form_10k.htm

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PART I

Statements in this report, which are not historical facts, are forward-looking statements within the meaning of the federal securities laws. These statements may contain words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” or other wording indicating future results or expectations. Forward-looking statements are subject to risks and uncertainties. Our actual results may differ materially from the results discussed in these forward-looking statements. Factors that could cause our actual results to differ materially include, but are not limited to, those discussed in “Risk Factors” in Item 1A of this report, and elsewhere in this report. Our business, financial condition or results of operations could be materially adversely affected by any of these factors. We undertake no obligation to revise or update any forward-looking statements to reflect any event or circumstance that arises after the date of this report. References in this report to “SanDisk®,” “we,” “our,” and “us,” collectively refer to SanDisk Corporation, a Delaware corporation, and its subsidiaries. All references to years or annual periods are references to our fiscal years, which consisted of 52 weeks in 2008, 2007 and 2006.

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 in a durable, compact format that retains the digital information even after the power has been switched off. Our mission is to provide simple, reliable and affordable storage at different capacities for consumer use in a wide variety of formats and devices. We sell SanDisk branded products for consumer electronics 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 flash memory, controller and firmware technologies. We source the vast majority of our flash memory supply through our significant flash venture relationships with Toshiba Corporation, or Toshiba, which provide us with leading-edge, low-cost memory wafers. Our card products are used in a wide range of consumer electronics devices such as mobile phones, digital cameras, gaming devices and laptop computers. We also provide high-speed and high-capacity storage solutions, known as solid-state drives, or SSDs, that can be used in lieu of hard disk drives in a variety of computing devices, including personal computers and enterprise servers. We also produce Universal Serial Bus, or USB, drives, and MP3 players as well as embedded flash storage products that are used in a variety of systems for the enterprise, industrial, military and other markets.

Our Strategy. Our strategy is to be an industry-leading supplier of flash storage solutions and to develop large scale markets for flash-based storage products. We maintain our technology leadership by investing in advanced technologies and flash memory fabrication capacity in order to produce leading-edge, low-cost flash memory for use in end-products that we design and market. We are a one-stop-shop for our retail and OEM customers, 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 believe the market for flash storage is price elastic, meaning that a decrease in the price per megabyte results in demand for higher capacity and the emergence of new applications for flash storage. We continuously reduce the cost of NAND flash memory, which we believe over time will enable new markets and expand existing markets and allow us to achieve higher overall revenue. However, pricing in the NAND flash industry depends on the balance between supply and demand, and in periods of oversupply, price declines can more than offset unit growth, leading to a decline in product revenues, as was the case in fiscal year 2008. In the last three years, price decline has been greater than cost decline due to industry-wide oversupply of NAND flash memory, resulting in a decline in our product gross margin, which was negative in fiscal year 2008.

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We enable new markets for NAND flash memory through a variety of embedded and removable card form factors. 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 SD™, card, together with a subsidiary of Toshiba and Panasonic Corporation, or Panasonic. The SD card is currently the most popular form factor of flash storage cards used in digital cameras. Subsequent to pioneering the SD card, we worked with mobile network operators and handset manufacturers to develop the miniSD™ card and microSD™ card to satisfy the need for even smaller form factor memory cards. The microSD card has become the leading card format for mobile phones. With Sony Corporation, or Sony, we co-own the Memory Stick PRO™ format and co-developed the SxS memory card specification for high-capacity and high-speed file transfer in professional camcorders. We also worked with Canon, Inc. to co-found the CompactFlash®, or CF, standard. Through our internal development and technology obtained through acquisitions, we also hold key intellectual property for USB drives. We plan to continue to work with leading mobile communications and digital consumer device companies to discover new markets for flash storage products.

Our team has a deep understanding of flash memory technology and we develop and own leading-edge technology and patents for the design, manufacture and operation of flash memory and data storage cards. One of the 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 area of silicon that is typically required to store one bit of data. We have an extensive patent portfolio that has been licensed by several leading semiconductor companies and other companies in the flash memory business. Our cumulative license and royalty revenues over the last three fiscal years were more than $1.29 billion.

We have invested with Toshiba in high volume, state-of-the-art flash manufacturing facilities in Japan. Our commitment takes the form of capital investments and loans to the flash ventures with Toshiba, credit enhancements of these ventures’ leases of semiconductor manufacturing equipment, take-or-pay commitments to purchase up to 50% of the output of these flash ventures with Toshiba at manufacturing cost plus a mark-up and sharing in the cost of SanDisk-Toshiba joint research and development activities related to flash memory. We refer to the flash memory which we purchase from the SanDisk-Toshiba joint ventures as captive memory. Our long-term strategy is to have a mix of captive and non-captive supply and we have historically supplemented our sourcing of captive flash memory with purchases of non-captive memory, primarily from Samsung Electronics Co., Ltd., or Samsung, Toshiba and Hynix Semiconductor, Inc., or Hynix.

In fiscal year 2008, we purchased almost no non-captive memory and our inventory balances grew due to the growth of output from the flash ventures with Toshiba and weak consumer demand influenced by worldwide macroeconomic conditions. Recently, we have implemented measures that we believe will provide us with a better supply/demand balance and allow us to return our flash memory supply model to a mix of captive and non-captive memory. The primary measure taken is to restructure our joint ventures by selling more than 20% of the venture’s capacity to Toshiba. In addition, we and Toshiba will be operating the fabs at less than full capacity for at least the first quarter of fiscal year 2009.

In addition to flash memory, our products include controllers that interface between the flash memory and digital consumer devices. We design the controllers in-house and fabricate the controllers at third-party foundries. Our flash memory products are assembled at our in-house assembly and test facility in Shanghai, China, and through our network of contract manufacturers.

We sell our products globally to retail and OEM customers. We continue to expand our retail customer base to new geographic regions as well as to new outlets such as mobile storefronts, supermarkets and drug stores. We also sell directly and through distributors to OEM customers, which include mobile phone and digital camera manufacturers, that include our products with their products when sold to end users. This strategy allows us to leverage the market position, geographic footprint and brand strength of our customers to achieve broad market penetration for our products. In North America, we sell our products principally through retailers such as Best Buy Co., Inc., or Best Buy, Costco Wholesale Corporation, RadioShack Corporation, Staples, Inc., and Wal-Mart Stores, Inc. In Europe and Asia, our key customers include Duttenhofer GmbH & Co. KG, Hama GmbH & Co. KG, or Hama, Kaga Electronics Co. Ltd., Nokia Corporation, Sony Ericsson Mobile Communications AB and Zenitron Corporation.

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Additional Information. We were incorporated in Delaware in June 1988 under the name SunDisk Corporation and changed our name to SanDisk Corporation in August 1995. We file reports and other information with the Securities and Exchange Commission, or SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and proxy or information statements. Those reports and statements and all amendments to those documents filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act (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 information statements and other information regarding issuers that file electronically with the SEC and (3) are available free of charge 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 at 1-800-SEC-0330. Our website address is www.sandisk.com. Information on our website is not incorporated by reference 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 for identification purposes only and may be the trademarks of their respective holder(s).

Description of Our Business

Industry Background. We operate in the digital electronics industry, which encompasses personal computers, or PCs, notebook computers, consumer electronics, communications and industrial products. Our products use flash memory to store digital information for devices such as mobile phones, digital cameras, digital video camcorders, gaming devices, 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, high capacity, low in power consumption and heat dissipation, and capable of withstanding high levels of shock vibration and temperature fluctuation.

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

Our Primary End Markets. We currently focus on three primary markets:

Consumer. We make and sell flash storage products that address multiple consumer markets. Certain flash storage cards are used as the film for all major brands of digital cameras. Our cards are also used to store video in solid-state digital camcorders and to store digital data in many other devices, such as maps in GPS devices. In addition, portable game devices now include advanced features that require high capacity memory storage cards and we provide SD cards, Memory Stick PRO Duo™ cards and USB drives that are all specifically packaged for the gaming market. We also sell a line of digital media players with both embedded and removable memory under our Sansa® brand with varying combinations of audio and video capabilities. We recently introduced slotMusic™ cards which are preloaded with music content and can be used in a wide variety of mobile phones and digital media players. Primary card formats for consumer devices include CF, SD, Memory Stick® and xD-Picture Card™.

Mobile Phones. We provide embedded, semi-removable and removable storage for mobile phones. We are a leading supplier of the microSD, SD and Memory Stick product lines of removable storage cards used in mobile 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 storage capacity in the mobile phone and transferability of data between devices.

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Computing. We provide multiple flash storage devices and solutions for a variety of computing, industrial and enterprise markets. USB flash drives allow consumers to store computer files, pictures and music on keychain-sized devices and then quickly and easily transfer these files between laptops, notebooks, desktops and other devices that incorporate a USB connection. USB flash drives are easy to use, have replaced floppy disks and other types of external storage media, and are evolving into intelligent storage devices. In addition, we sell SSDs that are flash-based storage devices with capacities currently up to 64 gigabytes. We believe SSDs will become a major market for flash memory over the next several years as they increasingly replace hard disk drives in personal and notebook computers, and enterprise server products.

Our Sales Channels. Our products are delivered to end-users through worldwide retail storefronts and also by bundling data storage cards with host products or by embedding our data storage products in host 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, photo retailers, mobile phone stores, mass merchants, catalog and mail order companies, internet and e-commerce retailers, drug stores, supermarkets and convenience stores. We also sell our products to smaller or regional retailers through distributors.

We have a separate distribution network focused on the mobile phone market. Our distributors provide us access to mobile network branded storefronts as well as other retailers with significant mobile communications 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 other digital consumer devices, such as gaming devices. Our products are sold directly to OEMs and through distributors. We support our OEM customers through our direct sales representatives as well as through independent manufacturers’ representatives.

As of the end of fiscal years 2008 and 2007, our backlog was $169 million and $224 million, respectively. Due to 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 generally highest in our fourth quarter due to the holiday buying season. In the fourth quarter of fiscal year 2008, the seasonal lift in our revenues was less than usual due to worldwide recessionary conditions and aggressive industry pricing.

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Our Customers. In fiscal years 2008, 2007 and 2006, revenues from our top 10 customers and licensees accounted for approximately 48%, 46% and 52% of our total revenues, respectively. In fiscal year 2008, Samsung accounted for 13% of our total revenues through a combination of license and royalty and product revenues. All customers were less than 10% of our total revenues in fiscal years 2007 and 2006. The composition of our major customer base has changed over time, and we expect this pattern to continue as our markets and strategies evolve. Sales to our customers are generally made pursuant 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 include the following:

Removable Cards. Our removable data storage solutions are available in almost every major form factor in our primary markets. For example, our CompactFlash removable cards, available in capacities up to 32 gigabytes, are well-suited for a range of consumer applications, including digital cameras. Our professional products include the SanDisk Ultra® and SanDisk Extreme® product lines which are designed with additional performance and reliability. Our ultra-small microSD removable cards, available in capacities up to 16 gigabytes, are designed for use in mobile phones.

USB Drives. Our Cruzer® line of USB Flash Drives, or UFDs, are used in the computing and consumer markets, are available in capacities up to 16 gigabytes, are highly-reliable and are designed for high-performance. Our Cruzer products provide the user with the ability to carry files and application software on a portable USB drive. Also, our Cruzer Crossfire UFDs are specially designed to make the console or PC gaming experience portable. Our Professional and Enterprise line of UFDs are geared towards the corporate user and are specifically designed to support secure and authorized access to corporate information.

Embedded and Semi-Removable Products. 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 iNAND™ embedded flash product line, with capacities up to 16 gigabytes, are designed to respond to the increasing demand for embedded storage for mobile phones and other portable devices. We also offer high-capacity SSDs targeted for the personal computing and network server markets in capacities up to 64 gigabytes.

Digital Media Players. Sansa is our branded line of flash-based digital media players for the digital audio and video player market. Many of our Sansa models offer a removable card slot for easy transportability of music between devices and storage capacity expansion. Features within our Sansa line of products include FM radio, voice recording and support for a variety of audio and video music download and subscription services. Sansa media players are available in capacities up to 32 gigabytes. We recently launched our slotMusic™ and slotRadio™ products that greatly simplify music content availability for consumers.

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Technology. Since our inception, we have focused our research, development and standardization efforts on developing highly reliable, high-performance, cost-effective flash memory storage products in small form factors to address a variety of emerging markets. We have been actively involved in all aspects of this development, including flash memory process development, module integration, chip design, controller development and system-level integration, to help ensure the creation of fully-integrated, broadly interoperable products that are compatible with both existing and newly developed system platforms. We developed and commercialized 2-bits/cell flash MLC, or X2, and more recently 3-bits/cell flash MLC, or X3, technology. We are also investing in the development of 4-bits/cell flash MLC, or X4, storage technologies. In addition, we are investing in the development of three-dimensional, or 3D, memory architecture with multiple read-write capabilities. We have also initiated, defined and developed standards to meet new market needs and to promote wide acceptance of these standards through interoperability and ease-of-use. We believe our core 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 operating systems used, we developed new capabilities in flash memory chip design and created intelligent controllers. We also 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 with industry-standard interfaces used in standard operating systems for PCs, mobile phones, gaming devices, digital media players and other consumer and industrial products.

Our patented intelligent controller technology, with its advanced defect management system, permits our flash storage card products to achieve a high level of reliability and longevity. Each one of our flash devices contains millions of flash memory cells. A failure in any one of these cells can result in loss of data such as picture files, and this can occur several years into the life of a flash storage card. The controller chip inside our cards is designed to detect such defects and recover data under 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 2008, we owned, or had rights to, more than 1,100 U.S. patents and more than 600 foreign patents. We had more than 1,450 patent applications pending in the U.S., and had foreign counterparts pending on many of the applications in multiple jurisdictions. We continually seek additional international and U.S. patents on our technology.

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

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

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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 and controller components. The majority of our memory is supplied from the flash ventures with Toshiba. This represents captive memory supply and we are obligated to take our share of the output from the flash ventures with Toshiba or pay the fixed costs associated with that capacity. See “Ventures with Toshiba.” We also purchase non-captive NAND memory supply primarily from Samsung and Hynix, and source our 3D one-time programmable, or OTP, memory on a foundry basis at Taiwan Semiconductor Manufacturing Company, Ltd., or TSMC. We are guaranteed a certain amount of the total output from Samsung and Hynix, but we are not obligated to use the guaranteed supply until we give them an order for future purchases. Our controller wafers are currently supplied by Semiconductor Manufacturing International Corporation, or SMIC, TSMC, Tower Semiconductor Ltd., or Tower, and United Microelectronics Corporation, or UMC. We have a foundry agreement with Tower on a purchase order basis.

Assembly and Testing. We sort and test our wafers at Toshiba in Yokkaichi, Japan, and Ardentec Corporation in Taiwan. Our flash memory products are assembled in both our in-house assembly and test facility in Shanghai, China, and through our network of contract manufacturers, including STATS ChipPAC Ltd., or STATS ChipPAC, in China, and Siliconware Precision Industries Co., Ltd., or SPIL, in Taiwan. Our packaged memory final test, card assembly and card test is performed at our in-house facility and at subcontractors such as SPIL and United Test and Assembly Center Ltd., in Taiwan, and Beautiful Enterprise Co., Ltd., Flextronics International Ltd., or Flextronics, Global Brands Manufacture Ltd. and STATS ChipPAC, in China. We believe the use of our in-house assembly and test facility as well as subcontractors reduces the cost 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., or FlashVision, which produced 200-millimeter NAND flash memory wafers. In September 2004, we and Toshiba formed Flash Partners Ltd., or Flash Partners, or Fab 3, which produces 300-millimeter NAND flash wafers and operated at full production capacity of approximately 150,000 wafers per month during fiscal year 2008. In July 2006, we and Toshiba formed Flash Alliance Ltd., or Flash Alliance, or Fab 4, a 300-millimeter wafer fabrication facility which began initial production in the third quarter of fiscal year 2007 with full capacity estimated to be approximately 210,000 wafers per month. Fab 4 was ramped to more than 50% of this estimated full capacity by the end of fiscal year 2008. We are currently not investing in further capacity expansion of Fab 4 as weak macroeconomic conditions coupled with the growth of our NAND supply base have resulted in us carrying excess inventory. During fiscal year 2008, the 200-millimeter FlashVision venture ceased operation as planned. The FlashVision venture is in the process of selling its equipment.

With the Flash Partners and Flash Alliance ventures, or hereinafter referred to as Flash Ventures, located at Toshiba’s Yokkaichi Japan operations, we and Toshiba collaborate in the development and manufacture of NAND-based flash memory products using the semiconductor manufacturing equipment owned or leased by each venture entity. We hold a 49.9% ownership position in each of the current Toshiba and SanDisk venture entities. Each venture entity purchases wafers from Toshiba at cost and then resells those wafers to us and Toshiba at cost plus a mark-up. We are committed to purchase half of each venture’s NAND wafer supply or pay for half of the venture’s fixed costs regardless of the output we choose to purchase. We are also committed to fund 49.9% of each venture’s costs to the extent that the venture’s revenues from wafer sales to us and Toshiba are insufficient to cover these costs. The investments in each venture entity are shared equally between us and Toshiba. In addition, we have the right to purchase a certain amount of wafers from Toshiba on a foundry basis. See Note 20, “Subsequent Events,” of the Notes to Consolidated Financial Statements of this Form 10-K included in Item 8 of this report, for further information regarding our definitive agreement with Toshiba to restructure Flash Ventures current production capacity.

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Competition

We face competition from numerous semiconductor manufacturers and manufacturers and resellers of flash memory cards, USB drives, digital audio players and other consumer electronics devices. We also face competition from manufacturers of hard disk drives and from new technologies.

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 flash memory;

·	our intellectual property ownership, in particular our patent claims and MLC manufacturing know-how, provides us with license and royalty revenue as well as certain cost advantages;

·	Flash Ventures provide us with leading edge, low-cost flash memory;

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

·	we have global retail distribution of our products through worldwide retail storefronts; and

·	we have worldwide leading market share in removable flash cards and UFDs.

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

Flash Memory Card and USB Drive Manufacturers. Our primary card and USB drive competitors currently include, among others, A-DATA Technology Co., Ltd., or A-DATA, Buffalo, Inc., or Buffalo, Chips and More GmbH, or CnMemory, Dane-Elec Memory, or Dane-Elec, Eastman Kodak Company, or Kodak, Elecom Co., Ltd., or Elecom, FUJIFILM Corporation, or FUJI, Gemalto N.V., or Gemalto, Hagiwara Sys-Com Co., Ltd., or Hagiwara, Hama, Hynix, Imation Corporation, or Imation, and its division Memorex Products, Inc., or Memorex, I-O Data Device, Inc., or I-O Data, Kingmax Digital, Inc., or KingMax, Kingston Technology Company, Inc., or Kingston, Lexar, Micron, Netac Technology Co., Ltd., or Netac, Panasonic, PNY Technologies, Inc., or PNY, RITEK Corporation, or RITEK, Samsung, Sony, STMicroelectronics N.V., or STMicroelectronics, Toshiba, Tradebrands International, or Tradebrands, Transcend Information, Inc., or Transcend, and Verbatim Americas LLC, or Verbatim.

Solid-State Drive and Hard Disk Drive Manufacturers. Our SSDs face competition from other manufacturers of SSDs, including Intel, Samsung, Toshiba, and others. Our SSDs also face competition from hard disk drives, which are offered by companies including, among others, Seagate Technology LLC, or Seagate, Samsung and Western Digital Corporation, or Western Digital.

Digital Audio/Video Player Manufacturers. Our digital audio/video players face strong competition from products offered by companies, including Apple Inc., or Apple, ARCHOS Technology, or ARCHOS, Coby Electronics Corporation, or Coby, Creative Technology Ltd., or Creative, Koninklijke Philips Electronics N.V., or Royal Philips Electronics, Microsoft Corporation, or Microsoft, Samsung and Sony.

Other Technologies. Other technologies compete with our product offerings and many companies are attempting to develop memory cells that use different designs and materials in order to reduce memory costs. These potential competitive technologies include 3D, which we are also developing with Toshiba, phase-change and charge-trap flash technologies.

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Employees

As of December 28, 2008, we had 3,565 full-time employees, including 1,341 in research and development, 500 in sales and marketing, 468 in general and administration, and 1,256 in operations. As of December 28, 2008, approximately 249 of our employees had been notified that their positions were being eliminated and they remained employed during a notice period. None of our employees are represented by a collective bargaining agreement and we have never experienced any work stoppage. We believe that 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, 2009):

Name	Age	Position
Eli Harari	63	Chairman of the Board and Chief Executive Officer
Sanjay Mehrotra	50	President and Chief Operating Officer
Judy Bruner	50	Executive Vice President, Administration and Chief Financial Officer
Yoram Cedar	56	Executive Vice President, OEM Business and Corporate Engineering

Dr. Eli Harari, the founder of SanDisk, has served as Chief Executive Officer and as a director of SanDisk since June 1988. He was appointed Chairman of the Board in June 2006. Dr. Harari also served as President from June 1988 to June 2006. From 1973 to 1988, Dr. Harari held various technical and management positions with Waferscale Integration, Inc., Honeywell Inc., Intel Corporation and Hughes Microelectronics Ltd. Dr. Harari holds a Ph.D. in Solid State Sciences from Princeton University and has more than 100 patents issued in the field of non-volatile memories and storage systems.

Sanjay Mehrotra co-founded SanDisk in 1988 and has been our President since June 2006. He continues to serve as our Chief Operating Officer, a position he has held since 2001, and he has previously served as our Executive Vice President, Vice President of Engineering, Vice President of Product Development, and Director of Memory Design and Product Engineering. Mr. Mehrotra has more than 29 years of experience in the non-volatile semiconductor memory industry including engineering and engineering management positions at SanDisk, Integrated Device Technology, Inc., SEEQ Technology, Inc., Intel Corporation and Atmel Corporation. Mr. Mehrotra earned B.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 and flash memory systems.

Judy Bruner has been our Chief Financial Officer and Executive Vice President, Administration since June 2004. She served as a member of our board of directors from July 2002 to July 2004. Ms. Bruner has over 25 years of financial 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. Prior to Palm, Inc., Ms. Bruner held financial management positions with 3Com Corporation, Ridge Computers and Hewlett-Packard Company. Since January 2009, Ms. Bruner has served on the board of directors and the audit committee of Brocade Communications Systems, Inc. Ms. Bruner holds a B.A. degree in Economics from the University of California, Los Angeles and an M.B.A. degree from Santa Clara University.

Yoram Cedar is our Executive Vice President, OEM Business and Corporate Engineering. Prior to October 2005, Mr. Cedar served as our Senior Vice President of Engineering and Emerging Market Business Development. Mr. Cedar began his career at SanDisk in 1998 when he joined as Vice President of Systems Engineering. He has extensive experience working in product definition, marketing and development of systems and embedded flash-based semiconductors. Prior to SanDisk, he was the Vice President of New Business Development at Waferscale Integration, Inc. and has more than 30 years of experience in design and engineering management of electronic systems. Mr. Cedar earned B.S. and M.S. degrees in Electrical Engineering and Computer 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 stock price. Our quarterly and annual operating results have fluctuated significantly in the past and we expect that they will continue to fluctuate in the future. Our results of operations are subject to fluctuations and other risks, including, among others:

·	competitive pricing pressures, and industry or our excess supply, resulting in significantly lower average selling prices and lower or negative product gross margins;

·	significant reduction in demand due to a prolonged and severe global economic downturn, or other conditions;

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

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

·	reduced sales due to continued declines in consumer confidence or worldwide economic weakness;

·	a potential future downgrade in our corporate rating by Rating & Investment Information, Inc., leading to non-compliance with certain covenants in, or potential default under, certain Flash Venture master equipment leases;

·	inability to match our captive memory output to overall market demand for our products, which could result in write-downs for excess inventory, lower of cost or market reserves, fixed costs associated with our investments, restructuring of our joint ventures with Toshiba, or other actions;

·	inability to complete the restructuring transactions with Toshiba announced on January 29, 2009 in a timely manner, or at all;

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

·	inability to reduce operating expenses to reflect the current environment while continuing to invest in future technologies and products;

·	expansion of supply from existing competitors and ourselves creating excess market supply, causing our average selling prices to decline faster than our costs;

inability to develop or unexpected difficulties or delays in developing or manufacturing with acceptable yields, X3, X4, 3D Read/Write, or other advanced, alternative technologies or difficulty in bringing advanced technologies such as 32-nanometer NAND flash memory into volume production at cost competitive levels;

·	increased purchases of non-captive flash memory, including due to our plan to restructure and slow the growth of captive capacity, which typically costs more than captive flash memory and may be of less consistent quality;

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

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·	difficulty in forecasting and managing inventory levels due to noncancelable contractual obligations to purchase materials, such as custom non-memory materials, and the need to build finished product in advance of customer purchase orders;

·	timing, volume and cost of wafer production from Flash Ventures as impacted by fab start-up delays and costs, technology transitions, yields or production interruptions;

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

·	potential delays in the emergence of new markets and products for NAND-based flash memory and acceptance of our products in these markets;

·	timing of sell-through and the financial liquidity of our distributors and retail customers;

·	errors or defects in our products caused by, among other things, errors or defects in the memory or controller components, including memory and non-memory components we procure from third-party suppliers;

·	write-downs or impairments of our investments in fabrication capacity, equity investments and other assets;

·	impairment of intangible assets related to our acquisitions;

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

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

Competitive pricing pressures and excess supply have resulted in lower average selling prices and negative product gross margin which may continue and if we do not experience adequate price elasticity, our revenues may continue to decline. The NAND flash memory industry is currently in the midst of a severe downturn, characterized by supply exceeding demand, which has led to significant declines in average selling prices. For example, our average selling price per gigabyte for product revenues declined 70% in the fourth quarter of fiscal year 2008 as compared to the same period of fiscal year 2007, and declined 62% in fiscal year 2008 compared to fiscal year 2007. The price decline was especially aggressive in the second half of fiscal year 2008, with sequential price declines of 30% in the third quarter and 28% in the fourth quarter. Price declines have exceeded cost declines in each of the last three fiscal years, resulting in negative product gross margin in fiscal year 2008. Price declines may be influenced by, among other factors, supply exceeding demand, macroeconomic factors, technology transitions, conversion of industry DRAM capacity to NAND and new technologies or other strategic actions by us or our competitors to gain market share. If our technology transitions take longer or are more costly than anticipated to complete, or our cost reductions continue to fail to keep pace with the rate of price declines, our product gross margin and operating results will continue to be negatively impacted, leading to quarterly or annual net losses.

Over our history, price decreases have generally been more than offset by increased unit demand and demand for products with increased storage capacity. However, in fiscal year 2008, price declines outpaced unit and megabyte growth resulting in reduced revenue as compared to fiscal year 2007. There can be no assurance that current and future price reductions will result in sufficient demand for increased product capacity or unit sales, which could continue to harm our margins and revenue.

We have incurred negative product gross margins and net losses, which may continue to reduce our cash flows and harm our financial condition. In the fourth quarter of fiscal year 2008, we had negative product gross margins due to sustained aggressive industry price declines as well as higher inventory charges primarily due to lower of cost or market write downs. We expect product gross margins to continue to be negative through the first quarter of fiscal year 2009. Our ability to return to or sustain profitability on a quarterly or annual basis in the future depends in part on industry and our supply/demand balance, our ability to develop new products and technologies, the rate of growth of our target markets, the competitive position of our products, the continued acceptance of our products by our customers, and our ability to manage expenses. If we fail to return to profitability, continued operating losses will reduce our cash flows and cash resources, and negatively harm our business and financial condition. If we are unable to generate sufficient cash, we may have to reduce, curtail or terminate certain business activities.

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Sales to a small number of customers represent a significant portion of our revenues, and if we were to lose one of our major licensees or customers or experience any material reduction in orders from any of our customers, our revenues and operating results would suffer. In fiscal years 2008, 2007 and 2006, revenues from our top 10 customers and licensees accounted for approximately 48%, 46% and 52% of our total revenues, respectively. In fiscal year 2008, Samsung accounted for 13% of our total revenues through a combination of license and royalty and product revenues. All customers were less than 10% of our total revenues in fiscal years 2007 and 2006. The composition of our major customer base has changed over time, and we expect this pattern to continue as our markets and strategies evolve. Sales to our customers are generally made pursuant to purchase orders rather than long-term contracts. The composition of our major customer base has changed over time, and we expect this pattern to continue as our markets and strategies evolve. If we were to lose one of our major customers or licensees, or experience any material reduction in orders from any of our customers or in sales of licensed products by our licensees, our revenues and operating results would suffer. Additionally, our license and royalty revenues may decline significantly in the future as our existing license agreements and key patents expire or if licensees fail to perform on a portion or all of their contractual obligations. Our sales are generally made from standard purchase orders rather than long-term contracts. Accordingly, our customers may generally terminate or reduce their purchases from us at any time without notice or penalty. In addition, the composition of our major customer base changes from year-to-year as we enter new markets, making our revenues from these major customers less predictable from year-to-year.

Our business depends significantly upon sales through retailers and distributors, and if our retailers and distributors are not successful, we could experience reduced sales, substantial product returns or increased price protection, any of which would negatively impact our business, financial condition and results of operations. A significant portion of our sales are made through retailers, either directly or through distributors. Sales through these channels typically include rights to return unsold inventory and protection against price declines, as well as participation in various cooperative marketing programs. As a result, we do not recognize revenue until after the product has been sold through to the end user, in the case of sales to retailers, or to our distributors’ customers, in the case of sales to distributors. Price protection against declines in our selling prices has the effect of reducing our deferred revenues and eventually, our revenues. If our retailers and distributors are not successful, due to weak consumer retail demand caused by the current worldwide economic downturn, decline in consumer confidence, or other factors, we could continue to experience reduced sales as well as substantial product returns or price protection claims, which would harm our business, financial condition and results of operations. Except in limited circumstances, we do not have exclusive relationships with our retailers or distributors, and therefore, must rely on them to effectively sell our products over those of our competitors. Certain of our retail and distributor partners are experiencing financial difficulty and prolonged negative economic conditions could cause liquidity issues for our retail and distributor customers and channels. For example, two of our North American retail customers, Circuit City, Inc. and Ritz Camera Centers, Inc., recently filed for bankruptcy protection. Negative changes in customer credit worthiness; the ability of our customers to access credit; or the bankruptcy or shutdown of any of our significant retail or distribution partners would harm our revenue and our ability to collect outstanding receivable balances. In addition, we have certain retail customers to which we provide inventory on a consigned basis, and a bankruptcy or shutdown of these customers could preclude us from taking possession of our consigned inventory, which could result in inventory or impairment charges.

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We may be unable to renew existing licenses, which could reduce our license and royalty revenues. If our existing licensees do not renew their 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 harmed. Our current license agreement with Samsung expires in August 2009, and to the extent that we are unable to renew this agreement under similar terms or at all, our financial results would be adversely impacted by the reduced license and royalty revenue and the significant patent litigation costs to enforce our patents against and renew our license agreement with Samsung. In addition, we may be subject to disputes, claims or other disagreements on the timing, amount or collection of royalties from Samsung as the current agreement nears expiration.

We may be unable to complete the transactions with Toshiba, announced on January 29, 2009, in a timely manner, or at all. On January 29, 2009, we entered into a definitive agreement with Toshiba to restructure Flash Ventures by selling to Toshiba more than 20% of Flash Ventures current production capacity through the acquisition by Toshiba of certain owned and leased equipment. The total value of the restructuring transaction to us is approximately $890 million based upon the exchange rate as of January 29, 2009. Approximately one-third of this value will be in cash paid to us and approximately two-thirds of this value represents a transfer of lease obligations to Toshiba which should reduce our outstanding lease obligations and associated lease guarantees by approximately 28%. These transactions are expected to occur at several closings between January 30, 2009 and March 31, 2009, subject to certain closing conditions and contingencies. However, if we fail to complete the transactions with Toshiba on a timely basis, or at all, we may continue to experience significant excess captive capacity and the associated fixed costs, and we would not benefit from the expected cash and reduction in lease obligations. This would harm our business, financial condition and results of operations.

Our financial performance depends significantly on worldwide economic conditions and the related impact on levels of consumer spending, which has recently deteriorated significantly in many countries and regions, including the U.S., and may remain depressed for the foreseeable future. Demand for our products is adversely affected by negative macroeconomic factors affecting consumer spending. The severe tightening of consumer credit, low level of consumer liquidity, and extreme volatility in credit and equity markets have weakened consumer confidence and decreased consumer spending. These and other economic factors have reduced demand for our products and harmed our business, financial condition and results of operations, and to the extent such economic conditions continue, they could cause further harm to our business, financial condition and results of operations.

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

The future growth of our business depends on the development and performance of new markets and products for NAND-based flash memory. Our future growth is dependent on development of new markets, new applications and new products for NAND-based flash memory. Historically, the digital camera market provided the majority of our revenues, but it is now a more mature market, and the mobile handset market has emerged as the largest segment of our revenues. Other markets for flash memory include digital audio and video players, USB drives and SSDs. We cannot assure you that the use of flash memory in mobile handsets or other existing markets and products will develop and grow fast enough, or that new markets will adopt NAND flash technologies in general or our products in particular, to enable us to grow. Our future growth is also dependent on continued geographic expansion and we may face difficulties entering or maintaining sales in international markets. Some international markets are subject to a higher degree of commodity pricing or tariffs and import taxes than in the U.S., subjecting us to increased risk of pricing and margin pressure.

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Our strategy of investing in captive manufacturing sources could harm us if our competitors are able to produce products at lower costs or if industry supply continues to exceed demand. We secure captive sources of NAND through our significant investments in manufacturing capacity. We believe that by investing in captive sources of NAND, we are able to develop and obtain supply at the lowest cost and access supply during periods of high demand. Our significant investments in manufacturing capacity require us to obtain and guarantee capital equipment leases and use available cash, which could be used for other corporate purposes. To the extent we secure manufacturing capacity and supply that is in excess of demand, or our cost is not competitive with other NAND suppliers, we may not achieve an adequate return on our significant investments and our revenues, gross margins and related market share may be negatively impacted. We may also incur increased inventory or impairment charges related to our captive manufacturing investments and may not be able to exit those investments without significant cost to us. For example, in fiscal year 2008, we took impairment charges related to FlashVision, Flash Partners and Flash Alliance of approximately $93 million, primarily due to NAND industry pricing conditions due to supply exceeding demand. In addition, in fiscal year 2008, we recorded inventory reserves primarily for lower-of-cost-or-market for both inventory on-hand and in the channel of $394 million. We also recorded a charge of $121 million in fiscal year 2008 for adverse purchase commitments associated with under utilization of Flash Partners and Flash Alliance capacity for the 90-day period in which we have non-cancelable orders.

Our business and the markets we address are subject to significant fluctuations in supply and demand and our commitments to Flash Ventures may result in periods of significant excess inventory. The start of production at Fab 4 at the end of fiscal year 2007 and the continuing ramp of production has increased our captive supply and resulted in excess inventory in fiscal year 2008. Our obligation to purchase 50% of the supply from Flash Ventures could continue to harm our business and results of operations if 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 inventory write-downs, such as those we experienced in fiscal year 2008, which would harm our gross margins and could result in the impairment of our investments in Flash Ventures.

We continually seek to develop new applications, products, technologies and standards, which may not be widely adopted by consumers or, if adopted, may reduce demand for our older products; and our competitors seek to develop new standards which could reduce demand for our products. We continually devote significant resources to the development of new applications, products and standards and the enhancement of existing 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 of new product introductions is dependent on a number of factors, including market acceptance, our ability to manage risks associated with new products and production ramp issues. New applications, such as the adoption of flash-based SSDs that are designed to replace hard disk drives in devices such as computers and servers, can take several years to develop. We cannot guarantee that manufacturers will adopt SSDs or that this market will grow as we anticipate. For the solid-state drive market to become sizeable, the cost of flash memory must decline significantly so that the cost to consumers is competitive with the cost of hard disk drives. We believe this will require us to implement multi-level cell, or MLC, technology into our SSDs, which will require us to develop new controllers. There can be no assurance that our MLC-based SSDs will be able to meet the specifications required to gain customer qualification and acceptance or will be delivered to the market on a timely basis as compared with our competitors. Other new products, such as slotMusic™, our pre-recorded flash memory cards, may not gain market acceptance, and we may not be successful in penetrating the new markets that we target. For example, our Sansa®Connect™ product, a Wi-Fi® enabled MP3 player, did not achieve market acceptance or our expected sales volume.

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New applications may require significant up-front investment with no assurance of long-term commercial success or profitability. As we introduce new standards or technologies, it can take time for these new standards or technologies to be adopted, for consumers to accept and transition to these new standards or technologies and for significant sales to be generated, if at all.

Competitors or other market participants could seek to develop new standards for flash memory products that, 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 new standard, referred to as Universal Flash Storage, or UFS, for flash memory cards used in mobile phones. Intel and Micron have also developed a new specification for a NAND flash interface, called Open NAND Flash Interface, or ONFI, which would be used primarily in computing devices. Broad acceptance of new standards, technologies or products may reduce demand for some of our products. If this decreased demand is not offset by increased demand for new form factors or products that we offer, our results of operations would be harmed.

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

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

We are developing X4, a new generation of MLC technology which is expected to contribute to planned future memory cost reductions. The performance, reliability, yields and time-to-market of X4 technology is uncertain, and there can be no assurance of the commercial success of this technology.

In addition, we are investing in future alternative technologies, particularly our 3D semiconductor memory. We are investing significant resources to develop this technology for multiple read-write applications; however, there can be no assurance that we will be successful in developing this or other technologies or that we will be able to achieve the yields, quality or capacities to be cost competitive with existing or other alternative technologies.

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We face competition from numerous manufacturers and marketers of products using flash memory, as well as from manufacturers of new and alternative technologies, and if we cannot compete effectively, our results of operations and financial condition will suffer. Our competitors include many large companies that may have greater advanced wafer manufacturing capacity and substantially greater financial, technical, marketing and other resources than we do, which allows them to produce flash memory chips in high volumes at low costs and to sell these flash memory chips themselves or to our flash card competitors at a low cost. Some of our competitors may sell their flash memory chips at or below their true manufacturing costs to gain market share and to cover their fixed costs. Such practices occurred in the DRAM industry during periods of excess supply and resulted in substantial losses in the DRAM industry. Our primary semiconductor competitors include Hynix, IMFT, Micron, Samsung and Toshiba. We, along with Hynix, IMFT, Samsung and Toshiba, are increasing NAND output and are expected to continue to produce significant NAND output in the future. In addition, current and future competitors produce or could produce alternative flash or other memory technologies that compete against our NAND-based flash memory technology or our alternative technologies, which may reduce demand or accelerate price declines for NAND. Furthermore, the future rate of scaling of the NAND-based flash technology design that we employ may slow down significantly, which would slow down cost reductions that are fundamental to the adoption of flash memory technology in new applications. If the scaling of NAND-based flash technology slows down or alternative technologies prove to be more economical, our business would be harmed, and our investments in captive fabrication facilities could be impaired.

We also compete with flash memory card manufacturers and resellers. These companies purchase or have a captive supply of flash memory components and assemble memory cards. Our primary competitors currently include, among others, A-DATA, Buffalo, CnMemory, Dane-Elec, Elecom, FUJI, Gemalto, Hagiwara, Hama, Imation, I-O Data, KingMax, Kingston, Kodak, Lexar, Memorex, Micron, Netac, Panasonic, PNY, RITEK, Samsung, Sony, STMicroelectronics, Toshiba, Tradebrands, Transcend, and Verbatim.

Some of our competitors have substantially greater resources than we do, have well recognized brand names or have the ability to operate their business on lower margins than we do. The success of our competitors may adversely 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 face competition from well established companies such as Apple, ARCHOS, Coby, Creative, Microsoft, Royal Philips Electronics, Samsung and Sony. In the USB flash drive market, we face competition from a large number of competitors, including Hynix, Imation, Kingston, Lexar, Memorex, PNY, Sony and Verbatim. In the market for SSDs, we face competition from large NAND flash producers such as Intel, Samsung and Toshiba, as well as from hard drive manufacturers, such as Seagate, Samsung, Western Digital and others, who have established relationships with computer manufacturers. We also face competition from third-party solid-state drive solutions providers such as Kingston, STEC Inc., and Transcend.

Furthermore, many companies are pursuing new or alternative technologies or alternative forms of NAND, such as phase-change and charge-trap flash technologies which may compete with NAND-based flash memory. New or alternative technologies, if successfully developed by our competitors, and if we are unable to scale our technology on an equivalent basis, could provide an advantage to these competitors.

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These new or alternative technologies may enable products that are smaller, have a higher capacity, lower cost, lower power consumption or have other advantages. If we cannot compete effectively, our results of operations and financial 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.

There can be no assurance that we will be able to compete successfully in the future.

Under certain conditions, a portion or the entire outstanding lease obligations related to Flash Ventures’ master equipment lease agreements could be accelerated, which would harm our business, results of operations, cash flows, and liquidity. Flash Ventures’ master lease agreements contain customary covenants for Japanese lease facilities. In addition to containing customary events of default related to Flash Ventures that could result in an acceleration of Flash Ventures’ obligations, the master lease agreements contain an acceleration clause for certain events of default related to us as guarantor, including, among other things, our failure to maintain a minimum stockholder equity of at least $1.51 billion, and our failure to maintain a minimum corporate rating of either BB- from Standard & Poors, or S&P, or Moody’s Corporation, or a minimum corporate rating of BB+ from Rating & Investment Information, Inc., or R&I. As of December 28, 2008, Flash Ventures was in compliance with all of its master lease covenants. While our S&P credit rating was B, two levels below the required minimum corporate rating threshold from S&P, our R&I credit rating was BBB-, one level above the required minimum corporate rating threshold from R&I.

On February 4, 2009, R&I confirmed our credit rating at BBB- with a change in outlook from stable to negative. If R&I were to downgrade our credit rating below the minimum corporate rating threshold, Flash Ventures would become non-compliant with certain covenants under its master equipment lease agreements and would be required to negotiate a resolution to the non-compliance to avoid acceleration of the obligations under such agreements. Such resolution could include, among other things, supplementary security to be supplied by us, as guarantor, or increased interest rates or waiver fees, should the lessors decide they need additional collateral or financial consideration under the circumstances. If a resolution is unsuccessful, we may be required to pay a portion or the entire outstanding lease obligations up to $2.09 billion, based upon the exchange rate at December 28, 2008, covered by our guarantee under such Flash Ventures master lease agreements, which would substantially deplete our cash position and may force us to seek additional financing, which may or may not be available.

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The semiconductor industry is subject to significant downturns that have harmed our business, financial condition and results of operations in the past and may do so in the future. The semiconductor industry is highly cyclical and is characterized by constant and rapid technological change, rapid product obsolescence, price declines, evolving standards, short product life cycles and wide fluctuations in product supply and demand. The industry has experienced significant downturns, often in connection with, or in anticipation of, maturing product cycles of both semiconductor companies’ and their customers’ products and declines in general economic conditions. The flash memory industry is currently experiencing significant excess supply, reduced demand, high inventory levels, and accelerated declines in selling prices. If the oversupply of NAND-based flash products continues, we may be forced to hold excessive inventory, sell our inventory below cost, and record inventory write-downs, all of which would place additional pressure on our results of operation and our cash position. We are currently experiencing these conditions in our business and may experience such downturns in the future.

We depend on Flash Ventures and third parties for silicon supply and any disruption or shortage in our supply from these sources will reduce our revenues, earnings and gross margins. All of our flash memory products require silicon supply for the memory and controller components. The substantial majority of our flash memory is currently supplied by Flash Ventures and to a much lesser extent by third-party silicon suppliers. Any disruption or shortage in supply of flash memory from our captive or non-captive sources would harm our operating results. The risks of supply disruption are magnified at Toshiba’s Yokkaichi, Japan operations, where Flash Ventures are operated and Toshiba’s foundry capacity is located. Earthquakes and power outages have resulted in production line stoppages and loss of wafers in Yokkaichi and similar stoppages and losses may occur in the future. For example, in the first quarter of fiscal year 2006, a brief power outage occurred at Fab 3, which resulted in a loss of wafers and significant costs associated with bringing the fab back on line. In addition, the Yokkaichi location is often subject to earthquakes, which could result in production stoppage, a loss of wafers and the incurrence of significant costs. Moreover, Toshiba’s employees that produce Flash Ventures’ products are covered by collective bargaining agreements and any strike or other job action by those employees could interrupt our wafer supply from Flash Ventures. If we have disruption in our captive wafer supply or if our non-captive sources fail to supply wafers in the amounts and at the times we expect, we may not have sufficient supply to meet demand and our operating results could be harmed.

Currently, our controller wafers are manufactured by SMIC, TSMC, Tower and UMC. Any disruption in the manufacturing operations of our controller wafer vendors would result in delivery delays, adversely affect our ability to make timely shipments of our products and harm our operating results until we could qualify an alternate source of supply for our controller wafers, which could take several quarters to complete. In times of significant growth in global demand for flash memory, demand from our customers may outstrip the supply of flash memory and controllers available to us from our current sources. If our silicon vendors are unable to satisfy our requirements on competitive terms or at all, we may lose potential sales and our business, financial condition and operating results may suffer. Any disruption or delay in supply from our silicon sources could significantly harm our business, financial condition and results of operations.

If actual manufacturing yields are lower than our expectations, this may result in increased costs and product shortages. The fabrication of our products requires wafers to be produced in a highly controlled and ultra clean environment. Semiconductor manufacturing yields and product reliability are a function of both design technology and manufacturing process technology and production delays may be caused by equipment malfunctions, fabrication facility accidents or human errors. Yield problems may not be identified or improved until an actual product is made and can be tested. As a result, yield problems may not be identified until the wafers are well into the production process. We have from time-to-time experienced yields that have adversely affected our business and results of operations. We have experienced adverse yields on more than one occasion when we have transitioned to 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 ramp and/or yield of 43-nanometer X3 technology wafers, or 43-nanometer or 32-nanometer X2 technology wafers do not increase as expected in fiscal year 2009, our cost competitiveness would be harmed, we may not have adequate supply or the right product mix to meet demand, and our business, financial condition and results of operations will be harmed.

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We depend on our captive assembly and test manufacturing facility in China and our business could be harmed if this facility does not perform as planned. Our reliance on our captive assembly and test manufacturing facility near Shanghai, China has increased significantly during fiscal year 2008 and we now utilize this factory to satisfy a majority of our assembly and test requirements, and also to produce products with leading-edge technologies such as multi-stack die packages. Any delays or interruptions in the production ramp or targeted yields or any quality issues at our captive facility could harm our results of operations and financial condition.

We depend on our third-party subcontractors and our business could be harmed if our subcontractors do not perform as planned. We rely on third-party subcontractors for a portion of our wafer testing, IC assembly, packaged testing, product assembly, product testing and order fulfillment. From time-to-time, our subcontractors have experienced difficulty meeting our requirements. If we are unable to increase the capacity of our current subcontractors or qualify and engage additional subcontractors, we may not be able to meet demand for our products. We do not have long-term contracts with our existing subcontractors nor do we expect to have long-term contracts with any new subcontract suppliers. We do not have exclusive relationships with any of our subcontractors, 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 with some of our subcontract suppliers. In these arrangements, we do not have visibility and control of their inventories of 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, could lead to product shortages or quality assurance problems, either of which would have adverse effects on our operating results.

In transitioning to new processes, products and silicon sources, we face production and market acceptance risks that may cause significant product delays, cost overruns or performance issues that could harm our business. 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 32-nanometer X2 technology or 43-nanometer X3 technology, is highly complex and requires new controllers, new test procedures and modifications of numerous aspects of manufacturing, as well as extensive qualification of the new products by both us and our OEM customers. There can be no assurance that these transitions or other future technology transitions will occur on schedule or at the yields or costs that we anticipate. If Flash Ventures encounters difficulties in transitioning to new technologies, our cost per gigabyte may not remain competitive with the costs achieved by other flash memory producers, which would harm our gross margins and financial results. Any material delay in a development or qualification schedule could delay deliveries and adversely impact our operating results. We periodically have experienced significant delays in the development and volume production ramp-up of our products. Similar delays could occur in the future and could harm our business, 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 warranty claims and litigation. Our products are complex, must meet stringent user requirements, may contain errors or defects and the majority of our products are warrantied for one to five years. Errors or defects in our products may be caused by, among other things, errors or defects in the memory or controller components, including components we procure from non-captive sources. In addition, the substantial majority of our flash memory is supplied by Flash Ventures, and if the wafers contain errors or defects, our overall supply could be adversely affected. These factors could result in the rejection of our products, damage to our reputation, lost revenues, diverted development resources, increased customer service and support costs and warranty claims and litigation. We record an allowance for warranty and similar costs in connection with sales of our products, but actual warranty and similar costs may be significantly higher than our recorded estimate and result in an adverse effect on our results of operations and financial condition.

Our new products have from time-to-time been introduced with design and production errors at a rate higher than the error rate in our established products. We must estimate warranty and similar costs for new products without historical information and actual costs may significantly exceed our recorded estimates. Warranty and similar costs may be even more difficult to estimate as we increase our use of non-captive supply. Underestimation of our warranty and similar costs would have an adverse effect on our results of operations and financial condition.

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Our remaining investment of approximately $64 million in our FlashVision venture may not be recoverable. In the second quarter of fiscal year 2008, we determined that the production of NAND flash memory products utilizing 200-millimeter wafers is no longer cost effective and signed an agreement with Toshiba to wind-down our FlashVision venture. As of the end of May 2008, the operations of FlashVision were discontinued and a plan was put in place to sell or otherwise dispose of the tools owned or leased by FlashVision. In fiscal year 2008, we took an impairment on our investment of approximately $10 million due to FlashVision’s difficulty in selling its excess capital equipment due to deteriorating market conditions. As of December 28, 2008, we had an investment in FlashVision of $64 million denominated in Japanese yen, offset by $43 million of cumulative translation adjustments recorded in Accumulated Other Comprehensive Income, or OCI. A depreciation of the Japanese yen to U.S. dollar exchange rate or a decrease in the expected final cash distribution from FlashVision could result in further impairments on this investment, which could harm our financial results.

From time-to-time, we overestimate our requirements and build excess inventory, or underestimate our requirements and have a shortage of supply, either of which harm our financial results. The majority of our products are sold into consumer markets, which are difficult to accurately forecast. Also, a substantial majority of our quarterly sales are from orders received and fulfilled in that quarter. Additionally, we depend upon timely reporting from our retail and distributor customers as to their inventory levels and sales of our products in order to forecast demand for our products. We have in the past significantly over-forecasted or under-forecasted actual demand for our products. The failure to accurately forecast demand for our products will result in lost sales or excess inventory, both of which will have an adverse effect on our business, financial condition and results of operations. In addition, at times inventory may increase in anticipation of increased demand or as captive wafer capacity ramps. If demand does not materialize, we may be forced to write-down excess inventory or write-down inventory to the lower of cost or market, as was the case in fiscal year 2008, which may harm our financial condition and results of operations.

During periods of excess supply in the market for our flash memory products, we may lose market share to competitors who aggressively lower their prices. In order to remain competitive, we may be forced to sell inventory below cost. If we lose market share due to price competition or we must write-down inventory, our results of operations and financial condition could be harmed. Conversely, under conditions of tight flash memory supply, we may be unable to adequately increase our production volumes 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.

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

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

We are sole-sourced from time to time for certain of our components and the absence of a back-up supplier exposes our supply chain to unanticipated disruptions. We rely on our vendors, some of which are the sole source of supply for certain of our components. We do not have long-term supply agreements with most of these vendors. Our business, financial condition and operating results could be significantly harmed by delays or reductions in shipments if we are unable to obtain sufficient quantities of these components or develop alternative sources of supply.

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Our global operations and operations at Flash Ventures and third-party subcontractors are subject to risks for which we may not be adequately insured. Our global operations are subject to many risks including errors and omissions, infrastructure disruptions, such as large-scale outages or interruptions of service from utilities or telecommunications providers, supply chain interruptions, third-party liabilities and fires or natural disasters. 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 on commercially acceptable terms or, in some cases, have been unavailable. We cannot assure you that in the future we will be able to maintain existing insurance coverage or that premiums will not increase substantially. We maintain limited insurance coverage and in some cases no coverage for natural disasters and sudden and accidental environmental damages as these types of insurance are sometimes not available or available only at a prohibitive cost. Accordingly, we may be subject to an uninsured or under-insured loss in such situations. We depend upon Toshiba to obtain and maintain sufficient property, business interruption and other insurance for Flash Ventures. If Toshiba fails to do so, we could suffer significant unreimbursable losses, and such failure could also cause Flash Ventures to breach various financing covenants. In addition, we insure against property loss and business interruption resulting from the risks incurred at our third-party subcontractors; however, we have limited control as to how those sub-contractors run their operations and manage their risks, and as a result, we may not be adequately insured.

We are exposed to foreign currency exchange rate fluctuations that could negatively impact our business, results of operations and financial condition. A significant portion of our business is conducted in currencies other than the U.S. dollar, which exposes us to adverse changes in foreign currency exchange rates. These exposures may change over time as our business and business practices evolve, and they could have a material adverse impact on our financial results and cash flows. Our most significant exposure is related to our purchases of NAND-based flash memory from Flash Ventures, which is denominated in Japanese yen. In fiscal year 2008, the Japanese yen significantly appreciated relative to the U.S. dollar and this has increased our costs of NAND flash wafers, negatively impacting our gross margins and results of operations. In addition, our investments in Flash Ventures are denominated in Japanese yen and adverse changes in the exchange rate could increase the cost to us of future funding or increase our exposure to asset impairments. We also have foreign currency exposures related to certain non-U.S. dollar-denominated revenue and operating expenses in Europe and Asia. Additionally, we have exposures to emerging market currencies, which can be extremely volatile. An increase in the value of the U.S. dollar could increase the real cost to our customers of our products in those markets outside the U.S. where we sell in dollars, and a weakened U.S. dollar could increase local operating expenses and the cost of raw materials to the extent purchased in foreign currencies. We also have significant monetary assets and liabilities that are denominated in non-functional currencies.

We enter into foreign exchange forward contracts to reduce the short-term impact of foreign currency fluctuations on certain foreign currency assets and liabilities. In addition, we hedge certain anticipated foreign currency cash flows with foreign exchange forward and option contracts. We generally have not hedged our future investments and distributions denominated in Japanese yen related to Flash Ventures.

Our attempts to hedge against currency risks may not be successful, resulting in an adverse impact on our results of operations. In addition, if we do not successfully manage our hedging program in accordance with current accounting guidelines, we may be subject to adverse accounting treatment of our hedging program, which could harm our results of operations and financial condition. There can be no assurance that this hedging program will be economically beneficial to us. Further, the availability of foreign exchange credit lines from financial institutions is based upon available credit. Continued operating losses, third party downgrades of our credit rating or continued instability in the worldwide financial markets could impact our ability to effectively manage our foreign currency exchange rate fluctuation risk, which could negatively impact our business, results of operations and financial condition.

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We may be unable to protect our intellectual property rights, which would harm our business, financial condition and results of operations. We rely on a combination of patents, trademarks, copyright and trade secret laws, 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 of others, including claims that we may be infringing third-parties’ patents, trademarks and other intellectual property rights. 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 rights and potential commercial advantage; or

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

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

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

On October 24, 2007, we initiated two patent infringement actions in the United States District Court for the Western District of Wisconsin and one action in the United States International Trade Commission against 25 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 successful in these actions, that the validity of the asserted patents will be preserved or that we will not face counterclaims of the nature described above.

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We are currently and may in the future be involved in litigation, including litigation regarding our intellectual property rights or those of third parties, which may be costly, may divert the efforts of our key personnel and could result in adverse court rulings, which could materially harm our business. We are involved in a number of lawsuits, including among others, several cases involving our patents and the patents of third parties. We are the plaintiff in some of these actions and the defendant in other of these actions. Some of the actions seek injunctions against the sale of our products and/or substantial monetary damages, which if granted or awarded, could have a material 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 of California in purported consumer class actions alleging a conspiracy to fix, raise, maintain or stabilize the pricing of flash memory, and concealment thereof, in violation of state and federal laws. The lawsuits purport to be on behalf of classes of purchasers of flash memory. The lawsuits seek restitution, injunction and damages, including treble damages, in an unspecified amount.

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 California indicating a Department of Justice investigation into possible antitrust violations in the NAND flash memory industry. We also received a notice from the Canadian Competition Bureau that the Bureau has commenced an industry-wide investigation with respect to alleged anti-competitive activity regarding the conduct of companies engaged in the supply of NAND flash memory chips to Canada and requesting that we preserve any records relevant to such investigation. We intend to cooperate in these investigations. We are unable to predict the outcome of these lawsuits and investigations. The cost of discovery and defense in these actions as well as the final resolution of these alleged violations of antitrust laws could result in significant liability and expense and may harm our business, financial condition and results of operations. For additional information concerning these proceedings, see Part I, Item 3, “Legal Proceedings.”

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

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

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We may be obligated to indemnify our current or former directors or employees, or former directors or employees of companies that we have acquired, in connection with litigation or regulatory or Department of Justice investigations. These liabilities could be substantial and may include, among other things, the costs of defending lawsuits 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; and expenses associated with the remedial measures, if any, which may be imposed.

We continually evaluate and explore strategic opportunities as they arise, including business combinations, strategic partnerships, collaborations, capital investments and the purchase, licensing or sale of assets. Potential continuing uncertainty surrounding these activities may result in legal proceedings and claims against us, including class and derivative lawsuits on behalf of our stockholders. We may be required to expend significant resources, including management time, to defend these actions and could be subject to damages or settlement costs related to these actions.

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

We may be unable to license intellectual property to or from third parties as needed, which could expose us to liability for damages, increase our costs or limit or prohibit us from selling products. If we incorporate third-party technology into our products or if we are found to infringe others’ intellectual property, we could be required to license intellectual property from a third party. We may also need to license some of our intellectual property to others in order to enable us to obtain important cross-licenses to third-party patents. We cannot be certain that licenses will be offered when we need them, that the terms offered will be acceptable, or that these licenses will help our business. If we do obtain licenses from third parties, we may be required to pay license fees or royalty payments. In addition, if we are unable to obtain a license that is necessary to manufacture our products, we could be required to suspend the manufacture of products or stop our product suppliers from using processes that may infringe the rights of third parties. We may not be successful in redesigning our products, or the necessary licenses may not be available under reasonable terms.

Seasonality in our business may result in our inability to accurately forecast our product purchase requirements. Sales of our products in the consumer electronics market are subject to seasonality. For example, sales have typically increased significantly in the fourth quarter of each fiscal year, sometimes followed by significant declines in the first quarter of the following fiscal year. This seasonality makes it more difficult for us to forecast our business, especially in the current global economic environment and its corresponding decline in consumer confidence, which may impact typical seasonal trends. If our forecasts are inaccurate, we may lose market share or procure excess inventory or inappropriately increase or decrease our operating expenses, any of which could harm our business, financial condition and results of operations. This seasonality also may lead to higher volatility in our stock price, the need for significant working capital investments in receivables and inventory and our need to build inventory levels in advance of our most active selling seasons.

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Because of our international business and operations, we must comply with numerous international laws and regulations, and we are vulnerable to political instability and other risks related to international operations. Currently, a large portion of our revenues is derived from our international operations, and all of our products are produced 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.

For example, China does not currently have a comprehensive and highly developed legal system, particularly with respect to the protection of intellectual property rights. This results, among other things, in the prevalence of counterfeit goods in China. The enforcement of existing and future laws and contracts remains uncertain, and the implementation and interpretation of such laws may be inconsistent. Such inconsistency could lead to piracy and degradation of our intellectual property protection. Although we engage in efforts to prevent counterfeit products from entering the market, those efforts may not be successful. Our results of operations and financial condition could 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 may arise from regional issues in Asia;

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

·	changes in, or the particular application of, government regulations;

·	duties and/or fees related to customs entries for our products, which are all manufactured offshore;

·	longer payment cycles and greater difficulty in accounts receivable collection;

·	adverse tax rules and regulations;

·	weak protection of our intellectual property rights;

·	delays in product shipments due to local customs restrictions; and

·	delays in research and development that may arise from political unrest at our development centers in Israel.

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Our stock price has been, and may continue to be, volatile, which could result in investors losing all or part of their investments. The market price of our stock has fluctuated significantly in the past and may continue to fluctuate in the future. We believe that such fluctuations will continue as a result of many factors, including financing plans, future announcements concerning us, our competitors or our principal customers regarding financial results or expectations, technological innovations, industry supply or demand dynamics, new product introductions, governmental regulations, the commencement or results of litigation or changes in earnings estimates by analysts. In addition, in recent years the stock market has experienced significant price and volume fluctuations and the market prices of the securities of high technology and semiconductor companies have been especially volatile, often for reasons outside the control of the particular companies. These fluctuations as well as general economic, political and market conditions may have an adverse affect on the market price of our common stock as well as the price of our outstanding convertible notes.

We may engage in business combinations that are dilutive to existing stockholders, result in unanticipated accounting charges or otherwise adversely affect our results of operations, and result in difficulties in assimilating and integrating the operations, personnel, technologies, products and information systems of acquired companies or businesses. We continually evaluate and explore strategic opportunities as they arise, including business combinations, strategic partnerships, collaborations, capital investments and the purchase, licensing or sale of assets. If we issue equity securities in connection with an acquisition, the issuance may be dilutive to our existing stockholders. 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 in difficulties in assimilating and integrating the operations, personnel, technologies, products and information systems of acquired companies. We may experience delays in the timing and successful integration of acquired technologies and product development through volume production, unanticipated costs and expenditures, changing relationships with customers, suppliers and strategic partners, or contractual, intellectual property or employment issues. In addition, key personnel of an acquired company may decide not to work for us. The acquisition of another company or its products and technologies may also result in our entering into a geographic or business market in which we have little or no prior experience. These challenges could disrupt our ongoing business, distract our management and employees, harm our reputation, subject us to an increased risk of intellectual property and other litigation and increase our expenses. These challenges are magnified as the size of the acquisition increases, and we cannot 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, substantial depreciation or deferred compensation charges, the amortization of identifiable purchased intangible assets or impairment of goodwill, any of which could have a material adverse effect on our business, financial condition or results of operations.

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

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Our success depends on our key personnel, including our executive officers, the loss of whom could disrupt our business. Our success greatly depends on the continued contributions of our senior management and other key research 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 officers and they are free to terminate their employment with us at any time. Our success will also depend on our ability to recruit additional highly skilled personnel. Historically, a significant portion of our employee compensation has been dependent on equity compensation, which is directly tied to our stock price. Currently, the equity incentives for virtually all of our employees are underwater, and as a result, our equity compensation has little or no retention value. In addition, we are not paying annual cash performance bonuses in fiscal year 2009 and may not pay cash bonuses in fiscal year 2010. Furthermore, we have frozen salaries, instituted forced shutdown days, and reduced certain employee benefits to reduce costs. These actions or any further reduction in compensation elements may make it more difficult for us to hire or retain key personnel.

We may incur additional restructuring charges or not realize the expected benefits of new initiatives to reduce costs across our operations. In fiscal year 2008, we pursued a number of initiatives to reduce costs across our operations. These initiatives included workforce reductions in certain areas as we realigned our business. In fiscal year 2008, we recorded charges of $36 million for employee severance and benefits for employee reductions worldwide, marketing contract termination costs, technology license impairments, fixed asset impairments, and other charges. We may record additional employee severance and related costs for terminated employees in fiscal year 2009. We may not realize the expected benefits of these initiatives. In addition, we continue to focus on reducing our costs. As a result of these initiatives, we expect to incur restructuring or other charges and we may experience disruptions in our operations and loss of 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 and any corresponding decline in consumer confidence could have a negative impact on consumer retail demand, which is the largest channel for our products. Any of these events may disrupt our operations or those of our customers and suppliers and may affect the availability of materials needed to manufacture our products or the means to transport those materials to manufacturing facilities and finished products to customers. Any of these events could also increase volatility in the U.S. and world financial markets, which could harm our stock price and may limit the capital resources available to us and our customers or suppliers, or adversely affect consumer confidence. We have substantial operations in Israel including a development center in Northern Israel, near the border with Lebanon, and a research center in Omer, Israel, which is near the Gaza Strip, areas that have recently experienced significant violence and political unrest. Continued turmoil and unrest in Israel or the Middle East could cause delays in the development or production of our products. This could harm our business and results of operations.

Natural disasters or epidemics in the countries in which we or our suppliers or subcontractors operate could negatively impact our operations. Our operations, including those of our suppliers and subcontractors, are concentrated in Milpitas, California; Raleigh, North Carolina; Brno, Czech Republic; Astugi and Yokkaichi, Japan; Hsinchu and Taichung, Taiwan; and Dongguan, Futian, Shanghai and 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 or epidemic were to occur in one or more of these areas, our operations could be significantly impaired and our business 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.

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To manage our business complexity, we may need to improve our systems, controls, processes and procedures. We have experienced and may again experience rapid growth or changes in business requirements, which could place a significant strain on our managerial, financial and operations resources and personnel. We must continually enhance our operational, accounting and financial systems to accommodate the growth, changing practices, and increasing complexity of our business. For example, we are planning to replace our enterprise resource planning, or ERP, system in fiscal year 2009. This project requires significant investment, the re-engineering of many processes used to run our business, and the attention of many employees and managers who would otherwise be focused on other aspects of our business. The design and implementation of the new ERP system could also take longer than anticipated and put further strain on our ability to run our business on the older, existing ERP system. For example, our current system integrator, Satyam Computer Services Ltd., is experiencing financial difficulty which has resulted in some project delays and loss of productivity. If the system integrator were to lose key personnel, declare bankruptcy or otherwise be unable to perform at the level we expect, we would have to engage a new integrator, which would likely result in significant delays in our implementation and additional cost. Any design flaws or delays in the new ERP system or any distraction of our workforce from competing business requirements could harm our business or results of operations. We must also continue to enhance our controls and procedures and workforce training. If we do not manage or adapt our systems, processes and procedures to our changing or growing business and organization, 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 in satisfactory amounts may prevent us from funding Flash Ventures, developing or enhancing our products, taking advantage of future opportunities, growing our business or responding to competitive pressures or unanticipated industry changes, any of which could harm our business. We currently believe that we have sufficient cash resources to fund our operations as well as our anticipated investments in Flash Ventures for at least the next twelve months; however, we may decide to raise additional funds to maintain the strength of our balance sheet, and we cannot be certain that we will be able to obtain additional financing on favorable terms, if at all. The current worldwide financing environment is extremely challenging, which could make it more difficult for us to raise funds on reasonable terms or at all. From time-to-time, we may decide to raise additional funds through equity, public or private debt, or lease financings. If we issue additional equity securities, our stockholders will experience dilution and the new equity securities may have rights, preferences or privileges senior to those of existing holders of common stock. If we raise funds through debt or lease financing, we will have to pay interest and may be subject to restrictive covenants, which could harm our business. If we cannot raise funds on acceptable terms, if and when needed, our credit rating may be downgraded, and we may not be able to develop or enhance our technology or products, fulfill our obligations to Flash Ventures, take advantage of future opportunities, grow our business or respond to competitive pressures or unanticipated industry changes, any of which could harm our business.

Anti-takeover provisions in our charter documents, stockholder rights plan and in Delaware law could discourage or delay a change in control and, as a result, negatively impact our stockholders. We have taken a number of actions that could have the effect of discouraging a takeover attempt. For example, we have a stockholders’ rights plan that would cause substantial dilution to a stockholder, and substantially increase the cost paid by a stockholder, who attempts to acquire us on terms not approved by our board of directors. This could discourage an acquisition of us. In addition, our certificate of incorporation grants our board of directors the authority to fix the rights, preferences and privileges of and issue up to 4,000,000 shares of preferred stock without stockholder action (2,000,000 of which have already been reserved under our stockholder rights plan). Issuing preferred stock could have the effect of making it more difficult and less attractive for a third party to acquire a majority of our outstanding voting stock. Preferred stock may also have other rights, including economic rights senior to our common stock that could have a material adverse effect on the market value of our common stock. In addition, 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 interested stockholder 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.

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Unanticipated changes in our tax provisions or exposure to additional income tax liabilities could affect our profitability. We are subject to income tax in the U.S. and numerous foreign jurisdictions. Our tax liabilities are affected by the amounts we charge for inventory, services, licenses, funding and other items in intercompany transactions. We are subject to ongoing tax audits in various jurisdictions. Tax authorities may disagree with our intercompany charges or other matters and assess additional taxes. We regularly assess the likely outcomes of these audits in order to determine the appropriateness of our tax provision. However, there can be no assurance that we will accurately predict the outcomes of these audits, and the actual outcomes of these audits could have a material impact on our results of operations or financial condition. In addition, our effective tax rate in the future could be adversely affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws, and the discovery of new information in the course of our tax return preparation process. In particular, the carrying value of deferred tax assets, which are predominantly in the U.S., is dependent on our ability to generate future taxable income in the U.S. Any of these changes could affect our profitability.

We may be subject to risks associated with environmental regulations. Production and marketing of products in 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 been passed in several jurisdictions in which we operate, including Japan and certain states within the U.S. Although we do not anticipate any material adverse effects in the future based on the nature of our operations and the focus of such laws, there is no assurance such existing laws or future laws will not harm 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 internal control over financial reporting is not effective, our business could suffer. In connection with our certification process under Section 404 of Sarbanes-Oxley Act, we have identified in the past and will from time-to-time identify deficiencies in our internal control over financial reporting. We cannot assure you that individually or in the aggregate these deficiencies would not be deemed to be a material weakness. A material weakness or deficiency in internal control over financial reporting could materially impact 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 a negative impact on our reputation, business and stock price. Any internal control or procedure, no matter how well designed and operated, can only provide reasonable assurance of achieving desired control objectives and cannot prevent intentional misconduct or fraud.

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Our debt service obligations may adversely affect our cash flow. While the 1% Senior Convertible Notes due 2013 and the 1% Convertible Notes due 2035 are outstanding, we are obligated to pay to the holders thereof approximately $12.3 million per year in interest. If we issue other debt securities in the future, our debt service obligations will increase. If we are unable to generate sufficient cash to meet these obligations and must instead use our existing cash or investments, we may have to reduce, curtail or terminate other business activities. We intend to fulfill our debt service obligations from cash generated by our operations, if any, and from our existing cash and investments. 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 principal of, and interest on, our indebtedness, thereby reducing the availability of such cash flow to fund our growth strategy, working capital, capital expenditures and other general corporate purposes;

·	limit our flexibility in planning for, or reacting to, changes in our business and our industry;

·	place us at a competitive disadvantage relative to our competitors with less debt; and

·	increase our risk of credit rating downgrades.

We have significant financial obligations related to Flash Ventures, which could impact our ability to comply with our obligations under our 1% Senior Convertible Notes due 2013 and our 1% Convertible Notes due 2035. We have entered into agreements to guarantee or provide financial support with respect to lease and certain other obligations of Flash Ventures in which we have a 49.9% ownership interest. In addition, we may enter into future agreements to increase manufacturing capacity, including the expansion of Fab 4. As of December 28, 2008, we had guarantee obligations for Flash Venture master lease agreements of approximately $2.09 billion. In addition, we have significant commitments for the future fixed costs of Flash Ventures. Due to these and our other commitments, we may not have sufficient funds to make payments under or repay the notes.

The settlement of the 1% Senior Convertible Notes due 2013 or the 1% Convertible Notes due 2035 may have adverse consequences. The 1% Senior Convertible Notes due 2013 are subject to net share settlement, which means that we will satisfy our conversion obligation to holders by paying cash in settlement of the lesser of the principal amount or the conversion value of the 1% Senior Convertible Notes due 2013 and by delivering shares of our common stock in settlement of any and all conversion obligations in excess of the daily conversion values. The holders of the 1% Convertible Notes due 2035 have a put option in March 2010 and various dates thereafter under which they can demand cash repayment of the principal amount of $75 million.

Our failure to convert the 1% Senior Convertible Notes due 2013 into cash or a combination of cash and common stock upon exercise of a holder’s conversion right in accordance with the provisions of the indenture would constitute a default under the indenture. Similarly, our failure to settle the 1% Convertible Notes due 2035 if we were forced to repurchase the Notes in March 2010 or thereafter would constitute a default under the indenture. We may not have the financial resources or be able to arrange for financing to pay such principal amount in connection with the surrender of the 1% Senior Convertible Notes due 2013 or the 1% Convertible Notes due 2035. While we currently only have debt related to the 1% Senior Convertible Notes due 2013 and the 1% Convertible Notes due 2035 and we do not have other agreements that would restrict our ability to pay the principal amount of any convertible notes in cash, we may enter into such an agreement in the future, which may limit or prohibit our ability to make any such payment. In addition, a default under the indenture could lead to a default under existing and future agreements governing our indebtedness. If, due to a default, the repayment of related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay such indebtedness and amounts owing in respect of the conversion, maturity, or put of any convertible notes.

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The convertible note hedge transactions and the warrant option transactions may affect the value of the notes and 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 the potential 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 the net cost of the convertible note hedge in excess of the warrant transactions. These transactions were accounted for as an adjustment to our stockholders’ equity. In connection with hedging these transactions, the dealers or their affiliates:

·	have entered into various over-the-counter cash-settled derivative transactions with respect to our common stock, concurrently with, and shortly after, the pricing of the notes; and


·	may enter into, or may unwind, various over-the-counter derivatives and/or purchase or sell our common stock in secondary market transactions following the pricing of the notes, including during any observation period related to a conversion of notes.

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

The effect of any of these transactions on the market price of our common stock or the 1% Senior Convertible Notes due 2013 will depend in part on market conditions and cannot be ascertained at this time. However, any of these activities could adversely affect the value of our common stock and the value of the 1% Senior Convertible Notes due 2013, and consequently affect the amount of cash and the number of shares of common stock the holders will receive upon the conversion of the notes.

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

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ITEM 2. PROPERTIES

Our principal facilities are located in Milpitas, California. We lease four adjacent buildings comprising approximately 444,000 square feet. These facilities house our corporate offices, the majority of our engineering team, as well as a portion of our sales, marketing, operations and corporate services organizations. We occupy this space under lease agreements that expire in 2011 and 2013. In addition, we own two buildings comprising approximately 157,000 square feet located in Kfar Saba, Israel, that house administrative offices and research and development facilities. The buildings are located on a 99-year land lease of approximately 268,000 square feet of which approximately 70,000 square feet is vacant land for future expansion. We have a 50-year land lease in Tefen, Israel of approximately 87,000 square feet of vacant land for future expansion.

We have a 50-year land lease in Shanghai, China of approximately 653,000 square feet on which we own an advanced testing and assembly facility of approximately 363,000 square feet. We lease office space of approximately 29,000 square feet and manufacturing space of approximately 21,000 square feet in Madrid, Spain.

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

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ITEM 3. LEGAL PROCEEDINGS

The flash memory industry is characterized by significant litigation seeking to enforce patent and other intellectual property rights. The Company's patent and other intellectual property rights are primarily responsible for generating license and royalty revenue. The Company seeks to protect its intellectual property through patents, copyrights, trademarks, trade secret laws, confidentiality agreements and other methods, and has been, and likely will, continue to enforce such rights as appropriate through litigation and related proceedings. The Company expects that its competitors and others who hold intellectual property rights related to its industry will pursue similar strategies against it in litigation and related proceedings. From time-to-time, it has been and may continue to be necessary to initiate or defend litigation against third parties. These and other parties could bring suit against the Company. In each case listed below where the Company is the defendant, the Company intends to vigorously defend the action. At this time, the Company does not believe it is reasonably possible that losses related to the litigation described below have occurred beyond the amounts, if any, that have been accrued.

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 infringe one of the Company’s U.S. patents, U.S. Patent No. 5,172,338 (the “’338 patent”), and also alleges that several of ST’s patents are invalid and not infringed. On June 18, 2007, the Company filed an amended complaint, removing several of the Company’s declaratory judgment claims. At a case management conference conducted on June 29, 2007, the parties agreed that the remaining declaratory judgment claims would be dismissed pursuant to a settlement agreement in two matters being litigated in the Eastern District of Texas (Civil Case No. 4:05CV44 and Civil Case No. 4:05CV45, discussed below). The parties also agreed that the ’338 patent and a second Company patent, presently at issue in Civil Case No. C0505021 JF (discussed below), will be litigated together in this case. ST filed an answer and counterclaims on September 6, 2007. ST’s counterclaims included assertions of antitrust violations. On October 19, 2007, the Company filed a motion to dismiss ST’s antitrust counterclaims. On December 20, 2007, the Court entered a stipulated order staying all procedural deadlines until the Court resolves the Company’s motion to dismiss. At a hearing held on January 25, 2008, the Court converted the Company’s motion to dismiss into a motion for summary judgment. On June 17, 2008, the Court issued a stipulated order rescheduling the hearing on the Company’s motion for summary judgment for September 12, 2008. On October 17, 2008, the Court issued an order granting in part and denying in part the Company’s motion for summary judgment on ST’s antitrust counterclaims. The Court has not yet established new procedural deadlines in this matter.

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On October 14, 2005, STMicroelectronics, Inc. (“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 to Wafer Scale Integration, Inc.’s (“WSI”) legal rights, has an ownership interest in several Company patents that were issued 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 the 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 of California, where it was assigned case number C05-04691. On December 13, 2005, STMicro filed a motion to remand the case back to the Superior Court of Alameda County. The case was remanded to the Superior Court of Alameda County on July 18, 2006, after briefing and oral argument on a motion by STMicro for reconsideration of an earlier order denying STMicro’s request for remand. Due to the remand, the District Court did not rule upon a summary judgment motion previously filed by the Company. In the Superior Court of Alameda County, the Company filed a Motion to Transfer Venue to Santa Clara County on August 10, 2006, which was denied on September 12, 2006. On October 6, 2006, the Company filed a Petition for Writ of Mandate with the First District Court of Appeal, which asked 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 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 the Company’s venue transfer motion or to show cause why a writ of mandate should not issue compelling such an order. On January 23, 2007, the Superior Court of Alameda transferred the case to Santa Clara County as a result of the writ proceeding at the Court of Appeal. The Company also filed a special motion to strike STMicro’s unfair competition claim, which the Superior Court denied on September 11, 2006. The Company appealed the denial of that motion, and the proceedings at the Superior Court were stayed during the pendency of the appeal. On August 7, 2007, the First District Court of Appeal affirmed the Superior Court’s decision, and the Supreme Court subsequently denied the Company’s petition for review. On February 7, 2008, the Company and Dr. Harari moved for judgment on the pleadings on the ground that the federal courts have exclusive jurisdiction over the claims in the case. The Superior Court denied this motion and litigation then proceeded at the Superior Court until May 7, 2008, when the Company and Dr. Harari again removed the case to the U.S. District Court for the Northern District of California. The District Court consolidated the case and the previously-removed action under case number C05-04691. STMicro filed a motion to remand which was granted on August 26, 2008. The case was remanded to the Superior Court for the County of Santa Clara, Case No. 1-07-CV-080123, and trial has been set for September 8, 2009. On January 30, 2009, the Company and Dr. Harari filed a motion for summary judgment on the grounds that STMicro’s claims are time-barred. The motion for summary judgment is scheduled to be heard on April 27, 2009.

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

On September 11, 2006, Mr. Rabbi, a shareholder of msystems Ltd. (“msystems”), a company subsequently acquired by the Company in or about November 2006, filed a derivative action in Israel and a motion to permit him to file the derivative action against msystems and four directors of msystems arguing that options were allegedly allocated to officers and employees of msystems in violation of applicable law. Mr. Rabbi claimed that the aforementioned actions allegedly caused damage to msystems. On January 25, 2007, SanDisk IL Ltd. (“SDIL”), successor in interest to msystems, filed a motion to dismiss the motion to seek leave to file the derivative action and the derivative action on the grounds, inter alia, that Mr. Rabbi ceased to be a shareholder of msystems after the merger between msystems and the Company. On March 12, 2008, the court granted SDIL’s motion and dismissed the motion to seek leave to file the derivative action and consequently, the derivative action itself was dismissed. On May 15, 2008, Mr. Rabbi filed an appeal with the Supreme Court of Israel, the hearing of which is set for March 19, 2009.

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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 the Eastern District 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 judgment that the ’417 patent is invalid, unenforceable and not infringed by the Company. On July 31, 2007, Texas MP3 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 the litigation pending 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 a counterclaim: (a) denying infringement; (b) seeking a declaratory judgment that the ’417 patent is invalid, unenforceable and not infringed by the Company. Texas MP3 and the Company have reached a settlement, effective January 16, 2009. As a result of the settlement the Court dismissed all claims against the Company with prejudice on January 23, 2009.

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 a declaratory judgment of non-infringement and patent invalidity against Lucent Technologies Inc. and Lucent in the United States District Court for the Northern District of California, captioned SanDisk Corporation v. Lucent Technologies Inc., et al., Civil Case No. C 07 03618. The complaint sought a declaratory judgment that the Company does not infringe the two patents asserted by Lucent against the Company’s digital music players. The complaint further sought a judicial determination and declaration that Lucent’s patents are invalid. Defendants answered and asserted a counterclaim of infringement in connection with the ’080 patent. Defendants also moved to dismiss the case without prejudice and/or stay the case pending their appeal of a judgment involving the same patents in suit entered by the United States District Court for the Southern District of California. The Company moved for summary judgment on its claims for declaratory relief and moved to dismiss defendant Lucent’s counterclaim for infringement of the ’080 patent as a matter of law. The Court granted Defendants’ motion to stay and dismissed all other motions without prejudice. In November 2008, this case was settled with Lucent stipulating to non-infringement by the Company and dismissing its counterclaim with prejudice.

On August 10, 2007, Lonestar Invention, L.P. (“Lonestar”) filed suit against the Company in the Eastern District of Texas, Civil Action No. 6:07-CV-00374-LED. The complaint alleges that a memory controller used in the Company’s flash memory devices infringes U.S. Patent No. 5,208,725. Lonestar sought a permanent injunction, actual damages, treble damages for willful infringement, and costs and attorney fees. The Company answered Lonestar’s complaint, denying the allegations. Pursuant to a settlement agreement reached, the lawsuit was dismissed on November 14, 2008. Lonestar’s claims were dismissed with prejudice with respect to the particular products accused of infringement. SanDisk’s counterclaims were dismissed without prejudice.

On September 11, 2007, the Company and the Company’s CEO, Dr. Eli Harari, received grand jury subpoenas issued from the United States District Court for the Northern District of California indicating a Department of Justice investigation into possible antitrust violations in the NAND flash memory industry. The Company also received 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 in the supply of NAND flash memory chips to Canada and requesting that the Company preserve any records relevant to such investigation. The Company is cooperating in these investigations.

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On September 11, 2007, Premier International Associates LLC (“Premier”) filed suit against the Company and 19 other named defendants, including Microsoft Corporation, Verizon Communications Inc. and AT&T Inc., in the United 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 the Company’s portable digital music players, and seeks an injunction and damages in an unspecified amount. On December 10, 2007, an amended complaint was filed. On February 5, 2008, the Company filed an answer to the amended complaint and counterclaims: (a) denying infringement; (b) seeking a declaratory judgment that the ’725 and ’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 of reexaminations of the ’725 and ’345 patents by the U.S. Patent and Trademark Office. This motion was granted and on June 4, 2008, the action is currently stayed.

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 players and products containing same” in the ITC (hereinafter, “the 619 Investigation”), naming the following companies as respondents: Phison Electronics Corp. (“Phison”); Silicon Motion Technology Corp., Silicon Motion, Inc. (Taiwan), Silicon Motion, Inc. (California), and Silicon Motion International, Inc. (collectively, “Silicon Motion”); USBest Technology, Inc. dba Afa Technologies, Inc. (“USBest”); Skymedi Corp. (“Skymedi”); Chipsbrand Microelectronics (HK) Co., Ltd., Chipsbank Technology (Shenzhen) Co., Ltd., and Chipsbank Microelectronics Co., 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. (collectively, “Buffalo”); Verbatim Corp. (“Verbatim”); Transcend Information Inc. (Taiwan), Transcend Information Inc. (California), and Transcend Information Maryland, Inc., (collectively, “Transcend”); Imation Corp., Imation Enterprises Corp., and Memorex Products, Inc. (collectively, “Imation”); Add-On Computer Peripherals, Inc. and Add-On Computer Peripherals, LLC (collectively, “Add-On Computer Peripherals”); Add-On Technology Co.; 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”); Emprex Technologies Corp.(“Emprex”); 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 Corp. (“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 asserts that respondents’ accused flash memory controllers, drives, memory cards, and media players infringe the following: U.S. Patent No. 5,719,808 (the “’808 patent”); U.S. Patent No. 6,763,424 (the “’424 patent”); U.S. Patent No. 6,426,893 (the “’893 patent”); U.S. Patent No. 6,947,332 (the “’332 patent”); and U.S. Patent No. 7,137,011 (the “’011 patent”). The Company seeks an order excluding the accused products from entry into the United States as well as a permanent cease and desist order against the respondents. Since filing its complaint, the Company has terminated the investigation as to the’808 patent, the ’893 patent, and the ’332 patent. After filing its complaint, the Company reached settlement agreements with Add-On Computer Peripherals, EDGE, Infotech, Interactive, Kaser, PNY, TSR, Verbatim, Chipsbank, USBest and Welldone. The investigation has been terminated as to these respondents in light of these settlement agreements. Three of the remaining respondents – Buffalo, Corsair, and A-Data – were terminated from the investigation after entering consent orders. The investigation has also been terminated as to Add-On Tech. Co., Behavior, Emprex, and Zotek after these respondents were found in default. The investigation has also been terminated as to Acer, Payton, Silicon Motion Tech. Corp., and Silicon Motion, Int’l Inc. The Company also terminated PQI from the investigation as to the ’011 patent. On July 15, 2008, the ALJ issued a Markman ruling regarding the ’011 patent, the ’893 patent, the ’332 patent, and the ’424 patent. Beginning October 27, 2008, the ALJ held an evidentiary hearing. At the hearing, the respondents denied infringement and raised several affirmative defenses including, among others, lack of domestic industry, invalidity, unenforceability, patent misuse, license, patent exhaustion, intervening rights, and laches. After the hearing, the parties filed a series of post-hearing briefs. On February 9, 2009, the ALJ extended the target date for conclusion of the investigation to August 10, 2009. The ALJ is expected to issue an initial determination on the merits by April 10, 2009.

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On October 24, 2007, the Company filed a complaint for patent infringement in the United States District Court for the Western District of Wisconsin against the following defendants: Phison, Silicon Motion, Synergistic, USBest, Skymedi, Zotek, Infotech, 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. Patent No. 6,149,316 (the “’316 patent”) and U.S. Patent No. 6,757,842 (the “’842 patent”). The Company seeks damages and injunctive relief. In light of above mentioned settlement agreements, the Company dismissed its claims against Infotech 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 defendants joined in Kingston’s motion. On December 17, 2007, the Company filed an opposition to Kingston’s motion. That same day, several defendants filed another motion to stay this action. On January 7, 2008, the Company opposed the defendants’ second motion to stay. On January 22, 2008, defendants Phison, Skymedi and Behavior filed motions to dismiss 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 the Company’s complaint denying infringement and raising several affirmative defenses. These defenses included, among others, 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 motion to dismiss the Company’s complaint for lack of personal jurisdiction. On January 25, 2008, Dane-Elec also filed a motion to dismiss the Company’s complaint for lack of personal jurisdiction. On January 28, 2008, the Court issued an order staying the case in its entirety with respect to all parties until the proceeding in the 619 Investigation become final. In its order, the Court also consolidated this action (Case Nos. 07-C-0605-C) with the action discussed in the preceding paragraph (07-C-0607-C).

Between August 31, 2007 and December 14, 2007, the Company (along with a number of other manufacturers of flash memory products) was sued in the Northern District of California, in eight purported class action complaints. On February 7, 2008, all of the civil complaints were consolidated into two complaints, one on behalf of direct purchasers and one on behalf of indirect purchasers, in the Northern District of California in a purported class action captioned In re Flash Memory Antitrust Litigation, Civil Case No. C07-0086. Plaintiffs allege the Company and a number of other manufacturers of flash memory products conspired to fix, raise, maintain, and stabilize the price of NAND flash memory in violation of state and federal laws. The lawsuits purport to be on behalf of purchasers of flash memory between January 1, 1999 through the present. The lawsuits seek an injunction, damages, restitution, fees, costs, and disgorgement of profits. On April 8, 2008, the Company, along with co-defendants, filed motions to dismiss the direct purchaser and indirect purchaser complaints. Also on April 8, 2008, the Company, along with co-defendants, filed a motion for a protective order to stay discovery. On April 22, 2008, direct and indirect purchaser plaintiffs filed oppositions to the motions to dismiss. The Company’s, along with co-defendants’, reply to the oppositions was filed May 13, 2008. The Court took the motions to dismiss and the motion for a protective order under submission on June 3, 2008, and has yet to issue its ruling.

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On November 6, 2007, Gil Mosek, a former employee of SanDisk IL Ltd. (“SDIL”), filed a lawsuit against SDIL, Dov Moran and Amir Ban in the Tel-Aviv District Court, claiming that he and Amir Ban, another former employee of SDIL, reached an agreement according to which a jointly-held company should have been established together with SDIL. According to Mr. Mosek, SDIL knew about the agreement, approved it and breached it, while deciding not to establish the jointly-held company. On January 1, 2008, SDIL filed a statement of defense. Simultaneously, SDIL filed a request to dismiss the lawsuit, claiming that Mr. Mosek signed a waiver in favor of SDIL, according to which he has no claim against SDIL. On February 12, 2008, Mr. Mosek filed a request to allow him to present certain documents, which contain confidential information of SDIL. On February 26, 2008, SDIL opposed this request, claiming that SDIL’s documents are the sole property of SDIL and Mr. Mosek has no right to hold and to use them. On March 6, 2008, the court decided that Mr. Mosek has to pay a fee according to the estimated amount of the claim. On April 3, 2008, Mr. Mosek filed a request to amend the claim by setting the claim on an amount of NIS 3,000,000. On April 9, 2008, SDIL filed its response to this request, according to which it has no objection to the amendment, subject to the issuance of an order for costs. On April 10, 2008, the Court accepted Mr. Mosek’s request. According to the settlement agreement, reached between the SDIL and Amir Ban in January 2008, Amir Ban shall indemnify and hold SDIL harmless with regard to the claim filed by Mosek, as described in this section above. At a pre-trial hearing held on February 9, 2009, the Court indicated that Mr. Mosek should transfer his claim to the Tel-Aviv Labor Court due to the District Court’s lack of jurisdiction. Mr. Mosek asked for the Court's permission to divide the lawsuit into two parts so the action against Amir Ban may be transferred to the Labor Court whereas the claim against SDIL would remain in the District Court. The District Court has not yet ruled as to whether the portion of the claim against Amir Ban should be transferred to the Labor Court together with the claim against SDIL.

In April 2006, the Company's subsidiary SanDisk IL Ltd. (“SDIL”) terminated its supply and license agreement (the “Agreement”) with Samsung. As a result of this termination, the Company’s subsidiary no longer was entitled to purchase products on favorable pricing terms from Samsung, Samsung no longer had a life-of-patent license to the Company’s subsidiary’s patents, and no further patent licensing payments would be due. Samsung contested the termination and SDIL commenced an arbitration proceeding seeking a declaration that its termination was valid. Samsung asserted various defenses and counterclaims in the arbitration. A hearing was held in December 2007, and the arbitration panel issued an award on May 16, 2008 declaring that SDIL’s termination of the agreement was valid and effective, and dismissing all Samsung’s counterclaims (the “Award”). On July 24, 2008, in an action captioned Samsung Electronics Co., Ltd. v. SanDisk IL f/k/a M-Systems Ltd., No. 08 Civ. 6596 (AKH), Samsung filed a petition to vacate the award in the District Court for the Southern District of New York (“Samsung's Petition”). On September 18, 2008, in an action captioned SanDisk IL, Ltd. f/k/a msystems Ltd., No. 08 Civ. 8069 (AKH), SDIL petitioned to confirm the award pursuant to the dispute resolution provisions of the Agreement and Section 207 of the Federal Arbitration Act, 9 U.S.C. § 207. On September 22, 2008, Samsung withdrew its petition for vacatur and asked the Court to immediately enter judgment against itself with respect to SDIL's petition to confirm. On September 24, 2008, the Court entered judgment in favor of SDIL on SDIL's petition to confirm the award. On October 7, 2008, SDIL filed a motion for attorneys’ fees and expenses incurred in connection with Samsung's withdrawn petition to vacate the award. On October 20, 2008, after Samsung offered to pay in full the expenses claimed by SDIL, the motion for attorneys’ fees and expenses was denied by the District Court.

On September 14, 2008, Daniel Harkabi and Gidon Elazar, former employees and founders of MDRM, Inc., filed a breach of contract action in the U.S. District Court for the Southern District of New York seeking earn-out payments of approximately $3.8 million in connection with SanDisk’s acquisition of MDRM, Inc. in fiscal year 2004. A mediation was held in June 2007, as required by the acquisition agreement, but was unsuccessful. The Company filed its answer on November 14, 2008 and discovery is proceeding.

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On September 17, 2008, a purported shareholder class action, captioned McBride v. Federman, et al., Case No. 1-08-CV-122921, was filed in the Superior Court of California in Santa Clara County. The lawsuit was brought by a purported shareholder of the Company and names as defendants the Company and its directors, Irwin Federman, Steven J. Gomo, Dr. Eli Harari, Eddy W. Hartenstein, Catherine P. Lego, Michael E. Marks, and Dr. James D. Meindl. The complaint alleges breach of fiduciary duty by the Company and its directors in rejecting Samsung Electronics Co., Ltd.'s non-binding proposal to acquire all of the outstanding common stock of the Company for $26.00 per share. On September 29, 2008, plaintiff served his first request for production of documents on the Company. On October 17, 2008, the Company and its directors filed a demurrer seeking dismissal of the lawsuit, and plaintiff served his first requests for production of documents on the Company's directors. On November 4, 2008, the parties filed a stipulation to dismiss the litigation without prejudice, with each party to bear its own costs. On November 11, 2008, the Court dismissed the case without prejudice.

On October 1, 2008, NorthPeak Wireless LLC (“NorthPeak”) filed suit against the Company and 30 other named defendants including Dell, Inc., Fujitsu Computer Systems Corp., Gateway, Inc., Hewlett-Packard Company and Toshiba America, Inc., in the United States District Court for the Northern District of Alabama, Northeastern Division. The suit, Case No. CV-08-J-1813, alleges infringement of U.S. Patents 4,977,577 and 5,978,058 by certain of the Company’s discontinued wireless electronic products. On January 21, 2009, the Court granted a motion by the defendants to transfer the case to the United States District Court for the Northern District of California, where it is now Case No. 3:09-CV-01813.

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 2008.

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PART II

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

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

	High		Low
2007
First quarter	$	46.24	$	35.82
Second quarter	$	49.61	$	41.48
Third quarter	$	59.75	$	47.14
Fourth quarter	$	55.98	$	33.15
2008
First quarter	$	33.73	$	19.54
Second quarter	$	33.17	$	18.95
Third quarter	$	23.50	$	13.06
Fourth quarter	$	21.82	$	5.07

Holders. As of January 30, 2009, we had approximately 425 stockholders of record.

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

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Stock Performance Graph *

Five-Year Stockholder Return Comparison. The following graph compares the cumulative total stockholder return on our common stock with that of the Standard & Poors (“S&P”) 500 Stock Index, a broad market index published by S&P, a selected S&P Semiconductor Company stock index compiled by Morgan Stanley & Co. Incorporated and the Philadelphia, or PHLX, Semiconductor Index for the five-year period ended December 28, 2008. These indices, which reflect formulas for dividend reinvestment and weighting of individual stocks, do not necessarily reflect returns that could be achieved by an individual investor.

The comparison for each of the periods assumes that $100 was invested on December 26, 2003 in our common stock, the stocks included in the S&P 500 Stock Index, the stocks included in the S&P Semiconductor Company Stock Index and the stocks included in the PHLX Semiconductor Index, and assumes all dividends are reinvested. For each reported year, our reported dates are the last trading dates of our fiscal quarters (which ends on the Sunday closest to March 31, June 30 and September 30, respectively) and year (which ends on the Sunday closest to December 31), and the S&P 500 Stock Index, S&P Semiconductor Company Stock Index and PHLX Semiconductor Index are based on our fiscal quarters and year.

	2003		2004		2005		2006		2007		2008
SanDisk Corporation	$	100.00	$	81.71	$	205.56	$	140.81	$	109.75	$	30.04
S&P 500 Index		100.00		110.59		113.91		129.42		134.91		79.64
S&P Semiconductor Stock Index		100.00		80.42		89.41		80.51		89.28		45.18
PHLX Semiconductor Index		100.00		86.89		96.15		93.83		82.21		40.51

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

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ITEM 6. SELECTED FINANCIAL DATA

SANDISK CORPORATION SELECTED FINANCIAL DATA

	Fiscal Years Ended
	December 28, 2008 (1)			December 30, 2007 (2)		December 31, 2006 (3)		January 1, 2006 (4)		January 2, 2005 (5)
	(In thousands, except per share data)
Revenues
Product	$	2,843,243		$	3,446,125	$	2,926,472	$	2,066,607	$	1,602,836
License and royalty		508,109			450,241		331,053		239,462		174,219
Total revenues		3,351,352			3,896,366		3,257,525		2,306,069		1,777,055
Cost of product revenues		3,288,265			2,693,647		2,018,052		1,333,335		1,091,350
Gross profit		63,087			1,202,719		1,239,473		972,734		685,705
Operating income (loss)		(1,973,480	)		276,514		326,334		576,582		418,591
Net income (loss)	$	(2,056,776	)	$	218,357	$	198,896	$	386,384	$	266,616
Net income (loss) per share:
Basic	$	(9.13	)	$	0.96	$	1.00	$	2.11	$	1.63
Diluted	$	(9.13	)	$	0.93	$	0.96	$	2.00	$	1.44
Shares used in computing net income (loss) per share:
Basic		225,292			227,744		198,929		183,008		164,065
Diluted		225,292			235,857		207,451		193,016		188,837

	At
	December 28, 2008		December 30, 2007		December 31, 2006		January 1, 2006		January 2, 2005
	(In thousands)
Working capital	$	1,440,336	$	2,385,774	$	3,345,414	$	2,004,598	$	1,526,674
Total assets		5,926,936		7,234,819		6,967,783		3,120,187		2,320,180
Convertible long-term debt		1,225,000		1,225,000		1,225,000		—		—
Total stockholders’ equity		3,174,799		4,959,617		4,768,134		2,523,791		1,940,150

(1)

Includes impairment charges related to goodwill of ($845.5) million, acquisition-related intangible assets of ($175.8) million, investments in our flash ventures with Toshiba of ($93.4) million, and our investment in Tower of ($18.9) million. Also includes share-based compensation of ($97.8) million, amortization of acquisition-related intangible assets of ($71.6) million and restructuring and other charges of ($35.5) million.

(2)	Includes share-based compensation of ($133.0) million and amortization of acquisition-related intangible assets of ($90.1) million. Also includes other-than-temporary impairment charges of ($10.0) million related to our investment in FlashVision.

(3)

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

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

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

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

Overview

	Fiscal Years Ended
	December 28, 2008			% of Revenue			December 30, 2007		% of Revenue			December 31, 2006		% of Revenue
	(In thousands, except percentages)
Product revenues	$	2,843,243			84.8	%	$	3,446,125		88.4	%	$	2,926,472		89.8	%
License and royalty revenues		508,109			15.2	%		450,241		11.6	%		331,053		10.2	%
Total revenues		3,351,352			100.0	%		3,896,366		100.0	%		3,257,525		100.0	%
Cost of product revenues		3,288,265			98.1	%		2,693,647		69.1	%		2,018,052		62.0	%
Gross profit		63,087			1.9	%		1,202,719		30.9	%		1,239,473		38.0	%
Operating expenses
Research and development		429,949			12.8	%		418,066		10.7	%		306,866		9.4	%
Sales and marketing		328,079			9.8	%		294,594		7.6	%		203,406		6.3	%
General and administrative		204,765			6.1	%		181,509		4.7	%		159,835		4.9	%
Impairment of goodwill		845,453			25.2	%		—		—			—		—
Impairment of acquisition-related intangible assets		175,785			5.3	%		—		—			—		—
Amortization of acquisition-related intangible assets		17,069			0.5	%		25,308		0.6	%		17,432		0.5	%
Write-off of acquired in-process technology		—			—			—		—			225,600		6.9	%
Restructuring and other		35,467			1.1	%		6,728		0.2	%		—		—
Total operating expenses		2,036,567			60.8	%		926,205		23.8	%		913,139		28.0	%
Operating income (loss)		(1,973,480	)		(58.9	)%		276,514		7.1	%		326,334		10.0	%
Other income		70,446			2.1	%		121,902		3.1	%		104,374		3.2	%
Income (loss) before provision for taxes		(1,903,034	)		(56.8	)%		398,416		10.2	%		430,708		13.2	%
Provision for income taxes		153,742			4.6	%		174,848		4.5	%		230,193		7.1	%
Minority interest		—			—			5,211		0.1	%		1,619		—
Net income (loss)	$	(2,056,776	)		(61.4	)%	$	218,357		5.6	%	$	198,896		6.1	%

General

We are the inventor of and worldwide leader in NAND-based flash storage cards. Our mission is to provide simple, reliable and affordable storage for consumer use in portable devices. We sell SanDisk branded products for consumer electronics through broad global retail and OEM distribution channels.

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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 generally price elastic. Accordingly, we expect that as we reduce the price of our flash devices, consumers will demand an increasing number of gigabytes and/or units of memory and that over time, new markets will emerge. In order to profitably capitalize on price elasticity of demand in the market for flash storage products, we must reduce our cost per gigabyte at a rate similar to the change in selling price per gigabyte, and the average capacity of our products must grow enough to offset price declines. We seek to achieve these cost reductions through technology improvements, primarily by increasing the amount of memory stored in a given area of silicon.

We adopted Statement of Financial Accounting Standards No. 157, or SFAS 157, Fair Value Measurements, as of the beginning of fiscal year 2008. In February 2008, the Financial Accounting Standards Board, or FASB, issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157, which provides a one year deferral of the effective date of SFAS 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. Therefore, we have only adopted the provisions of SFAS 157 with respect to our financial assets and liabilities. SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under SFAS 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. The adoption of this statement did not have a material impact on our consolidated results of operations and financial condition. See Note 3, “Investments and Fair Value Measurements,” of the Notes to Consolidated Financial Statements of this Form 10-K included in Item 8 of this report.

We adopted Statement of Financial Accounting Standards No. 159, or SFAS 159, Establishing the Fair Value Option for Financial Assets and Liabilities, which permits entities to elect, at specified election dates, to measure eligible financial instruments at fair value. As of December 28, 2008, we did not elect the fair value option for any financial assets and liabilities that were not previously measured at fair value. See Note 3, “Investments and Fair Value Measurements,” of the Notes to Consolidated Financial Statements of this Form 10-K included in Item 8 of this report.

The provision for income taxes for the year ended December 28, 2008, has been corrected to $153.7 million from $166.8 million as reported in our Form 8-K filed with the Securities and Exchange Commission on February 2, 2009. This correction has correspondingly reduced our net loss and net loss per share for fiscal year 2008 and adjusted net assets at December 28, 2008.

Critical Accounting Policies & Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP.

Use of Estimates. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an ongoing basis, we evaluate our estimates, including, among others, those related to customer programs and incentives, product returns, bad debts, inventories and related reserves, investments, long-lived assets, income taxes, warranty obligations, restructuring, contingencies, share-based compensation, and litigation. We base our estimates on historical experience and on other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for our judgments about the carrying values of assets and liabilities when those values are not readily apparent from other sources. Estimates have historically approximated actual results. However, future results will differ from these estimates under different assumptions and conditions.

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Valuation of Long-Lived Assets, Intangible Assets and Goodwill. In accordance with Statement of Financial Accounting Standards No. 144, or SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we perform tests for impairment of long-lived assets whenever events or circumstances suggest that other long-lived assets may not be recoverable. This analysis differs from our goodwill analysis in that an impairment is only deemed to have occurred if the sum of the forecasted undiscounted future cash flows related to the assets are less than the carrying value of the asset we are testing for impairment. If the forecasted cash flows are less than the carrying value, then we must write down the carrying value to its estimated fair value based primarily upon forecasted discounted cash flows. We recorded impairments of certain acquisition-related amortizable intangible assets of $176 million in fiscal year 2008 based primarily upon forecasted discounted cash flows. In addition, we recorded impairments of our investments in Flash Partners and Flash Alliance of $83 million in fiscal year 2008 based primarily upon forecasted discounted cash flows. These forecasted discounted cash flows include estimates and assumptions related to revenue growth rates and operating margins, risk-adjusted discount rates based on our weighted average cost of capital, future economic and market conditions and determination of appropriate market comparables. Our estimates of market segment growth and our market segment share and costs are based on historical data, various internal estimates and certain external sources, and are based on assumptions that are consistent with the plans and estimates we are using to manage the underlying business. Our business consists of both established and emerging technologies and our forecasts for emerging technologies are based upon internal estimates and external sources rather than historical information. If future forecasts are revised, they may indicate or require future impairment charges. We base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates.

We perform our annual impairment analysis of goodwill on the first day of the fourth quarter of each year, or more often if there are indicators of impairment present. The provisions of Statement of Financial Accounting Standards No. 142, or SFAS 142, Goodwill and Other Intangible Assets, require that a two-step impairment test be performed on goodwill. In the first step, or Step 1, we compare our fair value to our carrying value. If the fair value exceeds the carrying value of the net assets, goodwill is considered not impaired and we are not required to perform further testing. If the carrying value of the net assets exceeds the fair value, then we must perform the second step, or Step 2, of the impairment test in order to determine the implied fair value of goodwill. If the carrying value of goodwill exceeds its implied fair value, then we would record an impairment loss equal to the difference. To determine the fair value used in Step 1, we use our market capitalization based upon our quoted closing stock price per NASDAQ, including an estimated control premium that an investor would be willing to pay for a controlling interest in us. The determination of a control premium requires the use of judgment and is based primarily on comparable industry and deal-size transactions, related synergies and other benefits. When we are required to perform a Step 2 analysis, determining the fair value of our net assets and our off-balance sheet intangibles used in Step 2 requires us to make judgments and involves the use of significant estimates and assumptions. We performed our annual impairment test on the first day of the fourth quarter of fiscal year 2008 and determined that the goodwill was not impaired. However, based on a combination of factors, including the economic environment, our current and forecasted operating results, NAND-industry pricing conditions and a sustained decline in our market capitalization, we concluded that there were sufficient indicators to require us to perform an interim goodwill impairment analysis during the fourth quarter of fiscal year 2008 and we recognized an impairment charge of $845.5 million.

Revenue Recognition, Sales Returns and Allowances and Sales Incentive Programs. We recognize revenues when the earnings process is complete, as evidenced by an agreement with the customer, transfer of title and acceptance, if applicable, fixed pricing and reasonable assurance of realization. Sales made to distributors and retailers are generally under agreements allowing price protection and/or right of return and, therefore, the sales and related costs of these transactions are deferred until the retailers or distributors sell the merchandise to their end customer, or the rights of return expire. At December 28, 2008 and December 30, 2007, deferred income from sales to distributors and retailers was $75.7 million and $167.3 million, respectively. Estimated sales returns are provided for as a reduction to product revenue and deferred revenue and were not material for any period presented in our Consolidated Financial Statements.

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We record estimated reductions to revenue or to deferred revenue for customer and distributor incentive programs and offerings, including price protection, promotions, co-op advertising, and other volume-based incentives and expected returns. Additionally, we have incentive programs that require us to estimate, based on historical experience, the number of customers who will actually redeem the incentive. All sales incentive programs are recorded as an offset to product revenues or deferred revenues. In calculating the value of sales incentive programs, 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. In addition, actual returns and rebates in any future period could differ from our estimates, which could impact the revenue we report.

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. The determination of market value involves numerous judgments including estimating average selling prices based upon recent sales, industry trends, existing customer orders, current contract prices, industry analysis of supply and demand and seasonal factors. Should actual market conditions differ from our estimates, our future results of operations could be materially affected. The valuation of inventory also requires us to estimate obsolete or excess inventory. The determination of obsolete or excess inventory requires us to estimate the future demand for our products within specific time horizons, generally six to twelve months. To the extent our demand forecast for specific products is less than both our product on-hand and on noncancelable orders, we could be required to record additional 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 are variable interest entities within the definition of the FASB Interpretation No. 46R, or FIN 46R, Accounting for Variable Interest Entities. If those entities are variable interest entities, or VIEs, we then determine whether we are the primary beneficiary of that entity by reference to our contractual and business arrangements with respect to expected gains and losses. The assessment of the primary beneficiary includes an analysis of the forecast and contractual stipulations of the VIE. Determining whether we would consolidate or apply the equity method to a particular VIE requires review of the VIE’s forecast, which involves analysis 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, gross margin and operating income trends.

Deferred Tax Assets. We must make certain estimates in determining income tax expense for financial statement purposes. These estimates occur in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. In determining the need for and amount of our valuation allowance, we assess the likelihood that we will be able to recover our deferred tax assets using historical levels of income, estimates of future income and tax planning strategies. We have incurred cumulative losses in recent years and determined in the fourth quarter of fiscal year 2008, based on all available evidence, that there was substantial uncertainty as to the realizability of the deferred tax assets in future periods and accordingly we recorded a valuation allowance against a significant portion of our U.S. and certain foreign net 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 other estimates. There is no assurance that domestic or international tax authorities will agree with the tax positions we have taken which could materially impact future results.

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Results of Operations

Product Revenues.

	FY 2008		Percent Change			FY 2007		Percent Change			FY 2006
	(in millions, except percentages)
Retail	$	1,812.9		(16	)%	$	2,162.5		9	%	$	1,975.5
OEM		1,030.3		(20	)%		1,283.6		35	%		951.0
Product revenues	$	2,843.2		(17	)%	$	3,446.1		18	%	$	2,926.5

The decrease in our fiscal year 2008 product revenues compared to fiscal year 2007 reflected a 62% reduction in average selling price per gigabyte, partially offset by a 125% increase in the number of gigabytes sold, which reflected 15% growth in memory product units sold and 96% growth in average capacity. The decline in retail product revenues in fiscal year 2008 compared to fiscal year 2007 was due to aggressive price declines partially offset by a 116% increase in gigabytes sold. The decline in original equipment manufacturer, or OEM, product revenues in fiscal year 2008 compared to fiscal year 2007 was due to aggressive price declines, partially offset by a 135% increase in gigabytes sold, and the discontinuation of TwinSys Data Storage Limited Partnership, or TwinSys, operations on March 31, 2007, which contributed $53 million of product revenues in the first quarter of fiscal year 2007 prior to ceasing operations. We believe the unit growth of 15% in fiscal year 2008 was below the 75% unit growth in fiscal year 2007 due primarily to deteriorating worldwide economic conditions.

The increase in our fiscal year 2007 product revenues was comprised of a 190% increase in the number of gigabytes sold, partially offset by a 60% reduction in average selling price per gigabyte. Our unit sales increased 75% compared to fiscal year 2006 with the strongest unit growth coming from cards for mobile phones. OEM revenue 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 of USB flash drives.

Geographical Product Revenues.

	FY 2008					FY 2007					FY 2006
	Revenue		Percent of Total			Revenue		Percent of Total			Revenue		Percent of Total
	(in millions, except percentages)
United States	$	1,006.7		35	%	$	1,193.6		35	%	$	1,259.8		43	%
Asia-Pacific		834.8		29	%		944.7		27	%		649.5		22	%
Europe, Middle East and Africa		752.6		27	%		889.7		26	%		728.4		25	%
Japan		178.3		6	%		283.8		8	%		194.0		7	%
Other foreign countries		70.8		3	%		134.3		4	%		94.8		3	%
Product revenues	$	2,843.2		100	%	$	3,446.1		100	%	$	2,926.5		100	%

Product revenues in fiscal year 2008 compared to fiscal year 2007 decreased in all geographical regions due to aggressive industry price declines partially offset by unit sales growth in all regions except Japan. Revenue and unit sales in Japan declined on a year over year basis due to lower sales of OEM USB drives and cards, and the discontinuation of TwinSys operations on March 31, 2007, which contributed $53 million of product revenues in the first quarter of fiscal year 2007 prior to ceasing operations.

In fiscal year 2007, revenue growth was strong in both APAC and EMEA primarily as a result of increased sales 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 our msystems acquisition in November 2006. Unit sales in the U.S. increased 41% over fiscal year 2006; however total revenues in the U.S. were lower by 2% due primarily to aggressive price reductions in fiscal year 2007.

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License and Royalty Revenues.

	FY 2008		Percent Change			FY 2007		Percent Change			FY 2006
	(in millions, except percentages)
License and royalty revenues	$	508.1		13	%	$	450.2		36	%	$	331.1

The increase in our fiscal year 2008 license and royalty revenues was primarily due to the addition of new licensees.

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

Gross Margins.

	FY 2008			Percent Change			FY 2007			Percent Change			FY 2006
	(in millions, except percentages)
Product gross profit (loss)	$	(445.0	)		(159	)%	$	752.5			(17	)%	$	908.4
Product gross margins (as a percent of product revenue)		(15.7	)%					21.8	%					31.0	%
Total gross margins (as a percent of total revenue)		1.9	%					30.9	%					38.0	%

Product gross margins in fiscal year 2008 decreased 37.5 percentage points compared to fiscal year 2007 primarily due to aggressive industry price declines resulting in the sale of products at negative gross margins and related charges. The related charges in fiscal year 2008 included:

-	Inventory reserves primarily to reduce the carrying value to the lower-of-cost-or-market for both inventory on-hand and in the channel of $394 million.

-	Charges of $121 million for adverse purchase commitments associated with under-utilization of Flash Ventures capacity for the 90-day period in which we have non-cancellable orders.

-	Impairment in our investments in Flash Partners and Flash Alliance of $83 million.

Amortization expense of acquisition-related intangible assets is expected to decline in fiscal year 2009 primarily due to impairments recorded in fiscal year 2008.

In fiscal years 2008, 2007 and 2006, we sold $27 million, $13 million and $14 million, respectively, of inventory that had been fully written-off in previous periods.

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

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Research and Development.

	FY 2008			Percent Change			FY 2007			Percent Change			FY 2006
	(in millions, except percentages)
Research and development	$	429.9			3	%	$	418.1			36	%	$	306.9
Percent of revenue		12.8	%					10.7	%					9.4	%

Our fiscal year 2008 research and development expense growth was primarily due to an increase in payroll, payroll-related expenses and headcount-related expenses of approximately $21 million, an increase in consulting and material and equipment costs of $6 million, partially offset by lower share-based compensation expense of ($10) million and lower Flash Venture related costs of ($7) million. The growth in fiscal year 2008 research and development expense reflects parallel investment in NAND X2, X3 and X4 storage technologies, and 3D Read/Write memory architecture technology.

Our fiscal year 2007 research and development expense growth was primarily due to an increase in payroll and payroll-related expenses of $43 million associated with headcount growth and our acquisition of msystems, higher consultant 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, in fiscal year 2007 we recognized Flash Alliance start-up costs of $18 million.

Sales and Marketing.

	FY 2008			Percent Change			FY 2007			Percent Change			FY 2006
	(in millions, except percentages)
Sales and marketing	$	328.1			11	%	$	294.6			45	%	$	203.4
Percent of revenue		9.8	%					7.6	%					6.3	%

Our fiscal year 2008 sales and marketing expense growth over the comparable period in fiscal year 2007 was primarily due to increased branding and merchandising costs of $34 million and increased employee-related costs of $13 million, partially offset by lower share-based compensation expense of ($12) million. The growth in branding and merchandising and employee-related costs primarily reflected expansion of our international sales channels. Due to our restructuring activities in the fourth quarter of fiscal year 2008, we anticipate that our sales and marketing expenses will be lower in fiscal year 2009 than in fiscal year 2008. For further discussion, see “Restructuring Charges and Other” below.

Our fiscal year 2007 sales and marketing expense growth included increased advertising and promotional costs on 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 increased headcount and our acquisition of msystems in November 2006.

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General and Administrative.

	FY 2008			Percent Change			FY 2007			Percent Change			FY 2006
	(in millions, except percentages)
General and administrative	$	204.8			13	%	$	181.5			14	%	$	159.8
Percent of revenue		6.1	%					4.7	%					4.9	%

Our fiscal year 2008 general and administrative expense growth over the comparable period in fiscal year 2007 was primarily related to increased legal and outside advisor costs of $30 million and bad debt expense of $5 million, partially offset by lower share-based compensation costs of ($9) million and payroll and employee-related costs of ($3) million. Our legal and outside advisor costs increased in fiscal year 2008 as compared to fiscal year 2007 primarily due to increased patent and anti-trust litigation expenses as well as expenses incurred in connection with strategic initiatives. Due to our restructuring activities in the fourth quarter of fiscal year 2008, we expect that our general and administrative payroll and employee-related expenses will be lower in fiscal year 2009 than in fiscal year 2008. For further discussion, see “Restructuring Charges and Other” below.

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 our acquisition of msystems in November 2006.

Impairment of Goodwill.

FY 2008

Percent Change

FY 2007

Percent Change

FY 2006

(in millions, except percentages)

Impairment of goodwill

845.5

100

n/a

—

n/a

Percent of revenue

25.2

n/a

In accordance with SFAS 142, goodwill is not amortized, but instead is reviewed and tested for impairment at least annually and whenever events or circumstances occur which indicate that goodwill might be impaired. We performed our annual impairment test on the first day of the fourth quarter of fiscal year 2008 and determined that the goodwill was not impaired. However, based on a combination of factors, including the economic environment, current and forecasted operating results, NAND-industry pricing conditions and a sustained decline in our market capitalization, we concluded that there were sufficient indicators to require an interim goodwill impairment analysis during the fourth quarter of fiscal year 2008 and we recognized an impairment charge of $845.5 million.

Impairment of Acquisition-Related Intangible Assets.

FY 2008

Percent Change

FY 2007

Percent Change

FY 2006

(in millions, except percentages)

Impairment of acquisition-related intangible assets

175.8

100

n/a

—

n/a

Percent of revenue

5.3

n/a

In accordance with SFAS 144, we recorded a $176 million impairment on acquisition-related intangible assets in the fourth quarter of fiscal year 2008. This impairment was based upon forecasted discounted cash flows which considered factors including a reduced business outlook primarily due to NAND-industry pricing conditions.

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Amortization of Acquisition-Related Intangible Assets.

	FY 2008			Percent Change			FY 2007			Percent Change			FY 2006
	(in millions, except percentages)
Amortization of acquisition-related intangible assets	$	17.1			(32	)%	$	25.3			45	%	$	17.4
Percent of revenue		0.5	%					0.6	%					0.5	%

Amortization of acquisition-related intangible assets in fiscal year 2008 compared to fiscal year 2007 was lower due to intangible assets that were fully amortized in fiscal year 2007. Our expense from the amortization of acquisition-related intangible assets was primarily related to our acquisitions of Matrix in January 2006 and msystems in November 2006. Amortization expense of acquisition-related intangible assets is expected to decline in fiscal year 2009 primarily due to impairments recorded in fiscal year 2008.

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

Write-off of Acquired In-Process Technology.

FY 2008

Percent Change

FY 2007

Percent Change

FY 2006

(in millions, except percentages)

Write-off of acquired in-process technology

n/a

—

n/a

—

225.6

Percent of revenue

n/a

6.9

As part of the Matrix acquisition in the first quarter of fiscal year 2006 and the msystems acquisition in the fourth 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 at the date of acquisition because technological feasibility had not been established and no alternative future uses existed. The value was determined by estimating the net cash flows and discounting forecasted net cash flows to their present values. As of December 28, 2008, we estimated that the remaining in-process projects related to the msystems acquisition would be completed over the next two quarters at an estimated total cost of $4 million. As of December 28, 2008, all in-process projects related to the Matrix acquisition were completed.

Restructuring Charges and Other.

	FY 2008			Percent Change			FY 2007			Percent Change			FY 2006
	(in millions, except percentages)
Restructuring and other	$	35.5			430	%	$	6.7			100	%		n/a
Percent of revenue		1.1	%					0.2	%					n/a

During fiscal years 2008 and 2007, we implemented several restructuring plans which included reductions of our workforce and consolidation of operations. We recorded restructuring charges and other of $36 million and $7 million in fiscal years 2008 and 2007, respectively. The goal of these restructuring and other charges was to bring our operational expenses to appropriate levels relative to our net revenues, while simultaneously implementing extensive company-wide expense-control programs. All expenses, including adjustments, associated with our restructuring plans are included in Restructuring Charges and Other in the Consolidated Statements of Operations. For further discussion of our restructuring plans, refer to Note 10, “Restructuring Plans,” of the Notes to Consolidated Financial Statements of this Form 10-K included in Item 8 of this report.

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Fiscal 2008 Restructuring and Other

We recorded restructuring and other charges of $36 million for plans implemented in fiscal year 2008. Of these charges, $15 million related to severance and benefits for employee reductions worldwide and $21 million related to marketing contract termination costs, technology license impairments and fixed asset impairments related to outsourcing certain manufacturing activities. In addition, restructuring and other charges include an accrual for unrelated litigation settlements.

We expect to reduce our annual cost and operating expenses by approximately $53 million as a result of our fiscal year 2008 restructuring plans. Approximately 19%, 33%, 31% and 17% of the restructuring cost savings related to the fiscal year 2008 restructuring plans are expected to be reflected as a reduction in cost of revenues, research and development expense, sales and marketing expense, and general and administrative expense, respectively.

Fiscal 2007 Restructuring

In the first quarter of fiscal year 2007, management approved and initiated plans to bring our operational expenses to appropriate levels relative to our net revenues, while simultaneously implementing extensive company-wide expense-control programs. This restructuring plan eliminated certain duplicative assets and resources in all functions of the organization worldwide due to consolidating certain processes in order to reduce our cost structure, which resulted in a charge of $7 million in fiscal year 2007.

Other Income.

	FY 2008			Percent Change			FY 2007			Percent Change			FY 2006
	(in millions, except percentages)
Interest income	$	94.4			(29	)%	$	133.4			32	%	$	101.1
Interest expense		(16.5	)		(2	)%		(16.9	)		59	%		(10.6	)
Income (loss) in equity investments		(39.6	)		300	%		(9.9	)		(248	)%		6.7
Other income, net		32.1			110	%		15.3			113	%		7.2
Total other income, net	$	70.4			(42	)%	$	121.9			17	%	$	104.4

Our fiscal year 2008 other income decrease compared to fiscal year 2007 was primarily due to lower interest income in fiscal year 2008 reflecting reduced interest rates and lower cash and investment balances, impairment of our equity investment in Tower of ($19) million, and an impairment of our investment in FlashVision of ($10) million.

Our fiscal year 2007 other income increase over the comparable period of fiscal year 2006 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 in May 2006 and the acquired msystems’ $75 million debt offering, and an impairment charge of ($10) million to the wind-down of our FlashVision investment included in “Income (loss) in equity investments.”

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Provision for Income Taxes.

		FY 2008			Percent Change			FY 2007			Percent Change			FY 2006
	(in millions, except percentages)
Provision for income taxes		$	153.7			(12	)%	$	174.8			(24	)%	$	230.2
Effective income tax rates			(8.1	)%					43.9	%					53.5	%

Our fiscal year 2008 provision for income taxes was an expense of $154 million with a negative effective tax rate of 8.1%. This is primarily due to the non-deductibility of the goodwill impairment charge and a valuation allowance recorded on certain U.S. and foreign gross deferred tax assets. The valuation allowance significantly increased due primarily to the size of the fiscal year 2008 net loss and that it is not more likely than not that certain U.S. and foreign deferred tax assets will be realized in the future. Fiscal year 2007 had a provision for income taxes of $175 million and an effective tax rate of 43.9%, which was higher than the statutory rate primarily due to non-deductible share-based compensation expenses and certain foreign losses partially offset by foreign earnings taxed at other than U.S. rates and tax-exempt interest.

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

Our reserve for unrecognized tax benefits related to FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, increased by $69 million and $46 million in fiscal years 2008 and 2007, respectively.

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Liquidity and Capital Resources

Cash Flows. Our cash flows were as follows:

	FY 2008		Percent Change			FY 2007			Percent Change			FY 2006
	(in millions, except percentages)
Net cash provided by operating activities	$	86.8		(87	)%	$	652.9			9	%	$	598.1
Net cash provided by (used in) investing activities		29.3		102	%		(1,218.4	)		(25	)%		(978.1	)
Net cash provided by (used in) financing activities		11.9		107	%		(181.0	)		(115	)%		1,197.3
Effect of changes in foreign currency exchange rates on cash		0.3		160	%		(0.5	)		(138	)%		1.3
Net increase (decrease) in cash and cash equivalents	$	128.3		117	%	$	( 747.0	)		(191	)%	$	818.6

Operating Activities. Cash provided by operating activities is generated by net income (loss) adjusted for certain non-cash items and changes in assets and liabilities. Cash provided by operations was $87 million for fiscal year 2008 as compared to cash provided by operations of $653 million for fiscal year 2007. The decline in cash provided by operations in fiscal year 2008 compared to fiscal year 2007 resulted primarily from our net loss of $2.06 billion offset by non-cash impairments. Cash flow from accounts receivable in fiscal year 2008 was positively impacted by increased collection efforts and by reduced product accounts receivable levels as compared with the prior year period. The increase in inventory was related primarily to the expansion of capacity and production at Flash Alliance and Flash Partners while revenue from our products declined from fiscal year 2007 to fiscal year 2008. The increase in other assets was due to the increase in tax receivables related to tax refunds expected on carryback claims due to the fiscal year 2008 net loss. Within operating activities for fiscal year 2008, there was an increase in cash provided primarily related to an increase in related parties payables due to timing of Flash Ventures payments at fiscal year 2008 year end, an increase in other liabilities related to Flash Ventures capacity under utilization accrual, timing of the cash settlement of outstanding hedge contracts, and lower deferred income on shipments to distributors and retailers related to lower revenue levels.

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 in accounts receivable and increases in accounts payable trade and accounts payable to related parties, which were partially offset by increases in inventory and other assets and a decrease in other liabilities.

Investing Activities. Cash provided from investing activities for fiscal year 2008 was $29 million as compared to cash used in investing activities of $1.12 billion in fiscal year 2007. The increase in cash provided from investing was primarily related to reduced purchases of short and long-term investments due to our higher liquidity requirements and the return of $103 million on our investment in FlashVision and $40 million from the sale of 200-millimeter fab equipment that we owned directly as compared to the return of $38 million from FlashVision in the fiscal year 2007. Usage of cash for investments in and loans to Flash Partners and Flash Alliance was $384 million in fiscal year 2008 compared to $651 million in fiscal year 2007.

We used $1.22 billion for investing activities during the fiscal year ended December 30, 2007. Purchases of short and long-term investments, net of proceeds from sales and maturities of short-term investments, totaled $318 million. Capital expenditures for the year were $259 million and investments and notes to FlashVision, Flash Partners and Flash Alliance were $613 million, net of repayments.

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Financing Activities. Net cash provided by financing activities for fiscal year 2008 of $12 million as compared to cash used in financing activities of $181 million in fiscal year 2007 was primarily related to lower cash proceeds from employee stock programs and repayment of debt financing in fiscal year 2008 offset by the termination of the share repurchase programs which used cash in fiscal year 2007.

We used $181 million of cash for financing activities during the fiscal year ended December 30, 2007 comprised primarily of $300 million to purchase treasury shares pursuant to our share repurchase program, partially offset by cash received from exercises of share-based awards of $100 million. Additionally, during the fiscal year ended December 30, 2007, we received a tax benefit of $18 million on employee stock programs.

Liquid Assets. At December 28, 2008, we had cash, cash equivalents and short-term investments of $1.44 billion. We have $1.10 billion of long-term investments which we believe are also liquid assets, but are classified as long-term investments due to the remaining maturity of the investment being greater than one year.

Short-Term Liquidity. As of December 28, 2008, our working capital balance was $1.44 billion. We expect our loans to and investments in Flash Ventures as well as our investments in property, plant and equipment to be approximately $0.5 billion in fiscal year 2009.

Our short-term liquidity is impacted in part by our ability to maintain compliance with covenants in the outstanding Flash Ventures master lease agreements. The Flash Ventures master lease agreements contain customary covenants for Japanese lease facilities as well as an acceleration clause for certain events of default related to us as guarantor, including, among other things, our failure to maintain a minimum shareholder equity of at least $1.51 billion, and our failure to maintain a minimum corporate rating of BB- from Standard & Poors, or S&P, or Moody’s Corporation, or a minimum corporate rating of BB+ from Rating & Investment Information, Inc., or R&I. As of December 28, 2008, Flash Ventures was in compliance with all of its master lease covenants. While our S&P credit rating was B, two levels below the required minimum corporate rating threshold from S&P, our R&I credit rating was BBB-, one level above the required minimum corporate rating threshold from R&I.

On February 4, 2009, R&I confirmed our credit rating at BBB- with a change in outlook from stable to negative. If R&I were to downgrade our credit rating below the minimum corporate rating threshold, Flash Ventures would become non-compliant with certain covenants under its master equipment lease agreements and would be required to negotiate a resolution to the non-compliance to avoid acceleration of the obligations under such agreements. Such resolution could include, among other things, supplementary security to be supplied by us, as guarantor, or increased interest rates or waiver fees, should the lessors decide they need additional collateral or financial consideration under the circumstances. If a resolution was unsuccessful, we could be required to pay a portion or the entire outstanding lease obligations covered by our guarantee under such Flash Ventures master lease agreements of up to $2.09 billion, based upon the exchange rate at December 28, 2008, which could negatively impact our short-term liquidity.

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

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Financing Arrangements. At December 28, 2008, we had $1.23 billion of aggregate principal amount in convertible notes outstanding, consisting of $1.15 billion in aggregate principal amount of our 1% Senior Convertible Notes due 2013 and $75.0 million in aggregate principal amount of our 1% Convertible Notes due 2035. Our 1% Convertible Notes due 2035 may be redeemed in whole or in part by the holders thereof at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest on March 15, 2010 and various dates thereafter.

Concurrent with the issuance of the 1% Senior Convertible Notes due 2013, we sold warrants to acquire shares of our common stock at an exercise price of $95.03 per share. As of December 28, 2008, the warrants had an expected life of approximately 4.6 years and expire in August 2013. At expiration, we may, at our option, elect to settle the warrants on a net share basis. As of December 28, 2008, the warrants had not been exercised and remain outstanding. In addition, counterparties agreed to sell to us up to approximately 14.0 million shares of our common stock, which is the number of shares initially issuable upon conversion of the 1% Senior Convertible Notes due 2013 in full, at a conversion price of $82.36 per share. The convertible bond hedge transaction will be settled in net shares and will terminate upon the earlier of the maturity date of the 1% Senior Convertible Notes due 2013 or the first day that none of the 1% Senior Convertible Notes due 2013 remain outstanding due to conversion or otherwise. Settlement of the convertible bond hedge in net shares on the expiration date would result in us receiving net shares equivalent to the number of shares issuable by us upon conversion of the 1% Senior Convertible Notes due 2013. As of December 28, 2008, we had not purchased any shares under this convertible bond hedge agreement. See Note 7, “Financing Arrangements,” of the Notes to Consolidated Financial Statements of this Form 10-K included in Item 8 of this report.

Flash Partners and Flash Alliance Ventures with Toshiba. We are a 49.9% percent owner in both Flash Partners and Flash Alliance, or hereinafter referred to as Flash Ventures, our business ventures with Toshiba to develop and manufacture NAND flash 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. This equipment is funded or will be funded by investments in or loans to the Flash Ventures from us and Toshiba as well as through operating leases received by Flash Ventures from third-party banks and guaranteed by us and Toshiba. Flash Ventures 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 or to pay for 50% of the fixed costs of Flash Ventures. We are not able to estimate our total wafer purchase obligations beyond our rolling three month purchase commitment because the price is determined by reference to the future cost to produce the wafers. See Note 14, “Related Parties and Strategic Investments,” of the Notes to Consolidated Financial Statements of this Form 10-K included in Item 8 of this report.

The cost of the wafers we purchase from Flash Ventures is recorded in inventory and ultimately cost of product revenues. Flash Ventures are variable interest entities; however, we are not the primary beneficiary of these ventures because we are entitled to less than a majority of expected gains and losses with respect to each venture. Accordingly, we account for 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 product development and our common semiconductor research and development activities. As of December 28, 2008, we had accrued liabilities related to those common research and development expenses of $4.0 million. Our common research and development obligation related to Flash Ventures is variable based on an annual forecasted joint research and development costs as mutually agreed upon by us and Toshiba. In addition to general NAND product development and common semiconductor research performed by Toshiba, both parties perform direct research and development activities specific to Flash Ventures, and our contribution is based on a variable computation. We and Toshiba each pay the cost of our own design teams and 50% of the wafer processing and similar costs associated with this direct design and development of flash memory.

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For semiconductor fixed assets that are leased by Flash Ventures, we and/or Toshiba jointly guarantee on an unsecured and several basis, 50% of the outstanding Flash Ventures’ lease obligations under master lease agreements entered into from December 2004 through December 2008. These master lease obligations are denominated in Japanese yen and are noncancelable. Our total master lease obligation guarantee, net of lease payments, as of December 28, 2008, was 189.4 billion Japanese yen, or approximately $2.09 billion based upon the exchange rate at December 28, 2008.

From time-to-time, we and Toshiba mutually approve increases in the wafer supply capacity of Flash Ventures that may contractually obligate us to increase capital funding. As of December 28, 2008, Flash Partners’ Fab 3 had reached full capacity of approximately 150,000 wafers per month; however, we expect to continue to invest in Flash Partners in order to convert to future technology nodes. The capacity of Flash Alliance’s Fab 4 at full expansion is expected to be approximately 210,000 wafers per month, and the timeframe to reach full capacity is to be mutually agreed upon by both parties. In fiscal year 2008, Fab 4 was ramped to more than 50% of this estimated full capacity. We are currently not investing in further capacity expansion of Fab 4 as weak macroeconomic conditions coupled with the growth of our NAND supply base have resulted in us carrying excess inventory. During the remainder of fiscal year 2009, we expect to invest approximately $425 million in Flash Ventures primarily for future technology nodes, which we expect will be funded through additional investments and loans to Flash Ventures, and working capital contributions from Flash Ventures.

On January 29, 2009, we entered into definitive agreements with Toshiba, under which we and Toshiba agreed to restructure Flash Partners and Flash Alliance to provide for the acquisition by Toshiba of certain production capacity in connection with the production of NAND flash memory products at the facilities. The agreements specify the terms and conditions under which each flash venture has agreed to sell to Toshiba more than 20% of its current production capacity through the acquisition by Toshiba of certain owned and leased equipment. The total value of the restructuring transaction to us is approximately $890 million based upon the exchange rate as of January 29, 2009. Approximately one-third of this value will be in cash paid to us and approximately two-thirds of this value represents a transfer of lease obligations to Toshiba which should reduce our outstanding lease obligations and associated lease guarantees by approximately 28%. These transactions are expected to occur at several closings between January 30, 2009 and March 31, 2009, subject to certain closing conditions and contingencies.

FlashVision Venture with Toshiba. In the second quarter of fiscal year 2008, we and Toshiba determined that production of NAND flash memory products utilizing 200-millimeter wafers was no longer cost effective relative to market prices for NAND flash memory and decided to wind-down the FlashVision venture. As part of the ongoing wind-down of FlashVision, Toshiba purchased certain assets of FlashVision. The existing master equipment lease agreement between FlashVision and a consortium of financial institutions has been retired, thereby releasing us from our contingent indemnification obligation with Toshiba. Due to the wind-down qualifying as a reconsideration event under FIN 46R, we re-evaluated and concluded that FlashVision is no longer a variable interest entity within the scope of FIN 46R. In fiscal year 2008, we received distributions of $103 million, relating to our investment in FlashVision. We took impairment charges of $10 million in the fourth quarter of fiscal year 2007 and $10 million in the third quarter of fiscal year 2008 due to FlashVision’s difficulty in selling the remaining excess capital equipment due to deteriorating market conditions for equipment related to the production of 200-millimeter NAND-based flash memory products. At December 28, 2008, we had a net investment in FlashVision of $64 million denominated in Japanese yen, offset by $43 million of cumulative translation adjustments recorded in accumulated OCI within Stockholder’s Equity of the Consolidated Balance Sheets.

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Contractual Obligations and Off-Balance Sheet Arrangements

Our contractual obligations and off-balance sheet arrangements at December 28, 2008, and the effect those contractual obligations are expected to have on our liquidity and cash flow over the next five years are presented in textual and tabular format in Note 13, “Commitments, Contingencies and Guarantees,” of the Notes to Consolidated Financial Statements of this Form 10-K 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 results of operations. Our most significant foreign currency exposure is to the Japanese yen in which we purchase the vast majority of our NAND flash wafers. In addition, we also have significant costs denominated in the Chinese renminbi, or RMB, and the Israeli New shekel, or ILS. We do not enter into derivatives for speculative or trading purposes. In fiscal years 2008 and 2007, we used foreign currency forward contracts to mitigate transaction gains and losses generated by certain monetary assets and liabilities denominated in currencies other than the U.S. dollar. In addition, in fiscal year 2008, we used foreign currency forward contracts and options to partially hedge our future Japanese yen costs for NAND flash wafers. Our derivative instruments are recorded at fair value in assets or liabilities with final gains or losses recorded in other income (expense) or as a component of accumulated OCI and subsequently reclassified into cost of product revenues in the same period or periods in which the cost of product revenues is recognized. See Note 6, “Derivatives and Hedging Activities,” of the Notes to Consolidated Financial Statements of this Form 10-K included in Item 8 of this report.

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,” of the Notes to Consolidated Financial Statements of this Form 10-K included in Item 8 of this report.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest Rate Risk. Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. The primary objective of our investment activities is to preserve principal while maximizing yields without significantly increasing risk. This is accomplished by investing in widely diversified investment grade marketable securities. As of December 28, 2008, a hypothetical 50 basis point increase in interest rates would result in an approximate $11 million decline (less than 0.71%) in the fair value of our available-for-sale debt securities.

Foreign Currency Risk. The majority of our revenues are transacted in the U.S. dollar, with some revenues transacted in the Euro, the Great British pound, and the Japanese yen. Our flash memory costs, which represent the largest portion of our cost of revenues, are denominated in the Japanese yen. We also have some cost of revenues denominated in RMB. The majority of our operating expenses are denominated in the U.S. dollar, however, we have expenses denominated in ILS and numerous other currencies. On the balance sheet, we have numerous foreign currency denominated monetary assets and liabilities, with the largest monetary exposure being our notes receivable from the Flash Ventures, which are denominated in the Japanese yen.

We enter into foreign currency forward contracts to hedge the gains or losses generated by the remeasurement of our significant foreign currency denominated monetary assets and liabilities. The fair value of these contracts is reflected as other current assets or other current liabilities and the change in fair value of these balance sheet hedge contracts is recorded into earnings as a component of other income (expense) to largely offset the change in fair value of the foreign currency denominated monetary assets and liabilities which is also recorded in other income (expense).

We use foreign currency forward contracts and option contracts to partially hedge our future Japanese yen flash memory costs. These contracts are designated as cash flow hedges and are carried on our balance sheet at fair value with the effective portion of the contracts’ gains or losses included in accumulated OCI and subsequently recognized in cost of product revenues in the same period the hedged cost of product revenues is recognized.

At December 28, 2008 we had foreign currency forward exchange contracts in place that amounted to a net sale in U.S. dollar equivalent of approximately $577 million in foreign currencies to hedge our foreign currency denominated monetary net asset position. The maturities of these contracts were 3 months or less.

At December 28, 2008 we had foreign currency forward exchange contracts and option contracts in place that amounted to a net purchase in U.S. dollar equivalent of approximately $352 million to partially hedge our expected future wafer purchases in Japanese yen. The maturities of these contracts were 12 months or less.

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The notional amount and unrealized loss of our outstanding foreign currency forward contracts that are designated as balance sheet hedges as of December 28, 2008 is shown in the table below. This table also shows the change in fair value of these balance sheet hedges assuming a hypothetical adverse foreign currency exchange rate movement of 10 percent. These changes in fair values would be largely offset in other income (expense) by corresponding changes in the fair values of the foreign currency denominated monetary assets and liabilities.

	Notional Amount			Unrealized Gain/(Loss) as of December 28, 2008			Change in Fair Value Due to 10% Adverse Rate Movement
	(In thousands)
Balance sheet hedge forward contracts sold	$	(2,583,096	)	$	(144,041	)	$	(282,559	)
Balance sheet hedge forward contracts purchased		2,005,976			12,088			204,553
Total net forward contracts sold	$	(577,120	)	$	(131,953	)	$	(78,006	)

The notional amount and unrealized gain of our outstanding forward and option contracts that are designated as cash flow hedges as of December 28, 2008 is shown in the table below. This table also shows the change in fair value of these cash flow hedges assuming a hypothetical adverse foreign currency exchange rate movement of 10 percent.

	Notional Amount		Unrealized Gain/(Loss) as of December 28, 2008		Change in Fair Value Due to 10% Adverse Rate Movement
	(In thousands)
Cash flow hedge forward contracts purchased	$	259,563	$	40,182	$	(23,373	)
Cash flow hedge option contracts purchased		91,946		11,394		(7,334	)
Total cash flow hedge contracts purchased	$	351,509	$	51,576	$	(30,707	)

Notwithstanding our efforts to mitigate some foreign exchange risks, we do not hedge all of our foreign currency exposures, and there can be no assurances that our mitigating activities related to the exposures that we do hedge will adequately protect us against risks associated with foreign currency fluctuations.

Market Risk. We also hold available-for-sale equity securities in semiconductor wafer manufacturing companies. As of December 28, 2008, a reduction in price of 10% of these marketable equity securities would result in a decrease in the fair value of our investments in marketable equity securities of approximately $0.2 million.

All of the potential changes noted above are based on sensitivity analysis performed on our financial position at December 28, 2008. 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.

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

Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as of the end of the period covered by this report (the “Evaluation Date”). Based upon the evaluation, our principal executive officer and principal financial 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 be disclosed in our reports filed under the Exchange Act, such as this report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls include controls and procedures designed to reasonably ensure that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. Our quarterly evaluation of disclosure controls and procedures includes an evaluation of some components of our internal control over financial reporting, and internal control over financial reporting is also separately evaluated on an annual basis for purposes of providing the management report which is set forth below.

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

Based on the results of our evaluation, our management concluded that our internal control over financial reporting was effective as of December 28, 2008.

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

Our independent registered public accounting firm has audited the financial statements included in Item 8 of this report and has issued an attestation report on our internal control over financial reporting which is included 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 control system 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 over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the quarter ended December 28, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

Not applicable.

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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 Proxy Statement for our 2009 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 and accounting officer. This code of ethics, which consists of the “SanDisk Code of Ethics for Financial Executives” section of our code of ethics that applies to employees generally, is posted on our website, www.sandisk.com. Our code of ethics may be found on our website as follows:

·	From our main Web page, first click on “About SanDisk” and then scroll down and click on “Business Conduct and Ethics.”

·	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, or waiver from, a provision of this code of ethics by posting the required information on our website, at the address and location specified above.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is set forth under “Director Compensation- Fiscal 2008,” “Report of the Compensation Committee,” “Compensation Discussion and Analysis,” “Summary Compensation Table- Fiscal 2008,” “Outstanding Equity Awards at Fiscal 2008 Year-End” and “Option Exercises and Stock Vested in Fiscal 2008” in our Proxy Statement for our 2009 Annual Meeting of Stockholders, and is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item is set forth under “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” and “Equity Compensation Information for Plans or Individual Arrangements with Employees and Non-Employees” in our Proxy Statement for our 2009 Annual Meeting of Stockholders, and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, DIRECTOR INDEPENDENCE

The information required by this item is set forth under “Compensation Committee Interlocks and Insider Participation,” “Certain Transactions and Relationships,” and under “Election of Directors” in our Proxy Statement for our 2009 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 2009 Annual Meeting of Stockholders, and is incorporated 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 Operations	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 in amounts sufficient to require submission of the schedules, or because the information required is included in the Consolidated 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 this report.

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SANDISK CORPORATION

INDEX TO FINANCIAL STATEMENTS

	Page
Reports of Independent Registered Public Accounting Firm	F-2
Consolidated Balance Sheets	F-4
Consolidated Statements of Operations	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

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REPORT OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of

SanDisk Corporation

We have audited the accompanying Consolidated Balance Sheets of SanDisk Corporation as of December 28, 2008 and December 30, 2007, and the related Consolidated Statements of Operations, Stockholders’ Equity, and Cash Flows for each of the three years in the period ended December 28, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements 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 about whether 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 the accounting principles used and significant estimates made by management, as well as evaluating the overall financial 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, the consolidated financial position of SanDisk Corporation at December 28, 2008 and December 30, 2007, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 28, 2008, in conformity with U.S. generally accepted accounting principles.

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 of December 28, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”) and our report, dated February 20 2009, expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

San Jose, California

February 20, 2009

F-2

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REPORT OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of

SanDisk Corporation

We have audited SanDisk Corporation’s internal control over financial reporting as of December 28, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). SanDisk Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control 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 about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes 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 reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, SanDisk Corporation maintained, in all material respects, effective internal control over financial reporting as of December 28, 2008, 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 28, 2008 and December 30, 2007, and the related Consolidated Statements of Operations, Stockholders’ Equity, and Cash Flows for each of the three years in the period ended December 28, 2008 of SanDisk Corporation and our report dated February 20, 2009 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

San Jose, California

February 20, 2009

F-3

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SANDISK CORPORATION

CONSOLIDATED BALANCE SHEETS

	December 28, 2008			December 30, 2007
	(In thousands, except for share and per share amounts)
ASSETS
Current assets:
Cash and cash equivalents	$	962,061		$	833,749
Short-term investments		477,296			1,001,641
Accounts receivable from product revenues, net of allowance for doubtful accounts of $13,881 in fiscal year 2008 and $13,790 in fiscal year 2007		122,092			462,983
Inventory		598,251			555,077
Deferred taxes		73,684			212,255
Other current assets		469,961			233,952
Total current assets		2,703,345			3,299,657
Long-term investments		1,097,302			1,060,393
Property and equipment, net		396,987			422,895
Notes receivable and investments in flash ventures with Toshiba		1,602,291			1,108,905
Deferred taxes		15,188			117,130
Goodwill		—			840,870
Intangible assets, net		63,182			322,023
Other non-current assets		48,641			62,946
Total assets	$	5,926,936		$	7,234,819
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable trade	$	240,985		$	285,711
Accounts payable to related parties		370,006			158,443
Other current accrued liabilities		502,443			286,850
Deferred income on shipments to distributors and retailers and deferred revenue		149,575			182,879
Total current liabilities		1,263,009			913,883
Convertible long-term debt		1,225,000			1,225,000
Non-current liabilities		263,977			135,252
Total liabilities		2,751,986			2,274,135

Minority interest		151			1,067

Commitments and contingencies (see Note 13)

Stockholders’ 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: 226,128,177 in fiscal year 2008 and 224,166,707 in fiscal year 2007		226			224
Capital in excess of par value		3,912,303			3,796,849
Retained earnings (accumulated deficit)		(926,707	)		1,130,069
Accumulated other comprehensive income		188,977			32,475
Total stockholders’ equity		3,174,799			4,959,617
Total liabilities and stockholders’ equity	$	5,926,936		$	7,234,819

The accompanying notes are an integral part of these consolidated financial statements.

F-4

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SANDISK CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

	Fiscal Years Ended
	December 28, 2008			December 30, 2007			December 31, 2006
	(In thousands, except per share amounts)
Revenues
Product	$	2,843,243		$	3,446,125		$	2,926,472
License and royalty		508,109			450,241			331,053
Total revenues		3,351,352			3,896,366			3,257,525

Cost of product revenues		3,233,753			2,628,838			2,007,684
Amortization of acquisition-related intangible assets		54,512			64,809			10,368
Total cost of product revenues		3,288,265			2,693,647			2,018,052
Gross profit		63,087			1,202,719			1,239,473

Operating expenses
Research and development		429,949			418,066			306,866
Sales and marketing		328,079			294,594			203,406
General and administrative		204,765			181,509			159,835
Impairment of goodwill		845,453			—			—
Impairment of acquisition-related intangible assets		175,785			—			—
Amortization of acquisition-related intangible assets		17,069			25,308			17,432
Write-off of acquired in-process technology		—			—			225,600
Restructuring and other		35,467			6,728			—
Total operating expenses		2,036,567			926,205			913,139
Operating income (loss)		(1,973,480	)		276,514			326,334

Interest income		94,417			133,355			101,088
Income (loss) in equity investments		(39,568	)		(9,949	)		6,678
Interest (expense) and other income (expense), net		15,597			(1,504	)		(3,392	)
Total other income		70,446			121,902			104,374
Income (loss) before provision for income taxes		(1,903,034	)		398,416			430,708
Provision for income taxes		153,742			174,848			230,193
Income (loss) after taxes		(2,056,776	)		223,568			200,515
Minority interest		—			5,211			1,619
Net income (loss)	$	(2,056,776	)	$	218,357		$	198,896
Net income (loss) per share:
Basic	$	(9.13	)	$	0.96		$	1.00
Diluted	$	(9.13	)	$	0.93		$	0.96
Shares used in computing net income (loss) per share:
Basic		225,292			227,744			198,929
Diluted		225,292			235,857			207,451

The accompanying notes are an integral part of these consolidated financial statements.

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SANDISK CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

	Common Stock Shares			Common Stock Par Value			Capital in Excess of Par Value			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss)			Deferred Compensation			Total Stockholders’ Equity
	(In thousands)
Balance at January 1, 2006		188,222		$	188		$	1,621,819		$	906,624		$	2,635		$	(7,475	)	$	2,523,791
Net income											198,896									198,896
Unrealized income on available-for-sale investments														2,315						2,315
Unrealized loss on investments in foundries														(227	)					(227	)
Foreign currency translation														770						770
Comprehensive income																				201,754
Issuance of shares pursuant to equity plans		4,861			5			87,049												87,054
Issuance of stock pursuant to employee stock purchase plan		264						9,250												9,250
Issuance of restricted stock		63																		—
Income tax benefit from stock options exercised								61,453												61,453
Share-based compensation expense and reversal of deferred compensation								96,415									7,475			103,890
Purchased calls								(386,090	)											(386,090	)
Sold warrants								308,672												308,672
Tax benefit on purchased calls								145,556												145,556
Issuance of stock and equity awards related to acquisitions		33,108			33			1,686,356												1,686,389
Reclass 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									218,357
Unrealized income on available-for-sale investments														6,770						6,770
Foreign currency translation														15,797						15,797
Unrealized income on hedging activities														4,415						4,415
Comprehensive income																				245,339
Issuance of shares pursuant to equity plans		4,724			5			87,010												87,015
Issuance of stock pursuant to employee stock purchase plan		386						13,296												13,296
Income tax benefit from stock options exercised								18,442												18,442
Share-based compensation expense								132,647												132,647
Cumulative effect to prior year related to unrecognized tax benefits upon adoption of FIN 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
Net loss											(2,056,776	)								(2,056,776	)
Unrealized loss on available-for-sale investments														(22,650	)					(22,650	)
Foreign currency translation														77,368						77,368
Unrealized income on hedging activities														101,784						101,784
Comprehensive loss																				(1,900,274	)
Issuance of shares pursuant to equity plans		1,005			1			5,397												5,398
Issuance of stock pursuant to employee stock purchase plan		956			1			14,302												14,303
Income tax benefit from stock options exercised								(3,945	)											(3,945	)
Share-based compensation expense								98,719												98,719
Change in unrecognized tax benefits as a result of settlement and expiration of statute of limitations								981												981
Balance at December 28, 2008		226,128		$	226		$	3,912,303		$	(926,707	)	$	188,977		$	—		$	3,174,799

The accompanying notes are an integral part of these consolidated financial statements.

F-6

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SANDISK CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Fiscal Years Ended
	December 28, 2008			December 30, 2007			December 31, 2006
	(In thousands)
Cash flows from operating activities:
Net income (loss)	$	(2,056,776	)	$	218,357		$	198,896
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Deferred and other taxes		265,633			(35,188	)		(25,636	)
Depreciation and amortization		257,389			255,743			135,585
Provision for doubtful accounts		8,778			3,530			3,316
Share-based compensation expense		97,799			133,010			100,641
Excess tax benefit from share-based compensation		(1,938	)		(18,375	)		(57,393	)
Write-off of acquired in-process technology		—			—			225,600
Impairment, restructuring and other charges		1,146,407			—			—
Other non-cash charges (income)		18,940			12,721			(2,793	)
Changes in operating assets and liabilities:
Accounts receivable from product revenues		332,113			145,657			(115,061	)
Inventory		(42,969	)		(57,586	)		(23,660	)
Other assets		(320,593	)		(34,789	)		(12,094	)
Accounts payable trade		(48,727	)		23,772			(64,228	)
Accounts payable to related parties		215,563			20,966			24,617
Other liabilities		215,189			(14,891	)		210,273
Total adjustments		2,143,584			434,570			399,167
Net cash provided by operating activities		86,808			652,927			598,063
Cash flows from investing activities:
Purchases of short and long-term investments		(1,986,338	)		(3,717,897	)		(2,135,973	)
Proceeds from sales and maturities of short and long-term investments		2,441,374			3,399,583			1,497,120
Proceeds from sales of property and equipment		39,680			—			—
Acquisition of property and equipment, net		(184,033	)		(258,954	)		(176,474	)
Investment in Flash Partners Ltd. and Flash Alliance Ltd.		(96,705	)		(125,547	)		(132,209	)
Distribution from FlashVision Ltd.		102,530			—			—
Notes receivable proceeds, FlashVision Ltd.		—			37,512			23,538
Notes receivable issuance, Flash Partners Ltd.		(37,418	)		(525,252	)		(95,445	)
Notes receivable proceeds (issuance), Tower Semiconductor Ltd.		3,125			1,125			(9,705	)
Notes receivable issuance, Flash Alliance Ltd.		(250,070	)		—			—
Purchased technology and other assets		1,786			(28,928	)		—
Acquisition of MusicGremlin, Inc.		(4,604	)		—			—
Cash acquired in business combinations, net of acquisition costs		—			—			51,087
Net cash provided by (used in) investing activities		29,327			(1,218,358	)		(978,061	)
Cash flows from financing activities:
Proceeds from issuance of convertible senior notes, net of issuance costs		—			—			1,125,500
Proceeds from employee stock programs		19,701			100,311			96,304
Proceeds from (repayment of) debt financing		(9,785	)		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		1,938			18,375			57,393
Share repurchase programs		—			(299,607	)		—
Net cash provided by (used in) financing activities		11,854			(180,998	)		1,197,288
Effect of changes in foreign currency exchange rates on cash		323			(522	)		1,352
Net increase (decrease) in cash and cash equivalents		128,312			(746,951	)		818,642
Cash and cash equivalents at beginning of the year		833,749			1,580,700			762,058
Cash and cash equivalents at end of the year	$	962,061		$	833,749		$	1,580,700

Supplemental disclosure of cash flow information:
Cash paid for income taxes	$	(129,141	)	$	(193,300	)	$	(81,100	)
Cash paid for interest expense	$	(12,386	)	$	(15,168	)	$	(6,965	)
Non-cash financing and investing activities:
Issuance of shares in a business combination	$	—		$	—		$	1,607,450

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

601 McCarthy Blvd. Milpitas, California		95035
(Address of principal executive offices)		(Zip 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

Class		Outstanding at January 30, 2009
Common Stock, $0.001 par value per share		226,149,437 shares

Document		Parts Into Which Incorporated
Annual Report to Stockholders for the Fiscal Year Ended December 28, 2008 (Annual Report)		Parts I, II, and IV
Proxy Statement for the Annual Meeting of Stockholders to be held May 27, 2009 (Proxy Statement)		Part III

		Page No.
	PART I
Item 1.	Business	3
Item 1A.	Risk Factors	12
Item 1B.	Unresolved Staff Comments	33
Item 2.	Properties	34
Item 3.	Legal Proceedings	35
Item 4.	Submission of Matters to a Vote of Security Holders	41

	PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	42
Item 6.	Selected Financial Data	44
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	45
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	61
Item 8.	Financial Statements and Supplementary Data	62
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	63
Item 9A.	Controls and Procedures	63
Item 9B.	Other Information	63

	PART III
Item 10.	Directors, Executive Officers and Corporate Governance	64
Item 11.	Executive Compensation	64
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	64
Item 13.	Certain Relationships and Related Transactions, and Director Independence	64
Item 14.	Principal Accountant Fees and Services	64

	PART IV
Item 15.	Exhibits and Financial Statement Schedules	65

	OTHER
Index To Financial Statements		F-1
Signatures		S-1

(Mark One)
þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	As of December 28, 2008				As of December 30, 2007
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
1% Convertible senior notes due 2013	$	1,150	$	477	$	1,150	$	913
1% Convertible notes due 2035		75		64		75		85

	December 28, 2008		December 30, 2007
Convertible long-term debt, as reported	$	1,225,000	$	1,225,000
Convertible long-term debt, pro forma		947,926		897,518

Level 1	Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to directly access.

Level 2	Valuations based on quoted prices for similar assets or liabilities; valuations for interest-bearing securities based on non-daily quoted prices in active markets; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.

Level 3	Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Fixed income securities	$	1,822,466	$	317,081	$	1,505,385	$	—
Equity investments		37,227		37,227		—		—
Derivative assets		105,133		—		105,133		—
Other		2,889		—		2,889		—
Total financial assets	$	1,967,715	$	354,308	$	1,613,407	$	—

Derivative liabilities	$	153,523	$	—	$	153,523	$	5,714
Total financial liabilities	$	153,523	$	—	$	153,523	$	5,714

	December 28, 2008									December 30, 2007
	Book Value		Gross Unrealized Gains		Gross Unrealized Losses			Market Value		Book Value		Gross Unrealized Gains		Gross Unrealized Losses			Market Value
Fixed income securities:
U.S. Treasury and agency securities	$	40,110	$	476	$	—		$	40,586	$	142,667	$	269	$	—		$	142,936
U.S. Corporate notes and bonds		56,916		267		(360	)		56,823		340,458		11		—			340,469
Municipal notes and bonds		1,387,592		21,714		(1,330	)		1,407,976		2,094,585		12,203		(109	)		2,106,679
Total fixed income securities		1,484,618		22,457		(1,690	)		1,505,385		2,577,710		12,483		(109	)		2,590,084
Equity investments		70,226		—		(32,999	)		37,227		89,678		6,266		(10,965	)		84,979
Total available-for-sale investments	$	1,554,844	$	22,457	$	(34,689	)	$	1,542,612	$	2,667,388	$	18,749	$	(11,074	)	$	2,675,063

	Unrealized Loss for Less than 12 Months
	Market Value		Gross Unrealized Losses
U.S. corporate and municipal notes and bonds	$	132,018	$	(1,690	)
Equity investments		35,165		(32,999	)
Total	$	167,183	$	(34,689	)

	Cost		Estimated Fair Value
Due in one year or less	$	472,023	$	475,234
Due after one year through five years		1,012,595		1,030,151
Total	$	1,484,618	$	1,505,385

	December 28, 2008			December 30, 2007
Trade accounts receivable	$	584,262		$	1,027,588
Related party accounts receivable		─			4,725
Allowance for doubtful accounts		(13,881	)		(13,790	)
Price protection, promotions and other activities		(448,289	)		(555,540	)
Total accounts receivable from product revenues, net	$	122,092		$	462,983

	December 28, 2008		December 30, 2007
Raw material	$	309,436	$	197,077
Work-in-process		90,544		94,283
Finished goods		198,271		263,717
Total inventory	$	598,251	$	555,077

	December 28, 2008		December 30, 2007
Royalty and other receivables	$	81,451	$	103,802
Prepaid expenses		20,321		15,109
Tax related receivables		294,906		40,354
Other current assets		73,283		74,687
Total other current assets	$	469,961	$	233,952

	December 28, 2008			December 30, 2007
Machinery and equipment	$	659,881		$	649,075
Software		113,190			68,664
Building		33,759			32,972
Capital land lease		7,885			7,272
Furniture and fixtures		6,766			6,382
Leasehold improvements		44,311			33,419
Property and equipment, at cost		865,792			797,784
Accumulated depreciation and amortization		(468,805	)		(374,889	)
Property and equipment, net	$	396,987		$	422,895

	December 28, 2008		December 30, 2007
Notes receivable, Flash Partners Ltd.	$	843,380	$	639,834
Notes receivable, Flash Alliance Ltd.		276,518		—
Investment in FlashVision Ltd.		63,965		159,146
Investment in Flash Partners Ltd.		202,530		177,529
Investment in Flash Alliance Ltd.		215,898		132,396
Total notes receivable and investments in the flash ventures with Toshiba	$	1,602,291	$	1,108,905

	December 28, 2008		December 30, 2007
Accrued payroll and related expenses	$	54,516	$	94,220
Taxes payable		7,244		56,945
Accrued restructuring		22,545		2,071
Research and development liability, related party		4,000		8,000
Foreign currency forward contract payables		153,523		5,714
Flash Ventures adverse purchase commitments for under utilized capacity (see Note 13)		121,486	─
Other accrued liabilities		139,129		119,900
Total other current accrued liabilities	$	502,443	$	286,850

	December 28, 2008		December 30, 2007
Deferred tax liability	$	77,349	$	14,479
Income taxes payable		145,432		79,608
Accrued restructuring		11,070		11,891
Other non-current liabilities		30,126		29,274
Total non-current liabilities	$	263,977	$	135,252

	December 28, 2008			December 30, 2007
Accumulated net unrealized gain (loss) on:
Available-for-sale investments	$	(18,408	)	$	4,242
Foreign currency translation		101,186			23,818
Hedging activities		106,199			4,415
Total accumulated other comprehensive income	$	188,977		$	32,475

Balance at December 31, 2006	$	910,254
Goodwill adjustment		(69,384	)
Balance at December 30, 2007		840,870
Goodwill additions, net		4,583
Goodwill impairment		(845,453	)
Balance at December 28, 2008	$	—

	December 28, 2008										December 30, 2007
	Gross Carrying Amount		Impairment			Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Core technology	$	315,301	$	(136,001	)	$	(132,407	)	$	46,893	$	311,801	$	(78,863	)	$	232,938
Developed product technology		12,900		—			(6,318	)		6,582		12,900		(4,689	)		8,211
Trademarks		4,000		—			(4,000	)		—		4,000		(4,000	)		—
Backlog		5,000		—			(5,000	)		—		5,000		(5,000	)		—
Supply agreement		2,000		—			(2,000	)		—		2,000		(2,000	)		—
Customer relationships		80,100		(39,784	)		(40,316	)		—		80,100		(23,907	)		56,193
Acquisition-related intangible assets		419,301		(175,785	)		(190,041	)		53,475		415,801		(118,459	)		297,342
Technology licenses and patents		23,814		—			(14,107	)		9,707		39,243		(14,562	)		24,681
Total	$	443,115	$	(175,785	)	$	(204,148	)	$	63,182	$	455,044	$	(133,021	)	$	322,023

	Estimated Amortization Expenses
Fiscal periods	Acquisition-related Intangible Assets		Technology Licenses and Patents
	(In thousands)
2009	$	13,695	$	4,533
2010		13,695		3,100
2011		13,034		1,248
2012		12,528		600
2013		523		226
Total	$	53,475	$	9,707

	Derivative Assets Reported in Other Current Assets				Long-term Investments				Derivative Liabilities Reported in Other Current Accrued Liabilities
	December 28, 2008		December 30, 2007		December 28, 2008		December 30, 2007		December 28, 2008		December 30, 2007
Foreign exchange contracts designated as cash flow hedges	$	51,576	$	—	$	—	$	—	$	—	$	—
Equity market risk contract designated as cash flow hedge		—		—		31,987		4,415		—		—
Total derivatives designated as hedging instruments		51,576		—		31,987		4,415		—		—
Foreign exchange contracts not designated		21,570		—		—		—		153,523		—
Total derivatives	$	73,146	$	—	$	31,987	$	4,415	$	153,523	$	—

	December 30, 2007		Amount of gain (loss) recognized in OCI (effective portion)		Amount of gain (loss) reclassified from OCI to income (loss) (effective portion)			December 28, 2008
Foreign exchange contracts designated as cash flow hedges	$	—	$	60,511	$	(13,701	)	$	74,212
Equity market risk contract designated as cash flow hedge		4,415		27,572		—			31,987

	December 30, 2008		December 30, 2007
	(In millions)
1% Convertible Senior Notes due 2013	$	1,150	$	1,150
1% Convertible Notes due 2035		75		75

	As of
	December 28, 2008		December 30, 2007
Long-Lived Assets:
United States	$	205,022	$	227,630
Japan		482,980		507,794
China		146,666		116,936
Israel		36,519		41,217
Other foreign countries		8,193		3,981
Total	$	879,380	$	897,558

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
	(In thousands, except exercise price and contractual term)
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 through acquisition		5,807			30.57
Options and SARs outstanding at December 31, 2006		26,392			31.97		6.7		392,469
Granted		5,848			43.65
Exercised		(4,678	)		20.24				124,816
Forfeited		(1,728	)		45.99
Expired		(277	)		56.03
Options and SARs outstanding at December 30, 2007		25,557			35.59		5.8		165,185
Granted		3,616			21.29
Exercised		(895	)		7.77				11,751
Forfeited		(1,927	)		42.47
Expired		(1,294	)		43.35
Options and SARs outstanding at December 28, 2008		25,057			33.59		4.9		5,284
Options and SARs vested and expected to vest after December 28, 2008, net of forfeitures		23,892			33.56		4.8		5,274
Options and SARs exercisable at December 28, 2008		16,500			31.88		4.5		5,212

	Shares			Weighted Average Grant Date Fair Value		Aggregate Intrinsic Value
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
Granted		1,338			18.79
Vested		(173	)		54.41		4,149
Forfeited		(141	)		32.22
Non-vested share units at December 28, 2008		1,523			25.38		13,983

	Severance and Benefits			Contract Termination Fees and Other Charges		Total
Restructuring provision	$	4.1		$	─	$	4.1
Cash paid		(3.1	)		─		(3.1	)
Accrual balance at December 28, 2008	$	1.0		$	─	$	1.0

	December 28, 2008			December 30, 2007
Deferred tax assets:
Deferred revenue recognized for tax purposes	$	35,908		$	48,932
Accruals and reserves not currently deductible		149,582			170,279
Depreciation and amortization not currently deductible		60,406			53,176
Deductible original issue discount		98,615			119,358
Deductible share-based compensation		50,465			37,959
Unrealized loss on investments		52,138			24,879
Unrealized foreign exchange loss		58,131		─
Net operating loss carryforwards		52,553			33,444
Tax credit carryforward		149,785			15,287
Other		17,073			7,621
Gross deferred tax assets		724,656			510,935
Valuation allowance		(529,366	)		(67,354	)
Deferred tax assets, net of valuation allowance		195,290			443,581

Deferred tax liabilities:
Acquired intangible assets		(15,816	)		(42,477	)
Unrealized gain on investments		(72,302	)		(23,553	)
Unrealized foreign exchange gain		(78,031	)	─
U.S. taxes provided on unremitted earnings of foreign subsidiaries		(17,619	)		(62,647	)
Total deferred tax liabilities		(183,768	)		(128,677	)
Net deferred tax assets	$	11,522		$	314,904

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 31, 2007		70,194
Additions based on tax positions related to current year		26,342
Additions for tax positions of prior years		44,247
Reductions for tax positions of prior years		(13,501	)
Reductions due to expiration of statute of limitations		(2,845	)
Balance at December 28, 2008	$	124,437

Master Lease Agreements by Execution Date	Lease Amounts				Expiration
	(Yen in billions)		(Dollars in thousands)
Flash Partners
December 2004	¥	12.1	$	133,810	2010
December 2005		9.7		106,931	2011
June 2006		10.1		111,726	2011
September 2006		33.4		369,670	2011
March 2007		23.0		254,447	2012
February 2008		10.5		116,679	2013
	¥	98.8	$	1,093,263
Flash Alliance
November 2007	¥	43.7	$	483,274	2013
June 2008		46.9		518,440	2013
	¥	90.6	$	1,001,714
Total guarantee obligations	¥	189.4	$	2,094,977

Annual Installments	Payment of Principal Amortization		Purchase Option Exercise Price at Final Lease Terms		Guarantee Amount
	(In thousands)
Year 1	$	498,399	$	─	$	498,399
Year 2		437,210		66,521		503,731
Year 3		322,052		220,850		542,902
Year 4		169,712		144,341		314,053
Year 5		47,305		188,587		235,892
Total guarantee obligations	$	1,474,678	$	620,299	$	2,094,977