2007. As a result of the adoption, the Companyrecognized an increase of approximately $1.0 million in the liability for unrecognized tax benefits, which was

F-29


accounted for as a reduction to the January 1, 2007 balance of retained earnings. A reconciliation of the beginningand ending amount of unrecognized tax benefits is as follows (in thousands):

Balance at January 1, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $38,629

Additions based on tax positions related to current year . . . . . . . . . . . . . . . . . . . . . . . . . 30,983

Additions for tax positions of prior years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,051

Reductions for tax positions of prior years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,161)

Reductions due to expiration of statute of limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . (308)

Balance at December 30, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $70,194

The total amount of unrecognized tax positions that would impact the effective tax rate is approximately$54 million at December 30, 2007. The Company recognizes interest and penalties related to unrecognized taxbenefits in income tax expense. The liability related to unrecognized tax benefits included accrued interest andpenalties of approximately $10 million and $5 million at December 30, 2007 and December 31, 2006, respectively.Tax expense for the years ended December 30, 2007 and January 1, 2006 included approximately $3 million ofinterest expense in each year. Tax expense for the year ended December 31, 2006 included approximately $2 millionof interest expense offset by interest benefit of approximately $3 million related to unrecognized tax benefitspreviously recognized resulting in a net benefit of approximately $1 million.

It is reasonably possible that the unrecognized tax benefits could decrease by approximately $4 million withinthe next 12 months as a result of the expiration of statutes of limitation. The Company is currently under audit byseveral tax authorities. Because timing of the resolution and/or closure of these audits is highly uncertain it is notpossible to estimate other changes to the amount of unrecognized tax benefits for positions existing at December 30,2007.

The Company is subject to United States federal income tax as well as income taxes in many state and foreignjurisdictions. The federal statute of limitations on assessment remains open for the tax years 2004 through 2006, andthe statutes of limitation in state jurisdictions remain open in general from tax years 2002 through 2006. The majorforeign jurisdictions remain open for examination in general for tax years 2001 through 2006.

The tax benefit associated with the exercise of stock options was credited to capital in excess of par value in theamount of $18.4 million, $61.5 million and $95.6 million in fiscal years 2007, 2006 and 2005, respectively. In fiscalyears 2007 and 2006, the tax benefit associated with the exercise of stock options credited to goodwill was$0.6 million and $4.6 million, respectively.

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Note 11: Net Income per Share

The following table sets forth the computation of basic and diluted net income per share (in thousands, exceptper share amounts):

December 30,2007

December 31,2006

January 1,2006

Fiscal Years Ended

Numerator:

Numerator for basic net income per share:

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $218,357 $198,896 $386,384

Denominator for basic net income per share:

Weighted average common shares outstanding . . . . . . . . 227,744 198,929 183,008

Basic net income per share . . . . . . . . . . . . . . . . . . . . . . . . $ 0.96 $ 1.00 $ 2.11

Numerator for diluted net income per share:

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $218,357 $198,896 $386,384

Interest on the 1% Convertible Notes due 2035, net oftax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 469 58 —

Net income for diluted income per share . . . . . . . . . . . . $218,826 $198,954 $386,384

Denominator for diluted net income per share:

Weighted average common shares . . . . . . . . . . . . . . . . . 227,744 198,929 183,008

Incremental common shares attributable to exercise ofoutstanding employee stock options, restricted stock,restricted stock units and warrants (assuming proceedswould be used to purchase common stock) . . . . . . . . . 6,101 8,284 10,008

Effect of dilutive 1% Convertible Notes due 2035 . . . . . 2,012 238 —

Shares used in computing diluted net income per share . . . 235,857 207,451 193,016

Diluted net income per share . . . . . . . . . . . . . . . . . . . . . . . $ 0.93 $ 0.96 $ 2.00

Anti-dilutive shares excluded from net income per sharecalculation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,133 33,381 98

Basic earnings per share exclude any dilutive effects of stock options, SARs, RSUs, warrants and convertiblesecurities. Diluted earnings per share include the dilutive effects of stock options, SARs, RSUs, warrants and the1% Convertible Notes due 2035. Certain common stock issuable under stock options, SARs, warrants and the1% Senior Convertible Notes due 2013 have been omitted from the diluted net income per share calculation becausetheir inclusion is considered anti-dilutive.

Note 12: Commitments, Contingencies and Guarantees

FlashVision. The Company has a 49.9% ownership interest in FlashVision Ltd. (“FlashVision”), a businessventure with Toshiba Corporation (“Toshiba”) which owns 50.1%, formed in fiscal year 2000. In the venture, theCompany and Toshiba have collaborated in the development and manufacture of NAND flash memory products.These NAND flash memory products are manufactured by Toshiba at its 200-millimeter wafer fabrication facilitieslocated in Yokkaichi, Japan, using the semiconductor manufacturing equipment owned or leased by FlashVision.FlashVision purchases wafers from Toshiba at cost and then resells those wafers to the Company and Toshiba at costplus a markup. The Company accounts for its 49.9% ownership position in FlashVision under the equity method ofaccounting. The terms of the FlashVision venture contractually obligate the Company to purchase its providedthree-month forecast of FlashVision’s NAND wafer supply, which generally equals 50 percent of the venture’soutput. The Company is not able to estimate its total wafer purchase commitment obligation beyond its rolling three

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month purchase commitment because the price is determined by reference to the future cost to produce thesemiconductor wafers. In addition, the Company is committed to fund 49.9% of FlashVision’s costs to the extentthat FlashVision’s revenues from wafer sales to the Company and Toshiba are insufficient to cover these costs.

The Company agreed to indemnify Toshiba for certain liabilities Toshiba incurs as a result of Toshiba’sguarantee of the FlashVision equipment lease arrangement. If FlashVision fails to meet its lease commitments, andToshiba fulfills these commitments under the terms of Toshiba’s guarantee, then the Company will be obligated toreimburse Toshiba for 49.9% of any claims and associated expenses under the lease, unless the claims result fromToshiba’s failure to meet its obligations to FlashVision or its covenants to the lenders. Because FlashVision’sequipment lease arrangement is denominated in Japanese yen, the maximum amount of the Company’s contingentindemnification obligation on a given date when converted to U.S. dollars will fluctuate based on the exchange ratein effect on that date. See “Off-Balance Sheet Liabilities.”

Flash Partners. The Company has a 49.9% ownership interest in Flash Partners Ltd. (“Flash Partners”), abusiness venture with Toshiba which owns 50.1%, formed in fiscal year 2004. In the venture, the Company andToshiba have collaborated in the development and manufacture of NAND flash memory products. These NANDflash memory products are manufactured by Toshiba at the 300-millimeter wafer fabrication facility (“Fab 3”)located in Yokkaichi, Japan, using the semiconductor manufacturing equipment owned or leased by Flash Partners.Flash Partners purchases wafers from Toshiba at cost and then resells those wafers to the Company and Toshiba atcost plus a markup. The Company accounts for its 49.9% ownership position in Flash Partners under the equitymethod of accounting. The Company is committed to purchase its provided three-month forecast of Flash Partner’sNAND wafer supply, which generally equals 50 percent of the venture’s output. The Company is not able toestimate its total wafer purchase commitment obligation beyond its rolling three month purchase commitmentbecause the price is determined by reference to the future cost to produce the semiconductor wafers. In addition, theCompany is committed to fund 49.9% of Flash Partners’ costs to the extent that Flash Partners’ revenues from wafersales to the Company and Toshiba are insufficient to cover these costs.

As of December 30, 2007, the Company had notes receivable from Flash Partners of 72.3 billion Japanese yen,or approximately $640 million based upon the exchange rate at December 30, 2007. These notes are secured by theequipment purchased by Flash Partners using the note proceeds. The Company has additional guarantee obligationsto Flash Partners, see “Off-Balance Sheet Liabilities.”

Flash Alliance. The Company has a 49.9% ownership interest in Flash Alliance Ltd. (“Flash Alliance”), abusiness venture with Toshiba which owns 50.1%, formed in fiscal year 2006. In the venture, the Company andToshiba have collaborated in the development and manufacture of NAND flash memory products. These NANDflash memory products are manufactured by Toshiba at its 300-millimeter wafer fabrication facility (“Fab 4”) inYokkaichi, Japan, using the semiconductor manufacturing equipment owned or leased by Flash Alliance. FlashAlliance purchases wafers from Toshiba at cost and then resells those wafers to the Company and Toshiba at costplus a markup. The Company accounts for its 49.9% ownership position in Flash Alliance under the equity methodof accounting. The Company is committed to purchase its provided three-month forecast of Flash Alliance’s NANDwafer supply, which generally equals 50 percent of the venture’s output. The Company is not able to estimate itstotal wafer purchase commitment obligation beyond its rolling three month purchase commitment because the priceis determined by reference to the future cost to produce the semiconductor wafers. In addition, the Company iscommitted to fund 49.9% of Flash Alliance’s costs to the extent that Flash Alliance’s revenues from wafer sales tothe Company and Toshiba are insufficient to cover these costs.

The Company has guarantee obligations to Flash Alliance, see “Off-Balance Sheet Liabilities.”

As a part of the Flash Ventures’ agreements, the Company is required to fund direct and common research anddevelopment expenses related to the development of advanced NAND flash memory technologies. As ofDecember 30, 2007 and December 31, 2006, the Company had accrued liabilities related to these expenses of$8.0 million and $5.9 million, respectively.

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Toshiba Foundry. The Company has the ability to purchase additional capacity under a foundry arrangementwith Toshiba. Under the terms of this agreement, the Company is required to provide Toshiba with a purchase ordercommitment based on a nine-month rolling forecast.

TwinSys. The Company had a 50.1% beneficial ownership in TwinSys Data Storage Limited Partnership(“TwinSys”), a business venture with Toshiba, consisting of (i) 49.9% ownership in TwinSys and (ii) 0.2% interestheld by TwinSys Ltd., in which the Company has a 51% ownership interest. The Company and Toshiba terminatedthe operations of TwinSys as of March 31, 2007.

Business Ventures and Foundry Arrangement with Toshiba. Purchase orders placed under Flash Ventures andthe foundry arrangement with Toshiba for up to three months are binding and cannot be canceled.

Other Silicon Sources. The Company’s contracts with the other sources of silicon wafers generally requirethe Company to provide purchase order commitments based on nine-month rolling forecasts. The purchase ordersplaced under these arrangements relating to the first three months of the nine-month forecast are generally bindingand cannot be canceled. Outstanding purchase commitments for other sources of silicon wafers are included as partof the total “Noncancelable production purchase commitments” in the “Contractual Obligations” table below.

Subcontractors. In the normal course of business, the Company’s subcontractors periodically procureproduction materials based on the forecast the Company provides to them. The Company’s agreements withthese subcontractors require that it reimburse them for materials that are purchased on the Company’s behalf inaccordance with such forecast. Accordingly, the Company may be committed to certain costs over and above itsopen noncancelable purchase orders with these subcontractors. Outstanding purchase commitments to subcon-tractors are included as part of the total “Noncancelable production purchase commitments” in the “ContractualObligations” table below.

Off-Balance Sheet Liabilities

The following table details the Company’s portion of the remaining indemnification or guarantee obligationsunder each of Flash Ventures’ master lease facilities in both Japanese yen and U.S. dollar equivalent based upon theexchange rate at December 30, 2007.

Master Lease Agreements by Execution Date Lease Amounts Expiration(Yen in billions) (Dollars in millions)

FlashVision

June 2006. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 3.6 $ 32 2009

Flash Partners

December 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 16.1 $ 143 2010

December 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . 12.4 110 2011

June 2006. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.8 105 2011

September 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . 41.2 364 2011

March 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28.5 252 2012

¥ 110.0 $ 974

Flash Alliance

November 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 15.0 $ 133 2012

Total indemnification or guarantee obligations . . . . . . ¥ 128.6 $1,139

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The following table details the breakdown of the Company’s remaining indemnification or guaranteeobligations between the principal amortization and the purchase option exercise price at the term of the leases,in annual installments as of December 30, 2007 in U.S. dollars based upon the exchange rate at December 30, 2007.

Annual Installments

Payment ofPrincipal

Amortization

PurchaseOption

Exercise Priceat Final Lease

Terms

Indemnificationor Guarantee

Amount(In millions)

Year 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 231 $ — $ 231

Year 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234 13 247

Year 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191 53 244

Year 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118 177 295

Year 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 88 122

Total indemnification or guarantee obligations . . . . $ 808 $ 331 $1,139

FlashVision. FlashVision has an equipment lease arrangement of approximately 15.0 billion Japanese yen,or approximately $133 million based upon the exchange rate at December 30, 2007, of which 7.3 billion Japaneseyen, or approximately $64 million based upon the exchange rate at December 30, 2007, was outstanding as ofDecember 30, 2007.

Master lease payments are due quarterly and are scheduled to be completed in February 2009. Under the termsof the June 2006 master lease, Toshiba guaranteed these commitments on behalf of FlashVision. The Companyagreed to indemnify Toshiba for certain liabilities Toshiba incurs as a result of Toshiba’s guarantee of theFlashVision equipment lease arrangement. If FlashVision fails to meet its lease commitments, and Toshiba fulfillsthese commitments under the terms of Toshiba’s guarantee, then the Company will be obligated to reimburseToshiba for 49.9% of any claims and associated expenses under the lease, unless the claims result from Toshiba’sfailure to meet its obligations to FlashVision or its covenants to the lenders. Because FlashVision’s equipment leasearrangement is denominated in Japanese yen, the maximum amount of the Company’s contingent indemnificationobligation on a given date when converted to U.S. dollars will fluctuate based on the exchange rate in effect on thatdate. As of December 30, 2007, the maximum amount of the Company’s contingent indemnification obligation,which reflects payments and any lease adjustments, was approximately 3.6 billion Japanese yen, or approximately$32 million based upon the exchange rate at December 30, 2007.

Flash Partners. Flash Partners sells and leases-back from a consortium of financial institutions a portion ofits tools and has entered into and drawn down five equipment master lease agreements totaling approximately275.0 billion Japanese yen, or approximately $2.44 billion based upon the exchange rate at December 30, 2007, ofwhich 220.0 billion Japanese yen, or approximately $1.95 billion based upon the exchange rate at December 30,2007, was outstanding at December 30, 2007. The Company and Toshiba have each guaranteed, on a several basis,50% of Flash Partners’ obligations under the master lease agreements. As of December 30, 2007, the maximumamount of the Company’s guarantee obligation of the Flash Partners master lease agreements, which reflectspayments and any lease adjustments, was approximately 110.0 billion Japanese yen, or approximately $974 millionbased upon the exchange rate at December 30, 2007. Master lease payments are due quarterly and semi-annually,and are scheduled to be completed in stages through fiscal year 2012. At the end of each of the lease terms, FlashPartners has the option of purchasing the tools from the lessors. Flash Partners is obligated to insure the equipment,maintain the equipment in accordance with the manufacturers’ recommendations and comply with other customaryterms to protect the leased assets. The master lease agreements contain covenants, the most restrictive of whichrequire the Company to maintain a minimum shareholder equity balance of $1.16 billion as well as a long-term loanrating of BB- or Ba3, based on a named independent rating service. In addition, the master lease agreements containcustomary events of default for a Japanese lease facility. The fair value of the Company’s guarantee of FlashPartners’ lease obligations was insignificant at inception of each of the guarantees. In addition, Flash Partners

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expects to secure additional equipment lease facilities over time, which the Company may be required to guaranteein whole or in part.

Flash Alliance. Flash Alliance sells and leases-back from a consortium of financial institutions a portion ofits tools and has entered into an equipment master lease agreement totaling approximately 100.0 billion Japaneseyen, or approximately $886 million based upon the exchange rate at December 30, 2007, of which 30.0 billionJapanese yen, or approximately $266 million based upon the exchange rate at December 30, 2007, had been drawnand was outstanding as of December 30, 2007. The Company and Toshiba have each guaranteed, on a several basis,50% of Flash Alliance’s obligation under the master lease agreement. As of December 30, 2007, the maximumamount of the Company’s guarantee obligation of the Flash Alliance master lease agreement was approximately15.0 billion Japanese yen, or approximately $133 million based upon the exchange rate at December 30, 2007.Remaining master lease payments are due semi-annually and are scheduled to be completed in fiscal year 2012. Atthe end of the lease term, Flash Alliance has the option of purchasing the tools from the lessors. Flash Alliance isobligated to insure the equipment, maintain the equipment in accordance with the manufacturers’ recommendationsand comply with other customary terms to protect the leased assets. The master lease agreements contain covenants,the most restrictive of which require the Company to maintain a minimum shareholder equity balance of$1.51 billion as well as a long-term loan rating of BB+, based on a named independent rating service. In addition,the master lease agreement contains customary events of default for a Japanese lease facility. The fair value of theCompany’s guarantee of Flash Alliance’s lease obligation was insignificant at inception of each of the guarantee. Inaddition, Flash Alliance expects to secure additional equipment lease facilities over time, which the Company maybe required to guarantee in whole or in part. See also Note 19, “Subsequent Events.”

Guarantees

Indemnification Agreements. The Company has agreed to indemnify suppliers and customers for allegedpatent infringement. The scope of such indemnity varies, but may, in some instances, include indemnification fordamages and expenses, including attorneys’ fees. The Company may periodically engage in litigation as a result ofthese indemnification obligations. The Company’s insurance policies exclude coverage for third-party claims forpatent infringement. Although the liability is not remote, the nature of the patent infringement indemnificationobligations prevents the Company from making a reasonable estimate of the maximum potential amount it could berequired to pay to its suppliers and customers. Historically, the Company has not made any significant indem-nification payments under any such agreements. As of December 30, 2007, no amount had been accrued in theaccompanying consolidated financial statements with respect to these indemnification guarantees.

As permitted under Delaware law and the Company’s charter and bylaws, the Company has agreements, or hasassumed agreements in connection with its acquisitions, whereby it indemnifies certain of its officers, employeesand each of its directors for certain events or occurrences while the officer, employee or director is, or was, servingat the Company’s or the acquired company’s request in such capacity. The term of the indemnification period is forthe officer’s, employee’s or director’s lifetime. The maximum potential amount of future payments the Companycould be required to make under these indemnification agreements is generally unlimited; however, the Companyhas a Director and Officer insurance policy that may reduce its exposure and enable it to recover all or a portion ofany future amounts paid. As a result of its insurance policy coverage, the Company believes the estimated fair valueof these indemnification agreements is minimal. The Company has no liabilities recorded for these agreements as ofDecember 30, 2007 or December 31, 2006, as this liability is not reasonably estimable even though liability underthese agreements is not remote.

The Company and Toshiba have agreed to mutually contribute to, and indemnify each other, Flash Partners andFlash Alliance, for environmental remediation costs or liability resulting from Flash Partners or Flash Alliance’smanufacturing operations in certain circumstances. In fiscal years 2004 and 2006, the Company and Toshiba eachengaged consultants to perform a review of the existing environmental conditions at the site of the facilities at whichFlash Partners and Flash Alliance operations are located to establish a baseline for evaluating future environmentalconditions. The Company and Toshiba have also entered into a Patent Indemnification Agreement under which inmany cases the Company will share in the expenses associated with the defense and cost of settlement associated

F-35


with such claims. This agreement provides limited protection for the Company against third-party claims thatNAND flash memory products manufactured and sold by Flash Partners or Flash Alliance infringe third-partypatents. The Company has not made any indemnification payments under any such agreements and as ofDecember 30, 2007, no amounts have been accrued in the accompanying consolidated financial statements withrespect to these indemnification guarantees.

Contractual Obligations and Off-Balance Sheet Arrangements

Contractual Obligations. The following summarizes the Company’s contractual cash obligations, commit-ments and off-balance sheet arrangements at December 30, 2007, and the effect such obligations are expected tohave on its liquidity and cash flows in future periods (in thousands).

Total1 Year or Less(Fiscal 2008)

2 - 3 Years(Fiscal 2009and 2010)

4-5 Years(Fiscal 2011and 2012)

More than 5Years

(BeyondFiscal 2012)

Operating leases . . . . . . . . . $ 39,673 $ 8,468 $ 15,700 $ 7,472 $ 8,033FlashVision reimbursement

for certain other costsincluding depreciation . . . 137,021(3) 64,429 69,673 2,919 —

Flash Partnersreimbursement for certainother costs includingdepreciation . . . . . . . . . . 1,915,456(3) 581,359 890,771 401,235 42,091

Flash Alliance fabricationcapacity expansion andreimbursement for certainother costs includingdepreciation andstart-up. . . . . . . . . . . . . . 2,526,791(3) 945,551 877,081 612,275 91,884

Toshiba research anddevelopment . . . . . . . . . . 10,000(3) 10,000 — — —

Capital equipmentpurchasescommitments . . . . . . . . . 55,697 55,697 — — —

Convertible notes principaland interest(1) . . . . . . . . . 1,307,170 12,250 24,500 24,500 1,245,920

Operating expensecommitments . . . . . . . . . 21,384 21,384 — — —

Noncancelable productionpurchasecommitments(2) . . . . . . . . 250,544(3) 250,544 — — —

Total contractual cashobligations . . . . . . . . . . . $6,263,736 $1,949,682 $1,877,725 $1,048,401 $1,387,928

Off-Balance Sheet Arrangements.As of

December 30,2007

Indemnification of FlashVision equipment lease(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,106

Guarantee of Flash Partners equipment leases(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $974,126

Guarantee of Flash Alliance equipment lease(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $132,837

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(1) In May 2006, the Company issued and sold $1.15 billion in aggregate principal amount of 1% SeniorConvertible 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. InNovember 2006, through its acquisition of msystems, the Company assumed msystems’ $75 millionin aggregate principal amount of 1% Convertible Notes due March 15, 2035. The Company will paycash interest at an annual rate of 1%, payable semi-annually on March 15 and September 15 of eachyear until calendar year 2035.

(2) Includes Toshiba foundries, FlashVision, Flash Partners, Flash Alliance, related party vendors andother silicon source vendor purchase commitments.

(3) Includes amounts denominated in Japanese yen, which are subject to fluctuation in exchange ratesprior to payment and have been translated using the exchange rate at December 30, 2007.

(4) The Company’s contingent indemnification obligation is 3.6 billion Japanese yen, or approximately$32 million based upon the exchange rate at December 30, 2007.

(5) The Company’s guarantee obligation, net of cumulative lease payments, is 125.0 billion Japaneseyen, or approximately $1.11 billion based upon the exchange rate at December 30, 2007.

Due to the uncertainty with respect to the timing of future cash flows associated with unrecognized tax benefitat December 30, 2007, the Company is unable to make reasonable reliable estimates of the period of cash settlementwith the respective taxing authorities. Therefore, approximately $80 million of unrecognized tax benefits have beenexcluded from the contractual obligation table above.

The Company leases many of its office facilities and operating equipment for various terms under long-term,noncancelable operating lease agreements. The leases expire at various dates from fiscal years 2007 through 2016.Future minimum lease payments at December 30, 2007 are presented below (in thousands):

Fiscal Year Ending:

2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,3152009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,082

2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,061

2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,047

2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,144

2013 and beyond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,033

44,682

Sublease income to be received in the future under noncancelable subleases . . . . . . . . . . . (5,009)

Net operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $39,673

Foreign Currency Exchange and Other Contracts. The Company transacts business in various foreigncurrencies. Exposure to foreign currency exchange rate fluctuations arises mainly from non-functional currencydenominated trade accounts payable, intercompany accounts and loans receivable from related parties. TheCompany utilizes foreign currency forward contracts to minimize the risk associated with foreign exchangeeffects of trade accounts payable, intercompany accounts and loans receivable from related parties. As a result,increases or decreases in these accounts due to foreign exchange rate changes are offset by gains and losses on theforward contracts so as to minimize foreign currency transaction gains and losses. All foreign currency balances andall outstanding forward contracts are marked-to-market at December 30, 2007 with unrealized gains and lossesincluded in “Other income” of the Consolidated Statements of Income. As of December 30, 2007, the Company hadforeign currency exchange contract lines of $1.57 billion. The Company had net foreign currency forward contractsin place denominated in European euros, Israeli New Israel shekels, Japanese yen and Taiwanese dollars to sellU.S. dollar equivalent of approximately $534 million in foreign currencies based upon the exchange rates atDecember 30, 2007.

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For the years ended December 30, 2007, December 31, 2006 and January 1, 2006, foreign currency contractsresulted in a loss of $8.3 million and gains of $5.8 million and $5.1 million, respectively, including forward pointincome, offset by the foreign currency exposures hedged by these forward contracts which had a gain of$17.8 million and losses of $2.2 million and $5.1 million, respectively. The Company has outstanding cash flowhedges designated to mitigate equity risk associated with certain available-for-sale equity securities totalingapproximately $60.4 million. The changes in the fair value of the cash flow hedges are included in accumulatedother comprehensive income and were immaterial for the year ended December 30, 2007. The Company does notenter into derivatives for speculative or trading purposes.

Note 13: Related Parties and Strategic Investments

Toshiba. The Company and Toshiba have collaborated in the development and manufacture of NAND flashmemory products. These NAND flash memory products are manufactured by Toshiba at Toshiba’s Yokkaichi,Japan operations using the semiconductor manufacturing equipment owned or leased by Flash Ventures. See alsoNote 12, “Commitments, Contingencies and Guarantees.” The Company purchased NAND flash memory wafersfrom Flash Ventures and Toshiba, made payments for shared research and development expenses, made loans toFlash Ventures and made investments in Flash Ventures totaling approximately $1,294.5 million, $658.4 millionand $571.7 million in the years ended December 30, 2007, December 31, 2006 and January 1, 2006, respectively.The purchases of NAND flash memory wafers are ultimately reflected as a component of the Company’s cost ofproduct revenues. During the twelve months ended December 30, 2007, the Company had sales to Toshiba(excluding TwinSys Ltd. as described below) of $26.7 million, compared to zero in the prior years. At December 30,2007 and December 31, 2006, the Company had accounts payable balances due to Toshiba of $0.2 million and$19.2 million, respectively, and accounts receivable balances from Toshiba of $4.2 million and $1.4 million,respectively. At December 30, 2007 and December 31, 2006, the Company had accrued current liabilities due toToshiba for shared research and development expenses of $8.0 million and $5.9 million, respectively.

Flash Ventures with Toshiba. The Company owns 49.9% of each Flash Venture entity and accounts for itsownership position under the equity method of accounting. The Company’s obligations with respect to the FlashVentures’ lease arrangements, capacity expansion, take-or-pay supply arrangements and research and developmentcost sharing are described in Note 12, “Commitments, Contingencies and Guarantees.” Flash Ventures are allvariable interest entities as defined under FASB Interpretation No. 46 (“FIN 46R”), Consolidation of VariableInterest Entities, and the Company is not the primary beneficiary of any of the Flash Venture’s entities because itabsorbs less than a majority of the expected gains and losses of each entity. At December 30, 2007 and December 31,2006, the Company had accounts payable balances due to Flash Ventures of $131.3 million and $61.6 million,respectively.

The Company’s maximum reasonably estimable loss exposure (excluding lost profits) as a result of itsinvolvement with Flash Ventures was $2.2 billion and $1.1 billion, as of December 30, 2007 and December 31,2006, respectively. These amounts are comprised of the Company’s investments, notes receivable and guaranteeand contingent indemnification obligations. At December 30, 2007 and December 31, 2006, the Company’sconsolidated retained earnings included approximately $2.8 million and $2.5 million, respectively, of undistributedearnings of Flash Ventures.

The following summarizes the aggregated financial information for Flash Ventures as of December 30, 2007and December 31, 2006 (in thousands).

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December 30,2007

December 31,2006

(Unaudited)

Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 870,018 $ 448,520

Property, plant and equipment and other assets . . . . . . . . . . . . . . . . . . . 3,331,584 1,652,706

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,201,602 2,101,226

Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,958,322 1,169,543

Long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,280,471 $ 262,063

The following summarizes the aggregated financial information for Flash Ventures for the fiscal years endedDecember 30, 2007, December 31, 2006 and January 1, 2006, respectively (in thousands). Flash Ventures’ year-ends are March 31, with quarters ending on March 31, June 30, September 30 and December 31.

December 30,2007

December 31,2006

January 1,2006

Twelve Months Ended

(Unaudited)

Net sales(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,435,114 $1,462,024 $795,464

Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,587 8,894 4,027

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 927 $ 1,730 $ 763

(1) Net sales represent sales to both the Company and Toshiba.

TwinSys. The Company assumed msystems’ ownership interest in the venture with Toshiba, TwinSys Ltd.(“TwinSys”), designed to enable the parties to benefit from a portion of each party’s respective sales of USB flashdrives. The Company had a 50.1% beneficial ownership in TwinSys, consisting of (i) 49.9% ownership in TwinSysand (ii) 0.2% interest held by TwinSys Ltd., in which the Company has a 51% ownership interest. The Companyconsolidated the venture under FIN 46R. During the twelve months ended December 30, 2007, TwinSys had sales toand purchases from Toshiba of $53.0 million and $28.5 million, respectively. The Company and Toshiba terminatedthe operations of TwinSys as of March 31, 2007.

Tower Semiconductor. As of December 30, 2007, the Company owned approximately 12.8% of theoutstanding shares of Tower, one of its suppliers of wafers for its controller components, has prepaid wafercredits issued by Tower, and has convertible debt and a warrant to purchase Tower ordinary shares. The Company’sChief Executive Officer is also a member of the Tower board of directors. As of December 30, 2007, the Companyowned approximately 14.1 million Tower shares with a market value of $20.1 million. In addition, the Companyholds a Tower convertible debenture with a market value of $5.5 million. As of December 30, 2007, the Companyhad an outstanding loan of $8.6 million to Tower for expansion of Tower’s 0.13 micron logic wafer capacity. Theloan to Tower is secured by the equipment purchased. The Company purchased controller wafers and related non-recurring engineering of approximately $65.8 million, $41.0 million and $31.3 million in the fiscal years endedDecember 30, 2007, December 31, 2006 and January 1, 2006, respectively. These purchases of controller wafers areultimately reflected as a component of the Company’s cost of product revenues. At December 30, 2007 andDecember 31, 2006, the Company had amounts payable to Tower of approximately $6.1 million and $7.7 million,respectively.

Flextronics. The former Chairman of Flextronics International, Ltd., (“Flextronics”), who served on theFlextronics board of directors from 1991 to January 10, 2008, has served on the Company’s board of directors sinceSeptember 2003. For the fiscal years ended December 30, 2007, December 31, 2006 and January 1, 2006 theCompany recorded revenues related to Flextronics and its affiliates of $75.5 million, $106.6 million and$25.3 million, respectively, and at December 30, 2007 and December 31, 2006, the Company had receivablesfrom Flextronics and its affiliates of $0.6 million and $18.9 million, respectively. In addition, the Companypurchased from Flextronics and its affiliates $72.6 million, $53.5 million and $40.2 million of services for cardassembly and testing in the fiscal years ended December 30, 2007, December 31, 2006 and January 1, 2006,

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respectively, which are ultimately reflected as a component of the Company’s cost of product revenues. AtDecember 30, 2007 and December 31, 2006, the Company had amounts payable to Flextronics and its affiliates ofapproximately $10.3 million and $6.7 million, respectively, for these services.

Solid State Storage Solutions LLC. During the second quarter of fiscal 2007, the Company formed a venturewith third parties that will license intellectual property. This venture qualifies as a variable interest entity underFIN 46R. The Company is considered the primary beneficiary of this venture, and in accordance with FIN 46R, theCompany consolidates this venture in its financial statements. The venture was financed with $10.2 million of initialaggregate capital contributions from the partners. In July 2007, Solid State Storage Solutions LLC invested$10.0 million for the acquisition of intellectual property. The venture has an obligation of up to an additional$32.5 million related to the acquisition of intellectual property should the venture be profitable.

Note 14: Business Acquisitions

msystems Ltd. On November 19, 2006, the Company completed the acquisition of msystems in an all stocktransaction. This combination joined together two flash memory companies with complementary products,customers and channels. The transaction was accounted for using the purchase method of accounting in accordancewith Statement of Financial Accounting Standards No. 141 (“SFAS 141”), Business Combinations. The purchaseprice was comprised of the following (in thousands):

Fair value of SanDisk common stock issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,365,150

Estimated fair value of options and stock appreciation rights assumed . . . . . . . . . . . . . . 115,670

Direct transaction costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,918

Total purchase price. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,495,738

As a result of the acquisition, the Company issued approximately 29.4 million shares of SanDisk commonstock based on an exchange ratio of 0.76368 shares of the Company’s common stock for each outstanding share ofmsystems common stock as of November 19, 2006. The average market price per share of SanDisk common stockof $46.48 was based on the average of the closing prices for a range of trading days around the announcement date(July 30, 2006) of the proposed transaction.

Pursuant to the terms of the merger agreement, each msystems stock option and stock appreciation rightoutstanding and unexercised as of November 19, 2006 was converted into a stock option and stock appreciationright (“SARs”), to purchase the Company’s common stock. Based on msystems’ stock options outstanding atNovember 19, 2006, the Company assumed msystems’ options and SARs to purchase approximately 5.4 millionshares of the Company’s common stock. The fair value of options and SARs assumed was estimated a valuationmodel with the following assumptions:

Vested Options Unvested Options SARs

Valuation method . . . . . . . . . . Black-Scholes-Merton Black-Scholes-Merton Binomial Model

Dividend yield . . . . . . . . . . . . None None None

Expected volatility . . . . . . . . . 0.50 0.50 0.50

Risk-free interest rate . . . . . . . 5.04% 4.68% 4.67%

Weighted average expectedlife . . . . . . . . . . . . . . . . . . . 0.9 Years 3.4 Years 3.7 Years

Fair value . . . . . . . . . . . . . . . . $46.48 $46.48 $46.48

Exercise cap . . . . . . . . . . . . . . N/A N/A $104.76

Direct transaction costs of approximately $15 million include investment banking, legal and accounting fees,and other external costs directly related to the acquisition. As of December 30, 2007, substantially all costs foraccounting, legal and other professional services had been paid.

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Net Tangible Assets. The allocation of the msystems’ purchase price to the tangible assets acquired andliabilities assumed is summarized below (in thousands). In the year ended December 30, 2007, the Companybooked adjustments to the net tangible assets acquired of approximately $53.8 million largely related to a revisedestimate of other assets.

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 41,657

Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,341

Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163,705

Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134,677

Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,872

Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108,889

Total assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 585,141

Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (133,263)

Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (184,068)

Total liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (317,331)

Net tangible assets acquired. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 267,810

Purchase Price Allocation. In accordance with SFAS 141, the total purchase price was allocated to msystemsnet tangible and intangible assets based upon their estimated fair values as of November 19, 2006. The excesspurchase price over the value of the net tangible and identifiable intangible assets was recorded as goodwill. The fairvalues assigned to tangible and intangible assets acquired and liabilities assumed are based on estimates andassumptions of management.

The following represents the allocation of the purchase price to the acquired net assets of msystems (inthousands):

Net tangible assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 267,810

Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 693,730

Other identifiable intangible assets:

Core technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235,500

Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000

Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66,000

Backlog . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000

Supply agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000

Total other identifiable intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 312,500Acquired in-process technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186,000

Deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (19,641)

Assumed unvested share-based awards to be expensed . . . . . . . . . . . . . . . . . . . . . . . . . 55,339

Total purchase price. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,495,738

Acquisition-Related Restructuring. During the fourth quarter of fiscal year 2006, the Company establishedits plans to integrate the msystems operations, which included the involuntary termination of approximately100 employees and the exiting of duplicative facilities, and recorded $1.6 million for acquisition-related restruc-turing activities, of which $0.3 million relates to excess lease obligations and $1.3 million is related to personnel.The lease obligations extend through the end of the lease term in fiscal year 2009. These acquisition-relatedrestructuring liabilities were included in the purchase price allocation of the cost to acquire msystems. In the twelvemonths ended December 30, 2007, the Company reversed through goodwill approximately $0.6 million of the

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restructuring accrual based on actual costs being less than the original estimates. As of December 30, 2007, therewas no remaining acquisition-related restructuring accrual that had not been paid or utilized.

In-process Technology. As part of the msystems purchase agreement, a certain amount of the purchase pricewas allocated to acquired in-process technology, which was determined through established valuation techniques inthe high-technology industry and written-off in the fourth quarter of fiscal year 2006 because technologicalfeasibility had not been established and no alternative future uses existed. The value was determined by estimatingthe net cash flows and discounting forecasted net cash flows to their present values. The Company wrote-off theacquired in-process technology of $186.0 million in the fourth quarter of fiscal year 2006. As of December 30, 2007,it was estimated that these in-process projects would be completed at an estimated total cost of $14.4 million. Thenet cash flows from the identified projects were based on estimates of revenues, costs of revenues, research anddevelopment expenses, including costs to complete the projects, selling, marketing and administrative expenses,and income taxes from the projects. The Company believes the assumptions used in the valuations were reasonableat the time of the acquisition. The estimated net revenues and gross margins were based on management’sprojections of the projects and were in line with industry averages. Estimated total net revenues from the projectswere expected to grow through fiscal year 2009 and decline thereafter as other new products are expected to becomeavailable. Estimated operating expenses included research and development expenses and selling, marketing andadministrative expenses based upon historical and expected direct expense level and general industry metrics.Estimated research and development expenses included costs to bring the projects to technological feasibility andcosts associated with ongoing maintenance after a product is released, estimated at 2% of the expected net revenuesfor the in-process technologies.

The effective tax rate used in the analysis of the in-process technologies reflects a historical industry-specificaverage for the United States federal income tax rates. A discount rate (the rate utilized to discount the net cashflows to their present values) of 19% was used in computing the present value of net cash flows for the projects. Thepercentage of completion was determined using costs incurred by msystems prior to the acquisition date comparedto the estimated remaining research and development to be completed to bring the projects to technologicalfeasibility.

Matrix Semiconductor, Inc. On January 13, 2006, the Company completed the acquisition of Matrix, adesigner and developer of three-dimensional (“3D”) integrated circuits. Matrix» 3D Memory is used for one-timeprogrammable storage applications that complement the Company’s existing flash storage memory products. TheCompany acquired 100% of the outstanding shares of Matrix for a total purchase price of $296.4 million. Thepurchase price is comprised of the following (in thousands):

Fair value of SanDisk common stock issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $242,303

Estimated fair value of options assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,169

Cash consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000

Direct transaction costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 907

Total purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $296,379

As a result of the acquisition, the Company issued approximately 3.7 million shares of SanDisk common stockand assumed equity instruments to issue 567,704 shares of common stock. The assumed stock options were valuedusing the Black-Scholes-Merton valuation model with the following assumptions: stock price of $65.09; a weightedaverage volatility rate of 52.8%; a risk-free interest rate of 4.3%; a dividend yield of zero and a weighted averageexpected remaining term of 1.4 years. The fair value of unvested assumed stock options, which was valued at theconsummation date, will be recognized as compensation expenses, net of forfeitures, over the remaining vestingperiod.

Acquisition-Related Restructuring. During the first quarter of fiscal year 2006, the Company established itsplans to integrate the Matrix operations, which included exiting duplicative facilities and recording $17.5 millionfor acquisition-related restructuring activities, of which $17.4 million relates to excess lease obligations. The leaseobligations extend through the end of the lease term in fiscal year 2016. These acquisition-related restructuring

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liabilities were included in the purchase price allocation of the cost to acquire Matrix. As of December 30, 2007, theoutstanding accrual balance was $13.4 million. The reduction in the accrual balance was primarily related to leaseobligation payments.

In-process Technology. As part of the Matrix purchase agreement, a certain amount of the purchase price wasallocated to acquired in-process technology, which was determined through established valuation techniques in thehigh-technology computer industry and written-off in the first quarter of fiscal year 2006 because technologicalfeasibility had not been established and no alternative future uses existed. The value was determined by estimatingthe net cash flows and discounting forecasted net cash flows to their present values. The Company wrote-off theacquired in-process technology of $39.6 million in the first quarter of fiscal year 2006. As of December 30, 2007, itwas estimated that these in-process projects were completed.

The net cash flows from the identified projects were based on estimates of revenues, costs of revenues, researchand development expenses, including costs to complete the projects, selling, marketing and administrativeexpenses, and income taxes from the projects. The Company believes the assumptions used in the valuationswere reasonable at the time of the acquisition. The estimated net revenues and gross margins were based onmanagement’s projections of the projects and were in line with industry averages. Estimated total net revenues fromthe projects were expected to grow through fiscal year 2009 and decline thereafter as other new products areexpected to become available. Estimated operating expenses included research and development expenses andselling, marketing and administrative expenses based upon historical and expected direct expense level and generalindustry metrics. Estimated research and development expenses included costs to bring the projects to technologicalfeasibility and costs associated with ongoing maintenance after a product is released. These activities range from0% to 5% of Matrix’s portion of the Company’s net revenues for the in-process technologies.

The effective tax rate used in the analysis of the in-process technologies reflects a historical industry-specificaverage for the United States federal income tax rates. Discount rates (the rates utilized to discount the net cashflows to their present values) ranging from 12.5% to 15.5% were used in computing the present value of net cashflows for the projects. The percentage of completion was determined using costs incurred by Matrix prior to theacquisition date compared to the estimated remaining research and development to be completed to bring theprojects to technological feasibility.

Pro Forma Results. The following unaudited pro forma financial information for the twelve months endedDecember 31, 2006 presents the combined results of the Company, Matrix and msystems, as if the acquisitions hadoccurred at the beginning of the period presented (in thousands, except per share amounts). Certain adjustmentshave been made to the combined results of operations, including amortization of acquired other intangible assets;however, charges for acquired in-process technology were excluded as these items were non-recurring.

December 31,2006

January 1,2006

Twelve Months Ended

Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,030,645 $2,925,431

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 340,097 $ 295,305


Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.49 $ 1.39

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.41 $ 1.29

The pro forma financial information does not necessarily reflect the results of operations that would haveoccurred had the Company, Matrix and msystems constituted a consolidated entity during such period.

Note 15: Stockholders’ Rights Plan

On September 15, 2003, the Company amended its existing stockholder rights plan to terminate the rightsissued under that rights plan, and the Company adopted a new rights plan. Under the new rights plan, rights weredistributed as a dividend at the rate of one right for each share of common stock of the Company held by

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stockholders of record as of the close of business on September 25, 2003. In November 2006, the Companyextended the term of the rights plan, such that the rights will expire on April 28, 2017 unless redeemed orexchanged. Under the new rights agreement and after giving effect to the Company’s stock dividend effected onFebruary 18, 2004, each right will, under the circumstances described below, entitle the registered holder to buy onetwo-hundredths of a share of Series A Junior Participating Preferred Stock for $225.00. The rights will becomeexercisable only if a person or group acquires beneficial ownership of 15% or more of the Company’s commonstock or commences a tender offer or exchange offer upon consummation of which such person or group wouldbeneficially own 15% or more of the Company’s common stock.

Note 16: Litigation

From time-to-time, it has been and may continue to be necessary to initiate or defend litigation against thirdparties. These and other parties could bring suit against us. In each case listed below where we are the defendant, weintend to vigorously defend the action. At this time, the Company does not believe it is reasonably possible thatlosses related to the litigation described below have occurred beyond the amounts, if any, that have been accrued.

On October 31, 2001, the Company filed a complaint for patent infringement in the United States DistrictCourt for the Northern District of California against Memorex Products, Inc. (“Memorex”), Pretec ElectronicsCorporation (“Pretec”), RITEK Corporation (“RITEK”), and Power Quotient International Co., Ltd (“PQI”). In thesuit, captioned SanDisk Corp. v. Memorex Products, Inc., et al., Civil Case No. CV 01 4063 VRW, the Companyseeks damages and injunctions against these companies from making, selling, importing or using flash memorycards that infringe its U.S. Patent No. 5,602,987. On May 6, 2003, the District Court entered a stipulated consentjudgment against PQI. The District Court granted summary judgment of non-infringement in favor of defendantsRITEK, Pretec and Memorex and entered judgment on May 17, 2004. On June 2, 2004, the Company filed a noticeof appeal of the summary judgment rulings to the United States Court of Appeals for the Federal Circuit. On July 8,2005, the Federal Circuit held in favor of the Company, vacating the judgment of non-infringement and remandingthe case back to the District Court. The District Court issued an order on claim construction on February 22, 2007.On June 29, 2007, defendant RITEK entered into a settlement agreement and cross-license with the Company. Inlight of the agreement, the Company agreed to dismiss all current patent infringement litigation against RITEK. Astipulated dismissal with prejudice between the Company and RITEK was entered on July 23, 2007. On August 30,2007, the Company entered into a settlement agreement with Memorex regarding the accused products. OnSeptember 7, 2007, in light of the settlement between the Company and Memorex, the Court entered a stipulationdismissing the Company’s claims against Memorex. On October 25, 2007, the Court Clerk entered a default againstPretec. On January 14, 2008, the Company filed a motion for default judgment against Pretec. The Court scheduleda hearing regarding the Company’s motion for April 3, 2008.

On February 20, 2004, the Company and a number of other manufacturers of flash memory products were suedin the Superior Court of the State of California for the City and County of San Francisco in a purported consumerclass action captioned Willem Vroegh et al. v. Dane-Electric Corp. USA, et al., Civil Case No. GCG 04 428953,alleging false advertising, unfair business practices, breach of contract, fraud, deceit, misrepresentation andviolation of the California Consumers Legal Remedy Act. The lawsuit purports to be on behalf of a class ofpurchasers of flash memory products and claims that the defendants overstated the size of the memory storagecapabilities of such products. The lawsuit seeks restitution, injunction and damages in an unspecified amount. Theparties have reached a settlement of the case, which received final approval from the Court on November 20, 2006.Four objectors to the settlement filed appeals from the Court’s order granting final approval. On November 30,2007, the First District of the California Court of Appeal affirmed in full the trial court’s judgment and finalapproval of the settlement. The objectors then filed petitions for the Court of Appeal to rehear the matter en banc,which petitions were denied on December 21, 2007. The objectors have now filed petitions with the CaliforniaSupreme Court, currently pending in Case No. S159760, asking the Supreme Court to review of the decision of theCourt of Appeal.

On October 15, 2004, the Company filed a complaint for patent infringement and declaratory judgment of non-infringement and patent invalidity against STMicroelectronics N.V. and STMicroelectronics, Inc. (collectively,

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“ST”) in the United States District Court for the Northern District of California, captioned SanDisk Corporation v.STMicroelectronics, Inc., et al., Civil Case No. C 04 04379 JF. The complaint alleges that ST’s products infringeone of the Company’s U.S. patents, U.S. Patent No. 5,172,338 (the “’338 patent”), and also alleges that several ofST’s patents are invalid and not infringed. On June 18, 2007, the Company filed an amended complaint, removingseveral of the Company’s declaratory judgment claims. A case management conference was conducted on June 29,2007. At that conference, the parties agreed that the remaining declaratory judgment claims will be dismissed,pursuant to a settlement agreement in two matters being litigated in the Eastern District of Texas (Civil CaseNo. 4:05CV44 and Civil Case No. 4:05CV45, discussed below). The parties also agreed that the ’338 patent and asecond Company patent, presently at issue in Civil Case No. C0505021 JF (discussed below), will be litigatedtogether in this case. ST filed an answer and counterclaims on September 6, 2007. ST’s counterclaims includedassertions of antitrust violations. On October 19, 2007, the Company filed a motion to dismiss ST’s antitrustcounterclaims. On December 20, 2007, the Court entered a stipulated order staying all procedural deadlines untilthe Court resolves the Company’s motion to dismiss. On January 25, 2008, the Court held a hearing on theCompany’s motion. At the hearing, the Court converted the Company’s Motion to Dismiss into a Motion forSummary Judgment. The Court scheduled a hearing on the Company’s Motion for Summary Judgment for May 30,2008. The trial is currently scheduled for summer of 2008. This trial date, however, may be moved depending on theCourt’s ruling on the Company’s Motion for Summary Judgment.

On October 14, 2005, STMicro filed a complaint against the Company and the Company’s CEO, Dr. EliHarari, in the Superior Court of the State of California for the County of Alameda, captioned STMicroelectronics,Inc. v. Harari, Case No. HG 05237216 (the “Harari Matter”). The complaint alleges that STMicro, as the successorto Wafer Scale Integration, Inc.’s (“WSI”) legal rights, has an ownership interest in several Company patents thatwere issued from applications filed by Dr. Harari, a former WSI employee. The complaint seeks the assignment orco-ownership of certain inventions and patents conceived of by Dr. Harari, including some of the patents asserted bythe Company in its litigations against STMicro, as well as damages in an unspecified amount. On November 15,2005, Dr. Harari and the Company removed the case to the U.S. District Court for the Northern District ofCalifornia, where it was assigned case number C05-04691. On December 13, 2005, STMicro filed a motion toremand the case back to the Superior Court of Alameda County. The case was remanded to the Superior Court ofAlameda County on July 18, 2006, after briefing and oral argument on a motion by STMicro for reconsideration ofan earlier order denying STMicro’s request for remand. Due to the remand, the District Court did not rule upon asummary judgment motion previously filed by the Company. In the Superior Court of Alameda County, theCompany filed a Motion to Transfer Venue to Santa Clara County on August 10, 2006, which was denied onSeptember 12, 2006. On October 6, 2006, the Company filed a Petition for Writ of Mandate with the First DistrictCourt of Appeal, which asks that the Superior Court’s September 12, 2006 Order be vacated, and the casetransferred to Santa Clara County. On October 20, 2006, the Court of Appeal requested briefing on the Company’spetition for a writ of mandate and stayed the action during the pendency of the writ proceedings. On January 17,2007, the Court of Appeal issued an alternative writ directing the Superior Court to issue a new order granting theCompany’s venue transfer motion or to show cause why a writ of mandate should not issue compelling such anorder. On January 23, 2007, the Superior Court of Alameda transferred the case to Santa Clara County as a result ofthe writ proceeding at the Court of Appeal. The Company also filed a special motion to strike STMicro’s unfaircompetition claim, which the Superior Court denied on September 11, 2006. The Company has appealed the denialof that motion, and the proceedings at the Superior Court were stayed during the pendency of the appeal. OnAugust 7, 2007, the First District Court of Appeal affirmed the Superior Court’s decision. The California SupremeCourt subsequently denied the Company’s petition for review of the Court of Appeal’s decision. The Superior Courtscheduled a case management conference for April 10, 2008.

On December 6, 2005, the Company filed a complaint for patent infringement in the United States DistrictCourt for the Northern District of California against ST (Case No. C0505021 JF). In the suit, the Company seeksdamages and injunctions against ST from making, selling, importing or using flash memory chips or products thatinfringe the Company’s U.S. Patent No. 5,991,517 (the “’517 patent”). As discussed above, the ’517 patent will belitigated together with the ’338 patent in Civil Case No. C 04 04379JF.

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On August 7, 2006, two purported shareholder class and derivative actions, captioned Capovilla v. SanDiskCorp., No. 106 CV 068760, and Dashiell v. SanDisk Corp., No. 106 CV 068759, were filed in the Superior Court ofCalifornia in Santa Clara County, California. On August 9, 2006 and August 17, 2006, respectively, two additionalpurported shareholder class and derivative actions, captioned Lopiccolo v. SanDisk Corp., No. 106 CV 068946, andSachs v. SanDisk Corp., No. 106 CV 069534, were filed in that court. These four lawsuits were subsequentlyconsolidated under the caption In re msystems Ltd. Shareholder Litigation, No. 106 CV 068759 and on October 27,2006, a consolidated amended complaint was filed that superseded the four original complaints. The lawsuit wasbrought by purported shareholders of msystems Ltd. (“msystems”), and named as defendants the Company andeach of msystems’ former directors, including its President and Chief Executive Officer, and its former ChiefFinancial Officer, and named msystems as a nominal defendant. The lawsuit asserted purported class action andderivative claims. The alleged derivative claims asserted, among other things, breach of fiduciary duties, abuse ofcontrol, constructive fraud, corporate waste, unjust enrichment and gross mismanagement with respect to past stockoption grants. The alleged class and derivative claims also asserted claims for breach of fiduciary duty by msystems’board, which the Company was alleged to have aided and abetted, with respect to allegedly inadequate consid-eration for the merger, and allegedly false or misleading disclosures in proxy materials relating to the merger. Thecomplaints sought, among other things, equitable relief, including enjoining the proposed merger, and compen-satory and punitive damages. In January 2008, the court granted, without prejudice, the Company’s and msystems’motion to dismiss.

On September 11, 2006, Mr. Rabbi, a shareholder of msystems filed a derivative action and a motion to permithim to file the derivative action against four directors of msystems and msystems, arguing that options wereallegedly allocated to officers and employees of msystems in violation of applicable law. Mr. Rabbi claimed that theaforementioned actions allegedly caused damage to msystems. On January 25, 2007, msystems filed a motion todismiss the motion to seek leave to file the derivative action and the derivative action on the grounds, inter alia, thatMr. Rabbi ceased to be a shareholder of msystems after the merger between msystems and the Company. msystemsreceived an extension to file its comprehensive response to the motion, to be submitted 30 days after the decision ofthe court in its motion to dismiss.

On February 16, 2007, Texas MP3 Technologies, Ltd. (“Texas MP3”) filed suit against the Company,Samsung Electronics Co., Ltd., Samsung Electronics America, Inc. and Apple Inc., Case No. 2:07-CV-52, in theEastern District of Texas, Marshall Division, alleging infringement of U.S. Patent 7,065,417 (the “’417 patent”). OnJune 19, 2007, the Company filed an answer and counterclaim: (a) denying infringement; (b) seeking a declaratoryjudgment that the ’417 patent is invalid, unenforceable and not infringed by the Company. On July 31, 2007, TexasMP3 filed an amended complaint against the Company and the other parties named in the original complaint,alleging infringement of the ’417 patent. On August 1, 2007, defendant Apple, Inc. filed a motion to stay thelitigation pending completion of an inter-partes reexamination of the ’417 patent by the U.S. Patent and TrademarkOffice. That motion was denied. On August 10, 2007, the Company filed an answer to the amended complaint and acounterclaim: (a) denying infringement; (b) seeking a declaratory judgment that the ’417 patent is invalid,unenforceable and not infringed by the Company. A status conference in the case was held on November 2,2007. A Markman hearing has been scheduled for March 12, 2009 and jury selection for July 6, 2009. Discovery isproceeding.

On or about May 11, 2007, the Company received written notice from Alcatel-Lucent, S.A., (“Lucent”),alleging that the Company’s digital music players require a license to U.S. Patent No. 5,341,457 (the “’457 patent”)and U.S. Patent No. RE 39,080 (the “’080 patent”). On July 13, 2007, the Company filed a complaint for adeclaratory judgment of non-infringement and patent invalidity against Lucent Technologies Inc. and Lucent in theUnited States District Court for the Northern District of California, captioned SanDisk Corporation v. LucentTechnologies Inc., et al., Civil Case No. C 07 03618. The complaint seeks a declaratory judgment that the Companydoes not infringe the two patents asserted by Lucent against the Company’s digital music players. The complaintfurther seeks a judicial determination and declaration that Lucent’s patents are invalid. Defendants have answeredand defendant Lucent has asserted a counterclaim of infringement in connection with the ’080 patent. Defendantshave also moved to dismiss the case without prejudice and/or stay the case pending their appeal of a judgment

F-46


involving the same patents in suit entered by the United States District Court for the Southern District of California.The Company has moved for summary judgment on its claims for declaratory relief, and has moved to dismissdefendant Lucent’s counterclaim for infringement of the ’080 patent as a matter of law. All motions are presentlypending before the Court.

On August 10, 2007, Lonestar Invention, L.P. (“Lonestar”) filed suit against the Company in the EasternDistrict of Texas, Civil Action No. 6:07-CV-00374-LED. The complaint alleges that a memory controller used inthe Company’s flash memory devices infringes U.S. Patent No. 5,208,725. Lonestar is seeking a permanentinjunction, actual damages, treble damages for willful infringement, and costs and attorney fees. The Company hasanswered Lonestar’s complaint, denying Lonestar’s allegations.

On September 11, 2007 the Company and the Company’s CEO, Dr. Eli Harari, received grand jury subpoenasissued from the United States District Court for the Northern District of California indicating a Department ofJustice investigation into possible antitrust violations in the NAND flash memory industry. The Company alsoreceived a notice from the Canadian Competition Bureau (“Bureau”) that the Bureau has commenced an industry-wide investigation with respect to alleged anti-competitive activity regarding the conduct of companies engaged inthe supply of NAND flash memory chips to Canada and requesting that the Company preserve any records relevantto such investigation. The Company is cooperating in these investigations.

On September 11, 2007, Premier International Associates LLC (“Premier”) filed suit against the Company and19 other named defendants, including Microsoft Corporation, Verizon Communications Inc. and AT&T Inc., in theUnited States District Court for the Eastern District of Texas (Marshall Division). The suit, Case No. 2-07-CV-396,alleges infringement of Premier’s U.S. Patents 6,243,725 (the “’725”) and 6,763,345 (the “’345”) by certain of theCompany’s portable digital music players, and seeks an injunction and damages in an unspecified amount. OnDecember 10, 2007, an amended complaint was filed. On February 5, 2008, the Company filed an answer to theamended complaint and counterclaims: (a) denying infringement; (b) seeking a declaratory judgment that the ’725and ’345 patents are invalid, unenforceable and not infringed by the Company. On February 5, 2008, the Company(along with the other defendants in the action) filed a motion to stay the litigation pending completion ofreexaminations of the ’725 and ’345 patents by the U.S. Patent and Trademark Office. This motion is pending. Atrial date has not been set.

On October 24, 2007, the Company filed a complaint under Section 337 of the Tariff Act of 1930 (as amended)(Inv. No. 337-TA-619) titled, “In the matter of flash memory controllers, drives, memory cards, and media playersand products containing same” in the ITC (hereinafter, “the 619 Investigation”), naming the following companies asrespondents: Phison Electronics Corp. (“Phison”); Silicon Motion Technology Corporation, Silicon Motion, Inc.(located in Taiwan), Silicon Motion, Inc. (located in California), and Silicon Motion International, Inc. (collec-tively, “Silicon Motion”); USBest Technology, Inc. (“USBest”); Skymedi Corporation (“Skymedi”); ChipsbrandMicroelectronics (HK) Co., Ltd., Chipsbank Technology (Shenzhen) Co., Ltd., and Chipsbank MicroelectronicsCo., Ltd., (collectively, “Chipsbank”); Zotek Electronic Co., Ltd., dba Zodata Technology Ltd. (collectively,“Zotek”); Infotech Logistic LLC (“Infotech”), Power Quotient International Co., Ltd., and PQI Corp. (collectively,“PQI”); Power Quotient International (HK) Co., Ltd.; Syscom Development Co. Ltd.; PNY Technologies, Inc.(“PNY”); Kingston Technology Co., Inc., Kingston Technology Corp., Payton Technology Corp., and MemoSun,Inc. (collectively, “Kingston”); Buffalo, Inc., Melco Holdings, Inc., and Buffalo Technology (USA), Inc. (collec-tively, “Buffalo”); Verbatim Corp. (“Verbatim”); Transcend Information Inc. (located in Taiwan), TranscendInformation Inc. (located in California), and Transcend Information Maryland, Inc., (collectively, “Transcend”);Imation; Add-On Computer Peripherals, Inc., Add-On Computer Peripherals, LLC, and Add-On Technology Co.(collectively, “Add-On”); A-Data Technology Co., Ltd., and A-Data Technology (USA) Co., Ltd., (collectively, “A-DATA”); Apacer Technology Inc. and Apacer Memory America, Inc. (collectively, “Apacer”); Acer, Inc. (“Acer”);Behavior Tech Computer Corp. and Behavior Tech Computer (USA) Corp. (collectively, “Behavior”); EmprexTechnologies Corp.; Corsair Memory, Inc. (“Corsair”); Dane-Elec Memory S.A., and Dane-Elec Corp. USA,(collectively, “Dane-Elec”); Deantusaiocht Dane-Elec TEO; EDGE Tech Corp. (“EDGE”); Interactive Media Corp,(“Interactive”); Kaser Corporation (“Kaser”); LG Electronics, Inc., and LG Electronics U.S.A., Inc., (collectively,“LG”); TSR Silicon Resources Inc. (“TSR”); and Welldone Co. (“Welldone”). In the complaint, the Company

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alleges that respondents’ flash memory products, such as USB flash drives, Compact Flash cards, and flash mediaplayers, infringe the following: U.S. Patent No. 5,719,808 (the “’808 patent”); U.S. Patent No. 6,763,424 (the “’424patent”); U.S. Patent No. 6,426,893 (the ‘’893 patent”); U.S. Patent No. 6,947,332 (the “’332 patent”); andU.S. Patent No. 7,137,011 (the “’011 patent”). The Company seeks an order excluding the respondents’ flashmemory controllers, drives, memory cards, and media players from entry into the United States as well as apermanent cease and desist order against the respondents. On December 6, 2007, the Commission instituted aninvestigation based on the Company’s complaint. The target date for completing the investigation was originally setfor March 12, 2009. Since filing its complaint, the Company has reached settlement agreements with Add-OnComputer Peripherals, Inc., Add-On Computer Peripherals, LLC, EDGE, Infotech, Interactive, Kaser, PNY, TSR,and Welldone. The parties’ moved to terminate the investigation as to these respondents in light of the settlementagreements. Most of the respondents that have not settled with the Company have responded to the complaint.Among other things, these respondents deny infringement or that the Company has a domestic industry in theasserted patents. In responding to the complaint, these respondents have also raised several affirmative defensesincluding, among others, invalidity, unenforceability, express license, implied license, patent exhaustion, waiver,acquiescence, latches, estoppel and unclean hands. On January 23, 2008, the Administrative Law Judge issued aninitial determination extending the target date by three months to June 12, 2009, proposing a Markman hearing forMay 6-7, 2008 and tentatively scheduling the evidentiary hearing to begin on October 27, 2008.

On October 24, 2007, the Company filed a complaint for patent infringement in the United States DistrictCourt for the Western District of Wisconsin against the following defendants: Phison, Silicon Motion, SynergisticSales, Inc. (“Synergistic”), USBest, Skymedi, Chipsbank, Infotech, Zotek, PQI, PNY, Kingston, Buffalo, Verbatim,Transcend, Imation, Add-On, A-DATA, Apacer, Behavior, Corsair, Dane-Elec, EDGE, Interative, LG, TSR andWelldone. In this action, Case No. 07-C-0607-C, the Company asserts that the defendants infringe the ’808 patent,the ’424 patent, the ’893 patent, the ’332 patent and the ’011 patent. The Company seeks damages and injunctiverelief. In light of the above mentioned settlement agreements, the Company dismissed its claims against Add-OnComputer Peripherals, Inc., Add-On Computer Peripherals, LLC, EDGE, Infotech, Interactive, PNY, TSR, andWelldone. The Company also voluntarily dismissed its claims against Acer and Synergistic without prejudice. OnNovember 21, 2007, defendant Kingston filed a motion to stay this action. Several defendants joined in Kingston’smotion. On December 19, 2007, the Court issued an order staying the case in its entirety until the 619 Investigationbecomes final. On January 14, 2008, the Court issued an order clarifying that the entire case is stayed for all parties.

On October 24, 2007, the Company filed a complaint for patent infringement in the United States District Courtfor the Western District of Wisconsin against the following defendants: Phison, Silicon Motion, Synergistic, USBest,Skymedi, Zotek, Infortech, PQI, PNY, Kingston, Buffalo, Verbatim, Transcend, Imation, A-DATA, Apacer, Behavior,and Dane-Elec. In this action, Case No. 07-C-0605-C, the Company asserts that the defendants infringe U.S. PatentNo. 6,149,316 (the “’316 patent”) and U.S. Patent No. 6,757,842 (the “’842 patent”). The Company seeks damagesand injunctive relief. In light of above mentioned settlement agreements, the Company dismissed its claims againstInfotech and PNY. The Company also voluntarily dismissed its claims against Acer and Synergistic without prejudice.On November 21, 2007, defendant Kingston filed a motion to consolidate and stay this action. Several defendantsjoined in Kingston’s motion. On December 17, 2007, the Company filed an opposition to Kingston’s motion. Thatsame day, several defendants filed another motion to stay this action. On January 7, 2008, the Company opposed thedefendants’ second motion to stay. On January 22, 2008, defendants Phison, Skymedi and Behavior filed motions todismiss the Company’s complaint for lack of personal jurisdiction. That same day, defendants Phison, Silicon Motion,USBest, Skymedi, PQI, Kingston, Buffalo, Verbatim, Transcend, A-DATA, Apacer, and Dane-Elec answered theCompany’s complaint denying infringement and raising several affirmative defenses. These defenses included, amongothers, lack of personal jurisdiction, improper venue, lack of standing, invalidity, unenforceability, express license,implied license, patent exhaustion, waiver, latches, and estoppel. On January 24, 2008, Silicon Motion filed a motionto dismiss the Company’s complaint for lack of personal jurisdiction. On January 25, 2008, Dane-Elec also filed amotion to dismiss the Company’s complaint for lack of personal jurisdiction. On January 28, 2008, the Court issued anorder staying the case in its entirety with respect to all parties until the proceeding in the 619 Investigation becomefinal. In its order, the Court also consolidated this action (Case Nos. 07-C-0605-C) with the action discussed in thepreceding paragraph (07-C-0607-C).

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Between August 31, 2007 and December 14, 2007, the Company (along with a number of other manufacturersof flash memory products) was sued in the Northern District of California, in eight purported class actioncomplaints. On February 7, 2008 all of the civil complaints were consolidated into two complaints, one on behalf ofdirect purchasers and one on behalf of indirect purchasers, in the Northern District of California in a purported classaction captioned In re Flash Memory Antitrust Litigation, Civil Case No. C07-0086. Plaintiffs allege the Companyand a number of other manufacturers of flash memory products conspired to fix, raise, maintain, and stabilize theprice of NAND flash memory in violation of state and federal laws. The lawsuits purport to be on behalf ofpurchasers of flash memory between January 1, 1999 through the present. The lawsuits seek an injunction,damages, restitution, fees, costs, and disgorgement of profits.

Note 17: Condensed Consolidating Financial Statements

As part of the acquisition of msystems in November 2006, the Company entered into a supplemental indenturewhereby the Company became an additional obligor and guarantor of the assumed $75.0 million 1% ConvertibleNotes due 2035 issued by msystems Finance Company, (the “Subsidiary Issuer” or “mfinco”) and guaranteed bySanDisk IL Ltd. (the “Other Guarantor Subsidiary” or “SDIL”). SanDisk Corporation’s (the “Parent Company” orthe “Company”) guarantee is full and unconditional, jointly and severally with SDIL. Both SDIL and mfinco arewholly-owned subsidiaries of the Company. The following condensed consolidating financial statements presentseparate information for mfinco as the subsidiary issuer, the Company and SDIL as guarantors and the Company’sother combined non-guarantor subsidiaries, and should be read in conjunction with the consolidated financialstatements of the Company.

These condensed consolidating financial statements have been prepared using the equity method of account-ing. Earnings of subsidiaries are reflected in the Company’s investment in subsidiaries account. The eliminationentries eliminate investments in subsidiaries, related stockholders’ equity and other intercompany balances andtransactions. The fiscal year 2006 financials for mfinco and SDIL represent the period from the date of acquisition,November 19, 2006, to December 31, 2006, as the inception of the guarantee by the Company coincides only withthe consummation of the acquisition of msystems on November 19, 2006.

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Condensed Consolidating Statements of OperationsFor the fiscal year ended December 30, 2007

ParentCompany(1)

SubsidiaryIssuer(1)

OtherGuarantor

Subsidiary(1)

CombinedNon-

GuarantorSubsidiaries(2)

ConsolidatingAdjustments

TotalCompany

(In thousands)

Total revenues . . . . . . . . . . $2,193,435 $ — $ 311,441 $4,993,166 $(3,601,676) $3,896,366

Total cost of revenues . . . . . 1,253,220 — 299,885 4,601,636 (3,461,094) 2,693,647

Gross margin . . . . . . . . . . . 940,215 — 11,556 391,530 (140,582) 1,202,719

Total operating expenses . . . 513,827 — 147,678 401,464 (136,764) 926,205

Operating income (loss) . . . 426,388 — (136,122) (9,934) (3,818) 276,514

Total other income(expense) . . . . . . . . . . . . 106,491 1 23,324 (12,215) 4,301 121,902

Income (loss) beforetaxes. . . . . . . . . . . . . . . . 532,879 1 (112,798) (22,149) 483 398,416

Provision (benefit) forincome taxes . . . . . . . . . . 163,422 — 7,539 3,895 (8) 174,848

Minority interest . . . . . . . . . — — 5,211 — — 5,211

Equity in net income (loss)of consolidatedsubsidiaries . . . . . . . . . . . 9,005 — (2,816) 3,836 (10,025) —

Net income (loss) . . . . . . . . $ 378,462 $ 1 $ (128,364) $ (22,208) $ (9,534) $ 218,357

(1) This represents legal entity results which exclude any subsidiaries required to be consolidated under GAAP.(2) This represents all other legal subsidiaries.

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Condensed Consolidating Statements of OperationsFor the Fiscal Year Ended December 31, 2006

ParentCompany(1)

SubsidiaryIssuer(1)

OtherGuarantor

Subsidiary(1)

CombinedNon-



TotalCompany

(In thousands)

Total revenues . . . . . . . . . . . $2,101,601 $ — $ 89,411 $4,165,416 $(3,098,903) $3,257,525

Total cost of revenues . . . . . 1,280,102 — 84,763 3,664,513 (3,011,326) 2,018,052

Gross profits . . . . . . . . . . . . 821,499 — 4,648 500,903 (87,577) 1,239,473

Total operating expenses . . . 467,259 — 212,735 324,587 (91,442) 913,139

Operating income. . . . . . . . . 354,240 — (208,087) 176,316 3,865 326,334

Total other income(expense) . . . . . . . . . . . . . 96,415 5 3,282 44,925 (40,253) 104,374

Income (loss) before taxes . . 450,655 5 (204,805) 221,241 (36,388) 430,708

Provision (benefit) forincome taxes . . . . . . . . . . 229,376 — (1,485) 2,302 — 230,193

Minority interest . . . . . . . . . — — 1,619 — — 1,619

Equity in net income (loss)of consolidatedsubsidiaries . . . . . . . . . . . 207,438 — 528 26,077 (234,043) —

Net income (loss). . . . . . . . . $ 428,717 $ 5 $(204,411) $ 245,016 $ (270,431) $ 198,896


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Condensed Consolidating Balance SheetsAs of December 30, 2007

ParentCompany(1)

SubsidiaryIssuer(1)

OtherGuarantor

Subsidiary(1)

CombinedNon-

GuarantorSubsidiaries(2),


TotalCompany

(In thousands)

ASSETSCurrent Assets:

Cash and cash equivalents . . . $ 389,337 $ 215 $ 90,639 $ 353,558 $ — $ 833,749

Short-term investments . . . . . 1,001,641 — — — — 1,001,641

Accounts receivable, net . . . . 215,049 — 32,497 223,624 (8,187) 462,983

Inventory . . . . . . . . . . . . . . . 104,626 — 30,238 423,850 (3,637) 555,077

Other current assets . . . . . . . 759,872 — 221,932 823,387 (1,358,984) 446,207

Total current assets . . . . . . . . 2,470,525 215 375,306 1,824,419 (1,370,808) 3,299,657

Property and equipment, net . . . 222,038 — 34,975 165,882 — 422,895

Other non-current assets . . . . . . 2,684,232 71,998 925,424 1,350,985 (1,520,372) 3,512,267

Total assets . . . . . . . . . . . . . . . $5,376,795 $ 72,213 $1,335,705 $3,341,286 $(2,891,180) $7,234,819

LIABILITIES AND STOCKHOLDERS’ EQUITYCurrent Liabilities:

Accounts payable . . . . . . . . . $ 48,386 $ — $ 34,462 $ 362,138 $ (832) $ 444,154

Other current accruedliabilities . . . . . . . . . . . . . . 587,129 601 66,353 1,253,114 (1,437,468) 469,729

Total current liabilities . . . . . 635,515 601 100,815 1,615,252 (1,438,300) 913,883Convertible long-term debt . . . . 1,150,000 75,000 — — — 1,225,000

Non-current liabilities . . . . . . . . 67,895 — 11,428 60,839 (4,910) 135,252

Total liabilities . . . . . . . . . . . . . 1,853,410 75,601 112,243 1,676,091 (1,443,210) 2,274,135

Minority interest . . . . . . . . . . . . — — 1,067 — — 1,067

Total stockholders’ equity . . . . . 3,523,385 (3,388) 1,222,395 1,665,195 (1,447,970) 4,959,617

Total liabilities andstockholders’ equity . . . . . . . $5,376,795 $ 72,213 $1,335,705 $3,341,286 $(2,891,180) $7,234,819


F-52


Condensed Consolidating Balance SheetsAs of December 31, 2006

ParentCompany(1)

SubsidiaryIssuer(1)

OtherGuarantor

Subsidiary(1)

CombinedNon-



TotalCompany

(In thousands)

ASSETSCurrent Assets:

Cash and cash equivalents . . . $1,165,473 $ 48 $ 71,839 $ 340,291 $ 3,049 $1,580,700

Short-term investments . . . . . 1,192,084 — 26,294 2,681 30,434 1,251,493

Accounts receivable, net . . . . 256,801 — 55,864 313,407 (14,332) 611,740

Inventory. . . . . . . . . . . . . . . . 106,772 — 71,839 318,154 (781) 495,984

Other current assets . . . . . . . . 497,513 — 74,434 253,129 (523,132) 301,944

Total current assets . . . . . . . . 3,218,643 48 300,270 1,227,662 (504,762) 4,241,861

Property and equipment, net . . . 182,750 — 34,870 100,345 — 317,965

Other non-current assets . . . . . . 1,735,998 71,789 1,184,165 595,333 (1,179,328) 2,407,957

Total assets . . . . . . . . . . . . . . . . $5,137,391 $ 71,837 $1,519,305 $1,923,340 $(1,684,090) $6,967,783

LIABILITIES AND STOCKHOLDERS’ EQUITYCurrent Liabilities:

Accounts payable . . . . . . . . . $ 43,910 $ — $ 46,349 $ 312,219 $ (981) $ 401,497

Other current accruedliabilities . . . . . . . . . . . . . . 515,042 226 59,287 512,525 (592,130) 494,950

Total current liabilities . . . . . . 558,952 226 105,636 824,744 (593,111) 896,447Convertible long-term debt . . . . 1,150,000 75,000 — — — 1,225,000

Non-current liabilities . . . . . . . . 18,029 — 32,229 29,770 (7,802) 72,226

Total liabilities . . . . . . . . . . . . . 1,726,981 75,226 137,865 854,514 (600,913) 2,193,673

Minority interest . . . . . . . . . . . . — — 5,976 — — 5,976

Total stockholders’ equity . . . . . 3,410,410 (3,389) 1,375,464 1,068,826 (1,083,177) 4,768,134

Total liabilities andstockholders’ equity . . . . . . . . $5,137,391 $ 71,837 $1,519,305 $1,923,340 $(1,684,090) $6,967,783


F-53


Condensed Consolidating Statements of Cash FlowsFor the fiscal year ended December 30, 2007

ParentCompany(1)

SubsidiaryIssuer(1)

OtherGuarantor

Subsidiary(1)

CombinedNon-



TotalCompany

(In thousands)

Net cash provided by (used in)operating activities . . . . . . . . . $ 389,524 $ 167 $ 2,211 $ 264,074 $ (3,049) $ 652,927

Net cash provided by (used in)investing activities . . . . . . . . . (983,835) — 26,087 (260,610) — (1,218,358)

Net cash provided by (used in)financing activities . . . . . . . . . (180,921) — (9,880) 9,803 — (180,998)

Effect of changes in foreigncurrency exchange rates oncash . . . . . . . . . . . . . . . . . . . (904) — 382 — — (522)

Net increase (decrease) in cashand cash equivalents . . . . . . . (776,136) 167 18,800 13,267 (3,049) (746,951)

Cash and cash equivalents atbeginning of period . . . . . . . . 1,165,473 48 71,839 340,291 3,049 1,580,700

Cash and cash equivalents atend of period . . . . . . . . . . . . . $ 389,337 $ 215 $ 90,639 $ 353,558 $ — $ 833,749

Condensed Consolidating Statements of Cash FlowsFor the fiscal year ended December 31, 2006

ParentCompany(1)

SubsidiaryIssuer(1)

OtherGuarantor

Subsidiary(1)

CombinedNon-



TotalCompany

(In thousands)

Net cash provided by (used in)operating activities . . . . . . . . $ 458,012 $ — $ (15,214) $ 330,074 $(174,809) $ 598,063

Net cash provided by (used in)investing activities . . . . . . . . (1,039,970) 48 73,927 (12,066) — (978,061)

Net cash provided by (used in)financing activities . . . . . . . . 1,201,779 — (3,222) (1,269) — 1,197,288

Effect of changes in foreigncurrency exchange rates oncash. . . . . . . . . . . . . . . . . . . 1,542 — 247 (437) — 1,352

Net increase (decrease) in cashand cash equivalents. . . . . . . 621,363 48 55,738 316,302 (174,809) 818,642

Cash and cash equivalents atbeginning of period . . . . . . . 544,110 — 16,101 23,989 177,858 762,058

Cash and cash equivalents atend of period . . . . . . . . . . . . $ 1,165,473 $ 48 $ 71,839 $ 340,291 $ 3,049 $1,580,700


F-54


Note 18: Supplementary Financial Data (Unaudited)

April 1,2007

July 1,2007

September 30,2007

December 30,2007

Fiscal Quarters Ended


2007Revenues

Product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $689,357 $719,991 $ 918,810 $1,117,967

License and royalty . . . . . . . . . . . . . . . . . . . . . . . . . 96,729 107,041 118,613 127,858

Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . 786,086 827,032 1,037,423 1,245,825

Gross profit(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194,936 223,713 342,320 441,750

Operating income (loss)(1) . . . . . . . . . . . . . . . . . . . . . . (19,517) 13,584 109,151 173,296

Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (575) $ 28,484 $ 84,638 $ 105,810

Net income (loss) per share

Basic(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.00) $ 0.12 $ 0.37 $ 0.47

Diluted(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.00) $ 0.12 $ 0.36 $ 0.45

April 2,2006

July 2,2006

October 1,2006

December 31,2006



2006Revenues

Product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $537,728 $636,675 $673,189 $1,078,880

License and royalty . . . . . . . . . . . . . . . . . . . . . . . . . . . 85,532 82,510 78,196 84,815

Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 623,260 719,185 751,385 1,163,695

Gross profit(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 238,393 289,008 296,040 416,032

Operating income(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,925 128,542 128,327 11,540

Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 35,115 $ 95,641 $103,281 $ (35,141)

Net income (loss) per share

Basic(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.18 $ 0.49 $ 0.53 $ (0.17)

Diluted(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.17 $ 0.47 $ 0.51 $ (0.17)

(1) Includes the following charges related to share-based compensation, amortization of acquisition-relatedintangible assets and charges related to acquisitions of Matrix in January 2006 and msystems in November2006. The Company received business interruption proceeds of $21.8 million, which were recorded as areduction to cost of product revenue as a result of a power outage in fiscal 2006 related to Flash Ventures.

April 1,2007

July 1,2007

September 30,2007

December 30,2007


(In thousands)

Share-based compensation . . . . . . . . . . . . . . . . 31,219 36,970 34,127 30,693

Amortization of acquisition-related intangibleassets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,162 21,633 19,182 19,140

Business interruption recovery . . . . . . . . . . . . . — — (16,812) (4,962)

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $61,381 $ 58,603 $ 36,497 $44,871

F-55


April 2,2006

July 2,2006

October 1,2006

December 31,2006


(In thousands)

Write-off of acquired in-process technology . . . . . . $39,600 $ — $ — $186,000

Share-based compensation . . . . . . . . . . . . . . . . . . . 18,786 25,870 25,192 30,793

Amortization of acquisition-related intangibleassets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,715 4,432 4,432 15,221

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $62,101 $30,302 $29,624 $232,014(2) Quarterly earnings per share figures may not total to yearly earnings per share, due to rounding and fluctuations

in the number of options included or omitted from diluted calculations based on the stock price or option strikeprices.

Note 19: Subsequent Events

In November 2007, Flash Alliance entered into a master equipment lease agreement providing for up to100.0 billion Japanese yen, or approximately $886 million based upon the exchange rate at December 30, 2007, oforiginal lease obligation. On January 29, 2008, Flash Alliance drew down approximately 30.0 billion Japanese yen,or approximately $266 million based upon the exchange rate at December 30, 2007, of the total amount provided forunder the November 2007 master lease agreement, of which the Company guaranteed 15.0 billion Japanese yen, orapproximately $133 million based upon the exchange rate at December 30, 2007. See Note 12, “Commitments,Contingencies and Guarantees.”

On February 19, 2008, the Company and Toshiba signed a non-binding memorandum of understanding for anew production joint venture to construct a 300-millimeter wafer fab located in Japan. The new venture has atargeted production start-up date in 2010. Half of the new memory wafer fab’s production capacity will be allocatedto the new joint venture and the Company and Toshiba will equally share wafer output and funding for the relatedequipment. The remaining 50% of the fab’s production capacity will be managed by Toshiba and half of the outputwill be provided to the Company on a committed foundry basis. The agreement provides the Company an option toconvert its committed foundry capacity into the joint venture or to convert to a non-committed foundryarrangement.

F-56


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant hasduly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

SANDISK CORPORATION

By: /s/ Judy Bruner

Judy BrunerExecutive Vice President, Administration andChief Financial Officer (On behalf of the Registrantand as Principal Financial and Accounting Officer)

Dated: February 22, 2008

POWER OF ATTORNEY

KNOW ALL PEOPLE BY THESE PRESENTS, that each person whose signature appears below constitutesand appoints each of Eli Harari and Judy Bruner, jointly and severally, his or her attorneys in fact, each with thepower of substitution, for him or her in any and all capacities, to sign any amendments to this Report on Form 10-K,and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities andExchange Commission, hereby ratifying and confirming all that each of said attorneys in fact, or his or her substituteor substitutes, may do or cause to be done by virtue thereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signedbelow by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature Title Date

By: /s/ Eli Harari

(Dr. Eli Harari)

Chairman of the Board and ChiefExecutive Officer (Principal Executive

Officer)

February 22, 2008

By: /s/ Judy Bruner

(Judy Bruner)

Executive Vice President,Administration and Chief Financial

Officer (Principal Financial andAccounting Officer)

February 22, 2008

By: /s/ Irwin Federman

(Irwin Federman)

Vice Chairman of the Board and LeadIndependent Director

February 20, 2008

By: /s/ Steven J. Gomo

(Steven J. Gomo)

Director February 20, 2008

By: /s/ Eddy W. Hartenstein

(Eddy W. Hartenstein)


By: /s/ Catherine P. Lego

(Catherine P. Lego)


By: /s/ Michael E. Marks

(Michael E. Marks)


By: /s/ James D. Meindl

(James D. Meindl)


S-1

INDEX TO EXHIBITSExhibitNumber Exhibit Title

2.2 Agreement and Plan of Merger, dated as of July 30, 2006, by and among the Registrant, Project DesertLtd. and msystems Ltd.(22)

3.1 Restated Certificate of Incorporation of the Registrant.(2)

3.2 Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant dated December 9,1999.(4)

3.3 Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant dated May 11,2000.(6)

3.4 Certificate of Amendment to the Amended Restated Certificate of Incorporation of the Registrant datedMay 26, 2006.(24)

3.5 Amended and Restated Bylaws of the Registrant dated July 25, 2007.(19)

3.6 Certificate of Designations for the Series A Junior Participating Preferred Stock, as filed with theDelaware Secretary of State on April 24, 1997.(3)

3.7 Amendment to Certificate of Designations for the Series A Junior Participating Preferred Stock, as filedwith the Delaware Secretary of State on September 24, 2003.(12)

4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, and 3.4.(2),(4),(6),(24)

4.2 Rights Agreement, dated as of September 15, 2003, between the Registrant and ComputershareTrust Company, Inc.(11)

4.3 Amendment No. 1 to Rights Agreement by and between the Registrant and ComputershareTrust Company, Inc., dated as of November 6, 2006.(27)

4.4 SanDisk Corporation Form of Indenture (including notes).(20)

4.5 Indenture (including form of Notes) with respect to the Registrant’s 1.00% Convertible Senior Notes due2013 dated as of May 15, 2006 by and between the Registrant and The Bank of New York.(21)

10.1 Form of Indemnification Agreement entered into between the Registrant and its directors and officers.(2)

10.2 License Agreement between the Registrant and Dr. Eli Harari, dated September 6, 1988.(2)

10.3 SanDisk Corporation 1995 Stock Option Plan, as Amended and Restated January 2, 2002.(9),(*)

10.4 SanDisk Corporation 1995 Non-Employee Directors Stock Option Plan, as Amended and Restated as ofJanuary 2, 2004.(10),(*)

10.5 Registration Rights Agreement, dated as of January 18, 2001, by and between the Registrant, The IsraelCorporation, Alliance Semiconductor Ltd., Macronix International Co., Ltd. and Quick LogicCorporation.(5)

10.6 Consolidated Shareholders Agreement, dated as of January 18, 2001, by and among the Registrant, TheIsrael Corporation, Alliance Semiconductor Ltd. and Macronix International Co., Ltd.(5)

10.7 Agreement, dated as of September 28, 2006, by and among the Registrant, Bank Leumi Le Israel B.M., abanking corporation organized under the laws of the State of Israel, The Israel Corporation Ltd., AllianceSemiconductor Corporation and Macronix International Co. Ltd.(26)

10.8 Agreement, dated as of September 28, 2006, by and among the Registrant, Bank Hapoalim B.M., abanking corporation organized under the laws of the State of Israel, The Israel Corporation Ltd., AllianceSemiconductor Corporation and Macronix International Co. Ltd.(26)

10.9 Amendment No. 3 to Payment Schedule of Series A-5 Additional Purchase Obligations, Waiver ofSeries A-5 Conditions, Conversion of Series A-4 Wafer Credits and Other Provisions, dated as ofNovember 11, 2003, by and between the Registrant, Tower Semiconductor Ltd. and the other partiesthereto.(12)

10.10 New Master Agreement, dated as of April 10, 2002, by and between the Registrant and ToshibaCorporation.(7),(1)

10.11 Amendment to New Master Agreement, dated and effective as of August 13, 2002 by and between theRegistrant and Toshiba Corporation.(8),(1)

10.12 New Operating Agreement, dated as of April 10, 2002, by and between the Registrant and ToshibaCorporation.(7),(1)

E-1

ExhibitNumber Exhibit Title

10.13 Indemnification and Reimbursement Agreement, dated as of April 10, 2002, by and between theRegistrant and Toshiba Corporation.(7),(1)

10.14 Amendment to Indemnification and Reimbursement Agreement, dated as of May 29, 2002 by andbetween the Registrant and Toshiba Corporation.(7)

10.15 Amendment No. 2 to Indemnification and Reimbursement Agreement, dated as of May 29, 2002 by andbetween the Registrant and Toshiba Corporation.(25)

10.16 Form of Change of Control Agreement entered into by and between the Registrant and each of thefollowing officers of the Registrant: the Chief Financial Officer; the Executive Vice President and ChiefOperating Officer; the Sr. Vice President and General Manager, Retail Business Unit; the Sr. VicePresident, Engineering; the Vice President and General Counsel; and the Vice President, BusinessDevelopment.(13),(*)

10.17 Change of Control Agreement entered into by and between the Registrant and the President and ChiefExecutive Officer of the Registrant.(13),(*)

10.18 Flash Partners Master Agreement, dated as of September 10, 2004, by and among the Registrant and theother parties thereto.(14),(1)

10.19 Flash Alliance Master Agreement, dated as of July 7, 2006, by and among the Registrant, ToshibaCorporation and SanDisk (Ireland) Limited.(23),(+)

10.20 Operating Agreement of Flash Partners Ltd., dated as of September 10, 2004, by and between SanDiskInternational Limited and Toshiba Corporation.(14),(1)

10.21 Operating Agreement of Flash Alliance, Ltd., dated as of July 7, 2006, by and between ToshibaCorporation and SanDisk (Ireland) Limited.(23),(+)

10.22 Mutual Contribution and Environmental Indemnification Agreement, dated as of September 10, 2004, byand among the Registrant and the other parties thereto.(14),(1)

10.23 Flash Alliance Mutual Contribution and Environmental Indemnification Agreement, dated as of July 7,2006, by and between Toshiba Corporation and SanDisk (Ireland) Limited.(23),(+)

10.24 Patent Indemnification Agreement, dated as of September 10, 2004 by and among the Registrant and theother parties thereto.(14),(1)

10.25 Patent Indemnification Agreement, dated as of July 7, 2006, by and among the Registrant and the otherparties thereto.(23),(+)

10.26 Master Lease Agreement, dated as of December 24, 2004, by and among Mitsui Leasing & Development,Ltd., IBJ Leasing Co., Ltd., and Sumisho Lease Co., Ltd. and Flash Partners Ltd.(15),(1)

10.27 Master Lease Agreement, dated as of September 22, 2006, by and among Flash Partners LimitedCompany, SMBC Leasing Company, Limited, Toshiba Finance Corporation, Sumisho Lease Co., Ltd.,Fuyo General Lease Co., Ltd., Tokyo Leasing Co., Ltd., STB Leasing Co., Ltd. and IBJ Leasing Co.,Ltd.(23),(+)

10.28 Guarantee Agreement, dated as of December 24, 2004, by and between the Registrant and MitsuiLeasing & Development, Ltd.(15)

10.29 Guarantee Agreement, dated as of September 22, 2006, by and among the Registrant, SMBC LeasingCompany, Limited and Toshiba Finance Corporation.(23)

10.30 Amended and Restated SanDisk Corporation 2005 Incentive Plan.(25),(*)

10.31 SanDisk Corporation Form of Notice of Grant of Stock Option.(16),(*)

10.32 SanDisk Corporation Form of Notice of Grant of Non-Employee Director Automatic Stock Option (InitialGrant).(16),(*)

10.33 SanDisk Corporation Form of Notice of Grant of Non-Employee Director Automatic Stock Option(Annual Grant).(16),(*)

10.34 SanDisk Corporation Form of Stock Option Agreement.(16),(*)

10.35 SanDisk Corporation Form of Automatic Stock Option Agreement.(16),(*)

10.36 SanDisk Corporation Form of Restricted Stock Unit Issuance Agreement.(16),(*)

10.37 SanDisk Corporation Form of Restricted Stock Unit Issuance Agreement (Director Grant).(16),(*)

E-2

ExhibitNumber Exhibit Title

10.38 SanDisk Corporation Form of Restricted Stock Award Agreement.(16),(*)

10.39 SanDisk Corporation Form of Restricted Stock Award Agreement (Director Grant).(16),(*)

10.40 Form of Amendment to Change of Control Agreement for those officers of the Registrant who are party tosuch Agreement.(17),(*)

10.41 Guarantee Agreement between the Registrant, IBJ Leasing Co., Ltd., Sumisho Lease Co., Ltd., andToshiba Finance Corporation.(18)

10.42 Guarantee Agreement, dated as of June 20, 2006, by and between the Registrant, IBJ Leasing Co., Ltd.,Sumisho Lease Co., Ltd. and Toshiba Finance Corporation.(25)

10.43 Basic Lease Contract between Flash Partners Yugen Kaisha, IBJ Leasing Co., Ltd., Sumisho Lease Co.,Ltd., and Toshiba Finance Corporation.(18),(+)

10.44 Basic Lease Contract, dated as of June 20, 2006, by and between Flash Partners Yugen Kaisha, IBJLeasing Co., Ltd., Sumisho Lease Co., Ltd. and Toshiba Finance Corporation.(25),(+)

10.45 Sublease (Building 3), dated as of December 21, 2005 by and between Maxtor Corporation and theRegistrant.(25)




10.49 Form of Second Amendment to Change of Control Agreement for those officers of the Registrant who areparty to such Agreement.(29)

12.1 Computation of ratio of earnings to fixed charges. (**)

21.1 Subsidiaries of the Registrant(**)

23.1 Consent of Independent Registered Public Accounting Firm(**)

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 toSection 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 toSection 906 of the Sarbanes-Oxley Act of 2002(**)

* Indicates management contract or compensatory plan or arrangement.

** Filed herewith.

*** Furnished herewith.

+ Confidential treatment has been requested with respect to certain portions hereof.

1. Confidential treatment granted as to certain portions of these exhibits.

2. Previously filed as an Exhibit to the Registrant’s Registration Statement on Form S-1 (No. 33-96298).

3. Previously filed as an Exhibit to the Registrant’s Current Report on Form 8-K/A dated April 18, 1997.

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 Schedule 13(d) dated January 26, 2001.



8. Previously filed as an Exhibit to the Registrant’s Form 10-Q for the quarter ended September 30, 2002.



E-3

11. Previously filed as an Exhibit to the Registrant’s Registration Statement on Form 8-A dated September 25,2003.

12. Previously filed as an Exhibit to the Registrant’s 2003 Annual Report on Form 10-K.


14. Previously filed as an Exhibit to the Registrant’s Form 10-Q for the quarter ended September 26, 2004.


16. Previously filed as an Exhibit to the Registrant’s Current Report on Form 8-K dated June 3, 2005.

17. Previously filed as an Exhibit to the Registrant’s Form 10-Q for the quarter ended July 3, 2005.


19. Previously filed as an Exhibit to the Registrant’s Form 8-K dated July 27, 2007.

20. Previously filed as an Exhibit to the Registrant’s Form 8-K dated May 9, 2006.

21. Previously filed as an Exhibit to the Registrant’s Form 8-K dated May 15, 2006.

22. Previously filed as an Exhibit to the Registrant’s Form 8-K/A dated August 1, 2006.

23. Previously filed as an Exhibit to the Registrant’s Form 10-Q for the quarter ended October 1, 2006

24. Previously filed as an Exhibit to the Registrant’s Form 8-K dated June 1, 2006.


26. Previously filed as an Exhibit to the Registrant’s Schedule 13(d)/A dated October 12, 2006.

27. Previously filed as an Exhibit to the Registrant’s Form 8-A/A dated November 8, 2006.



E-4