10-Q

Form 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

(Mark one)
x	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended September 26, 2004
	OR
o	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the transition period from            to

Commission File Number 0-26734

SanDisk Corporation

(Exact name of registrant as specified in its charter)

Delaware	77-0191793
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
140 Caspian Court, Sunnyvale, California	94089
(Address of principal executive offices)	(Zip code)

(408) 542-0500

(Registrant’s telephone number, including area code)

N/A

(Former name, former address, and former fiscal year, if changed since last report.)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

Yes x No o

Indicate the number of shares outstanding of each of the issuer’s classes of capital stock as of September 26, 2004.

Common Stock, $0.001 par value	162,909,975
Class	Number of shares

SanDisk Corporation

Index

		Page No.
	PART I. FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements:
	Condensed Consolidated Balance Sheets as of September 26, 2004 and December 28, 2003	3
	Condensed Consolidated Statements of Income for the Three and Nine months ended September 26, 2004 and September 28, 2003	4
	Condensed Consolidated Statements of Cash Flows for the Nine months ended September 26, 2004 and September 28, 2003	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46
Item 4.	Controls and Procedures	47
	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	48
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49
Item 3.	Defaults upon Senior Securities	49
Item 4.	Submission of Matters to a Vote of Security Holders	49
Item 5.	Other Information	49
Item 6.	Exhibits and Reports on Form 8-K	50
	Signatures	51
	Exhibit Index
EXHIBIT 10.1
EXHIBIT 10.2
EXHIBIT 10.3
EXHIBIT 10.4
EXHIBIT 10.5
EXHIBIT 10.6
EXHIBIT 10.7
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

2

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

SANDISK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)

	September 26,			December 28,
	2004			2003*
	(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	602,183		$	734,479
Short-term investments		748,830			528,117
Investment in foundries		23,541			36,976
Accounts receivable, net		136,156			184,236
Inventories		181,329			116,896
Deferred tax asset		94,827			70,806
Other receivable		11,250			11,352
Prepaid expenses and other current assets		18,559			42,042
Total Current Assets		1,816,675			1,724,904
Property and equipment, net		137,663			59,470
Investment in foundries		22,599			40,446
Investments in FlashVision and Flash Partners		146,164			144,616
Deferred tax asset		—			7,927
Other receivable		25,313			33,751
Note receivables, related party		32,969			—
Deposits and other non-current assets		10,747			12,400
Total Assets	$	2,192,130		$	2,023,514
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	113,949		$	88,737
Accounts payable to related parties		55,438			45,013
Deferred income on shipments to distributors and retailers and deferred revenue		96,290			99,136
Accrued payroll and related expenses		30,026			28,233
Income taxes payable		2,467			37,254
Research and development liability, related party		9,700			11,800
Other accrued liabilities		37,248			36,661
Total Current Liabilities		345,118			346,834
Convertible subordinated notes payable		150,000			150,000
Deferred revenue and other liabilities		25,808			25,992
Total Liabilities		520,926			522,826
Commitments and contingencies
Stockholders’ Equity:
Preferred stock		—			—
Common stock		1,230,990			1,207,958
Retained earnings		441,905			253,624
Accumulated other comprehensive (loss) income		(776	)		39,106
Deferred compensation		(915	)		—
Total Stockholders’ Equity		1,671,204			1,500,688
Total Liabilities and Stockholders’ Equity	$	2,192,130		$	2,023,514

*Information derived from the audited Consolidated Financial Statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.

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SANDISK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(unaudited)

	Three Months Ended						Nine Months Ended
	September 26,			September 28,			September 26,			September 28,
	2004			2003			2004			2003
Revenues:
Product	$	365,033		$	259,446		$	1,095,139		$	628,938
License and royalty		42,921			21,954			133,033			61,568
Total revenues		407,954			281,400			1,228,172			690,506
Cost of product revenues		260,573			167,765			746,220			416,508
Gross profits		147,381			113,635			481,952			273,998
Operating expenses:
Research and development		30,184			22,010			89,414			58,937
Sales and marketing		20,863			16,899			65,466			45,066
General and administrative		12,651			7,923			34,499			21,847
Total operating expenses		63,698			46,832			189,379			125,850
Operating income		83,683			66,803			292,573			148,148
Equity in income of business ventures		102			51			516			90
Interest income		5,339			1,611			13,539			5,622
Interest expense		(1,690	)		(1,688	)		(5,065	)		(5,063	)
Gain (loss) on investment in foundries		(399	)		6,662			(950	)		3,079
Loss on unauthorized sale of UMC shares		—			(18,339	)		—			(18,339	)
Gain (loss) on equity investment		—			4,352			—			(148	)
Other expense, net		(1,438	)		(149	)		(1,755	)		(1,004	)
Income before provision for income taxes		85,597			59,303			298,858			132,385
Provision for income taxes		31,495			44,533			110,577			51,364
Net income	$	54,102		$	14,770		$	188,281		$	81,021
Net income per share (see Note 7):
Basic	$	0.33		$	0.10		$	1.16		$	0.58
Diluted	$	0.29		$	0.09		$	1.02		$	0.51
Shares used in computing net income per share (see Note 7):
Basic		162,425			141,461			161,796			139,747
Diluted		188,562			171,562			188,903			165,404

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

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SANDISK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)

	Nine months ended
	September 26,			September 28,
	2004			2003
Cash flows from operating activities:
Net income	$	188,281		$	81,021
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		26,410			16,154
Provision for doubtful accounts		2,842			888
Amortization bond issuance costs		660			660
(Gain) loss on disposal of fixed assets		(129	)		195
Deferred compensation		211			—
Loss on unauthorized sale of UMC shares		—			18,339
Loss (gain) on investment in foundries		950			(3,079	)
Loss on equity investment		—			148
Equity in income of business ventures		(516	)		(90	)
Changes in operating assets and liabilities:
Accounts receivable		45,238			(59,748	)
Other receivable		8,540			—
Income tax refund receivable		(378	)		1,563
Inventories		(64,433	)		(6,164	)
Prepaid expenses and other current assets		22,891			4,886
Deposits and other non-current assets		1,724			(23	)
Deferred taxes		7,582			2,152
Investment in FlashVision		(962	)		270
Accounts payable		25,212			50,591
Accounts payable to related parties		10,425			11,450
Accrued payroll and related expenses		1,793			6,790
Income taxes payable		(55,202	)		16,355
Other accrued liabilities		587			5,360
Research and development liabilities, related parties		(2,100	)		(4,007	)
Current deferred revenue		(3,046	)		19,684
Non current deferred revenue		(4,855	)		(231	)
Other liabilities		900			(1,225	)
Net cash provided by operating activities		212,625			161,939
Cash flows from investing activities:
Purchases of short term investments		(919,110	)		(315,865	)
Proceeds from sale of short term investments		696,967			175,545
Proceeds from sale of investment in foundry		—			21,627
Proceeds from sale of equity investment		—			4,352
Investment in Flash Partners		(70	)		—
Acquisition of capital equipment		(106,081	)		(42,908	)
Investment in technology		(1,998	)		—
Loan to Flash Vision		(32,969	)		—
Investment in foundries		—			(4,282	)
Proceeds from sale of fixed assets		140			528
Net cash used in investing activities		(363,121	)		(161,003	)
Cash flows from financing activities:
Sale of common stock		18,200			35,766
Net cash provided by financing activities		18,200			35,766
Net increase (decrease) in cash and cash equivalents		(132,296	)		36,702
Cash and cash equivalents at beginning of period		734,479			220,785
Cash and cash equivalents at end of period	$	602,183		$	257,487

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

5

SANDISK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of Presentation

     These interim condensed consolidated financial statements are unaudited but reflect, in the opinion of management, all adjustments, consisting of normal recurring adjustments and accruals, necessary to present fairly the financial position of SanDisk Corporation and its subsidiaries (the “Company”) as of September 26, 2004, and the results of operations for the three and nine-month periods ended September 26, 2004 and September 28, 2003 and cash flows for the nine-month periods ended September 26, 2004 and September 28, 2003. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been omitted in accordance with the rules and regulations of the Securities and Exchange Commission. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s annual report on Form 10-K as of, and for, the year ended December 28, 2003. Certain prior period amounts have been reclassified to conform to the current period presentation.

     The Company’s results of operations for the three-month and nine-month periods and cash flows for the nine-month period ended September 26, 2004 are not necessarily indicative of results that may be expected for the year ended January 2, 2005, or for any future period.

     The Company’s fiscal year ends on the Sunday closest to December 31, and its fiscal quarters end on the Sunday closest to March 31, June 30, and September 30. The first fiscal quarters of 2004 and 2003 ended on March 28, 2004 and March 30, 2003. The second fiscal quarters of 2004 and 2003 ended on June 27, 2004 and June 29, 2003. The third fiscal quarters of 2004 and 2003 ended on September 26, 2004 and September 28, 2003. Fiscal year 2004 is 53 weeks long and ends on January 2, 2005. Fiscal year 2003 was 52 weeks long and ended on December 28, 2003.

     The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The accounting estimates that require management’s most significant judgments include: the assessment of sales returns and allowances, sales incentive programs, allowance for doubtful accounts, warranty cost, valuation of financial instruments including investments in foundries, inventory valuation, and deferred tax assets. The Company’s actual results may differ materially from management’s estimates.

2. Summary of Significant Accounting Policies

     Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.

     Foreign Currency Translation. The U.S. dollar is the functional currency for most of the Company’s foreign operations. Gains and losses on the re-measurement into U.S. dollars of the amounts denominated in foreign currencies are included in the net income for those operations whose functional currency is the U.S. dollar, and translation adjustments are included in other comprehensive income and as accumulated other comprehensive income for those operations whose functional currency is the local currency. The Japanese Yen is the functional currency for the Company’s FlashVision and Flash Partners business ventures.

     Recent Accounting Pronouncements. In December 2003, the Financial Accounting Standards Board (FASB) issued a revision to Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” (“FIN 46R”). FIN 46R clarifies the application of ARB No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support provided by any parties, including the equity holders. FIN 46R requires the consolidation of these entities, known as variable interest entities (“VIEs”), by the primary beneficiary of the entity. The primary beneficiary is the entity, if any, that will absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns, or both.

     Among other changes, the revisions of FIN 46R (a) clarified some requirements of the original FIN 46, which had been issued in January 2003, (b) eased some implementation matters, and (c) added new scope exceptions. FIN 46R deferred the

6

effective date of the Interpretation for public companies to the end of the first reporting period ending after March 15, 2004, except that all public companies must at a minimum apply the unmodified provisions of the Interpretation to entities that were previously considered “special-purpose entities” in practice and under the FASB literature prior to the issuance of FIN 46R by the end of the first reporting period ending after December 15, 2003.

     Among the scope exceptions, companies are not required to apply FIN 46R to an entity that meets the criteria to be considered a “business” as defined in the Interpretation unless one or more of four named conditions exist. FIN 46R applies immediately to a VIE created or acquired after January 31, 2003.

     The Company has reviewed its investment portfolio to determine whether any of its equity investments are considered variable interest entities. The Company has identified its FlashVision and Flash Partners business ventures as variable interest entities but as the Company is not the primary beneficiary, the Company does not consolidate these entities, but has made the required additional disclosures, see Notes 8 and 10.

     In March 2004, the Financial Accounting Standards Board (FASB) approved the consensus reached on the Emerging Issues Task Force (EITF) Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” The objective of this Issue is to provide guidance for identifying impaired investments. EITF 03-1 also provides new disclosure requirements for investments that are deemed to be temporarily impaired. The accounting provisions of EITF 03-1 are effective for all reporting periods beginning after June 15, 2004, while the disclosure requirements are effective only for annual periods ending after June 15, 2004. The Company has evaluated the impact of the adoption of EITF 03-1 and determined that the impact was not significant to the Company’s overall results of operations or financial position.

3. Stock Based Compensation

     The Company accounts for employee stock-based compensation using the intrinsic value method and accordingly, no expense has been recognized for options granted to employees under the plans as the grant price is set at the fair market value of the stock on the day of grant. The following table summarizes relevant information as if the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure,” had been applied to all stock-based awards (see also Note 7). For purposes of this pro forma disclosure, the value of the options is estimated using a Black-Scholes option pricing model and amortized ratably to expense over the options’ vesting periods. Because the estimated value is determined as of the date of grant, the actual value ultimately realized by the employee may be significantly different.

	Three months ended						Nine months ended
	September 26,			September 28,			September 26,			September 28,
	2004			2003			2004			2003
	(in thousands, except per share data)
Net income, as reported	$	54,102		$	14,770		$	188,281		$	81,021
Add: Intrinsic value stock based employee compensation expense included in reported net income, net of tax		133			—			133			—
Deduct: Fair value method expense, net of related tax		(10,294	)		(2,521	)		(29,826	)		(21,317	)
Pro forma net income	$	43,941		$	12,249		$	158,588		$	59,704
Pro forma basic income per share	$	0.27		$	0.09		$	0.98		$	0.43
Net income used for diluted net income per share:	$	55,304		$	15,245		$	191,893		$	84,960
Add: Intrinsic value stock based employee compensation expense included in reported net income, net of tax		133			—			133			—
Deduct: Fair value method expense, net of related tax		(10,294	)		(2,521	)		(29,826	)		(21,317	)
Pro forma net income assuming conversion	$	45,143		$	12,724		$	162,200		$	63,643
Pro forma diluted income per share	$	0.24		$	0.07		$	0.86		$	0.38

7

     The per share weighted-average fair value of options granted during the third quarters of fiscal 2004 and 2003 were $15.70 and $21.43, respectively. The per share weighted-average fair value of options granted during the first nine months of fiscal 2004 and 2003 were $22.80 and $7.86, respectively.

     The value of options granted was estimated on the date of grant using the following weighted-average assumptions:

	September 26,			September 28,
	2004			2003
Dividend yield		None			None
Expected volatility		0.89			0.97
Risk-free interest rate		3.50	%		2.87	%
Expected lives		5 years			5 years

     The pro forma net income and pro forma net income per share amounts listed above include expenses related to our employee stock purchase plans. The fair value of issuances under the employee stock purchase plans was estimated on the date of issuance, with the following weighted-average assumptions:

	September 26,			September 28,
	2004			2003
Dividend yield		None			None
Expected volatility		0.59			0.60
Risk-free interest rate		1.78	%		2.67	%
Expected lives		1/2 year			1/2 year

     A summary of activity under all stock option plans follows (shares in thousands):

	Total Available
	for Future						Weighted Average
	Grant/Issuance			Total Outstanding			Exercise Price
Balance at December 29, 2002		15,462			19,262		$	10.69
Granted		(6,088	)		6,088		$	11.76
Automatic share increase		6,307			—			—
Exercised		—			(5,477	)	$	9.45
Canceled		481			(481	)	$	17.13
Balance at December 28, 2003		16,162			19,392		$	11.21
Granted		(6,509	)		6,509		$	31.70
Automatic share increase		7,337			—			—
Exercised		—			(1,728	)	$	7.28
Canceled		433			(433	)	$	19.75
Balance at September 26, 2004		17,423			23,740		$	16.96

4. Warranty

     The Company’s warranty activity is as follows:

	Three months ended						Nine months ended
	September 26,			September 28,			September 26,			September 28,
	2004			2003			2004			2003
	(in thousands)
Balance, beginning of period	$	9,973		$	6,233		$	3,694		$	3,472
Additions (reductions) charged (credited) to costs of revenue		1,882			(755	)		10,647			4,759
Adjustments		(963	)		—			(588	)		—
Usage		(1,937	)		(724	)		(4,798	)		(3,477	)
Balance, end of period	$	8,955		$	4,754		$	8,955		$	4,754

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     The majority of the Company’s products are warrantied for one to five years. A provision for the estimated future cost related to warranty expense is recorded at the time of customer invoice. The Company’s warranty obligation is affected by product failure rates and repair or replacement costs incurred in supporting a product failure. The Company recorded net warranty liability adjustments, totaling approximately ($1.0) million and ($0.6) million, respectively, during the three and nine months ended September 26, 2004 related to revisions to estimates for specific warranty liability requirements recorded in previous periods.

5. Inventories

     Inventories are stated at the lower of cost or market. Cost is computed on a currently adjusted standard basis. Market value is based upon an estimated average selling price reduced by estimated costs of disposal. Inventories are as follows (in thousands):

	September 26,		December 28,
	2004		2003
	(in thousands)
Inventories:
Raw material	$	49,307	$	12,265
Work-in-process		18,800		40,246
Finished goods		113,222		64,385
Total Inventories	$	181,329	$	116,896

     The Company writes down its inventory to a new basis for estimated obsolescence or unmarketable inventory based upon assumptions about future demand and market conditions, including assumptions about changes in average selling prices. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. The Company’s finished goods inventory includes consigned inventory held at certain retail customer locations as well as at third party fulfillment centers and subcontractors. In the third quarter and first nine months of fiscal 2004 and 2003, the Company sold approximately $1.9 million, $6.8 million, $8.4 million and $13.9 million, respectively of inventory that had been fully written off in previous periods.

6. Accumulated Other Comprehensive (Loss) Income

     Accumulated other comprehensive income presented in the accompanying balance sheet consists of the accumulated unrealized gains and losses on available-for-sale marketable securities, including the Company’s investments in United Microelectronics, Inc., or UMC, and the short-term portion of the Company’s investment in Tower Semiconductor Ltd., or Tower, net of the related tax effects, for all periods presented.

	September 26,			December 28,
	2004			2003
	(in thousands)
Accumulated net unrealized gain (loss) on:
Available-for-sale short-term investments.	$	(996	)	$	433
Available-for-sale investment in foundries		220			38,673
Total accumulated other comprehensive income (loss)	$	(776	)	$	39,106

     Total accumulated other comprehensive income (loss) was ($0.8) million and $39.1 million at September 26, 2004 and December 28, 2003, respectively and included gains, net of taxes, on the Company’s investment in (i) UMC of $0.2 million at September 26, 2004 and $4.7 million at December 28, 2003 and (ii) Tower of $45,000 and $34.0 million at the same dates, respectively. During the three months ended September 26, 2004, the unrealized gain recorded in accumulated other comprehensive income on the condensed consolidated balance sheet related to the restricted Tower ordinary shares was reduced by approximately $21.3 million in order to adjust the value of the shares to their fair value. The fair value of these shares at September 26, 2004 approximated their original cost. The amount of income tax (benefit) allocated to unrealized gain (loss) on investments was $0.2 million and ($3.2) million as of September 26, 2004 and December 28, 2003, respectively (See also Note 10). The amount of income tax expense allocated to unrealized gain on available-for-sale securities was not significant at September 26, 2004 and December 28, 2003, respectively.

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     Comprehensive income is as follows (in thousands):

	Three months ended						Nine months ended
	September 26,			September 28,			September 26,			September 28,
	2004			2003			2004			2003
	(in thousands)
Net income	$	54,102		$	14,770		$	188,281		$	81,021
Unrealized (loss) gain on available-for-sale investment in foundries		(29,638	)		1,397			(38,453	)		8,422
Unrealized loss on available-for-sale short-term investments		1,101			(161	)		(1,429	)		(550	)
Comprehensive income	$	25,565		$	16,006		$	148,399		$	88,893

7. Net Income per Share

     The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share amounts):

	Three months ended				Nine months ended
	September 26,		September 28,		September 26,		September 28,
	2004		2003		2004		2003
Numerator:
Numerator for basic net income per share:
Net income	$	54,102	$	14,770	$	188,281	$	81,021
Denominator for basic net income per share:
Weighted average common shares outstanding		162,425		141,461		161,796		139,747
Basic net income per share	$	0.33	$	0.10	$	1.16	$	0.58
Numerator for diluted net income per share:
Net income	$	54,102	$	14,770	$	188,281	$	81,021
Tax-effected interest and bond amortization expenses attributable to convertible subordinated notes		1,202		475		3,612		3,939
Net income assuming conversion	$	55,304	$	15,245	$	191,893	$	84,960
Denominator for diluted net income per share:
Weighted average common shares		162,425		141,461		161,796		139,747
Incremental common shares attributable to exercise of outstanding employee stock options (assuming proceeds would be used to purchase common stock)		9,861		13,825		10,831		9,381
Weighted convertible subordinated debentures		16,276		16,276		16,276		16,276
Shares used in computing diluted net income per share		188,562		171,562		188,903		165,404
Diluted net income per share	$	0.29	$	0.09	$	1.02	$	0.51

     Basic net income per share excludes any dilutive effects of options, warrants and convertible securities. Diluted net income per share includes the dilutive effects of stock options, warrants, and convertible securities. For the three months ended September 26, 2004 and September 28, 2003, options to purchase 6,612,950 and 1,020,332 shares of common stock, respectively, and for the nine months ended September 26, 2004 and September 28, 2003 options to purchase 6,014,377 and 5,791,424 shares of common stock, respectively, have been omitted from the diluted net income per share calculation

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because the options’ exercise prices were greater than the average market price of the common shares, and therefore, the effect would be antidilutive.

8. Commitments, Litigation, Contingencies and Guarantees

Commitments

     FlashVision — The terms of the FlashVision business venture, as described in Note 10, contractually obligate the Company to purchase half of FlashVision’s NAND wafer production output. The Company also has the ability to purchase additional capacity under a foundry arrangement with Toshiba. Under the terms of the Company’s FlashVision business venture and foundry agreements with Toshiba, the Company is required to provide a six-month rolling forecast of purchase commitments. The purchase orders and other purchase commitments placed under these arrangements relating to the first three months of the six-month forecast are binding and cannot be cancelled. At September 26, 2004, the Company had approximately $83 million of non-cancelable purchase orders and other purchase commitments for flash memory wafers from Toshiba and FlashVision. In addition, as a part of the agreement with Toshiba, the Company is required to fund certain common and direct research and development expenses related to the development of advanced NAND flash memory technologies as well as other costs. As of September 26, 2004, the Company had accrued liabilities related to those expenses of $9.7 million. The common research and development amount is a variable computation with certain payment caps. Future obligations are to be paid in installments using a percentage of the Company’s revenue from NAND flash products built with flash memory supplied by Toshiba or FlashVision. The direct research and development is a pre-determined amount that extends through the third quarter of 2004. Subsequent to the third quarter of 2004, direct research and development liabilities will be computed using a variable percentage of actual research and development expenses incurred. The Company is committed to fund 49.9% of the total FlashVision business venture costs, to the extent such costs are not covered by the Company’s product purchases from FlashVision.

     The Company and Toshiba are currently expanding their fabrication and test capacity at the FlashVision operation in Yokkaichi, Japan. The capacity expansion is being funded through FlashVision internally generated funds, as well as through substantial additional investments and loans by Toshiba and SanDisk. Through September 26, 2004, the Company had funded approximately $33.0 million in loans to FlashVision at an interest rate of TIBOR plus 0.35%. These loans are secured by the equipment purchased by FlashVision using the loan proceeds. Additional loans totaling approximately $51 million are expected to be made by the Company in several tranches through the end of 2005. In addition, the Company has purchased approximately $61 million of capital equipment and has committed to purchase up to approximately $54 million of additional capital equipment, each based on the exchange rate in effect at September 26, 2004, which it has leased or will lease to Toshiba for use in the FlashVision operation. In return, the Company will receive an increased share of the output from FlashVision.

     Flash Partners — In September 2004, the Company and Toshiba entered into a series of definitive agreements and created a new semiconductor company, Flash Partners, to produce NAND flash memory products at a new 300-millimeter wafer fabrication facility, Fab 3, at Toshiba’s Yokkaichi operations. Under this agreement, the Company is obligated to purchase half of Flash Partners’ NAND wafer production output. Toshiba is bearing the cost to construct the Fab 3 building and depreciation of the Fab 3 building will be a component of the cost per wafer charged to each party. Both parties have agreed to equally share the cost of the manufacturing equipment, initial design and development of manufacturing process technology and start-up costs. Toshiba began construction of the building in April 2004. The investment in Flash Partners, excluding the cost of building construction, initial design and development of manufacturing process technology, start-up costs and wafer purchases, is currently estimated at $2.5 billion through the end of 2006, of which the Company’s share is estimated to be approximately $1.25 billion, with initial production currently scheduled for the end of 2005. In addition to the Company’s investment in Flash Partners, the Company will incur substantial expenses for several quarters related to initial design and development of manufacturing process technology and start-up costs for Fab 3. Fab 3 is expected to generate approximately 37,500 wafers per month by the end of 2006, of which the Company’s allocation will be 50%. Fab 3 has available space to expand capacity beyond 37,500 wafers per month, and it is expected that further investments and output will continue to be shared 50/50 between the Company and Toshiba. The Company expects to fund its portion of the investment through its cash as well as other financing sources.

     Convertible Subordinated Notes — On October 15, 2004, the Company announced that it has called for redemption on November 18, 2004 all of its outstanding 4 1/2% Convertible Subordinated Notes due 2006, or Notes. The aggregate principal amount of Notes outstanding is $150 million.

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     On or before November 17, 2004, holders may convert their Notes into shares of the Company’s common stock at a price of approximately $9.22 per share, or approximately 108.5 shares of the Company’s common stock per $1,000 principal amount of Notes. Cash will be paid in lieu of fractional shares. The last interest payment for the Notes will be paid to holders of record as of November 1, 2004. As long as the market price of SanDisk common stock is at least approximately $9.39 per share (the conversion price plus the redemption premium), a holder of Notes who converts after the record date for the interest payment will receive SanDisk common stock with a market value (plus cash in lieu of any fractional shares) greater than the amount of cash the holder would otherwise be entitled to receive upon redemption. Alternatively, holders may have their Notes redeemed at a total redemption price of $1,018 for each $1,000 principal amount due at the stated maturity, plus accrued and unpaid interest to, but excluding, the redemption date. Any Notes not converted on or before November 17, 2004, after which interest will cease to accrue, will be automatically redeemed on November 18, 2004. Upon redemption, the Company will be required to charge to earnings approximately $1.9 million, or approximately $1.2 million net of tax, related to unamortized bond issuance costs.

Contractual Obligations and Off Balance Sheet Arrangements

     In the normal course of business, the Company’s subcontractors periodically procure production materials based on the forecast the Company provides to them. The Company’s agreements with these subcontractors require that it reimburse them for materials that are purchased on the Company’s behalf in accordance with such forecast. As such, the Company may be committed to certain costs over and above its open non-cancelable purchase orders with these subcontractors. The following summarizes the Company’s contractual cash obligations, commitments and off balance sheet arrangements at September 26, 2004, and the effect such obligations are expected to have on its liquidity and cash flow in future periods.

										More than 5
				Less than		1 - 3 Years		3 5 Years		Years
				1 Year		(Fiscal 2005		(Fiscal 2008		(Beyond
	Total			(Fiscal 2004)		through 2007)		and 2009)		Fiscal 2009)
CONTRACTUAL OBLIGATIONS
(in thousands):
Convertible subordinated notes payable	$	150,000	(4)	$	150,000	$	—	$	—	$	—
Interest payable on convertible subordinated notes		3,764			3,764		—		—		—
Operating leases		6,129			1,097		5,032		—		—
FlashVision research and development, fabrication capacity expansion costs, and reimbursement for certain other costs including depreciation		714,326	(2)(3)		43,320		488,951		155,339		26,716
Flash Partners fabrication capacity expansion and start-up costs, and reimbursement for certain other costs including depreciation		818,361	(3)		32,618		491,781		188,840		105,122
Capital equipment purchase commitments		57,206			32,403		24,803		—		—
Operating expense commitments		7,862			7,862		—		—		—
Non-cancelable production purchase commitments		273,047	(1)		273,047		—		—		—
Total contractual cash obligations	$	2,030,695		$	544,111	$	1,010,567	$	344,179	$	131,838

(1) Includes all vendor production related commitments, some of which are denominated in Japanese Yen, and are subject to fluctuation in exchange rates prior to payment.

(2) Includes balance owed under loan agreement for FlashVision entered into in February 2004.

(3) Excludes certain potential FlashVision and Flash Partners costs not covered by our product purchases.

(4) As of November 3, 2004, no holders of Notes have tendered their Notes for conversion.

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									More than 5
			Less than		1 - 3 Years		3 - 5 Years		Years
			1 Year		(Fiscal 2005		(Fiscal 2008		(Beyond
	Total		(Fiscal 2004)		through 2007)		and 2009)		Fiscal 2009)
CONTRACTUAL SUBLEASE INCOME
(in thousands):
Total contractual cash income from non-cancelable operating subleases	$	177	$	53	$	124	$	—	$	—

	As of September 26, 2004
OFF BALANCE SHEET ARRANGEMENTS
(in thousands):
Indemnification of FlashVision foundry equipment lease	$	110,217

     The Company had foreign exchange contract lines in the amount of $120.0 million at September 26, 2004. Under these lines, the Company may enter into forward exchange contracts that require the Company to sell or purchase foreign currencies. There were no foreign exchange contracts outstanding at September 26, 2004.

Litigation

     The Company relies on a combination of patents, trademarks, copyright and trade secret laws, confidentiality procedures and licensing arrangements to protect its intellectual property rights. There can be no assurance that there will not be any disputes regarding the Company’s intellectual property rights. Specifically, there can be no assurance that any patents held by the Company will not be invalidated, that patents will be issued for any of the Company’s pending applications or that any claims allowed from existing or pending patents will be of sufficient scope or strength or be issued in the primary countries where the Company’s products can be sold to provide meaningful protection or any commercial advantage to the Company. Additionally, competitors of the Company may be able to design around the Company’s patents.

     To preserve its intellectual property rights, the Company believes it may be necessary to initiate litigation with one or more third parties, including but not limited to those the Company has notified of possible patent infringement. In addition, one or more of these parties may bring suit against the Company. Any litigation, whether as a plaintiff or as a defendant, would likely result in significant expense to the Company and divert the efforts of the Company’s technical and management personnel, whether or not such litigation is ultimately determined in favor of the Company.

     From time to time, it has been and may continue to be necessary to initiate or defend litigation against third parties to preserve and defend the Company’s intellectual property rights. These and other parties could bring suit against the Company.

     On or about August 3, 2001, the Lemelson Medical, Education & Research Foundation, or Lemelson Foundation, filed a complaint for patent infringement against the Company and four other defendants. The suit, captioned Lemelson Medical, Education, & Research Foundation, Limited Partnership vs. Broadcom Corporation, et al., Civil Case No. CIV01 1440PHX HRH, was filed in the United States District Court, District of Arizona. On November 13, 2001, the Lemelson Foundation filed an Amended Complaint, which made the same substantive allegations against the Company but named more than twenty-five additional defendants. The Amended Complaint alleges that the Company, and the other defendants, have infringed certain patents held by the Lemelson Foundation pertaining to bar code scanning technology. By its complaint, the Lemelson Foundation requests that the Company be enjoined from its allegedly infringing activities and seeks unspecified damages. On February 4, 2002, the Company filed an answer to the Amended Complaint, wherein the Company alleged that it does not infringe the asserted patents, and further that the patents are not valid or enforceable.

     On October 31, 2001, the Company filed a complaint for patent infringement in the United States District Court for the Northern District of California against Memorex Products, Inc., Pretec Electronics Corporation, Ritek Corporation, and Power Quotient International Co., Ltd. In the suit, captioned SanDisk Corp. v. Memorex Products, Inc., et al., Civil No. CV 01-4063 VRW, the Company seeks damages and injunctions against these companies from making, selling, importing

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or using flash memory cards that infringe the Company’s U.S. Patent No. 5,602,987, or the ‘987 patent. The Court granted summary judgment of noninfringement in favor of defendants Ritek, Pretec and Memorex and entered judgment on May 17, 2004. The rulings do not affect the validity of the patent. On June 2, 2004, the Company filed a Notice of Appeal of the summary judgment rulings to the Federal Circuit Court of Appeals.

     On or about June 9, 2003, the Company received written notice from Infineon Technologies AG, or Infineon, that it believes the Company has infringed Infineon’s U.S. Patent No. 5,726,601, or the ‘601 patent. On June 24, 2003, the Company filed a complaint against Infineon for a declaratory judgment of patent non-infringement and invalidity regarding the ‘601 patent in the United States District Court for the Northern District of California, captioned SanDisk Corporation v. Infineon Technologies AG, a German corporation, and Does I to X, Civil No. C 03 02931 BZ. On October 6, 2003, Infineon filed an answer and counterclaim: (i) denying that the Company is entitled to the declaration sought by the Company’s complaint; (ii) requesting that the Company be adjudged to have infringed, actively induced and/or contributed to the infringement of the ‘601 patent and an additional patent — U.S. Patent No. 4,841,222 (the ‘222 patent). On October 27, 2003, the Company filed a reply to Infineon’s counterclaims, wherein the Company denied that it infringes the asserted patents, and denied that Infineon is entitled to any relief in the action. Pursuant to the parties’ stipulation, on August 12, 2004, Infineon filed an amended counterclaim for patent infringement alleging that the Company infringes U.S. Patent Nos. 6,026,002 (the ‘002 patent); 5,041,894 (the ‘894 patent); and 6,226,219 (the ‘219 patent), and omitting the ‘601 and ‘222 patents. On August 18, 2004, the Company filed an amended complaint against Infineon for a declaratory judgment of patent non-infringement and invalidity regarding the ‘002, ‘894, and ‘219 patents.

     On July 3, 2003, a purported shareholder class action lawsuit was filed on behalf of United States holders of ordinary shares of Tower as of the close of business on April 1, 2002 in the United States District Court for the Southern District of New York. The suit, captioned Philippe de Vries, Julia Frances Dunbar De Vries Trust, et al., v. Tower Semiconductor Ltd., et al., Civil Case No. 03 CV 4999, was filed against Tower and certain of its shareholders and directors, including the Company and Eli Harari, the Company’s President and CEO and a Tower board member, and asserts claims arising under Sections 14(a) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 14a-9 promulgated there under. The lawsuit alleges that Tower and certain of its directors made false and misleading statements in a proxy solicitation to Tower shareholders regarding a proposed amendment to a contract between Tower and certain of its shareholders, including the Company. The plaintiffs are seeking unspecified damages and attorneys’ and experts’ fees and expenses. On August 19, 2004, the judge granted our and the other defendants’ motion to dismiss the complaint in its entirety with prejudice. On September 29, 2004, plaintiffs appealed the dismissal to the U.S. Court of Appeals for the Second Circuit. The appeal will likely be decided sometime in 2005.

     On February 20, 2004 the Company and a number of other manufacturers of flash memory products were sued in the Superior Court of the State of California for the City and County of San Francisco in a purported consumer class action captioned Willem Vroegh et al. v. Dane Electric Corp. USA, et al. alleging false advertising, unfair business practices, breach of contract, fraud, deceit, misrepresentation and violation of the California Consumers Legal Remedy Act. The lawsuit purports to be on behalf of a class of purchasers of flash memory products and claims that the defendants overstated the size of the memory storage capabilities of such products. The lawsuit seeks restitution, injunction and damages in an unspecified amount. On May 24, 2004, the Company filed an Answer denying all material allegations of the complaint and asserting affirmative defenses.

     On October 15, 2004, the Company filed a complaint for patent infringement and declaratory judgment of noninfringement and patent invalidity against STMicroelectronics N.V. and STMicroelectronics, Inc. in the United States District Court for the Northern District of California. The complaint alleges that STMicroelectronics N.V. and STMicroelectronics, Inc.’s products infringe the Company’s U.S. Patent No. 5,172,338 (the ‘338 patent) and seeks damages and an injunction. The complaint further seeks a declaratory judgment that the Company does not infringe the following patents and that the following United States patents are invalid: 4,839,768; 5,073,816; 5,175,706; 5,455,954; 5,589,762; 5,636,115; 5,793,679; 5,831,302; 5,999,456; 6,100,581; 6,163,487; Re. 35,121; 5,014,312; and 5,438,504.

     On October 15, 2004, the Company filed a complaint under Section 337 of the Tariff Act of 1930 (as amended) titled, “In the matter of certain NAND flash memory circuits and products containing same” in the United States International Trade Commission, naming STMicroelectronics N.V. and STMicroelectronics, Inc. as respondents. In the complaint, the Company alleges that STMicroelectronics N.V. and STMicroelectronics, Inc.’s NAND flash memory infringes the ‘338 patent and seeks an order excluding their products from importation into the United States.

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Contingencies

     FlashVision — FlashVision secured an equipment lease arrangement of approximately 37.9 billion Japanese Yen (or approximately $305.0 million based on the exchange rate in effect on the date the agreement was executed) in May 2002 with Mizuho Corporate Bank, Ltd., or Mizuho, and other financial institutions. Under the terms of the lease, Toshiba guaranteed these commitments on behalf of FlashVision. The Company agreed to indemnify Toshiba for certain liabilities Toshiba incurs as a result of Toshiba’s guarantee of the FlashVision equipment lease arrangement. If FlashVision fails to meet its lease commitments, and Toshiba fulfills these commitments under the terms of Toshiba’s guarantee, then the Company will be obligated to reimburse Toshiba for 49.9% of any claims and associated expenses under the lease, unless the claims result from Toshiba’s failure to meet its obligations to FlashVision or its covenants to the lenders. Because FlashVision’s equipment lease arrangement is denominated in Japanese Yen, the maximum amount of the Company’s contingent indemnification obligation on a given date when converted to U.S. dollars will fluctuate based on the exchange rate in effect on that date. As of September 26, 2004, the maximum amount of the Company’s contingent indemnification obligation, which reflects payments and any lease adjustments, was approximately $110.2 million.

     Flash Partners — The Company and Toshiba have agreed to mutually contribute to, and indemnify each other and Flash Partners for, environmental remediation costs or liability resulting from Flash Partners’ manufacturing operations in certain circumstances. The Company and Toshiba have also entered into a Patent Indemnification Agreement under which in many cases the Company will share in the expenses associated with the defense and cost of settlement associated with such claims. This agreement provides limited protection for the Company against third party claims that NAND flash memory products manufactured and sold by Flash Partners infringe third party patents. The Company has not made any indemnification payments under any such agreements and as of September 26, 2004, no amounts have been accrued in the accompanying consolidated financial statements with respect to these indemnification guarantees. In addition, Flash Partners is pursuing equipment lease financing for Fab 3 capital expenditures and the Company expects to guarantee 50% of that commitment.

Guarantees

     The Company has historically agreed to indemnify suppliers and customers for alleged patent infringement. The scope of the indemnity varies and in some instances includes indemnification for damages and expenses, including attorneys’ fees. The Company may periodically engage in litigation as a result of these indemnification obligations. The Company’s insurance policies exclude coverage for third-party claims for patent infringement. The nature of the patent infringement indemnification obligations prevents the Company from making a reasonable estimate of the maximum potential amount it could be required to pay to its suppliers and customers. The Company has not made any significant indemnification payments under any such agreements and as of September 26, 2004, no amount has been accrued in the accompanying consolidated financial statements with respect to these indemnification guarantees.

     As permitted under Delaware law and the Company’s charter and bylaws, the Company has agreements whereby it indemnifies certain of its officers and each of its directors for certain events or occurrences while the officer or director is, or was, serving at the Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a Director and Officer insurance policy that may reduce its exposure and enable it to recover all or a portion of any future amounts paid. As a result of its insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal. The Company has no liabilities recorded for these agreements as of September 26, 2004.

9. Foreign Currency

     The Company had foreign exchange contract lines in the amount of $120.0 million at September 26, 2004. Under these lines, the Company may enter into forward exchange contracts that require the Company to sell or purchase foreign currencies. At September 26, 2004, the Company had no forward exchange contracts outstanding.

     At September 26, 2004, the Company had a net $30.0 million in Japanese Yen-denominated accounts payable designated as fair value hedges against Japanese Yen-denominated cash holdings and accounts receivable. The Company had no outstanding hedge contracts. There were no unrealized gains or losses on derivative instruments as of September 26, 2004.

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     Foreign exchange loss was $0.7 million and $1.0 million in the third quarter and first nine months of 2004, respectively, and $0.1 million and $0.6 million in the third quarter and first nine months of 2003, respectively. These amounts are included in other expense, net, in the condensed consolidated statements of income.

10. Business Ventures, Strategic Manufacturing Relationships, Investments and Related Parties

     FlashVision — In April 2002, the Company and Toshiba restructured their FlashVision Dominion Semiconductor business in Virginia and consolidated FlashVision’s advanced NAND wafer fabrication manufacturing operations at Toshiba’s memory fabrication facility in Yokkaichi, Japan. The Company accounts for its 49.9% ownership position in FlashVision under the equity method of accounting, see also note 8.

     Flash Partners — In September 2004, the Company and Toshiba entered into a series of definitive agreements and created a new semiconductor company, Flash Partners, to produce NAND flash memory products at a new 300-millimeter wafer fabrication facility, Fab 3, at Toshiba’s Yokkaichi operations. The Company accounts for its 49.9% ownership position in Flash Partners under the equity method of accounting, see also note 8.

     UMC — The Company maintains its investment position in UMC, one of its suppliers of wafers for its controller components, on the cost basis of accounting. The Company owned 22.2 million shares of UMC stock as of September 26, 2004. At September 26, 2004, UMC’s share price had decreased to New Taiwan dollars, or NT$, of NT$21.00, from a stock dividend adjusted price of NT$26.85 at December 28, 2003. The value of the Company’s investment on a given date when converted to U.S. dollars will fluctuate based on the exchange rate in effect on that date. As a result, the Company’s investment, which is classified as available-for-sale in accordance with SFAS No. 115, includes a net unrealized gain of approximately $0.2 million, inclusive of related tax expense of $0.1 million, recorded as a component of accumulated comprehensive income on the Company’s condensed consolidated balance sheet (See also Note 6). If the fair value of the UMC shares declines in the future and such declines are deemed to be other-than-temporary, it may be necessary to record losses for such declines. In addition, in future periods, if the UMC shares are sold, there may be a gain or loss due to fluctuations in the market value of UMC’s stock.

     Tower Semiconductor — In July 2000, the Company entered into a share purchase agreement to make an aggregate $75.0 million investment in Tower Semiconductor in five installments upon Tower’s completion of specific milestones. As of September 26, 2004, the Company had paid all five of its milestone payments and participated in Tower’s 2002 rights offering for a total investment in Tower of $79.0 million in return for approximately 9.0 million Tower ordinary shares, $14.3 million of prepaid wafer credits, and a warrant to purchase 0.4 million Tower ordinary shares at an exercise price of $7.50 per share. The warrant expires on October 31, 2006. The 9.0 million Tower ordinary shares represented an approximate 14% equity ownership position in Tower as of September 26, 2004. From July 2000 through September 26, 2004, the Company has recognized cumulative losses of approximately $32.2 million as a result of the other-than-temporary decline in the value of its investment in Tower ordinary shares, $12.2 million as a result of the impairment in value on its prepaid wafer credits and $1.0 million of losses on its warrant to purchase Tower ordinary shares. As of September 26, 2004, the Company’s Tower ordinary shares were valued at $32.1 million and included an unrealized gain of $45,000, inclusive of related tax expense impact of $28,000, recorded as a component of accumulated other comprehensive income. Of the approximately 9.0 million Tower ordinary shares the Company owns, the Company has agreed not to sell approximately 6.3 million shares until on or after January 29, 2006, and the value of these restricted shares is included in the Company’s condensed consolidated balance sheet as long term investment in foundries. In addition, the Company has extended the date on which it may exercise its demand registration rights on all its shares until the earlier of (i) December 31, 2005 and (ii) such date that Tower has fulfilled all of its obligations to raise any additional financing pursuant to its facility agreement. During the three months ended September 26, 2004, the unrealized gain recorded in accumulated other comprehensive income on the condensed consolidated balance sheet related to the restricted Tower ordinary shares was reduced by approximately $21.3 million in order to adjust the value of the shares to their fair value. The fair value of these shares at September 26, 2004 approximated their original cost. The Company may be required to recognize additional losses with respect to its Tower investments in future periods. As of September 26, 2004, the Company’s Tower prepaid wafer credits were valued at $0.2 million and the warrant to purchase Tower ordinary shares was valued at $0.2 million.

     In November 2003, the Company amended its foundry investment agreements with Tower and, among other things, agreed not to use wafer credits until January 1, 2007, except with respect to purchase orders issued before the November 2003 amendment, which had been completely utilized as of the end of the Company’s second fiscal quarter of 2004. In the first nine months of fiscal 2004 the Company utilized approximately $0.7 million of these wafer credits to purchase

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controller wafers from Tower. The Company has the option to convert credits it would have otherwise been able to utilize per quarter into Tower ordinary shares at the 15-day average trading price, or ATP, preceding the last day of the relevant quarter. During the first quarter of 2004, the Company exercised its option to convert credits it would have otherwise been able to utilize for the period into Tower ordinary shares and received approximately $0.3 million in Tower ordinary shares, or approximately 52,000 Tower ordinary shares. For the third fiscal quarter of 2004 the Company determined that it would again exercise its option to convert credits it would have otherwise been able to utilize during the quarter into approximately $0.2 million in Tower ordinary shares or approximately 65,000 Tower ordinary shares. In the future, should the Company choose not to convert the credits it would have otherwise been able to utilize for the quarter into shares, the unconverted credits will accrue interest at a rate per annum equal to three-month LIBOR plus 2.5% through December 31, 2007. Interest payments will be made quarterly and the aggregate principal amount of the unconverted credits will be repaid in one lump sum on December 31, 2007. Effective as of December 31, 2005, the Company may convert all of the then remaining credits it was issued in connection with its fourth milestone payment into Tower ordinary shares at the 15 day ATP preceding December 31, 2005. If the number of Tower ordinary shares received by the Company and the other wafer partners as a result of this conversion is greater than or equal to an aggregate of 5% of Tower’s issued and outstanding share capital on January 31, 2006, Tower will transact a rights offering for the distribution of rights to all of Tower’s shareholders, other than the Company and the other wafer partners but including Israel Corporation Technologies, at the same 15 day ATP.

     Related party transactions — The Company has entered into agreements with Toshiba, under which they formed FlashVision and Flash Partners, to produce advanced NAND flash memory wafers. In addition, the Company and Toshiba jointly develop and share the research and development expenses of advanced NAND flash memory products. During the third quarter of 2004, the Company purchased approximately $61 million of capital equipment based on the exchange rate in effect at September 26, 2004, and has committed to purchase up to approximately $54 million of additional capital equipment, which it has leased or will lease to Toshiba for use in the FlashVision operation. In return, the Company will receive an increased share of the output from FlashVision. The Company also purchases NAND flash memory card products from Toshiba. In the third quarter and first nine months of 2004, the Company purchased NAND flash memory wafers and card products from FlashVision and Toshiba, purchased capital equipment from FlashVision and made payments for shared research and development expenses totaling approximately $166.1 million and $358.2 million, respectively, and $57.5 million and $159.6 million, respectively, in the comparable periods of fiscal 2003. At September 26, 2004 and December 28, 2003, the Company had accounts payable balances due to FlashVision of $43.6 million and $30.4 million respectively, and to Toshiba of $11.8 million and $14.6 million, respectively. At September 26, 2004 and December 28, 2003, the Company had accrued current liabilities due to Toshiba for joint research and development expenses of $9.7 million and $11.8 million, respectively.

     The Company owns approximately 14% of the outstanding shares of Tower and the Company’s CEO is a member of the Tower board of directors. The Company commenced the purchase of controller wafers from Tower in the last half of 2003. The Company purchased $3.2 million and $19.0 million of controller wafers from Tower in the third quarter and first nine months of 2004, respectively and $1.2 million in the third quarter of fiscal 2003. At September 26, 2004 and December 28, 2003 the Company had amounts payable to Tower of approximately $2.9 million and $5.4 million, respectively, related to the purchase of controller wafers.

     In September 2003, the president and chief executive officer of Flextronics International Ltd. joined the Company’s board of directors. For the third quarter and first nine months of 2004, the Company paid Flextronics and its affiliates approximately $9.1 million and $25.2 million, respectively and $3.3 million in the third quarter of 2003 for wafer testing, packaged memory final testing, card assembly and card testing. At September 26, 2004 and December 28, 2003, the Company had amounts payable to Flextronics and its affiliates of approximately $3.7 million and $1.5 million, respectively, for these services.

11. Income Taxes

     For the three and nine months ended September 26, 2004, the Company recorded an income tax provision of $31.5 million and $110.6 million, respectively representing effective tax rates of 36.8% and 37.0%, respectively. This compares to a tax provision of $44.5 million in the third quarter and $51.4 million for the first nine months of 2003 representing effective tax rates of 75.1% and 38.8%, respectively. The third quarter of 2003 had an unusually high tax rate due principally to a tax on the gain realized from the sale of UMC shares, a charge relating to the non-cash reversal of a tax benefit taken in 2001 and 2002 related to unrealized gain in UMC shares accounted for under FAS 115, a benefit from the

17

loss recorded on the theft of UMC shares, and benefit provided by partial reversal of the valuation allowance that the Company carried at the end of 2002. The tax provision for the third quarter and the first nine months of 2004 is computed based on the Company’s estimated annual earnings projection and is primarily related to U.S. federal and state income tax along with benefits from tax-exempt interest and research and development credits. The estimated annual effective tax rate for 2003 was less than the statutory rate primarily due to taxes provided in foreign jurisdictions offset by a reversal of valuation allowances.

12. Subsequent Events

     On October 15, 2004, the Company announced that it has called for redemption on November 18, 2004 all of its outstanding 4 1/2% Convertible Subordinated Notes due 2006. The aggregate principal amount of Notes outstanding is $150 million. On or before November 17, 2004, holders may convert their Notes into shares of the Company’s common stock at a price of approximately $9.22 per share, or approximately 108.5 shares of the Company’s common stock per $1,000 principal amount of Notes. Cash will be paid in lieu of fractional shares. The last interest payment for the Notes will be paid to holders of record as of November 1, 2004. As long as the market price of SanDisk common stock is at least approximately $9.39 per share (the conversion price plus the redemption premium), a holder of Notes who converts after the record date for the interest payment will receive SanDisk common stock with a market value (plus cash in lieu of any fractional shares) greater than the amount of cash the holder would otherwise be entitled to receive upon redemption. Alternatively, holders may have their Notes redeemed at a total redemption price of $1,018 for each $1,000 principal amount due at the stated maturity, plus accrued and unpaid interest to, but excluding, the redemption date. Any Notes not converted on or before November 17, 2004, after which interest will cease to accrue, will be automatically redeemed on November 18, 2004.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     Statements in this report that 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,” “estimates,” or other wording indicating future results or expectations. Forward-looking statements are subject to risks and uncertainties. Our actual results may materially differ from the results discussed in our forward-looking statements. Factors that could cause our actual results to materially differ include, but are not limited to, those discussed under “Factors That May Affect Future Results” below, and elsewhere in this report. Our business, financial condition or results of operations could be materially affected by any of these or other factors. The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto. We undertake no obligation to revise or update any forward-looking statements to reflect any event or circumstance that may arise after the date of this report.

Overview

     SanDisk, the worldwide leader in flash storage card products, designs, develops, manufactures and markets flash storage products used in a wide variety of electronic systems. Our flash storage products allow data to be stored in a compact, removable format. Our flash storage card products help enable mass market adoption of digital cameras, feature phones and other digital consumer devices, and use of our USB flash drive products is becoming an increasingly popular approach to transferring files between personal computers and other devices. We are the only company that has rights to manufacture and sell every major flash card format. We do not operate fabrication facilities, but do control a significant portion of our flash memory wafer manufacturing through business ventures with Toshiba Corporation, or Toshiba, contracts with fabrication facility owners and contractual supply rights from other partners. This multiple sourcing strategy enables us to adjust our supply with changes in demand. We receive a majority of our flash storage product revenues from sales to the retail channel with the balance principally attributable to sales to original equipment manufacturers, or OEMs, or their distributors. We also receive royalties from the licensing of our flash technology, including our patent portfolio, to third-party manufacturers of flash products. Royalty revenues comprise a significant portion of our total revenues and are a key part of funding our research efforts. We compete in an industry characterized by intense competition, rapid technological changes, evolving industry standards, declining average selling prices, declining costs and rapid product obsolescence. Demand for flash memory megabytes has traditionally been price elastic, allowing revenue to increase despite reductions in the price per megabyte. Because our products are predominately used in consumer electronics applications, our revenue is subject to consumer-driven seasonal patterns, such as seasonal increases in the fourth quarter of each year followed by declines in the first quarter of the following year.

     Our products are focused primarily on three markets: digital cameras and other consumer electronics, feature phones and USB flash drives:

• Digital Cameras and other consumer electronics. Shipments of digital cameras exceeded shipments of traditional film cameras in 2003. We make and sell flash cards that are used as digital film in all the major brands of digital cameras. Digital cameras have improved in terms of resolution quality, requiring flash cards with greater capacity. Our memory products are also used to store: music in MP3 players, video in solid-state digital camcorders, personal data in PDAs and maps in GPS devices.

• Feature Phones. Feature phones are phones which contain one or more multimedia features such as camera functionality, audio/MP3, games, video or internet access. These features require increasing storage capacity in the phone. We are a leading supplier of miniSD, SD, TransFlash, MMC and RS-MMC cards for removable storage in some of these feature phones.

• USB Flash Drives. We provide USB flash drive solutions designed to allow consumers to store computer files on keychain-sized devices and then quickly and easily transfer these files between laptops, desktops and other devices. USB flash drives are being increasingly used in the place of floppy disks, compact discs with read/write capability, and other storage devices for personal computers.

     Our products come in small formats from the Compact Flash card, or CF card, which weighs about a half an ounce and is approximately the size of a matchbook all the way down to our new TransFlash, which is about the size of a dime. All of our products store information in non-volatile memory cells that do not require power to retain information. Power

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consumption is also very low during read and write operations particularly when compared to rotation disk drives. Our products have a high degree of ruggedness, reliability and performance.

     Our principal products are CF card, SD card/miniSD cards, Memory Stick cards, SanDisk Ultra II products, Cruzer USB flash drives, Shoot & Store cards, xD Picture cards and TransFlash:

• CompactFlash. The ruggedness and low-power requirements of CompactFlash cards make them well suited for consumer applications such as digital cameras, PDAs and audio recorders.

• SD Card/miniSD. SD Cards provide advanced security and copyright protection features for the electronic distribution of music, video and other copyrighted works. The SD form factor is also used in digital cameras, feature phones, PDAs and MP3 players. A smaller version of the SD card, known as miniSD, is used in small feature phones.

• Memory Stick Products. The SanDisk Memory Stick family is used primarily in Sony’s wide variety of consumer electronics products and includes the Memory Stick, Memory Stick Duo, Memory Stick PRO and Memory Stick PRO Duo . The Memory Stick PRO and Memory Stick PRO Duo cards offer high performance with faster write speeds and the addition of copyright protection targeted for digital cameras, audio players, and cell phone applications.

• SanDisk Ultra II and SanDisk Extreme Products. The SanDisk Ultra II and SanDisk Extreme products are high speed CF, SD and Memory Stick PRO cards specifically designed for use in the rapidly growing market for high-performance digital cameras. These products are targeted at advanced photographers who require high-speed cards to quickly shoot many high-resolution images.

• Cruzer USB Flash Drive Product Line. The Cruzer product family allows the user to transfer data files between any device with a USB port offering a high-speed replacement for the floppy disk or other removable media.

• Shoot & Store Card Products. Shoot & Store card products are a new product line of inexpensive and lower capacity flash memory cards targeted for sale at supermarkets, and convenience and drug stores.

• xD Picture Card. SanDisk sells the xD-Picture card format under our arrangements with Olympus and Fuji for use in cameras from Olympus and Fuji.

• TransFlash. TransFlash, introduced in 2004, is the world’s smallest removable flash memory storage format. TransFlash is designed for new mobile phones that are compact yet fully-featured with storage-intensive multimedia applications such as digital cameras, video capture and playback, MP3 players, video games, personal organizers, Multimedia Message Service (MMS), email and voicemail capabilities. TransFlash is similar in size and function to embedded flash memory, but can also be readily removed and upgraded to allow for a range of memory capacities as well as interoperability with other consumer electronics devices.

• Reduced sized multimedia card (RS-MMC). Our RS-MMC is designed for use in the newest generation of ultra-small mobile phones. It is about half the size of a standard MultiMediaCard, and has the same simple, low power interface. This allows the RS-MMC to be used with an extender in a full size MMC slot.

     We make significant investments in the research and development of flash process and design technology as well as controller technology to continue to increase storage capacity, functionality and performance and to lower the cost of our flash memory products. This has allowed us to significantly reduce our cost per megabyte of capacity with each new generation of our products.

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     We market our products using our direct sales organization, distributors, manufacturers’ representatives, OEMs and retailers. Over 50% of our revenues in the third quarter and first nine months of 2004 were derived from outside of North America. We distribute SanDisk brand name products to consumer electronics stores, office superstores, photo retailers, mass merchants, catalog and mail order companies, Internet and e-commerce retailers, drug stores, supermarkets and convenience stores and retail distributors. Outside the U.S., we ship primarily to retail distributors. Our products are available through retail chains that have total combined retail outlets currently estimated at approximately 80,000 worldwide. In addition, manufacturers’ representative firms are supporting our sales efforts in the retail and OEM channels worldwide. Because of frequent sales price reductions and rapid technology obsolescence in the industry, sales made to distributors and retailers are generally under agreements allowing price protection and/or right of return and, therefore, the revenues on these sales is deferred until the retailers or distributors sell the merchandise to their end customer. We provide SanDisk brand name and private label products to OEMs and their distributors, including manufacturers of digital still cameras, mobile phones, and other electronic consumer and industrial products.

     An important element of our strategy has been to establish strategic relationships with technology companies that can provide us with access to leading edge semiconductor manufacturing capacity and that participate in the development of some of our products. This enables us to concentrate our resources on the product design and development areas where we believe we have competitive advantages. Our most significant strategic relationship is our 49.9% owned business venture, FlashVision, with Toshiba. The majority of our NAND flash memory wafers are currently supplied by FlashVision and through a separate Toshiba foundry agreement. We and Toshiba are currently expanding our fabrication and test capacity at the FlashVision operation, and we recently formed a new business venture with Toshiba, Flash Partners, to further expand future capacity. We also have supply agreements with Samsung Electronics Co., Ltd., or Samsung, in South Korea and Renesas Technology Corporation, or Renesas, in Japan which allow us to purchase NAND flash memory products. All of our flash memory products require silicon wafers for the controller components. We have strategic relationships with United Microelectronic Inc., or UMC, in Taiwan, and Tower Semiconductor Ltd., or Tower, in Israel for the supply of our controller wafers. We may establish relationships with other foundries in the future.

Critical Accounting Policies & Estimates

     Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. 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 on-going basis, we evaluate our estimates, including those related to customer programs and incentives, product returns, bad debts, inventories, investments, income taxes, warranty obligations, restructuring, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

     Revenue Recognition, Sales Returns and Allowances and Sales Incentive Programs. We recognize net 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. Because of frequent sales price reductions and rapid technology obsolescence in the industry, sales made to distributors and retailers are generally under agreements allowing price protection and/or right of return and, therefore, the income on these sales is deferred until the retailers or distributors sell the merchandise to their end customer, or the rights of return expire. At September 26, 2004 and December 28, 2003, deferred income, from sales to distributors and retailers was $87.8 million and $90.1 million, respectively. Estimated product returns are provided for in the condensed consolidated financial statements.

     We entered into patent cross-license agreements with several companies including Renesas, Samsung, Sharp Electronics Corporation, or Sharp, Silicon Storage Technology, Inc., or SST, SiliconSystems Inc., Sony Corporation, or Sony, Olympus, and TDK. Certain of these agreements provide for the payment of license fees or royalties, or a combination thereof, to us. The timing and amount of these payments can vary substantially from quarter to quarter, depending on the terms of each agreement and, in some cases, the timing of sales of products by the other parties.

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     Revenue recognition for our patent licensing arrangements is dependent on the terms of each contract and in some cases on the timing of product shipments by third parties. Licensing fees are generally amortized over the term of the agreement. Royalty revenues are generally a percentage of applicable revenues of our licensees, and our royalty revenues are generally recognized when reported to us by our licensees. We have received payments under our cross-license agreements, portions of which were recognized as revenue and portions of which were recorded as deferred revenue. Our cross license arrangements, that include a guaranteed access to flash memory supply, were recorded based upon the cash received for the arrangement as we do not have objective evidence for the fair value of the intellectual property exchanged or supply guarantees received. Under these arrangements we have recorded the cash received as the total value of goods received and are recognizing the associated revenues over the life of the agreement, which corresponds to the life of the supply arrangement as well. Recognition of deferred revenue is expected to occur in future periods over the life of the agreements as we meet certain obligations as provided in the various agreements. At September 26, 2004 and December 28, 2003, deferred revenue from patent license agreements was $29.9 million and $34.5 million, respectively. The cost of revenues associated with patent license and royalty revenues was insignificant for the three-month and nine-month periods ended September 26, 2004 and September 28, 2003.

     We generally record reductions to revenue and trade-accounts receivable for customer programs and incentive offerings, including promotions and other volume-based incentives, when revenue is recorded based on estimated requirements. However, marketing development programs, when granted, the substantial majority of which are recorded as a reduction to revenue or as an addition to marketing expense depending on the contractual nature of the program. These incentives generally apply only to our retail customers, which represented 78% and 75% of product revenues in the third quarter and first nine months of 2004 respectively, and 62% in both of the comparable periods of 2003.

     Allowance for Doubtful Accounts. We estimate the collectibility of our accounts receivable based on a combination of factors. In circumstances where we are aware of a specific customer’s inability to meet its financial obligations to us (e.g., bankruptcy filings or substantial down-grading of credit ratings), we record a specific reserve for bad debts against amounts due to reduce the net recognized receivable to the amount we reasonably believe will be collected. For all other customers, we recognize reserves for bad debts based on the length of time the receivables are past due based on our historical experience. If circumstances change (e.g., higher than expected defaults or an unexpected material adverse change in a major customer’s ability to meet its financial obligations to us), our estimates of the recoverability of amounts due us could be reduced by a material amount.

     Warranty Costs. The majority of our products are warrantied for one to five years. A provision for the estimated future cost related to warranty expense is recorded at the time of customer invoice. Our warranty obligation is affected by product failure rates and repair or replacement costs incurred in supporting a product failure. Should actual product failure rates, or repair or replacement costs differ from our estimates, increases or decreases to our warranty liability would be required.

     Valuation of Financial Instruments including Investments in Foundries. Our investments include investments in marketable equity and debt securities, which also include equity investments in UMC of $13.8 million and Tower of $32.1 million, as of September 26, 2004, which have operations or technology in areas within our strategic focus. In determining if and when a decline in market value on any of our financial instruments is below carrying cost and is other-than-temporary, we evaluate the market conditions, offering prices, trends of earnings, price multiples, and other key measures for our investments in marketable equity securities, debt instruments and current equity investments. When such a decline in value is deemed to be other-than-temporary, we recognize an impairment loss in the current period operating results to the extent of the decline. Certain of the investments carry restrictions on immediate disposition. Investments in public companies with restrictions of less than one year are classified as available-for-sale and are adjusted to their fair market value with unrealized gains and losses recorded as a component of accumulated other comprehensive income. Investments in non-public companies are reviewed on a quarterly basis to determine if their value has been impaired and adjustments are recorded as necessary. Upon disposition of these investments, the specific identification method is used to determine the cost basis in computing realized gains or losses. (See Liquidity and Capital Resources elsewhere within Management’s Discussion and Analysis).

     Inventories and Inventory Valuation. Inventories are stated at the lower of cost or market. Cost is computed on a currently adjusted standard basis. Market value is based upon an estimated average selling price reduced by estimated costs of disposal. We write down our inventory to a new basis for estimated obsolescence or unmarketable inventory based upon assumptions about future demand and market conditions, including assumptions about changes in average selling prices. Should actual market conditions differ from our estimates, our future results of operations could be materially affected.

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     Deferred Tax Assets. We provide a valuation allowance against deferred tax assets if it is more likely than not that such an amount will not be realized. At September 26, 2004, we carried a valuation allowance on our deferred tax assets of approximately $12.3 million based primarily on our probable inability to realize certain unrealized capital losses on our investments in Tower Semiconductor. At December 28, 2003, based on the weight of all available evidence, we carried no valuation allowance on the net deferred tax assets. The portion of the valuation allowance, associated with unrealized capital loss on our investment, was recognized into the accumulated other comprehensive income at December 28, 2003.

Results of Operations

     Product Revenues. Our product revenues were $365.0 million in the third quarter and $1.1 billion in the first nine months of 2004, up $105.6 million or 41% from the third quarter of 2003 and $466.2 million or 74% from the first nine months of fiscal 2003. The increase in product revenues for the third quarter and first nine months of 2004 compared to the same periods in the prior year, were primarily due to increased unit sales of our CF cards, SD cards, USB flash drives, Memory Stick, xD picture cards, TransFlash and miniSD cards. Product revenue of $365.0 million in the third quarter of 2004 was down 7% from $391.3 million in the second quarter of 2004. This decline in product revenue resulted from a 22% decline in average selling price per megabyte partially offset by a 20% increase in megabytes sold. NAND flash memory prices declined more steeply in the third quarter than in prior quarters of this year due to significant increases in the market supply of NAND flash components. During the third quarter of 2004 as compared to the third quarter of 2003, total flash memory product unit sales increased approximately 31%, total megabytes sold increased 115%, while our average selling price per megabyte declined 34%. During the first nine months of 2004 as compared to the same period of 2003, total flash memory product unit sales increased approximately 51%, total megabytes sold increased 131%, while our average selling price per megabyte declined 24%.

     In the third quarter and first nine months of 2004, sales through the retail channel accounted for 78% and 75% of total product revenues, respectively and 62% in each of the same periods of 2003. Total product revenue dollars from our retail channels increased 75% in the third quarter of 2004 over the comparable period in 2003 and 112% in the first nine months of 2004 over the same period of 2003. In the third quarter of 2004 and 2003, sales to the OEM and industrial distribution channels accounted for 22% and 38%, respectively of total product revenues, and 25% and 38% in the first nine months of 2004 and 2003. Total revenue dollars from our OEM and industrial distribution channels decreased 16% in the third quarter of 2004 over the same period of 2003 while increasing 12% for the first nine months of fiscal 2004 over the comparable period in 2003. Revenues related to OEM bundled card sales have become a smaller percentage of our business as average selling prices per megabyte have declined and the move to higher capacity cards has occurred predominately in the retail channel.

     International sales represented 56% and 54% of our product revenues in the third quarter and first nine months of 2004 and 61% in both of the comparable periods of 2003, respectively. The reduction in the percentage of product revenues coming from our international regions is due in part to slower growth in OEM sales which are primarily concentrated in international regions.

     Our top ten customers represented approximately 53% and 51% of our total revenues in the third quarter of 2004 and 2003, and 54% and 49% in the first nine months of fiscal 2004 and 2003 respectively. No customer exceeded 10% of total revenues in either the third quarters or first nine months of 2004 or 2003.

     License and Royalty Revenues. License and royalty revenues from patent cross-license agreements were $42.9 million in the third quarter and $133.0 million for the first nine months of 2004, compared to $22.0 million and $61.6 million in the same periods of 2003. These increases were primarily due to higher royalty-bearing sales by our licensees compared to the applicable periods in 2003 due to the expansion of the NAND flash memory market. Revenues from licenses and royalties represented 11% and 8% of total revenues in the third quarters of 2004 and 2003, respectively and 11% and 9% in the first nine months of 2004 and 2003, respectively. The timing of royalty revenue recognition is dependent on the terms of each contract and on the timing of product shipments by third parties.

     Gross Profits. In the third quarter of 2004, total gross profits were $147.4 million, or 36% of total revenues, compared to $178.7 million or 41% of total revenues in the prior quarter and $113.6 million, or 40%, in the third quarter of 2003. For the first nine months of fiscal 2004 gross profits were $482.0 million or 39% of total revenues compared to $274.0 million or 40% of total revenues in the comparable period of 2003. In the third quarter of 2004, product gross margins were 29%

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compared to 35% in the second quarter of 2004 and 35% for the third quarter of 2003. For the first nine months of fiscal 2004 product gross margins were 32% compared to 34% in the comparable period of 2003. The decrease in the product gross margin percentage in the third quarter and first nine months of 2004 compared to the previous quarter and to the same periods in 2003 was due to lower average selling prices and an increased mix of lower margin, non-captive supply.

     Product gross margins can fluctuate each quarter primarily due to changes in pricing, sourcing mix between captive and non-captive, the level of product that is produced using MLC technology, product mix, pricing from our non-captive suppliers, cost reductions or increases and start-up costs of new technologies.

     Research and Development Expenses. Research and development expenses consist principally of salaries and payroll-related expenses for design and development engineers, prototype supplies, contract services and costs related to our research and development arrangement with Toshiba. Research and development expenses were $30.2 million in the third quarter of 2004, down $2.3 million or 7% from the prior quarter and an increase of $8.2 million or 37% from the third quarter of 2003. Research and development expenses were $89.4 million in the first nine months of 2004, up $30.5 million or 52% from the comparable period of fiscal 2003. The decrease in research and development expenses compared to the previous quarter relate to lower initial design and development costs for our 300 millimeter Fab 3 business venture with Toshiba. The increases in 2004 over the comparable periods in 2003 were primarily due to increased salary and related expenses associated with higher headcount in support of our product development efforts, higher vendor engineering costs and costs associated with the initial design and development of manufacturing process technology related to our 300 millimeter Fab 3 business venture with Toshiba. We expect our research and development expenses to continue to increase in absolute dollars in future periods to support the development and introduction of new generations of flash data storage device and card products, including our development efforts at our business ventures with Toshiba as well as our continued development of advanced controller chips.

     Sales and Marketing Expenses. Sales and marketing expenses include salaries, sales commissions, benefits and travel expenses for our personnel, commissions for independent manufacturers’ representatives, advertising, certain sales and marketing promotions and trade shows. Sales and marketing expenses were $20.9 million in the third quarter of 2004, down $4.1 million or 16% from the second quarter of 2004 and up $4.0 million or 23% from the third quarter of 2003. Sales and marketing expenses were $65.5 million in the first nine months of 2004, up $20.4 million or 45% from the comparable period of 2003. The sequential decrease in our third quarter sales and marketing expenses compared to the previous quarter was primarily due to a negotiated reduction in our outside commission rates. The increase in sales and marketing expenses in the third quarter and first nine months of 2004 compared to the same periods in 2003 consisted of expenses associated with increased salary and related expenses due to additional headcount, an increase in outside commission expenses, and advertising and branding expenses, all in support of our higher revenue base. We expect sales and marketing expenses to increase, in absolute dollars, as sales of our products grow and we continue to invest in increasing brand awareness.

     General and Administrative Expenses. General and administrative expenses include the cost of our finance, human resources, shareholder relations, legal and administrative functions as well as a portion of our information systems costs. General and administrative expenses were $12.7 million in the third quarter of 2004, up $1.7 million or 16% from the second quarter of 2004 and up $4.7 million or 60% from the third quarter of 2003. General and administrative expenses were $34.5 million in the first nine months of 2004, up $12.7 million or 58% from the comparable period of 2003. The increase in our third quarter of 2004 general and administrative expenses compared to the previous quarter primarily relates to increased legal expenses related in part to our intellectual property strategy. The increase in general and administrative expenses in the third quarter and first nine months of 2004 compared to the same periods in 2003 consisted of higher salary and related expenses due to increases in staffing and consulting expenses to support our expanded business and the requirements of SEC Rule 404, as well as additions to the allowance for doubtful accounts due to the growth in accounts receivable balances. General and administrative expenses are expected to increase in absolute dollars in the future to grow and defend our patent portfolio as well as expand our administrative infrastructure.

     Equity in Income (Loss) of Business Ventures. Equity in income (loss) of business ventures was $0.1 million and $51,000 in the third quarters of 2004 and 2003, and $0.5 million and $0.1 million for the first nine months of 2004 and 2003, respectively, for our share of income (loss) from our FlashVision business venture in 2003 and 2004 and also the Flash Partners business venture completed in the third quarter of 2004.

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     Interest Income. Interest income was $5.3 million in the third quarter and $13.5 million in the first nine months of 2004, compared to $1.6 million in the third quarter and $5.6 million for the first nine months of 2003. The increase in interest income for the third quarter of 2004 and the first nine months of 2004 compared to the same periods of 2003 is due to higher investment balances and an increased earnings rate.

     Interest Expense. Interest expense on our outstanding convertible notes was $1.7 million in each of the third quarters of 2004 and 2003, and $5.1 million for each of the nine-month periods in 2004 and 2003.

     Gain (loss) on Investment in Foundry. The income(loss) on investment in foundry in the third quarter of 2004 and first nine months of 2004 was ($0.4) million and ($1.0) million, respectively, and represents the adjustment in value of our warrant to purchase Tower ordinary shares. In the third quarter of 2003, we sold 35 million shares of UMC common stock and recognized a gain of approximately $7.0 million which was partially offset by a $0.3 million adjustment to our Tower warrant. During the first nine months of 2003, we recognized a write-down of $3.9 million related to the recoverability of our Tower prepaid wafer credits, which at September 28, 2003 were valued at $1.7 million, and we recognized an $18,000 decrease in the fair value of our Tower warrant. We periodically assess the value of the warrant, our Tower ordinary shares and our prepaid wafer credits and adjust the value as necessary. In future periods, if we sell shares that we own in either UMC or Tower, we may recognize a gain or loss due to fluctuations in the market value of these stocks.

     Loss on unauthorized sale of UMC shares. On October 14, 2003, we were advised by our Taiwan law firm, Lee and Li, that UMC shares owned by us and held in custody by Lee and Li, had been embezzled by an employee of Lee and Li. Based on information provided by Lee and Li, a total of approximately 127.8 million of our UMC shares were sold in unauthorized transactions starting on August 6, 2003 and ending on September 15, 2003.

     As a result of the unauthorized sales of UMC shares and our sale of 35 million UMC shares, our holdings in UMC decreased to approximately 20.6 million shares and we recognized a loss of approximately $18.3 million in accordance with SFAS No. 5 related to the stolen shares and recognized a gain of $7.0 million related to the sale of the 35 million shares in our condensed consolidated statements of income for the three and nine months ended September 28, 2003. Related to the recorded loss, we recognized a tax benefit in the third quarter of approximately $7.0 million, and we also recognized a charge to our tax provision of approximately $24.4 million resulting from the reversal of a tax benefit recognized in prior periods associated with the stolen UMC shares. If we realize any additional recovery, a gain will be realized in the period of recovery.

     Gain (Loss) on Equity Investment. No gains or losses on equity investments were recorded in either the third quarter or first nine months of 2004. In the third quarter of 2003, we sold our full investment of 1.8 million shares in Divio, for a gain of approximately $4.4 million. In the first nine months of 2003, we recognized a net impairment charge of ($0.1) million as a result of our write-down of our equity investment in Divio in the first quarter of 2003 offset by our sale of our Divio investment in the third quarter of 2003.

     Other Income (Expense), net. Other income (expense), net was ($1.4) million and ($0.1) million in the third quarters of 2004 and 2003, respectively and ($1.8) million and ($1.0) million in the first nine months of 2004 and 2003, respectively. Other income (expense), net primarily relates to foreign exchange gains and losses on our Japanese Yen denominated assets, gains and losses on disposal of fixed assets and amortization of note issuance costs.

     Provision for Income Taxes. For the three months ended September 26, 2004, we recorded an income tax provision of $31.5 million, and $110.6 million for the first nine months of 2004, reflecting effective tax rates of 36.8% and 37.0%, respectively. This compares to a tax provision of $44.5 million in the third quarter and $51.4 million for the first nine months of 2003, reflecting effective tax rates of 75.1% and 38.8%, respectively. The unusually high effective tax rate in the third quarter of 2003 was due principally to tax on the gain realized from the sale of UMC shares, a charge relating to the non-cash reversal of a tax benefit taken in 2001 and 2002 related to unrealized gain in UMC shares accounted for under FAS 115, offset by a benefit from the loss recorded on the theft of UMC shares, as well as a benefit provided by partial reversal of the valuation allowance that we carried at the end of 2002. The tax provision for the third quarter and the first nine months of 2004 is computed based on our estimated annual earnings projection and is primarily related to U.S. federal and state income tax along with benefits from tax exempt interest and research and development credits. The estimated annual effective tax rate for 2003 was less than the statutory rate primarily due to taxes provided in foreign jurisdictions offset by a reversal of valuation allowance.

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Liquidity and Capital Resources

Cash Flows

     At September 26, 2004, we had cash, cash equivalents and short-term investments of approximately $1.35 billion, which included $602.2 million in cash and cash equivalents, $748.8 million in short-term investments, and $23.5 million relating to our investment in UMC and our short-term unrestricted shares in Tower.

     Operating activities for the first nine months of 2004 provided $212.6 million of cash. Major contributors were net income of $188.3 million, depreciation and amortization of $26.4 million, deferred taxes of $8.6 million, decreases in accounts receivable of $45.2 million, prepaid expenses, deposits and other of $24.6 million, other receivable of $8.5 million, increases in accounts payable of $25.2 million, and accounts payable, related parties of $10.4 million. These amounts were offset by increases in inventory of $64.4 million, decreases in income taxes payable of $56.2 million and decreases in research and development liability, related party of $2.1 million. Net cash provided by operating activities was $161.9 million for the first nine months of 2003.

     Net cash used in investing activities was $363.1 million for the first nine months of 2004, and was primarily comprised of purchases, net of proceeds, from short-term investments of $222.1 million, $108.1 million for acquisition of capital equipment and investment in technology purchases and notes receivable, related party of $33.0 million. Net cash used in investing activities was $161.0 million for the first nine months of 2003.

     Net cash provided by financing activities of $18.2 million for the first nine months of 2004 reflects sales of stock through our stock option and employee stock purchase plans. Financing activities provided cash of $35.8 million for the first nine months of 2003.

Transactions Affecting Liquidity

Investment in UMC

     Our UMC investment in foundries as shown in the condensed consolidated balance sheet was $17.5 million at December 28, 2003 and $13.8 million at September 26, 2004. We owned 22.2 million shares of UMC stock as of September 26, 2004. At September 26, 2004, UMC’s share price had decreased to New Taiwan dollars, or NT$, of NT$21.00, from a stock dividend adjusted price of NT$26.85 at December 28, 2003. The value of our investment on a given date when converted to U.S. dollars will fluctuate based on the exchange rate in effect on that date. As a result, our investment, which is classified as available-for-sale in accordance with SFAS No. 115, includes a net unrealized gain of approximately $0.2 million, inclusive of related tax expense of $0.1 million, recorded as a component of accumulated comprehensive income on our condensed consolidated balance sheet (See also Note 6). If the fair value of the UMC shares declines in the future and such declines are deemed to be other-than-temporary, it may be necessary to record losses on these declines. In addition, in future periods, if the UMC shares are sold, there may be a gain or loss due to fluctuations in the market value of UMC’s stock.

Investments in FlashVision

     In April 2002, we and Toshiba restructured our FlashVision Dominion Semiconductor business in Virginia and consolidated FlashVision’s advanced NAND wafer fabrication manufacturing operations at Toshiba’s memory fabrication facility in Yokkaichi, Japan. In May 2002, FlashVision secured an equipment lease arrangement of approximately 37.9 billion Japanese Yen (or approximately $305.0 million based on the exchange rate in effect on the date the agreement was executed) with Mizuho Corporate Bank, Ltd. and other financial institutions. Under the terms of the lease, Toshiba guaranteed these commitments on behalf of FlashVision. We have agreed to indemnify Toshiba for certain liabilities Toshiba incurs as a result of Toshiba’s guarantee of the FlashVision equipment lease arrangement. If FlashVision fails to meet its lease commitments, and Toshiba fulfills these commitments under the terms of Toshiba’s guarantee, we will be obligated to reimburse Toshiba for 49.9% of any claims and associated expenses under the lease, unless such claims result from Toshiba’s failure to meet its obligations to FlashVision or its covenants to the lenders. Because FlashVision’s equipment lease arrangement is denominated in Japanese Yen, the maximum amount of our contingent indemnification obligation on a given date when converted to U.S. dollars will fluctuate based on the exchange rate in effect on that date. As

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     of September 26, 2004 the maximum amount of our contingent indemnification obligation, which reflects payments and any lease adjustments, was approximately $110.2 million.

     The terms of the FlashVision agreement contractually obligate us to purchase half of FlashVision’s NAND wafer production output. We also have the ability to purchase additional capacity under a foundry arrangement with Toshiba. Under the terms of our FlashVision and foundry agreements with Toshiba, we must provide a six-month rolling forecast of purchase commitments. The purchase orders and other purchase commitments placed under these arrangements relating to the first three months of the six-month forecast are binding and cannot be cancelled. At September 26, 2004, we had approximately $82.5 million of non-cancelable purchase orders and other purchase commitments for flash memory wafers from Toshiba and FlashVision. In addition, as a part of the FlashVision agreement, we are required to fund certain common and direct research and development expenses related to the development of advanced NAND flash memory technologies as well as certain other costs. As of September 26, 2004, we had accrued liabilities related to those expenses of $9.7 million. The common research and development amount is a variable computation with certain payment caps. Future obligations are to be paid in installments using a percentage of our revenue from NAND flash products built with flash memory supplied by Toshiba or FlashVision. The direct research and development is a pre-determined amount that extends through the third quarter of 2004. Subsequent to the third quarter of 2004, direct research and development liabilities will be computed using a variable percentage of actual research and development expenses incurred. We are committed to fund 49.9% of the total FlashVision costs, to the extent such costs are not covered by our product purchases from FlashVision.

     We and Toshiba are currently expanding our fabrication and test capacity at the FlashVision operation in Yokkaichi, Japan. The capacity expansion is being funded through FlashVision internally generated funds, as well as through substantial additional investments and loans by Toshiba and SanDisk. Through September 26, 2004, we had funded approximately $33.0 million in loans to FlashVision at an interest rate of TIBOR plus 0.35%. These loans are secured by the equipment purchased by FlashVision using the loan proceeds. Additional loans totaling approximately $51 million are expected to be made by us in several tranches through the end of 2005. In addition, we have purchased approximately $61 million of capital equipment and have committed to purchase up to approximately $54 million of additional capital equipment, each based on the exchange rate in effect at September 26, 2004, which we have leased or will lease to Toshiba for use in the FlashVision operation. In return, we will receive an increased share of the output from FlashVision.

Investments in Flash Partners

     In September 2004, we and Toshiba entered into a series of definitive agreements and created a new semiconductor company, Flash Partners, to produce NAND flash memory products at a new 300-millimeter wafer fabrication facility, Fab 3, at Toshiba’s Yokkaichi operations. Under this agreement, we are obligated to purchase half of Flash Partners’ NAND wafer production output. Toshiba is bearing the cost to construct the Fab 3 building and depreciation of the Fab 3 building will be a component of the cost per wafer charged to each party. Both parties have agreed to equally share the cost of the manufacturing equipment, initial design and development of manufacturing process technology and start-up costs. Toshiba began construction of the building in April 2004. The investment in Flash Partners, excluding the cost of building construction, initial design and development of manufacturing process technology, start-up costs and wafer purchases, is currently estimated at $2.5 billion through the end of 2006, of which our share is estimated to be approximately $1.25 billion, with initial production currently scheduled for the end of 2005. In addition to the our investment in Flash Partners, for several quarters we will incur substantial expenses related to initial design and development of manufacturing process technology and start-up costs for Fab 3. Fab 3 is expected to generate approximately 37,500 wafers per month by the end of 2006, of which our allocation will be 50%. Fab 3 has available space to expand capacity beyond 37,500 wafers per month, and it is expected that further investments and output will continue to be shared 50/50 between us and Toshiba. We expect to fund our portion of the investment through our cash as well as other financing sources. We expect to receive the benefits of increased supply and cost reductions from our Flash Partners investment primarily in 2006 and beyond.

Investment in Tower

     In July 2000, we entered into a share purchase agreement to make an aggregate $75.0 million investment in Tower Semiconductor in five installments upon Tower’s completion of specific milestones. As of September 26, 2004, we had paid all five of our milestone payments and participated in Tower’s 2002 rights offering for a total investment in Tower of $79.0 million in return for approximately 9.0 million Tower ordinary shares, $14.3 million of prepaid wafer credits, and a warrant to purchase 0.4 million Tower ordinary shares at an exercise price of $7.50 per share. The warrant expires on October 31, 2006. The 9.0 million Tower ordinary shares represented an approximate 14% equity ownership position in

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Tower as of September 26, 2004. From July 2000 through September 26, 2004, we have recognized cumulative losses of approximately $32.2 million as a result of the other-than-temporary decline in the value of our investment in Tower ordinary shares, $12.2 million as a result of the impairment in value on our prepaid wafer credits and $1.0 million of losses on our warrant to purchase Tower ordinary shares. As of September 26, 2004, our Tower ordinary shares were valued at $32.1 million and included an unrealized gain of $45,000, inclusive of related tax expense impact of $28,000, recorded as a component of accumulated other comprehensive income. Of the approximately 9.0 million Tower ordinary shares we own, we have agreed not to sell approximately 6.3 million shares until on or after January 29, 2006, and the value of these restricted shares is included in our condensed consolidated balance sheet as long term investment in foundries. In addition, we have extended the date on which we may exercise our demand registration rights on all its shares until the earlier of (i) December 31, 2005 and (ii) such date that Tower has fulfilled all of its obligations to raise any additional financing pursuant to its facility agreement. During the three months ended September 26, 2004, the unrealized gain recorded in accumulated other comprehensive income on the condensed consolidated balance sheet related to the restricted Tower ordinary shares was reduced by approximately $21.3 million in order to adjust the value of the shares to their fair value. The fair value of these shares at September 26, 2004 approximated their original cost. We may be required to recognize additional losses with respect to our Tower investment in future periods. As of September 26, 2004, our Tower prepaid wafer credits were valued at $0.2 million and the warrant to purchase Tower ordinary shares was valued at $0.2 million.

Convertible Subordinated Notes

     On October 15, 2004, we announced that we had called for redemption on November 18, 2004 all of our outstanding 4 1/2% Convertible Subordinated Notes due 2006. The aggregate principal amount of Notes outstanding is $150 million. On or before November 17, 2004, holders may convert their Notes into shares of our common stock at a price of approximately $9.22 per share, or approximately 108.5 shares of our common stock per $1,000 principal amount of Notes. Cash will be paid in lieu of fractional shares. The last interest payment for the Notes will be paid to holders of record as of November 1, 2004. As long as the market price of our common stock is at least approximately $9.39 per share (the conversion price plus the redemption premium), a holder of Notes who converts after the record date for the interest payment will receive common stock with a market value (plus cash in lieu of any fractional shares) greater than the amount of cash the holder would otherwise be entitled to receive upon redemption. Alternatively, holders may have their Notes redeemed at a total redemption price of $1,018 for each $1,000 principal amount due at the stated maturity, plus accrued and unpaid interest to, but excluding, the redemption date. Any Notes not converted on or before November 17, 2004, after which interest will cease to accrue, will be automatically redeemed on November 18, 2004.

Other Receivable

     Our other receivable consists of approximately $36.6 million related to a prior settlement agreement. (Please refer to our Form 10-K for the year ended December 28, 2003.) At September 26, 2004, this other receivable has been classified on our condensed consolidated balance sheet as a short-term other receivable of $11.3 million and a long-term other receivable of $25.3 million. This other receivable is secured by irrevocable standby letters of credit.

Liquidity Sources, Requirements and Contractual Cash Commitments

     Our principal sources of liquidity as of September 26, 2004 consisted of: $602.2 million in cash and cash equivalents, $748.8 million in short-term investments and $23.5 million in investments in foundries.

     Our principal liquidity requirements are to meet our working capital requirements, fund research and development and capital expenditure needs, service our convertible, subordinated debt, and provide funding to certain current and planned FlashVision and Flash Partners arrangements that provide us with captive product supply. We believe our existing cash and cash equivalents and short-term investments will be sufficient to meet our currently anticipated working capital and capital expenditure requirements for at least the next twelve months.

     We expect to make significant investments in assembly and test manufacturing equipment or wafer fabrication foundry capacity to support our business in the future. We may also invest in or acquire other companies’ product lines or assets. Our operating expenses are expected to increase as a result of the need to hire additional personnel as well as to support our collaborations with Toshiba for the joint development of advanced NAND flash memory.

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     We may require additional equity or debt financing to address our working capital or capital equipment needs, particularly related to our commitments to Flash Partners and FlashVision. We may seek to raise equity or debt capital at any time that we deem market conditions to be favorable. Any equity capital will result in dilution to our current stockholders, which could be substantial. Debt financing would require the periodic payment of interest and/or principal, would be senior to our stockholders in terms of payment priority, and may include restrictive covenants. Additional financing, if needed, may not be available on reasonable terms, or at all.

     In the normal course of business, our subcontractors periodically procure production materials based on the forecast that we provide them. Our agreements with these contractors require that we reimburse them for materials that are purchased on our behalf in accordance with such forecast. As such, we may be committed to certain costs over and above our open non-cancelable purchase orders with these subcontractors. The following summarizes our contractual cash obligations, commitments and off balance sheet arrangements at September 26, 2004, and the effect such obligations are expected to have on our liquidity and cash flow in future periods.

     Contractual Obligations and Off Balance Sheet Arrangements

				Less than		1 - 3 Years
				1 Year		(Fiscal 2005		3 - 5 Years (Fiscal		More than 5 Years
	Total			(Fiscal 2004)		through 2007)		2008 and 2009)		(Beyond Fiscal 2009)
CONTRACTUAL OBLIGATIONS
(in thousands):
Convertible subordinated notes payable	$	150,000	(4)	$	150,000	$	—	$	—	$	—
Interest payable on convertible subordinated notes		3,764			3,764		—		—		—
Operating leases		6,129			1,097		5,032		—		—
FlashVision research and development, fabrication capacity expansion costs, and reimbursement for certain other costs including depreciation		714,326	(2)(3)		43,320		488,951		155,339		26,716
Flash Partners fabrication capacity expansion and start-up costs, and reimbursement for certain other costs including depreciation		818,361	(3)		32,618		491,781		188,840		105,122
Capital equipment purchases commitments		57,206			32,403		24,803		—		—
Operating expense commitments		7,862			7,862		—		—		—
Non-cancelable production purchase commitments		273,047	(1)		273,047		—		—		—
Total contractual cash obligations	$	2,030,695		$	544,111	$	1,010,567	$	344,179	$	131,838

(1)	Includes all vendor production related commitments, some of which are denominated in Japanese Yen, and are subject to fluctuation in exchange rates prior to payment.
(2)	Includes balance owed under loan agreement for FlashVision entered into in February 2004.
(3)	Excludes certain potential FlashVision and Flash Partners costs not covered by our product purchases.
(4)	As of November 3, 2004, no holders of Notes have tendered their Notes for conversion.

			Less than		1 - 3 Years		3 - 5 Years
			1 Year		(Fiscal 2005		(Fiscal 2008		More than 5 Years
	Total		(Fiscal 2004)		through 2007)		and 2009)		(Beyond Fiscal 2009)
CONTRACTUAL SUBLEASE INCOME
(in thousands):
Total contractual cash income from non-cancelable operating subleases	$	177	$	53	$	124	$	—	$	—

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	As of September 26, 2004
OFF BALANCE SHEET ARRANGEMENTS
(in thousands):
Indemnification of FlashVision foundry equipment lease	$	110,217

     In April 2002, we and Toshiba restructured our FlashVision business venture by consolidating FlashVision’s advanced NAND wafer fabrication manufacturing operations at Toshiba’s memory fabrication facility in Yokkaichi, Japan. In May 2002, FlashVision secured an equipment lease arrangement of approximately 37.9 billion Japanese Yen (or approximately $305 million based on the exchange rate in effect on the date the agreement was executed) with Mizuho Corporate Bank, Ltd. and other financial institutions. Under the terms of this lease, Toshiba guaranteed these commitments on behalf of FlashVision. We have agreed to indemnify Toshiba for certain liabilities Toshiba incurs as a result of Toshiba’s guarantee of the FlashVision equipment lease arrangement. If FlashVision fails to meet its lease commitments and Toshiba fulfills these commitments under the terms of Toshiba’s guarantee, we will be obligated to reimburse Toshiba for 49.9% of any claims and associated expenses under the lease, unless such claims result from Toshiba’s failure to meet its obligations to FlashVision or its covenants to the lenders. Because FlashVision’s equipment lease arrangement is denominated in Japanese Yen, the maximum amount of our contingent indemnification obligation on a given date when converted to U.S. dollars will fluctuate based on the exchange rate in effect on that date.

Impact of Currency Exchange Rates

     A portion of our revenues and a significant portion of our inventory purchases are denominated in Japanese Yen. From time to time, we enter into foreign exchange forward contracts to hedge against changes in foreign currency exchange rates. At September 26, 2004, we had no forward contracts outstanding. Future exchange rate fluctuations could have a material adverse effect on our business, financial condition and results of operations.

Factors That May Affect Future Results

Risks Related to Our Business

     Our operating results may fluctuate significantly, which may adversely affect our operations 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. This fluctuation could result from a variety of factors, including the following:

• unpredictable or changing demand for our products;

• slowing growth rates in the digital still camera market;

• potential delays in the growth of new markets for our products, including feature phones, music players and GPS systems;

• market acceptance of competing technologies, such as microdrives in music players and feature phones;

• competition from new and existing flash memory manufacturers;

• decline in the average selling prices, net of promotions, for our products due to excess supply, competitive pricing pressures and strategic price reductions initiated by us or our competitors;

• write-offs related to obsolescence or devaluation of unsold inventory;

• ability to commence Fab 3 operations on a timely basis;

• timing of sell through by our distributors and retail customers;

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• effect of declining flash memory prices and licensees sales volumes on our license and royalty revenues;

• seasonality in sales of our products;

• natural disasters affecting the countries in which we conduct our business, particularly Japan, where our principal source of flash memory supply is located, as well as Taiwan, South Korea, China and the United States;

• availability of sufficient flash memory capacity to meet customer demand;

• dependence on a limited number of key suppliers;

• increased purchases of flash memory products from our non-captive sources that may affect our gross margins;

• difficulty in forecasting and managing inventory levels; particularly, building a large inventory of unsold product due to non-cancelable contractual obligations to purchase materials such as flash memory, controllers, printed circuit boards and discrete components;

• write-downs of our investments in fabrication capacity, other fixed assets, equity investments and prepaid wafer credits;

• adverse changes in product and customer mix;

• competing flash memory device standards, which displace the standards used in our products;

• shortages of components such as controllers, capacitors, lids and printed circuit boards required for the manufacture of our products;

• significant or unexpected yield losses, which could affect our ability to fulfill customer orders and could increase our costs;

• manufacturing flaws affecting the reliability, functionality or performance of our products, which could increase our product costs, reduce demand for our products, increase our warranty costs or require costly product recalls;

• exchange rate fluctuations, particularly between the U.S. dollar and Japanese Yen; and

• changes in general economic conditions.

     The continued growth of our business depends on the development of new markets and products for NAND flash memory .

     Over the last several years, we have derived the majority of our revenue from the digital camera market. As this market begins to experience slower growth rates, our growth will be increasingly dependent on the development of new markets and new products for NAND flash memory. One of the new markets that we are focused on is the handset market in which feature phones are increasingly being designed to utilize NAND flash memory cards. There can be no assurance that new markets and products will develop and grow fast enough, or that new markets will adopt NAND flash technologies or our products, in order to continue our growth.

     We operate in the highly cyclical semiconductor industry, which is subject to significant downturns, and, due to our FlashVision and Flash Partners business ventures with Toshiba, the impact of these downturns may lead to unused captive capacity.

     The semiconductor industry is highly cyclical and is characterized by constant and rapid technological change, rapid product obsolescence and price erosion, 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. These downturns have been characterized by diminished product demand, production overcapacity, high

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inventory levels and accelerated erosion of average selling prices. We have experienced these conditions in our business in the past and may experience such downturns in the future. Our FlashVision and Flash Partners business ventures with Toshiba magnify the adverse effect of any significant downturns, price reductions or declines in customer demand as we have made significant investments in each business venture and will have excess supply that we are obligated to take and pay for, regardless of current market conditions. If we have excess supply of inventory or in periods of rapid price decline, we may be forced to take significant excess, obsolete or lower of cost or market inventory write-downs. Any future downturns could have a material adverse effect on our business, financial condition and results of operations.

     We depend on third-party foundries for silicon supply and any shortage or disruption in our supply from these sources during times of high demand will reduce our revenues, earnings and gross margins.

     All of our flash memory card products require silicon supply for the memory and controller components, which are included in our flash cards. The substantial majority of our flash memory is currently supplied by Toshiba’s facility at Yokkaichi, Japan, and to a lesser extent by Renesas and Samsung. Currently, our controller wafers are only manufactured by UMC and Tower. In times of significant growth in global demand for flash memory, demand from our customers may outstrip the supply of flash memory available to us from our current sources. If Toshiba, FlashVision, Renesas, Samsung, Tower and UMC are unable to satisfy our requirements on competitive terms, we may lose potential sales and our business, financial condition and operating results may suffer. Any disruption in supply from these sources due to natural disaster, power failure, labor unrest or other causes could significantly harm our business, financial condition and results of operations. In particular, any disruption in the manufacturing operations of Tower or UMC would result in delivery delays, would adversely affect our ability to make timely shipments of our products and would harm our operating results until we could qualify an alternate source of supply for our controller wafers, which could take a quarter or more to complete.

     The fabrication of our products requires wafers to be produced in a highly controlled and ultra clean environment. Semiconductor companies that supply our wafers sometimes have experienced problems achieving acceptable wafer manufacturing yields and product reliability. Semiconductor manufacturing yields and product reliability are a function of both our design technology and the foundry’s manufacturing process technology. Low yields may result from design errors or manufacturing failures. Yield problems may not be determined 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. The risks associated with yields are even greater because we rely exclusively on offshore foundries that we do not control for our wafers, which increases the effort and time required to identify, communicate and resolve manufacturing yield problems. If the foundries cannot achieve planned yields, we will experience higher costs and reduced product availability, which could harm our business, financial condition and results of operations.

     Difficulty of estimating future supply requirements may cause us to overestimate our requirements and build excess inventories, or underestimate our requirements and have a shortage of supply, either of which could harm our financial results.

     Under the terms of our supply agreements with FlashVision, Renesas, Samsung, Toshiba, Tower and UMC, we are obligated to provide six-month rolling forecasts of anticipated purchase orders. Generally, the estimates for the first three months of each rolling forecast are binding commitments and the estimates for the remaining months of the forecast may only be changed by a certain percentage from the previous month’s forecast. In addition, we are obligated to purchase 50% of both FlashVision’s and Flash Partners’ wafer production. This limits our ability to react to fluctuations in demand for our products. For example, if customer demand falls below our forecast and we are unable to reschedule or cancel our orders, we may end up with excess inventories, which could result in higher operating expenses and reduced gross margins. Conversely, if customer demand exceeds our forecasts, we may be unable to obtain an adequate supply of silicon wafers and other flash memory products to fill customer orders, which could result in dissatisfied customers, lost sales and lower revenues. If we are unable to obtain scheduled quantities of silicon wafers or other flash memory products with acceptable price and/or yields from any source, our business, financial condition and results of operations could be harmed. Because the majority of our products are sold into rapidly growing consumer markets, it has been, and likely will continue to be, difficult to accurately forecast future sales. In addition, sales visibility remains limited because a substantial majority of our quarterly sales are currently, have historically been, and we expect will continue to be, from orders received and fulfilled in the same quarter, which makes accurate demand forecasting very difficult.

     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. Conversely, under conditions of tight flash memory supply, we may be unable to

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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 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 flash memory products are complex, must meet stringent user requirements and the majority of our products are warrantied for one to five years. Products as sophisticated as ours are prone to contain undetected design errors or may be improperly tested for defects, especially when first introduced or when new models or versions are released. Our products may contain errors or defects after commercial shipments have begun, which 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. Furthermore, we are beginning to offer new products, such as music players, that move beyond solid-state memory products into the broader consumer electronics product category. We do not have historical failure and return rates for these new products and return rates for these types of consumer electronics products may be higher than we have experienced with our other products, which makes estimating our warranty liability more difficult. We estimate our warranty liability based upon historical and projected failure rates and repair or replacement costs. Should actual failure rates and repair or replacement costs differ from our estimates, adjustments to our warranty liability would be required, which could harm our business, revenues, cost of revenues and financial condition.

     We depend on our suppliers and third-party subcontractors for several critical components and our products and our business could be harmed if we are unable to obtain a sufficient supply of these components on a timely basis.

     We rely on our vendors, some of which are a sole source of supply, for several of our critical 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 develop alternative sources or obtain sufficient quantities of these components.

     We also rely on third-party subcontractors for our wafer testing, packaged memory final testing, product assembly and product testing, including Silicon Precision Industries Co., Ltd. and United Test Center, Inc. in Taiwan and Celestica, Inc., Flextronics International, Ltd. and StatsChipPAC in China. In addition to our existing subcontract suppliers, we are qualifying other subcontract suppliers for wafer testing, packaged memory final testing, card assembly, card testing and other products and services. We have no long-term contracts with our existing subcontractors nor do we expect to have long-term contracts with any new subcontract suppliers. As such, we cannot, and will not, be able to directly control product delivery schedules. 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 could increase the manufacturing costs of our products and have adverse effects on our operating results. Furthermore, we manufacture on a turnkey basis with some of our subcontract suppliers, which may reduce our visibility and control of their inventories of purchased parts necessary to build our products.

     We use third-party fulfillment facilities that hold our inventory on a consignment basis, and if these fulfillment facilities were to experience a loss with respect to our inventory, we may not be able to recoup the full cost of the inventory, which would harm our business.

     We utilize third-party fulfillment facilities, such as ModusLink, Limited and Nippon Express. These fulfillment houses hold our inventory on a consignment basis. While our third-party fulfillment houses bear the risk of loss with respect to our inventory, the amount we are reimbursed by them or their insurers may be less than our original cost of the inventory, which would harm our business, financial condition and results of operations.

     License fees and royalties from our patent cross license agreements are variable and fluctuate from period to period making it difficult to predict our royalty revenues.

     Our intellectual property strategy includes cross-licensing our patents to other manufacturers of flash memory products. Under these arrangements, we earn license fees and royalties on individually negotiated terms. Our revenue from patent licenses and royalties can fluctuate significantly from quarter to quarter. A substantial portion of this revenue comes from royalties based on the actual sales by our licensees. The timing of revenue recognition from these payments is dependent

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on the terms of each contract and on the timing of product shipments by our licensees. As a result, our license and royalty revenues have fluctuated significantly in the past and could fluctuate in the future. Reductions in our license and royalty revenues could harm our gross margins because this revenue carries little or no cost of revenue. Our license and royalty revenues may decline in the future as certain of our existing license agreements expire or as the prices for licensed products decrease.

     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 domestic and international companies that have greater access to 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 to our flash card competitors at a low cost. Today our most significant competitors include Samsung and Toshiba. Other companies that develop and manufacture flash memory chips include AMD, Hynix, Intel, Renesas and ST Micro. Some of our competitors may sell their flash memory chips at below their true manufacturing costs to gain market share and to cover their fixed costs. Such practices have been common in the DRAM industry during periods of excess supply, and have resulted in substantial losses in the DRAM industry. In addition, Hynix, ST Micro, Micron and Infineon, all large-scale manufacturers of DRAM and/or flash memory, have announced plans to bring up substantial new capacity of flash memory. Samsung and Renesas, as well as Toshiba and ourselves, have similarly announced plans to bring to market substantial new flash memory chip manufacturing capacity. If the combined total new flash memory capacity exceeds the corresponding growth in demand, prices may decline dramatically, adversely impacting our results of operations and financial condition.

     In addition, current and future competitors produce or could produce alternative flash memory technologies that compete against our NAND MLC flash memory technology.

     We also compete against a number of companies that combine controllers and flash memory chips that they acquire from other sources into flash storage cards or USB flashdrives that they resell under their own brand name, including, among others, Fuji, Kingston, Lexar, M-Systems, Olympus, PQI, Panasonic and Sony. Our new music players also face competition from similar products offered by other companies, including Apple, Creative, iRiver, Rio and Samsung. Many of these competitors have substantially greater resources than we do, have well recognized brand names and the ability to operate their business on lower margins than we do. Lexar recently introduced a line of flash cards bearing the Kodak brand name, which will create significant competition for our Shoot and Store product line and our other flash memory cards. In addition, other companies, such as Matrix Semiconductor, have announced products or technologies that may compete with our Shoot and Store products. Our Transflash product faces competition from M-Systems and Samsung who have announced similar form factors and from AMD, Intel, Sharp and Samsung who have competing embedded solutions. If our products cannot compete effectively, our market share and profitability will be adversely impacted.

     Our industry is characterized by rapid innovation and many companies are pursuing new or alternative technologies, such as nanotechnologies or microdrives, which may compete with flash memory. These new or alternative technologies may provide smaller size, higher capacity, reduced costs, lower power consumption or other advantages. If we cannot compete effectively, our results of operations and financial condition will suffer.

     We have patent cross-license agreements with several of our leading competitors, including, Intel, Matsushita, Renesas, SST, Samsung, Sharp, Sony, Toshiba and TDK. Under these agreements, each party may manufacture and sell products that incorporate technology covered by the other party’s patent or patents related to flash memory devices. If we continue to license our patents to our competitors, competition may increase and may harm our business, financial condition and results of operations.

     Future rapid growth may strain our operations.

     We must continue to hire, train, motivate and manage our employees to achieve future growth. In the past, we have from time-to-time experienced difficulty hiring the necessary engineering, sales and marketing personnel to support our growth. In addition, we must make significant investments in our information management systems to support increased manufacturing, as well as operations, accounting and other management-related functions. Our systems, procedures and

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controls may not be adequate to support rapid growth in the future, which could in turn harm our business, financial condition and results of operations.

     Our success depends on 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, president 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. We cannot assure you that we will be successful in hiring or retaining such key personnel, or that any of our key personnel will remain employed with us.

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

     We may grow our business through business combinations or other acquisitions of businesses, products, technologies or licensing arrangements that allow us to complement our existing product offerings, expand our market coverage, increase our engineering workforce or enhance our technological capabilities. We continually evaluate and explore strategic opportunities as they arise, including business combinations, strategic partnerships, 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 and increase our expenses. These challenges are magnified as the size of the acquisition increases.

     Furthermore, 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 negatively impact our results of operations. Any of these events could cause the price of our common stock to decline.

     We may not be able to find suitable acquisition opportunities that are available at attractive valuations, if at all. Even if we do find suitable acquisition opportunities, we may not be able to consummate the acquisitions on commercially acceptable terms or realize the anticipated benefits of any acquisitions we do undertake.

Risks Related to the Development of New Products

     In transitioning to new processes and products, we face production and market acceptance risks that have caused, and may in the future cause, significant product delays that could harm our business.

     Successive generations of our products have incorporated semiconductor devices with greater memory capacity per chip. Two important factors have enabled us to decrease the cost per megabyte of our flash data storage products as memory capacity has increased: the development of higher capacity semiconductor devices and the implementation of smaller feature size manufacturing processes. The transition to smaller feature sizes is highly complex and requires new controllers, new test procedures and modifications of numerous other aspects of manufacturing, as well as extensive qualification of the new products by both us and our OEM customers. Any material delay in a qualification schedule could

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delay deliveries and adversely impact our operating results. In addition, a number of challenges exist in achieving a lower cost per megabyte, including:

• lower yields often experienced in the early production of new semiconductor devices;

• manufacturing flaws with new processes including manufacturing processes at our subcontractors which may be extremely complex;

• problems with the design and manufacturing of products that will incorporate these devices, which may result in delays or product recalls; and

• production delays.

     Because our products are complex, we periodically experience 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.

     We cannot assure you that we, along with our flash memory sources, will successfully develop and bring into full production with acceptable yields and reliability these new products, processes or the underlying technology, or that any development or production ramp-up will be completed in a timely or cost-effective manner. If we are not successful or if our cost structure is not competitive, our business, financial condition and results of operations could suffer.

     We continually seek to develop new products and standards, which may not be widely adopted by consumers or, if adopted, may reduce demand by consumers for our older products, which if not offset by increased demand for the new products could harm our results of operations.

     We continually seek to develop new products and standards and enhance existing products and standards with higher memory capacities and other enhanced features. We undertake these development efforts independently as well as jointly with our strategic partners such as Toshiba, Matsushita and Sony. For example, in March 2003, our joint development efforts with Toshiba and Matsushita, together with contribution by the Secure Digital Association, or SD Association, resulted in the introduction of the miniSD card. In addition, we and Sony have co-developed and co-own the specifications for the MemoryStick Pro, which each of us has the right to manufacture and sell. Also, we recently introduced the SanDisk Digital Audio Player, which plays MP3 and other music files, and the SanDisk Photo Album, an enhanced version of our SanDisk Digital Photo Viewer. The digital music player market is a new market for us, but is a well-established, highly competitive market in which we compete against well-known products, such as Apple’s iPod, and may require additional customer support costs and other expenses. In addition, we recently introduced our Shoot and Store product to address the consumable flash markets. We cannot assure you that our new products will gain market acceptance or that we will be successful in penetrating the new markets that we target, such as the digital music player market or the consumable flash market with our Shoot and Store products. As we introduce new standards and new products, it will take time for these new standards and products to be adopted, for consumers to accept and transition to these new products and for significant sales to be generated from them, if this happens at all. Moreover, broad acceptance of new standards or products by consumers may reduce demand for our older products. If this decreased demand is not offset by increased demand for our new products, our results of operations could be harmed. In addition, in order for us to sell our products, we have been developing, and will continue to develop, new controllers, printed circuit boards and test algorithms. Any technical difficulties or delays in the development of these elements could prevent us from taking advantage of the available flash memory output and could adversely affect our results of operations. We cannot assure you that any new products or standards we develop will be commercially successful.

Risks Related to Our FlashVision and Flash Partners Business Ventures

     Our FlashVision and Flash Partners business ventures with Toshiba make us vulnerable to risks, including significant cash commitments, potential inventory write-offs, disruptions or shortages of supply, limited ability to react to fluctuations in product demand, direct competition with Toshiba, a significant contingent indemnification obligation for FlashVision, a mutual contribution and environmental indemnification obligation with respect to Flash Partners and a potential guarantee obligation for Flash Partners, any of which could substantially harm our business and financial condition.

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     We and Toshiba plan to continue to expand the wafer fabrication capacity of our FlashVision and Flash Partners business ventures in Japan and as we do so, we will make substantial capital investments and incur substantial start-up and tool relocation costs, which could adversely impact our operating results.

     We and Toshiba plan to make substantial investments in new capital assets to expand the wafer fabrication capacity of our FlashVision and Flash Partners business ventures in Japan. For the FlashVision expansion, we expect to make loans totaling approximately $51 million in several tranches through the end of 2005. In addition, we have committed to purchase up to approximately $54 million of additional capital equipment, based on the exchange rate in effect at September 26, 2004, which we will lease to Toshiba for use in the FlashVision operation. The investment in Flash Partners, excluding the cost of building construction, initial design and development of manufacturing process technology, start-up costs and wafer purchases, is currently estimated at $2.5 billion through the end of 2006, of which our share is estimated to be approximately $1.25 billion, with initial production currently scheduled for the end of 2005. These planned investments will be financed partially through our cash balances and partially through lease financing or other forms of financing. We cannot assure you that such financing will be available to SanDisk or available on favorable terms. In addition, each time that we and Toshiba add substantial new wafer fabrication capacity, we will experience significant initial design and development and start-up costs as a result of the delay between the time of the investment and the time qualified products are manufactured and sold in volume quantities. For several quarters, we will incur initial design and development costs and start-up costs and pay our share of ongoing operating activities even if we do not achieve the planned output volume or utilize our full share of the expanded output, and these costs will impact our gross margins, results of operations and financial condition

     We face challenges related to the development and introduction of new generations of flash memory wafers, which could adversely affect our market share or our operating results.

     We believe that our future success will continue to depend on the development and introduction of new generations of flash memory wafers, such as the 300-millimeter wafers to be produced at the Flash Partners Fab 3. These wafers are substantially larger in surface area and therefore more susceptible to new technological and manufacturing issues, such as mechanical and thermal stresses, than the current, mature 200-millimeter wafers that we use in production at Yokkaichi. Neither Toshiba nor we have prior experience in manufacturing 300-millimeter advanced NAND designs, nor in operating a new equipment set that has to be optimized to process 300-millimeter NAND wafers with competitive yields. During the early stages of operating the new 300-millimeter wafer processing equipment, we expect to generate a large number of test wafers and perform numerous process test splits that will increase our research and development expenses through most of 2005, prior to benefiting from any actual production output from Fab 3. Samsung, the largest NAND flash memory manufacturer, already has experience manufacturing 300-millimeter wafers with 90-nanometer feature sizes. Also, Samsung is licensed under our patents to use MLC technology which further enhances its manufacturing capabilities. Samsung may be able to produce product at a lower cost than we can and increase their market share, thus adversely affecting our operating results and financial condition.

     We face challenges and possible delays relating to the conversion of our production to smaller feature sizes, which could adversely affect our operating results.

     We and Toshiba are in the process of transitioning production capacity for NAND flash memory wafers at Toshiba’s Yokkaichi fabrication facilities from a feature size of 130-nanometer technology to 90-nanometer technology. Material delay in this transition or in completing full product conversion would delay deliveries of wafers and adversely impact our operating results. In addition, Fab 3 is expected to begin production using 90-nanometer technology. 90-nanometer technology is considered today to be the most advanced feature size for mass production of flash memory wafers. It is difficult to predict how long it will take to achieve adequate yields, product reliability, full product conversion and economically attractive product costs based on our new designs and feature sizes. We currently rely and will continue to rely on Toshiba to address these challenges. With our investments in the FlashVision and Flash Partners business ventures at Toshiba’s Yokkaichi facilities, we are now and will continue to be exposed to the adverse financial impact of any delays or manufacturing problems associated with wafer production lines. Any problems or delays in volume production at the Yokkaichi fabrication facilities could adversely impact our operating results in the fourth quarter of 2004 and beyond.

     Toshiba’s Yokkaichi fabrication facilities are a significant source of supply of flash memory wafers and any disruption in this supply will reduce our revenues, gross margins and earnings.

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     Although we buy flash memory from the FlashVision business venture, we also rely on Toshiba’s Yokkaichi fabrication facilities to supply a portion of our flash memory wafers on a foundry basis. Even if FlashVision successfully produces quantities at planned levels, the Yokkaichi fabrication facilities may not produce quantities of wafers with acceptable prices, reliability and yields to satisfy our needs. Any failure in this regard may harm our business, financial condition and results of operations, as Fab 3 will not produce wafers for some time and our right to purchase flash memory products from Samsung and others is limited and may not be sufficient to replace any shortfall in production at the Yokkaichi facilities. In addition, because a substantial majority of our wafers are produced at the Yokkaichi facilities, any disruption in supply from the Yokkaichi facilities due to natural disaster, power failure, labor unrest or other causes could significantly harm our business, financial condition and results of operations. For example, in the third quarter of 2004, an earthquake off the coast of southern Japan disrupted operations at Toshiba’s Yokkaichi fabrication line, causing some yield losses and delays. The occurrence and effects of these events is unpredictable and could materially harm our business, financial condition and results of operations. Moreover, we have no experience in operating a wafer manufacturing line and we rely on the existing manufacturing organizations at the Yokkaichi facilities. This reliance will increase when the Fab 3 facility commences operations.

     We have a contingent indemnification obligation for certain liabilities Toshiba incurs as a result of Toshiba’s guarantee of the FlashVision equipment lease arrangement and have environmental and intellectual property indemnification obligations with respect to Flash Partners.

     FlashVision secured an equipment lease arrangement of approximately 37.9 billion Japanese Yen (or approximately $305.0 million based on the exchange rate in effect on the date the agreement was executed) in May 2002 with Mizuho Corporate Bank, Ltd., and other financial institutions. Under the terms of the lease, Toshiba has guaranteed those commitments on behalf of FlashVision. We have agreed to indemnify Toshiba for certain liabilities Toshiba incurs as a result of Toshiba’s guarantee of the FlashVision equipment lease arrangement. If FlashVision fails to meet its lease commitments, and Toshiba fulfills these commitments under the terms of Toshiba’s guarantee, then we will be obligated to reimburse Toshiba for 49.9% of any claims and associated expenses under the lease, unless the claims result from Toshiba’s failure to meet its obligations to FlashVision or its covenants to the lenders. Because FlashVision’s equipment lease arrangement is denominated in Japanese Yen, the maximum amount of our contingent indemnification obligation on a given date when converted to U.S. dollars will fluctuate based on the exchange rate in effect on that date. As of September 26, 2004, the maximum amount of our contingent indemnification obligation, which reflects payments and any lease adjustments, was approximately $110.2 million.

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

Risks Related to Our Investment in Tower Semiconductor Ltd.

     If Tower is unable to sustain or increase production at its wafer foundry facility, we may be unable to obtain sufficient controller supply.

     Tower supplies a significant portion of our controller wafers and is currently a sole source of supply for some of our controllers. If Tower is unable to complete its Fab 2 Project in a timely manner and thereafter maintain volume production at acceptable yields, Tower may not be able to supply us with a sufficient supply of controllers. Moreover, Tower’s ability to complete its Fab 2 project is dependent on its ability to obtain additional financing from equity and other sources. In addition, political unrest in Israel could result in delays in the completion of the Fab 2 project and interruption or delay of manufacturing schedules at Tower’s wafer fabrication facilities, and could result in potential investors and foundry customers avoiding doing business with Tower. Any of these occurrences could adversely affect our operating results until we can qualify an alternate source of supply, which could take a quarter or more to complete.

     We may need to further write down the value of our Tower investments.

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     As of September 26, 2004, we own approximately 9.0 million Tower ordinary shares, representing an approximate 14% equity ownership position in Tower. The net value of our Tower equity investment on our condensed consolidated balance sheet is approximately $32.1 million as of September 26, 2004, which approximates market value as of that date. In addition, we hold prepaid wafer credits and a warrant to purchase Tower ordinary shares at a combined value of $0.4 million. From July 2000 through September 26, 2004, we have recognized cumulative losses of approximately $32.2 million as a result of the other-than-temporary decline in the value of our investment in Tower ordinary shares, $12.2 million as a result of the impairment in value on our prepaid wafer credits and $1.0 million of losses on our warrant to purchase Tower ordinary shares. Of the approximately 9.0 million Tower ordinary shares we own, we have agreed not to sell approximately 6.3 million shares until on or after January 29, 2006, and the value of these restricted shares is included in our condensed consolidated balance sheet as long term investment in foundries. If the market value of Tower declines and such decline is deemed to be other-than-temporary, we would be required to recognize losses up to the remaining recorded value of our Tower investment which would harm our results of operations and financial condition.

Risks Related to Sales of Our Products

     Sales to a small number of customers represent a significant portion of our revenues and if we were to lose one of our major customers or experience any material reduction in orders from any of these customers, our revenues and operating results would suffer.

     Approximately one-half of our revenues come from a small number of customers. For example, sales to our top 10 customers accounted for approximately 50% of our product revenues during fiscal 2003, 2002 and 2001. If we were to lose one of our major customers or experience any material reduction in orders from any of these customers, our revenues and operating results would suffer. Our sales are generally made by standard purchase orders rather than long-term contracts. Accordingly, our customers may generally terminate or reduce their purchases from us at any time. In addition, the composition of our major customer base changes from year to year as the market demand for our customers’ products changes.

     Variability of average selling prices and gross margins resulting from changes in the product mix of our sales, changes in the mix of our captive versus non-captive supply, price reductions, promotions, increased competition or excess supply may cause our net profitability to suffer.

     The product mix of our sales varies quarterly, which affects our overall average selling prices and gross margins. In addition, we realize higher gross margins on flash memory products manufactured using our captive sources of supply versus our non-captive sources of supply, such as Renesas or Samsung. Accordingly, if we are forced to increase our purchases from non-captive sources, our gross margins would be adversely impacted.

     At times, such as the third quarter of 2004, worldwide NAND flash memory supply exceeds customer demand, causing significant declines in average selling prices for NAND flash memory components. When this situation occurs, price declines and promotions for our products can be significant. In addition, flash data storage markets are intensely competitive, creating further pressure on market pricing. If we are unable to reduce our product manufacturing costs to offset these reduced prices, our gross margins and profitability will be adversely impacted.

     Our business depends significantly upon sales of products in the highly competitive consumer market, a significant portion of which are made to retailers and through distributors, and if our distributors and retailers are not successful in this market, we could experience substantial product returns, which would negatively impact our business, financial condition and results of operations.

     We continue to receive an increasing portion of our product revenue from the sale of flash card and USB drive products designed for consumer electronics devices, such as digital cameras, feature phones, PCs and laptops. In the future, we expect to receive increasing revenue from the sale of consumer electronic devices . The consumer market is intensely competitive and is more price sensitive than our other target markets. In addition, we must spend more on marketing and promotion in consumer markets to establish brand name recognition, maintain our competitive position at retailers and increase demand for our products.

     A significant portion of our sales to the consumer electronics market is made through retailers, either directly or through distributors. Sales through these channels typically include rights to return unsold inventory and protection against price

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declines. 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 distributor customers, in the case of sales to distributors. If our distributors and retailers are not successful in this market, there could be substantial product returns or price protection claims, which would harm our business, financial condition and results of operations. Availability of sell through data varies throughout the retail channel, which makes it difficult for us to determine actual retail product revenues until after the end of each of our fiscal quarters. In addition, except in certain 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.

     Our revenue depends, in part, on the success of products sold by our OEM customers.

     A portion of our sales are to a number of original equipment manufacturers, or OEMs, who bundle our flash memory products with their products, such as cameras or handsets. Our sales to these customers are dependent upon a particular OEM’s ability to create, introduce, market and sell their products successfully in their respective markets. Should our OEM customers be unsuccessful in selling their products, which include our product, or should they decide to discontinue bundling our products, our revenue, results of operation and financial condition could be harmed.

     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 year, sometimes followed by declines in the first quarter of the following year. This seasonality increases the complexity of forecasting our business. If our forecasts are inaccurate, we can be subject to loss of market share or procurement of excess inventory, either of which could harm our business, financial condition and results of operations.

Risks Related to Our Intellectual Property

     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 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 do not infringe on the patents of other companies.

     In addition, our competitors may be able to design their products around our patents.

     We intend to vigorously enforce our patents, but we cannot assure you that our efforts will be successful. Several companies have recently entered or announced their intentions to enter the flash memory market, and we believe these companies may require a license from us. Enforcement of our rights may require 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 counter sue us for infringement of their patent or assert a counterclaim that our patents are invalid or unenforceable. If we did not prevail as a defendant in a patent infringement case, we could be required to pay substantial damages, cease the manufacture, use and sale of infringing products, expend

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significant resources to develop non-infringing technology, discontinue the use of specific processes or obtain licenses to the infringing technology.

     We may be unable to license intellectual property to or from third parties as needed, or renew existing licenses, and we have agreed to indemnify various suppliers and customers for alleged patent infringement, which could expose us to liability for damages, increase our costs or limit or prohibit us from selling certain 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. Currently, we have patent cross-license agreements or similar intellectual property agreements with several companies, including Intel, Matsushita, Olympus, SST, Renesas, Samsung, Sharp, SiliconSystems Inc., Smartdisk, Sony, TDK and Toshiba, many of which are competitors, and we are in discussions with other companies regarding potential cross-license agreements. We cannot be certain that licenses will be offered when we need them, or 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 the manufacture of 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 cannot assure you that we would be successful in redesigning our products or that the necessary licenses will be available under reasonable terms, or that our existing licensees will renew their licenses upon expiration, or that we will be successful in signing new licensees in the future.

     We have historically agreed to indemnify suppliers and customers for alleged patent infringement. The scope of such indemnity varies, but may, in some instances, include indemnification for damages and expenses, including attorneys’ fees. We may periodically engage in litigation as a result of these indemnification obligations. Our insurance policies exclude coverage for third-party claims for patent infringement. Any future obligation to indemnify our customers or suppliers could harm our business, financial condition or results of operations.

     We may be involved in litigation regarding our intellectual property rights or those of third parties, which would be costly and would divert the efforts of our key technical and management personnel.

     We have been subject to, 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. Furthermore, parties that we have sued and that we may sue for patent infringement may counter sue us for infringing their patents. Litigation involving intellectual property is complex, can extend for a protracted period of time and is often very expensive. Intellectual property claims, whether or not meritorious, may result in the expenditure of significant financial resources, injunctions against us or the imposition of damages that we must pay and would also divert the efforts and attention of some of our key management and technical personnel. We may need to obtain licenses from third parties who allege that we have infringed their rights, but such licenses may not be available on terms acceptable to us or at all. Moreover, if we are required to pay significant monetary damages, are enjoined from selling any of our products or are required to make substantial royalty payments, our business would be harmed. For additional information concerning legal proceedings, see Item 1 “Legal Proceedings” in Part II of this report.

Risks Related to Our International Operations

     Because of our international operations, we must comply with numerous international laws and regulations, and we are vulnerable to political instability and currency fluctuations.

     Political risks. Currently, all of our flash memory, controller wafers and flash memory products are produced overseas by FlashVision, Renesas, Samsung, Toshiba, Tower and UMC. We also use third-party subcontractors in Taiwan, China, South Korea and Japan for the assembly and testing of some of our card and component products. We may, therefore, be affected by the political, economic and military conditions in these countries. Taiwan is currently engaged in various political disputes with China and in the past both countries have conducted military exercises in or near the other’s territorial waters and airspace. The Taiwanese and Chinese governments may escalate these disputes, resulting in an economic embargo, disruption in shipping routes or even military hostilities, which could harm our business by interrupting or delaying the production or shipment of our flash memory products.

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     Under its current leadership, the Chinese government has been pursuing economic reform policies, including the encouragement of foreign trade and investment and greater economic decentralization. The Chinese government may not continue to pursue these policies and, even if it does continue, these policies may not be successful. The Chinese government may also significantly alter these policies from time-to-time. In addition, China does not currently have a comprehensive and highly developed legal system, particularly with respect to the protection of intellectual property rights. One result of this is 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. Our results of operations and financial condition could be harmed by the sale of counterfeit products.

     Political unrest and violence in Israel could cause delays in the full completion of Tower’s production ramp at Fab 2 and interruption or delay of manufacturing schedules, either of which could cause potential foundry customers to go elsewhere for their foundry business and could cause investors and foundry customers to avoid Tower. Moreover, if U.S. military actions in Afghanistan, Iraq or elsewhere, or current Israeli military actions, result in retaliation against Israel, Tower’s fabrication facility and our engineering design center in Israel may be adversely impacted. In addition, while the political unrest has not yet posed a direct security risk to our engineering design center in Israel, it may cause unforeseen delays in the development of our products and may in the future pose such a direct security risk.

     Economic risks. We price our products primarily in U.S. dollars. If the Euro, Yen and other currencies weaken relative to the U.S. dollar, our products may be relatively more expensive in these regions, which could result in a decrease in our sales. While most of our sales are denominated in U.S. dollars, we invoice certain Japanese customers in Japanese Yen and are subject to exchange rate fluctuations on these transactions, which could harm our business, financial condition and results of operations.

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

• the need to comply with foreign government regulation;

• general geopolitical risks such as political and economic instability, potential hostilities and changes in diplomatic and trade relationships;

• natural disasters affecting the countries in which we conduct our business, particularly Japan, such as the earthquakes experienced in Taiwan in 1999, in Japan in 2004, 2003 and previous years, and in China in previous years;

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

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

• imposition of additional duties, charges and/or fees related to customs entries for our products, which are all manufactured offshore;

• longer payment cycles and greater difficulty in accounts receivable collection, particularly as we increase our sales through the retail distribution channel and general business conditions deteriorate;

• adverse tax rules and regulations;

• weak protection of our intellectual property rights; and

• delays in product shipments due to local customs restrictions.

     Terrorist attacks and threats, and government responses thereto, the war in Iraq and threats of war elsewhere, may negatively impact all aspects of our operations, revenues, costs and stock price.

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     The terrorist attacks in the United States, U.S. military responses to these attacks, the war in Iraq and threats of war elsewhere and the related decline in consumer confidence and continued economic weakness have had a negative impact on consumer retail demand, which is the largest channel for our product sales. Any escalation in these events or similar future 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. In addition, these events have had and may continue to have an adverse impact on the United States and world economy in general and consumer confidence and spending in particular, which could harm our sales. Any of these events could 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. This could have a significant impact on our operating results, revenues and costs and may result in increased volatility in the market price of our common stock.

Risks Related to Our Charter Documents, Stockholder Rights Plan, Our Stock Price, Our Debt Rating, the Raising of Additional Financing and Changes to Securities Laws and Regulations

     Anti-takeover provisions in our charter documents, stockholder rights plan and in Delaware law could prevent 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 prevent us from being acquired. 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). Although we have no present intention to issue shares of preferred stock, such an issuance 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 preventing a change of control of SanDisk.

     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 is likely to continue to fluctuate in the future. For example, in the 12 months ended September 26, 2004, our stock price fluctuated significantly from a low of $19.28 to a high of $43.15. We believe that such fluctuations will continue as a result of future announcements concerning us, our competitors or principal customers regarding technological innovations, new product introductions, governmental regulations, 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.

     The ratings assigned to us and our notes may fluctuate, which could harm the market price of our common stock.

     We and our notes have been rated by Standard & Poor’s Ratings Services, and may be rated by other rating agencies in the future. Standard & Poor’s Ratings Services assigned its “B+” corporate credit rating to us and its “B-” subordinated debt rating to our notes. If our current ratings are lowered or if other rating agencies assign us or the notes ratings lower than expected by investors, the market price of our common stock could be significantly harmed.

     We will need additional financing, which could be difficult to obtain, and which if not obtained in satisfactory amounts may prevent us from increasing our wafer supply, developing or enhancing our products, taking advantage of future opportunities, growing our business or responding to competitive pressures or unanticipated industry changes, any of which could harm our business.

43

     We will need to raise additional funds, including funds to meet our obligations with respect to Flash Partners and we cannot be certain that we will be able to obtain additional financing on favorable terms, if at all. From time-to-time, we may decide to raise additional funds through public or private debt or equity financings to fund our activities. If we issue additional equity securities in the future, 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 or debt securities. If we raise funds through debt 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, we may not be able to develop or enhance our products, take advantage of future opportunities, grow our business or respond to competitive pressures or unanticipated industry changes, any of which could have a negative impact on our business.

     Changes in securities laws and regulations have increased our costs; further, in the event we are unable to satisfy regulatory requirements relating to internal controls, or if these internal controls over financial reporting are not effective, our business could suffer.

     The Sarbanes-Oxley Act of 2002 that became law in July 2002 required changes in our corporate governance, public disclosure and compliance practices. The act also required the SEC to promulgate new rules on a variety of subjects. In addition to final rules and rule proposals already made, Nasdaq has enacted additional requirements for companies that are Nasdaq-listed. These additional rules and regulations have increased and will continue to increase our legal and financial compliance costs, and have made some activities more difficult, such as stockholder approval of new option plans. In addition, we have incurred and expect to continue to incur significant costs in connection with compliance with Rule 404 promulgated by the SEC regarding internal controls over financial reporting. We expect these developments to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These developments could make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee, and qualified executive officers. We are presently evaluating and monitoring regulatory developments and cannot estimate the timing or magnitude of additional costs we may incur as a result.

     In connection with our Rule 404 certification process, we have identified a number of deficiencies in our internal controls over financial reporting. We are diligently working to implement enhancements to eliminate these deficiencies prior to the end of fiscal 2004 and our first Rule 404 certification and independent auditor attestation. We cannot assure you that individually or in the aggregate these deficiencies would not be deemed to be a material weakness. Furthermore, we cannot assure you that we will be able to implement these enhancements on a timely basis in order to furnish an unqualified certification. In designing and evaluating our internal controls over financial reporting, we recognize that any internal control or procedure, no matter how well designed and operated, can provide only reasonable assurance of achieving desired control objectives. For example, a company’s operations may change over time as the result of new or discontinued lines of business and management must periodically modify a company’s internal controls and procedures to timely match these changes in its business. In addition, management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures and company personnel are required to use judgment in their application. A material weakness or deficiency in internal controls 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 over financial reporting could have a negative impact on our reputation, business and stock price.

Risks Related to Our Indebtedness

     We have convertible subordinated notes outstanding, which may restrict our cash flow, make it difficult for us to obtain future financing, divert our resources from other uses, limit our ability to react to changes in the industry, and place us at a competitive disadvantage.

     As a result of the sale and issuance of our 4 1/2% convertible subordinated notes in December 2001 and January 2002, we incurred $150.0 million aggregate principal amount of additional indebtedness, substantially increasing our ratio of debt to total capitalization. On November 18, 2004, we intend to redeem any notes that are not converted to common stock on or before the close of business eastern time on November 17, 2004. In the event that holders of our notes do not convert on or before November 17, 2004, either because our stock price is below approximately $9.39 per share or otherwise, we could have to pay as much as approximately $153 million to redeem such unconverted notes. While the notes are outstanding, we

44

have debt service obligations on the notes of approximately $6.8 million per year in interest payments. 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 activities of our business.

     We intend to fulfill our debt service obligations from cash generated by our operations, if any, and from our existing cash and investments. If necessary, among other alternatives, we may add lease lines of credit to finance capital expenditures and obtain other long-term debt and lines of credit. We may incur substantial additional indebtedness in the future. The level of our indebtedness, among other things, could:

• require the dedication of a substantial portion of any cash flow from our operations to service our indebtedness, thereby reducing the amount of cash flow available for other purposes, including working capital, capital expenditures and general corporate purposes;

• make it difficult for us to obtain any necessary future financing for working capital, capital expenditures, debt service requirements or other purposes;

• cause us to use a significant portion of our cash and cash equivalents or possibly liquidate other assets to repay the total principal amount due under the notes and our other indebtedness if we were to default under the notes or our other indebtedness;

• limit our flexibility in planning for, or reacting to changes in, our business and the industries in which we complete;

• place us at a possible competitive disadvantage with respect to less leveraged competitors and competitors that have better access to capital resources; and

• make us more vulnerable in the event of a downturn in our business.

     There can be no assurance that we will be able to meet our debt service obligations, including our obligations under the notes.

     In addition, we have agreed to indemnify Toshiba for certain liabilities Toshiba incurs as a result of Toshiba’s guarantee of the FlashVision equipment lease arrangement. If FlashVision fails to meet its lease commitments, and Toshiba fulfills these commitments under the terms of Toshiba’s guarantee, then we will be obligated to reimburse Toshiba for 49.9% of any claims and associated expenses under the lease, unless such claims result from Toshiba’s failure to meet its obligations to FlashVision or its covenants to the lenders. Because FlashVision’s new equipment lease arrangement is denominated in Japanese Yen, the maximum amount of our contingent indemnification obligation on a given date when converted to U.S. dollars will fluctuate based on the exchange rate in effect on that date. As of September 26, 2004, the maximum amount of our contingent indemnification obligation, which reflects payments and any lease adjustments, was approximately $110.2 million.

     This contingent indemnification obligation might constitute senior indebtedness under the notes and we may use a portion of the proceeds from the notes to repay the obligation. This would result in the diversion of resources from other important areas of our business and could significantly harm our business, financial condition and results of operations.

     We may not be able to satisfy a fundamental change offer under the indenture governing the notes.

     The indenture governing the notes contains provisions that apply to a fundamental change. A fundamental change as defined in the indenture would occur if we were to be acquired for consideration other than depository receipts or common stock traded on a major U.S. securities market. If someone triggers a fundamental change, we may be required to offer to purchase the notes with cash. This would result in the diversion of resources from other important areas of our business and could significantly harm our business, financial condition and results of operations.

     If we have to make a fundamental change offer, we cannot be sure that we will have enough funds to pay for all the notes that the holders could tender. Our failure to redeem tendered notes upon a fundamental change would constitute a

45

default under the indenture and might constitute a default under the terms of our other indebtedness, which would significantly harm our business and financial condition.

     We may not be able to pay our debt and other obligations, which would cause us to be in default under the terms of our indebtedness, which would result in harm to our business and financial condition.

     If our cash flow is inadequate to meet our obligations, we could face substantial liquidity problems. If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments on the notes or our other indebtedness, we would be in default under the terms thereof, which would permit the holders of the notes to accelerate the maturity of the notes and also could cause defaults under our other indebtedness. Any such default would harm our business, prospects, financial condition and operating results. In addition, we cannot assure you that we would be able to repay amounts due in respect of the notes if payment of the notes were to be accelerated following the occurrence of any other event of default as defined in the indenture governing the notes. Moreover, we cannot assure that we will have sufficient funds or will be able to arrange for financing to pay the principal amount due on the notes at maturity.

     The notes and other indebtedness have rights senior to those of our current stockholders such that in the event of our bankruptcy, liquidation or reorganization or upon acceleration of the notes due to an event of default under the indenture and in certain other events, our assets will be available for distribution to our current stockholders only after all senior indebtedness is repaid.

     In the event of our bankruptcy, liquidation or reorganization or upon acceleration of the notes due to an event of default under the indenture and in certain other events, our assets will be available for distribution to our current stockholders only after all senior indebtedness, including our contingent indemnification obligations to Toshiba, guarantee obligations under any equipment lease arrangement secured by Flash Partners and obligations under the notes, have been paid in full. As a result, there may not be sufficient assets remaining to make any distributions to our stockholders. The notes are also effectively subordinated to the liabilities of any of our subsidiaries (including trade payables, which as of September 26, 2004 were approximately $1.8 million). Neither we, nor our subsidiaries are limited from incurring debt, including senior indebtedness, under the indenture. If we or our subsidiaries were to incur additional debt or liabilities, our ability to pay our obligations on the notes could be adversely affected. We anticipate that from time-to-time we will incur additional debt, including senior indebtedness. Our subsidiaries are also likely to incur liabilities in the future.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     Please refer to our Form 10-K for the year ended December 28, 2003.

46

Item 4. 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 amended (the “Exchange Act”), 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 to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

47

PART II. OTHER INFORMATION

Item 1. Legal 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 us.

     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. Litigation may extend for a protracted period of time, and is often very expensive. Litigation, whether or not meritorious, may result in the expenditure of significant financial resources, injunctions against us or the imposition of damages that we must pay and would also divert the efforts and attention of some of our key management and technical personnel. Moreover, if we are required to pay significant monetary damages, are enjoined from selling any of our products or are required to make substantial payments, our business would be harmed.

     On or about August 3, 2001, the Lemelson Medical, Education & Research Foundation, or Lemelson Foundation, filed a complaint for patent infringement against us and four other defendants. The suit, captioned Lemelson Medical, Education, & Research Foundation, Limited Partnership vs. Broadcom Corporation, et al., Civil Case No. CIV01 1440PHX HRH, was filed in the United States District Court, District of Arizona. On November 13, 2001, the Lemelson Foundation filed an Amended Complaint, which made the same substantive allegations against us but named more than twenty-five additional defendants. The Amended Complaint alleges that we, and the other defendants, have infringed certain patents held by the Lemelson Foundation pertaining to bar code scanning technology. By its complaint, the Lemelson Foundation requests that we be enjoined from our allegedly infringing activities and seeks unspecified damages. On February 4, 2002, we filed an answer to the Amended Complaint, wherein we alleged that we did not infringe the asserted patents, and further that the patents are not valid or enforceable.

     On October 31, 2001, we filed a complaint for patent infringement in the United States District Court for the Northern District of California against Memorex Products, Inc., Pretec Electronics Corporation, Ritek Corporation, and Power Quotient International Co., Ltd. In the suit, captioned SanDisk Corp. v. Memorex Products, Inc., et al., Civil No. CV 01-4063 VRW, we seek damages and injunctions against these companies from making, selling, importing or using flash memory cards that infringe the Company’s U.S. Patent No. 5,602,987, or the ’987 patent. The Court granted summary judgment of noninfringement in favor of defendants Ritek, Pretec and Memorex and entered judgment on May 17, 2004. The rulings do not affect the validity of the patent. On June 2, 2004, the Company filed a Notice of Appeal of the summary judgment rulings to the Federal Circuit Court of Appeals.

     On or about June 9, 2003, we received written notice from Infineon Technologies AG, or Infineon, that it believes we have infringed Infineon’s U.S. Patent No. 5,726,601, or the ‘601 patent. On June 24, 2003, we filed a complaint against Infineon for a declaratory judgment of patent non-infringement and invalidity regarding the ‘601 patent in the United States District Court for the Northern District of California, captioned SanDisk Corporation v. Infineon Technologies AG, a German corporation, and Does I to X, Civil No. C 03 02931 BZ. On October 6, 2003, Infineon filed an answer and counterclaim: (i) denying that we are entitled to the declaration sought by the our complaint; (ii) requesting that we be adjudged to have infringed, actively induced and/or contributed to the infringement of the ‘601 patent and an additional patent — U.S. Patent No. 4,841,222 (the ’222 patent). On October 27, 2003, we filed a reply to Infineon’s counterclaims, wherein we denied that we infringe the asserted patents, and denied that Infineon is entitled to any relief in the action. Pursuant to the parties’ stipulation, on August 12, 2004, Infineon filed an amended counterclaim for patent infringement alleging that the Company infringes U.S. Patent Nos. 6,026,002 (the ‘002 patent); 5,041,894 (the ‘894 patent); and 6,226,219 (the ‘219 patent), and omitting the ‘601 and ‘222 patents. On August 18, 2004, we filed an amended complaint against Infineon for a declaratory judgment of patent non-infringement and invalidity regarding the ‘002, ‘894, and ‘219 patents.

     On July 3, 2003, a purported shareholder class action lawsuit was filed on behalf of United States holders of ordinary shares of Tower as of the close of business on April 1, 2002 in the United States District Court for the Southern District of New York. The suit, captioned Philippe de Vries, Julia Frances Dunbar De Vries Trust, et al., v. Tower Semiconductor Ltd., et al., Civil Case No. 03 CV 4999, was filed against Tower and certain of its shareholders and directors, including we and Eli Harari, our President and CEO and a Tower board member, and asserts claims arising under Sections 14(a) and

48

20(a) of the Securities Exchange Act of 1934, as amended, and Rule 14a-9 promulgated there under. The lawsuit alleges that Tower and certain of its directors made false and misleading statements in a proxy solicitation to Tower shareholders regarding a proposed amendment to a contract between Tower and certain of its shareholders, including us. The plaintiffs are seeking unspecified damages and attorneys’ and experts’ fees and expenses. On August 19, 2004, the judge granted our and the other defendants’ motion to dismiss the complaint in its entirety with prejudice. On September 29, 2004, plaintiffs appealed the dismissal to the U.S. Court of Appeals for the Second Circuit. The appeal will likely be decided sometime in 2005.

     On February 20, 2004, us and a number of other manufacturers of flash memory products were sued in the Superior Court of the State of California for the City and County of San Francisco in a purported consumer class action captioned Willem Vroegh et al. v. Dane Electric Corp. USA, et al. alleging false advertising, unfair business practices, breach of contract, fraud, deceit, misrepresentation and violation of the California Consumers Legal Remedy Act. The lawsuit purports to be on behalf of a class of purchasers of flash memory products and claims that the defendants overstated the size of the memory storage capabilities of such products. The lawsuit seeks restitution, injunction and damages in an unspecified amount. On May 24, 2004, we filed an Answer denying all material allegations of the complaint and asserting affirmative defenses.

     On October 15, 2004, we filed a complaint for patent infringement and declaratory judgment of noninfringement and patent invalidity against STMicroelectronics N.V. and STMicroelectronics, Inc. in the United States District Court for the Northern District of California. The complaint alleges that STMicroelectronics N.V. and STMicroelectronics, Inc.’s products infringe our U.S. Patent No. 5,172,338 (the ‘338 patent) and seeks damages and an injunction. The complaint further seeks a declaratory judgment that we do not infringe the following patents and that the following United States patents are invalid: 4,839,768; 5,073,816; 5,175,706; 5,455,954; 5,589,762; 5,636,115; 5,793,679; 5,831,302; 5,999,456; 6,100,581; 6,163,487; Re. 35,121; 5,014,312; and 5,438,504.

     On October 15, 2004, we filed a complaint under Section 337 of the Tariff Act of 1930 (as amended) titled, “In the matter of certain NAND flash memory circuits and products containing same” in the United States International Trade Commission, naming STMicroelectronics N.V. and STMicroelectronics, Inc. as respondents. In the complaint, we allege that STMicroelectronics N.V. and STMicroelectronics, Inc.’s NAND flash memory infringe the ‘338 patent and seek an order excluding their products from importation into the United States.

Item 2. Changes in Securities

     None

Item 3. Defaults upon Senior Securities

     None

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

     None.

Item 5. Other Information

     Dr. Eli Harari, our Chief Executive Officer, adopted a stock selling plan under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, on November 26, 2003, which became effective on March 1, 2004. The plan provides for sales of our common stock on a monthly basis subject to certain market prices. This plan will automatically terminate on the earlier of March 7, 2005 or the date when an aggregate of 800,000 shares have been sold pursuant to the plan. Dr. Harari terminated his prior 10b5-1 stock selling plan on November 3, 2003.

49

Item 6. Exhibits and Reports on Form 8-K

     A. Exhibits

Exhibit
Number	Exhibit Title
10.1	Flash Partners Master Agreement, dated as of September 10, 2004, by and among the Registrant and the other parties thereto. (+)
10.2	Operating Agreement of Flash Partners Ltd., dated as of September 10, 2004, by and between SanDisk International Limited and Toshiba Corporation. (+)
10.3	Amended and Restated Common R&D and Participation Agreement, dated as of September 10, 2004, by and between the Registrant and Toshiba Corporation. (+)
10.4	Amended and Restated Product Development Agreement, dated as of September 10, 2004, by and between the Registrant and Toshiba Corporation. (+)
10.5	Mutual Contribution and Environmental Indemnification Agreement, dated as of September 10, 2004, by and among the Registrant and the other parties thereto. (+)
10.6	Patent Indemnification Agreement, dated as of September 10, 2004 by and among the Registrant and the other parties thereto. (+)
10.7	Settlement and Release Agreement, dated as of June 29, 2004, by and between the Registrant and Michael Gray.
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

+ Confidential treatment has been requested for certain portions thereof.

     B. Reports on Form 8-K

     On July 14, 2004, the Registrant furnished a Current Report on Form 8-K reporting under Item 12 the issuance of a press release announcing the Registrant’s financial results for the second quarter and six months ended June 27, 2004.

     On July 22, 2004, the Registrant filed a Current Report on Form 8-K reporting under Item 5 financial guidance related to its fiscal quarter ended September 26, 2004 given by the Registrant during its webcast/conference call with respect to its second quarter and six months ended June 27, 2004.

     On September 16, 2004, the Registrant filed a Current Report on Form 8-K reporting under Item 1.01 that the Registrant closed a transaction with Toshiba Corporation, or Toshiba, under which the Registrant and Toshiba created a new semiconductor company, Flash Partners, Ltd., a Japanese yugen kaisha, owned 49.9% by the Registrant and 50.1% by Toshiba, and agreed to cooperate in the construction and equipping of a new 300-millimeter NAND wafer fabrication facility, Fab 3, to produce NAND flash memory products for the parties.

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

	SANDISK CORPORATION (Registrant)
Dated: November 5, 2004	By:	/s/ JUDY BRUNER
		Judy Bruner
		Executive Vice President Administration Chief Financial Officer (On behalf of the Registrant and as Principal Financial Officer)

51

EXHIBIT INDEX

Exhibit
Number	Exhibit Title
10.1	Flash Partners Master Agreement, dated as of September 10, 2004, by and among the Registrant and the other parties thereto. (+)
10.2	Operating Agreement of Flash Partners Ltd., dated as of September 10, 2004, by and between SanDisk International Limited and Toshiba Corporation. (+)
10.3	Amended and Restated Common R&D and Participation Agreement, dated as of September 10, 2004, by and between the Registrant and Toshiba Corporation. (+)
10.4	Amended and Restated Product Development Agreement, dated as of September 10, 2004, by and between the Registrant and Toshiba Corporation. (+)
10.5	Mutual Contribution and Environmental Indemnification Agreement, dated as of September 10, 2004, by and among the Registrant and the other parties thereto. (+)
10.6	Patent Indemnification Agreement, dated as of September 10, 2004 by and among the Registrant and the other parties thereto. (+)
10.7	Settlement and Release Agreement, dated as of June 29, 2004, by and between the Registrant and Michael Gray.
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

+ Confidential treatment has been requested for certain portions thereof.

EX-10.1

                                                                    EXHIBIT 10.1

================================================================================

                         FLASH PARTNERS MASTER AGREEMENT

                         Dated as of September 10, 2004

                                  by and among

                              TOSHIBA CORPORATION,

                               SANDISK CORPORATION

                                       and

                          SANDISK INTERNATIONAL LIMITED

================================================================================

CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.



                                Table of Contents



                                                                                 Page
                                                                                 ----
                                                                              
1.  Definitions and Interpretation..............................................   2

2.  Closing and Post-Closing Transactions.......................................   4

3.  Purpose of Flash Partners...................................................   7

4.  Representations and Warranties of the Parties...............................   7

5.  Covenants...................................................................  11

6.  Covenants concerning NAND Flash Memory Products Business....................  12

7.  Other Agreements............................................................  25

8.  Termination.................................................................  28

9.  Miscellaneous...............................................................  33


            This FLASH PARTNERS MASTER AGREEMENT, dated as of September 10,
2004, is entered into by and among, on one side, TOSHIBA CORPORATION, a Japanese
corporation ("Toshiba"), and, on the other side, SANDISK CORPORATION, a Delaware
corporation ("SanDisk Corporation"), and SANDISK INTERNATIONAL LIMITED, a
company organized under the laws of the Cayman Islands ("SanDisk International",
and collectively with SanDisk Corporation, "SanDisk," and SanDisk together with
Toshiba, the "Parties").

            WHEREAS, pursuant to that certain New Master Agreement between
SanDisk Corporation and Toshiba, dated as of April 10, 2002, as amended by that
certain Amendment to New Master Agreement between the Parties dated as of August
13, 2002 (the "FVC Japan Master Agreement"), and the agreements referenced
therein, the Parties have had a collaboration for development and manufacture of
FVC Japan NAND Flash Memory Products (as hereinafter defined);

            WHEREAS, the Parties desire to extend their collaboration to
encompass additional joint development and manufacture of Y3 NAND Flash Memory
Products (as hereinafter defined) to be produced at the wafer fabrication
facility known as "Y3"; and



            WHEREAS, in order to realize these goals, the Parties desire to
consummate or cause to be consummated the transactions described in this
Agreement, and any other transactions which the Parties may from time to time
consider necessary or appropriate to carry out the intent of the Parties as
expressed herein.

            NOW, THEREFORE, the Parties agree as follows:

1. DEFINITIONS AND INTERPRETATION.

1.1 Certain Definitions.

(a)   Capitalized terms used but not defined in this Agreement shall have the
      respective meanings assigned to them in Appendix A (Definitions, Rules of
      Construction and General Terms and Conditions).

(b)   As used herein, the term "Agreement" means this Flash Partners Master
      Agreement together with any Exhibits, Schedules, Appendices and
      Attachments hereto.

1.2   Additional Definitions. The following capitalized terms used in this
      Agreement shall have the respective meanings assigned in this Agreement:



        TERM                                                       DEFINED IN
        ----                                                       ----------
                                                             
Acquiring Party                                                 Section 8.1(d)
Alternative Use                                                 Section 6.3(c)(i)
Amendment No. 3 to Patent Cross License Agreement               Section 2.1(c)(iii)
Appointing Party                                                Section 6.7(b)(i)
[***]                                                           Section 6.3(c)(ii)(B)
Closing                                                         Section 2.1(a)
Committee Representatives                                       Section 6.7(b)(i)
Common R&D Agreement                                            Section 2.1(c)(i)
Common R&D Development Expenses                                 Section 6.6(a)(i)
Costs                                                           Section 6.3(c)(i)
Cross License Agreement                                         Section 2.1(c)(iii)
Defaulting Party                                                Section 6.10(d)
Excess Capacity Party/EC Party                                  Section 6.5(b)(i)
Embedded NAND Product                                           Section 6.5(c)(ii)
Employer                                                        Section 6.8(g)
Environmental Indemnification Agreement                         Section 2.1(b)(vii)
Equipment                                                       Section 6.3(c)(i)
Evaluation Wafers                                               Section 6.6(a)(iii)
Financing                                                       Section 6.10(b)(iii)
Flash Partners                                                  Section 2.1(b)


[***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

                                       2




        TERM                                                       DEFINED IN
        ----                                                       ----------
                                                             
FP Foundry Agreement                                            Section 2.1(b)(iv)
FP Operating Agreement                                          Section 2.1(b)(ii)
FP Operative Documents                                          Section 2.1(b)
FP Patent Indemnification Agreement                             Section 2.1(b)(vi)
FP Secondees                                                    Section 6.8
FP Termination Date                                             Section 8.1(b)
FP Units                                                        Section 4.2(a)
FVC Japan Master Agreement                                      Recitals
FVC Japan Operative Documents                                   Section 2.3
FVC Japan NAND Flash Memory Products                            Section 3.3(a)
Ics                                                             Section 3.2
Intellectual Property                                           Section 4.7
Investing Party                                                 Section 6.3(c)(i)
Joint Operative Documents                                       Section 2.1(c)
Lease Agreement                                                 Section 2.1(b)(viii)
Management Committee                                            Section 6.7
Minimum RUP Commitment                                          Section 6.3(c)(i)
Master Operative Documents                                      Section 2.2
NAND Flash Memory Integrated Circuits                           Section 6.11
NAND Flash Memory Products                                      Section 3.2
NAND Process Technology                                         Section 6.1(a)
Non-Defaulting Party                                            Section 6.10(d)
Non-Investing Party                                             Section 6.3(c)(i)
Non-Originating Party                                           Section 6.5(e)
Originating Party                                               Section 6.5(e)
Parties                                                         Heading
Product Development Agreement                                   Section 2.1(c)(ii)
Proprietary NAND Flash Memory Products                          Section 6.5(d)
Purchase and Supply Agreements                                  Section 2.1(b)(v)
Qualification Wafers                                            Section 6.6(a)(iv)
Ramp-Up Plan                                                    Section 6.3(b)
Requesting Party                                                Section 8.1(d)(i)
[***]                                                           Section 6.3(c)(ii)
[***]                                                           Section 6.3(c)(ii)
SanDisk                                                         Heading
SanDisk Corporation                                             Heading
SanDisk Financing                                               Section 6.10(b)(iii)
SanDisk International                                           Heading


[***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

                                       3




        TERM                                                       DEFINED IN
        ----                                                       ----------
                                                             
SanDisk Purchase and Supply Agreement                           Section 2.1(b)(v)
SanDisk Termination Capacity                                    Section 8.1(e)(i)
Selling Party                                                   Section 8.1(d)
Start-Up Costs                                                  Section 6.2
Termination Capacity                                            Section 8.1(d)(i)
Third Party Sale                                                Section 6.3(c)(i)
Toshiba                                                         Heading
Toshiba Financing                                               Section 6.10(b)(iii)
Toshiba Foundry NAND Flash Memory Products                      Section 3.3(a)
Toshiba Purchase and Supply Agreement                           Section 2.1(b)(v)
Toshiba-SanDisk Services Agreement                              Section 2.1(c)(iii)
[***]                                                           Section 6.3(c)(ii)(A)
Unit Purchase Agreement                                         Section 2.1(b)(i)
Y3 Direct R&D Development Products                              Section 6.6(a)(ii)
Y3 Facility                                                     Section 3.1
Y3 Facility Target Capacity                                     Section 7.3(b)
Y3 NAND Flash Memory Products                                   Section 3.3(a)
[***]                                                           Section 7.4(c)(i)


1.3   Rules of Construction and Documentary Conventions. The rules of
      construction and documentary conventions and general terms and conditions
      set forth in Appendix A shall apply to this Agreement.

1.4   Precedence. The terms and provisions of this Agreement are binding on the
      Parties; provided, however, that to the extent that a description in this
      Agreement of another agreement (whether an Operative Document or
      otherwise) conflicts with or differs from the provisions of that
      agreement, then the provisions of that agreement shall control as to such
      conflict or difference.

2.    CLOSING AND POST-CLOSING TRANSACTIONS

2.1   Closing Transactions.

(a)   Closing. The Parties shall effect the transactions set forth in this
      Section 2.1, all of which shall be considered to occur on the date hereof
      unless otherwise stipulated (the effecting of such transactions,
      collectively, the "Closing").

(b)   Flash Partners Documents. Unless otherwise indicated in this Section
      2.1(c), as of the Closing Date, the Parties shall enter into or cause to
      be entered into or otherwise become effective the following agreements and
      documents (collectively with this Agreement, the "FP Operative Documents")
      to apply to their joint development, manufacture and selling of Y3 NAND
      Flash Memory Products by

[***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

                                       4


      and through Flash Partners, Ltd., a Japanese yugen kaisha ("Flash
      Partners") (the description of each document below is for reference only
      and shall not be used in interpreting any such document):

      (i)    a Unit Purchase Agreement between Toshiba and SanDisk
             International, dated as of the date hereof, in the form of Exhibit
             A1 (the "Unit Purchase Agreement"), and which concerns the sale by
             Toshiba and purchase by SanDisk International at the Closing of
             49.9% of the FP Units;

      (ii)   an Operating Agreement between Toshiba and SanDisk International,
             dated as of the date hereof, in the form of Exhibit A2 (the "FP
             Operating Agreement"), and which concerns governance of Flash
             Partners;

      (iii)  Articles of Incorporation of Flash Partners in the form of Exhibit
             A to the FP Operating Agreement;

      (iv)   a Foundry Agreement, dated as of the date hereof, between Flash
             Partners and Toshiba in the form of Exhibit A3 (the "FP Foundry
             Agreement");

      (v)    a Purchase and Supply Agreement, dated as of the date hereof, by
             and between Flash Partners and SanDisk International in the form of
             Exhibit A4-1 (the "SanDisk Purchase and Supply Agreement") and a
             Purchase and Supply Agreement, dated as of the date hereof, between
             Flash Partners and Toshiba in the form of Exhibit A4-2 (the
             "Toshiba Purchase and Supply Agreement" and together with the
             SanDisk Purchase and Supply Agreement, the "Purchase and Supply
             Agreements"), and which concern the forecasting and purchase
             commitments by SanDisk and Toshiba, respectively, of Y3 NAND Flash
             Memory Products;

      (vi)   a Patent Indemnification Agreement between SanDisk Corporation and
             Toshiba, dated as of the date hereof, in the form of Exhibit A5
             (the "FP Patent Indemnification Agreement"), and which concerns
             patent indemnification obligations of Toshiba in favor of SanDisk
             and certain contribution obligations of SanDisk with respect to Y3
             NAND Flash Memory Products;

      (vii)  a Mutual Contribution and Environmental Indemnification Agreement
             between SanDisk Corporation and Toshiba, dated as of the date
             hereof, in the form of Exhibit A6 (the "Environmental
             Indemnification Agreement"), and which concerns indemnification
             obligations of the Parties in favor of one another with respect to
             Flash Partners and the Yokkaichi Facility; and

      (viii) a Lease Agreement between Flash Partners and Toshiba, as owner of
             the Yokkaichi Facility, dated as of the date hereof, in the form of
             Exhibit A7 (the "Lease Agreement"), and which concerns the leasing
             of Flash Partners' equipment to Toshiba as owner of the Yokkaichi
             Facility.

(c)   Joint Operative Documents. The Parties acknowledge and agree that the
      following agreements shall remain in force or be amended or executed as
      indicated below

                                       5


      and shall apply generally to the Parties' collaboration with respect to
      NAND Flash Memory Products and related products (collectively, the "Joint
      Operative Documents"):

      (i)   the Amended and Restated Common R&D and Participation Agreement,
            dated as of the date hereof, between SanDisk Corporation and Toshiba
            (the "Common R&D Agreement"), a copy of which is Exhibit B1 and
            which concerns collaboration between the Parties with respect to
            research and development activities;

      (ii)  the Amended and Restated Product Development Agreement, dated as of
            the date hereof, between the SanDisk Corporation and Toshiba (the
            "Product Development Agreement"), a copy of which is Exhibit B2 and
            which concerns collaboration between the Parties with respect to
            product development activities;

      (iii) an Amendment No. 3 to Patent Cross License Agreement, dated as of
            the date hereof, between SanDisk Corporation and Toshiba (the
            "Amendment No. 3 to Patent Cross License Agreement"), a copy of
            which is Exhibit B3, amending that certain Patent Cross License
            Agreement between SanDisk Corporation and Toshiba, dated as of July
            30, 1997 (as amended by Amendment No. 1 to Patent Cross License
            Agreement, dated as of May 9, 2000, and Amendment No. 2 to Patent
            Cross License Agreement, dated as of April 10, 2002, the "Cross
            License Agreement"), and which concerns certain patent licenses
            granted by SanDisk Corporation and Toshiba to one another; and an
            Amendment No. 1 to Services Agreement, dated as of the date hereof,
            between SanDisk Corporation and Toshiba ("Toshiba-SanDisk Services
            Agreement"), a copy of which is Exhibit B4, amending that certain
            Toshiba-SanDisk Services Agreement, dated as of July 1, 2002, which
            concerns Toshiba's provision of certain services to SanDisk and
            SanDisk's payment to Toshiba for such services.

2.2   Further Assurances. Following the Closing, each Party shall, and shall
      cause its Affiliates and Flash Partners to, take all reasonable actions
      necessary or appropriate to effectuate the transactions contemplated by
      this Agreement, the FP Operative Documents and the Joint Operative
      Documents (collectively, the "Master Operative Documents"), and to obtain
      (and cooperate with the other Party in obtaining) any Governmental Action
      or third party consent required to be obtained or made by it in connection
      with any of the transactions contemplated by the Master Operative
      Documents; provided, that no Burdensome Condition shall be made to exist
      with respect to such Party or any of its Affiliates in connection
      therewith.

2.3   Continuation of FVC Japan Documents. The Parties agree that unless
      otherwise expressly stated herein (A) the FVC Japan Operative Documents
      shall not affect the interpretation of this Agreement or the governance or
      operation of Flash Partners or the Y3 Facility and (B) the FP Operative
      Documents shall not affect the interpretation of the FVC Japan Master
      Agreement or the governance operation of FVC Japan or the FVC Japan
      Equipment. The Parties further

                                       6


      acknowledge that their agreement concerning the relationship between the
      FVC Japan Operative Documents and FP Operative Documents is stated in a
      letter agreement between Toshiba and SanDisk, dated as of the date hereof
      (which is not itself either an FVC Japan Operative Document or FP
      Operative Document).

3.    PURPOSE OF FLASH PARTNERS

3.1   Purpose. The Parties acknowledge and agree that the purpose of the Master
      Operative Documents and Flash Partners is the manufacture, including by
      subcontract to Toshiba pursuant to the FP Foundry Agreement, and sale to
      the Parties of NAND Flash Memory Products manufactured at the facility of
      the Flash Partners known by the Parties as "Y3" (the "Y3 Facility"), which
      is a part of the Yokkaichi Facility (defined in Appendix A).

3.2   NAND Flash Memory Products. "NAND Flash Memory Products" are NAND (both
      binary and MLC Flash Memory) Flash Memory Integrated Circuits ("ICs"),
      excluding any products with process design rules generally greater than
      .25 microns. Embedded IC's incorporating NAND Flash Memory Products shall
      be considered to constitute "NAND Flash Memory Products" if the main
      function and value of such IC is flash memory, but shall not be considered
      to constitute "NAND Flash Memory Products" if the main function and value
      of such IC is logic. For the purpose of the foregoing, the "main function
      and value" of any product shall be considered to be flash memory if (x)
      the total NAND flash memory array area is greater than [***] of the total
      die area or (y) the product is a cut-down or derivative of a standard NAND
      Flash Memory Product.

3.3   Products.

(a)   NAND Flash Memory Products manufactured at the Y3 Facility are referred to
      as "Y3 NAND Flash Memory Products," NAND Flash Memory Products
      manufactured for FVC Japan using the FVC Japan Equipment are referred to
      as "FVC Japan NAND Flash Memory Products" and NAND Flash Memory Products
      manufactured at the Toshiba Foundry Facility (defined in Appendix A) are
      referred to as "Toshiba Foundry NAND Flash Memory Products".

(b)   Each Party shall be permitted to market and sell all NAND Flash Memory
      Products to any third party in any form, including chips, packaged
      devices, wafers, die and cards.

4.    REPRESENTATIONS AND WARRANTIES OF THE PARTIES

      Except as may be disclosed in disclosure schedules attached to this
      Agreement, each Party represents and warrants to the other Party, as of
      the Closing, as follows:

4.1   Organization, Ownership Interest, etc.

(a)   It and each of its Affiliates that is a party to any Master Operative
      Document is duly organized, validly existing and in good standing under
      the laws of its

[***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT
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                                       7


      jurisdiction of organization or incorporation and has the power and
      authority to carry on its business as conducted on the date hereof, to own
      or hold under lease its properties and to enter into and perform its
      obligations under each Master Operative Document to which it is a party.

(b)   It and each of its Affiliates that is a party to any Master Operative
      Document is duly qualified to own or lease its properties and generally to
      conduct its business as currently, or proposed under the Master Operative
      Documents to be, conducted in each jurisdiction necessary for purposes of
      the transactions contemplated by the Master Operative Documents, except
      where failure to so qualify would not have a material adverse effect on
      either Party or Flash Partners.

4.2   Authorization; No Conflict.

(a)   It and each of its Affiliates has duly authorized by all necessary action
      (i) the execution, delivery and performance of each Master Operative
      Document to which it or any of its Affiliates is a party and (ii) the
      exercise of its rights as a holder of units (shusshi mochibun) of Flash
      Partners (the "FP Units") to approve the execution, delivery and
      performance by Flash Partners of each Master Operative Document to which
      it is a party and for which the approval of the holders of FP Units is
      required.

(b)   Its and each of its Affiliates' execution and delivery of each Master
      Operative Document to which it is a party, its and each of its Affiliates'
      consummation of the transactions contemplated thereby and its and each of
      its Affiliates' compliance therewith does not and will not (i) require any
      approval of its or any of such Affiliates' stockholders or any approval or
      consent of any trustee or holder of any of its or any of such Affiliates'
      Indebtedness or obligations, (ii) contravene any Governmental Rule
      applicable to or binding on it or any of such Affiliates or any of its or
      their properties if such contravention would have a material adverse
      effect on it or any of such Affiliates or on its or their ability to
      perform any of its or any of such Affiliates' obligations under any Master
      Operative Document, (iii) contravene or result in any breach of, or
      constitute any default, with or without the passage of time, the giving of
      notice or both, under its charter or by-laws, or contravene or result in
      any breach of or constitute any default under, or result in the creation
      of any Lien (other than Permitted Liens) upon any of its or any of such
      Affiliates property or the property of Flash Partners under, any material
      indenture, mortgage, chattel mortgage, deed of trust, conditional sales
      contract, loan or credit agreement, non-compete agreement, license
      agreement, partnership or joint venture agreement or other material
      agreement or document to which it or any of such Affiliates is a party or
      by which it or any of such Affiliates or any of its or their properties is
      or is intended to be bound or by which Flash Partners or any of its
      properties is or is intended to be bound, (iv) require any negotiation
      with, or notice to, any labor union or violate, or require any procedure
      to be followed under, any collective bargaining or other agreement with
      employees or (v) require any Governmental Action (other than immaterial
      Governmental Actions such as routine qualifications to do business
      intended to be obtained as needed or Governmental Actions needed in
      connection

                                       8


      with the construction and operation of the Y3 Facility), except, in each
      case described in clauses (i) through (v) above, such as have been duly
      obtained, made, taken or otherwise accomplished and which are in full
      force and effect. All consents and approvals of any Governmental Authority
      (other than immaterial Governmental Actions such as routine qualifications
      to do business intended to be obtained as needed or Governmental Actions
      needed in connection with the operation of the Y3 Facility) or other third
      Person necessary or advisable for such Party or any of its Affiliates to
      consummate in all material respects the transactions contemplated by the
      Master Operative Documents have been obtained. No Burdensome Condition
      exists with respect to such Party, any of its Affiliates or Flash Partners
      in connection with the transactions contemplated by the Master Operative
      Documents.

4.3   Enforceability.

(a)   It has duly executed and delivered this Agreement and, upon the execution
      and delivery of this Agreement by the other Party, this Agreement will
      constitute its legal, valid and binding obligation, enforceable against it
      in accordance with its terms except as enforceability may be limited by
      bankruptcy, insolvency, fraudulent conveyance or similar laws affecting
      the enforcement of creditors' rights generally or the availability of
      equitable remedies (regardless of whether enforceability is considered in
      a proceeding at law or in equity).

(b)   It and each of its Affiliates have duly executed and delivered each other
      Master Operative Document to which it or any such Affiliate is a party
      and, upon the execution and delivery of each such other Master Operative
      Document by each other party thereto, each such other Master Operative
      Document will constitute its legal, valid and binding obligation,
      enforceable against it or its Affiliates in accordance with its terms
      except as enforceability may be limited by bankruptcy, insolvency,
      fraudulent conveyance or similar laws affecting the enforcement of
      creditors' rights generally or the availability of equitable remedies
      (regardless of whether enforceability is considered in a proceeding at law
      or in equity).

4.4   Proceedings. There are no actions, claims, investigations or proceedings
      pending, or to its knowledge threatened, by or before any Governmental
      Authority that, if adversely determined, would have a material adverse
      effect on it or any of its Affiliates that is a party to any Master
      Operative Document or, on the conduct of the business of Flash Partners
      following the Closing as contemplated in the Master Operative Documents or
      on it or any of its Affiliates' ability to perform any material obligation
      under any Master Operative Document.

4.5   Litigation; Decrees. Except as set forth in Schedule 4.5, there are no
      lawsuits, arbitrations or other legal proceedings pending, or to its
      knowledge threatened, by or against or affecting it or any of its
      Affiliates or any of their respective properties that (i) are reasonably
      likely, based on information known to it as of the date hereof, to have a
      material adverse effect on the conduct of the business of Flash Partners
      following the Closing as contemplated by the Master Operative Documents or
      (ii) relate to any of the transactions contemplated by the Master


                                       9


      Operative Documents in a manner which is material to it, any of its
      Affiliates' or Flash Partners ability of it to carry out the transactions
      contemplated hereby and in the FP Operative Documents or which could have
      a material adverse effect on the conduct of the business of Flash Partners
      following the Closing as contemplated in the Master Operative Documents.

4.6   Compliance with Other Instruments. Neither it nor any of its Affiliates
      that is a party to any Master Operative Document is in default in any
      material respect in the performance of any material obligation, agreement,
      instrument or undertaking to which it or any of its Affiliates is a party
      or by which it or any of its Affiliates or any of its of their properties
      is bound, and there is no such obligation, agreement, instrument or
      undertaking to which it or any of its Affiliates is a party or by which it
      or any of its Affiliates or any of its or their properties is bound, in
      each case which is reasonably likely to have a material adverse effect on
      the conduct of the business of Flash Partners following the Closing as
      contemplated by the Master Operative Documents.

4.7   Patents and Proprietary Rights. Except as set forth in Schedule 4.7, to
      its knowledge, it owns or possesses sufficient legal rights to all
      patents, utility models, trademarks, service marks, trade names,
      copyrights, applications for any of the foregoing, mask works, software,
      trade secrets, licenses, information and proprietary rights and processes
      (collectively, "Intellectual Property") necessary (i) to carry out its or
      any of its Affiliates' obligations under the Master Operative Documents
      and (ii) for the conduct of the business of Flash Partners following the
      Closing as contemplated in the Master Operative Documents, without any
      conflict with or infringement of the rights of others, except as will not
      have a material adverse effect on either (i) or (ii) above. Except with
      respect to items referenced in Schedule 4.7, it has not received any
      communications alleging that its Intellectual Property violates, or by its
      or any of its Affiliates entering into the transactions contemplated by
      the Master Operative Documents, would violate the Intellectual Property of
      any other Person or entity, which violation could reasonably be expected
      to have a material adverse effect on either (i) or (ii) above.

4.8   Compliance with Laws. It and each of its Affiliates has complied and is
      complying in all material respects with all laws, statutes, permit
      requirements, licensing requirements, rules and regulations and judicial
      or administrative decisions, except where the failure to so comply would
      not have a material adverse effect on its or any of its Affiliates ability
      to perform its or their obligations hereunder or under any other Master
      Operative Document or on the conduct of the business of Flash Partners
      following the Closing as contemplated by the Master Operative Documents.

4.9   Patent Cross Licenses. Except as set forth on Schedule 4.9, with respect
      to (a) Toshiba, there are no patent cross licenses between it and any
      third party that would require Flash Partners to make any payment pursuant
      to Section 10 of the Cross License Agreement, and (b) SanDisk, there are
      no patent cross licenses between it and any third party that would require
      Flash Partners to make any payment pursuant to Section 8 of the Cross
      License Agreement.


                                       10


5.    COVENANTS

5.1   Covenants of the Parties. Each Party agrees that, during the term of this
      Agreement:

(a)   Performance of Obligations. It and each of its Affiliates shall fully and
      faithfully carry out (i) all its obligations under each Master Operative
      Document to which it or any Affiliate is a party, and (ii) once agreed,
      each applicable Business Plan (as defined in the FP Operating Agreement).

(b)   Ownership Interest. Except as otherwise expressly permitted by the FP
      Operating Agreement and this Agreement, it shall not Transfer or permit
      any of its Affiliates to Transfer all or any portion of its FP Units (or
      all or any portion of its interest in any Affiliate through which it
      beneficially owns its FP Units), to any Person without the consent of the
      other Party.

5.2   Public Announcements.

(a)   At or following the Closing, neither Party shall, nor shall it permit any
      of its Affiliates to, without the prior written consent of the other
      Party:

      (i)   issue any public release, announcement or other document, or
            otherwise publicly disclose any information or make any public
            statement, concerning the operations of Flash Partners or that
            refers to the other Party or any of its Affiliates in connection
            therewith (other than a general reference to affiliation with Flash
            Partners) that (A) concerns the financial condition or results of
            operations of Flash Partners other than as required by any
            Governmental Rule, Japanese GAAP, Japanese GAAS, US GAAP or US GAAS,
            with respect to the financial disclosure obligations of either Party
            or (B) disparages either Party, or Flash Partners' performance or
            reflects negatively on either Party's commitment to either of Flash
            Partners; or

      (ii)  other than as may be required in connection with filings required to
            be made with Governmental Authorities with respect to the
            transactions contemplated by the FP Operative Documents pursuant to
            the Japanese Foreign Exchange and Foreign Trade Law and related
            regulations, (A) publicly file all or any part of any Master
            Operative Document or any description thereof or (B) issue or
            otherwise make publicly available any press release, announcement or
            other document that contains Confidential Information belonging to
            the other Party (or its Affiliates) or Flash Partners, except as may
            be required by any applicable Governmental Rule, in which case such
            Party shall (or shall cause the Person required to make such filing
            to) cooperate with the other Party, to the extent reasonable and
            practicable, in obtaining any confidential treatment for such filing
            requested by the other Party.


                                       11


(b)   Each Party shall use commercially reasonable efforts to grant or deny any
      approval required under this Section 5.2 within five (5) days of receipt
      of written request by the other Party; provided, however, a Party's
      failure to respond within said time period shall not be deemed to
      constitute such Party's approval or consent.

5.3   Expenses. Each Party shall bear its own expenses in connection with the
      negotiation, execution and delivery of the Master Operative Documents.

5.4   Undertaking as to Affiliate Obligations. Each Party shall cause all
      covenants, conditions and agreements to be performed, observed or
      satisfied by each of its Affiliates that is a party to any Master
      Operative Documents to be fully and faithfully observed, performed and
      satisfied by such Affiliate, and shall not cause or permit to exist (i) an
      Event of Default with respect to such Affiliate or (ii) except as
      otherwise permitted by the FP Operating Agreement, any event of
      dissolution of Flash Partners caused by such Affiliate. Nothing in Section
      5.1 or in this Section 5.4 shall be construed to create any right in any
      Person other than the Parties. Without limiting the generality of the
      foregoing, SanDisk hereby guarantees the obligations of SanDisk
      International hereunder and under any Master Operative Document to which
      SanDisk International is a party.

5.5   Continuity and Maintenance of Operations. During the term of this
      Agreement, each Party agrees on behalf of itself and each of its
      Affiliates that is a party to any Master Operative Document to use all
      reasonable efforts consistent with past practice and policies to (i)
      preserve intact in all material respects its and their present business
      operations, (ii) keep available the services of its and their key
      employees as a group, and (iii) preserve its relationships with suppliers,
      licensors, licensees, and others having business relationships with it or
      them, each to the extent necessary to allow it and such Affiliates to
      perform its and their obligations under the Master Operative Documents and
      to allow Flash Partners to conduct its business as contemplated in its
      most recently approved Business Plan.

5.6   Certain Deliveries and Notices. Each Party shall promptly inform in
      writing the other Party of (i) any event or occurrences which could be
      reasonably expected to have a material adverse effect on its or any of its
      Affiliates' ability to perform its or their obligations under any of the
      Master Operative Documents or the ability of Flash Partners to conduct its
      business as contemplated in its most recently approved Business Plan, or
      (ii) any breach or failure to satisfy any condition or covenant contained
      herein or in any other Master Operative Document by such Party or any of
      its Affiliates.

6.    COVENANTS CONCERNING NAND FLASH MEMORY PRODUCTS BUSINESS

6.1   Technology Transfers.

(a)   Toshiba will make available to Flash Partners its 90 nanometer [***]
      process technology applicable to the manufacturing and testing of NAND
      Flash Memory Products ("NAND Process Technology") on the fastest
      practicable

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                                       12


      schedule. All process integration for new processes will be led by Toshiba
      employees at the Yokkaichi Facility to the extent reasonably possible.
      Toshiba will cause its employees, including its advanced microelectronics
      center

      employees, to cooperate in achieving an efficient transition from
      development module to operating process and volume production. Flash
      Partners will establish a pilot line where (unless impracticable)
      substantially all tests for 300 millimeter NAND technology will be
      conducted.

(b)   Whenever a technology transfer is required hereunder, Toshiba shall
      deliver such level of NAND Process Technology to the Y3 Facility as would
      be normal practice by the Toshiba Semiconductor Company whenever it
      transfers a technology to a new manufacturing facility or transfers a new
      or advanced technology to an existing manufacturing facility in order to
      achieve successful implementation of the newly transferred technology.

(c)   A technology transfer hereunder shall be deemed complete when the
      transferred technology passes a reasonable qualification procedure to be
      mutually agreed upon by the Parties.

(d)   [***]

(e)   [***]

6.2   Start-Up Services for Y3. The Parties acknowledge that either or both of
      the Parties and Flash Partners have incurred or will incur costs in
      connection with developing Flash Partners and the Y3 Facility and
      preparing the Y3 Facility for production, including personnel costs,
      materials costs and other operating expenses, that are properly allocable
      to Flash Partners and for which each Party has the obligation ultimately
      to bear 50% of the responsibility ("Start-Up Costs"). The Parties shall
      discuss in good faith and agree upon the Start-Up Costs, the allocation to
      Flash Partners of Start-Up Costs borne by either Party and the means and
      timing of each Party being reimbursed or credited for having incurred more
      than 50% of the Start-Up Costs or of making payments due to having
      incurred less than 50% of the Start-Up Costs.

6.3   Y3 Facility Ramp-Up Plan.

(a)   Equal Participation and Purchase Price Per Unit. The Parties intend to
      meet demand for increased capacity by equally investing in, and jointly
      building, and sharing, on equal or substantially equal terms, equal
      amounts of new capacity for Y3 NAND Flash Memory Products, except as they
      may otherwise agree as contemplated herein. [***]

(b)   Ramp-Up Plan. The Parties acknowledge that they intend to expand their Y3
      NAND Flash Memory Product manufacturing capacity through development of
      the Y3 Facility according to volumes and timing set forth in Schedule
      6.3(b) (including to [***] L/M, the "Ramp-Up Plan"). The Parties will
      discuss in good

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      faith whether the production capacity of Y3 should be expanded by the
      Parties toward the Y3 Facility's targeted capacity of approximately [***]
      L/M.

(c)   Ramp-Up Plan Commitments and Changes. The Parties agree as follows
      concerning the Ramp-Up Plan:

      (i)   The initial 600 L/M in aggregate increases in production capacity of
            the Y3 Facility identified on the Ramp-Up Plan shall be considered
            firmly committed by each Party (i.e., 300 L/M each) as of the times
            specified in the Ramp-Up Plan and in accordance with this Section
            6.3(c)(i) (the "Minimum RUP Commitment"). The Parties shall agree
            upon one or more Business Plans that provide for implementing the
            Minimum RUP Commitment. [***]

6.4   Capacity.

(a) Priority.

      [***]

(b)   [***]

(c)   Technology Transfer. If the Parties mutually agree to secure external
      manufacturing sources other than the Yokkaichi Facility through joint
      investment, Flash Partners and Toshiba, as applicable, will jointly
      transfer the applicable manufacturing technology and know-how to such
      source. Flash Partners (with respect to 300 millimeter wafers) and FVC
      Japan (with respect to 200 millimeter wafers) will conduct all
      negotiations with the external manufacturing source; provided, however,
      the terms and conditions of any agreement shall be subject to prior
      consultation with and the approval of Toshiba. In connection with any
      technology transfer to such external source, Toshiba will be reimbursed
      its mutually agreed transfer costs for assisting in the transfer of
      manufacturing technology and know-how. If the new capacity secured at such
      external manufacturing source is requested by only one of the Parties,
      such Party will pay the transfer costs and be entitled to purchase the
      full output of NAND Flash Memory Products purchased by FVC Japan or Flash
      Partners, as applicable, from such external manufacturing source. If both
      Parties request such new external capacity, then FVC Japan or Flash
      Partners, as applicable, will pay the transfer costs to Toshiba. Neither
      Party shall have the right to grant manufacturing licenses to such
      external manufacturing source or to disclose or transfer to any such
      external manufacturing source, manufacturing know-how related to the
      manufacture of NAND Flash Memory Products, except through FVC Japan or
      Flash Partners.

6.5   Capacity Sharing Arrangement.

(a)   Equal right to capacity. Subject to Section 6.3(c), each of the Parties
      will have the right and obligation, through Flash Partners, to utilize 50%
      of the wafers produced

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                                       14


      at the Y3 Facility based on a measure of equivalent lots out per week with
      the equivalency being weighed based on the process complexity factors (as
      calculated by a formula to be mutually determined by the Parties) of the
      Y3 NAND Flash Memory Products.

(b)   Alternative use of allotted capacity.

      (i)   If a Party is unable to utilize its allotted manufacturing capacity
            for Y3 NAND Flash Memory Products (such Party, an "Excess Capacity"
            or "EC Party"), it may do any of the following:

            (A)   An EC Party may request the other Party to negotiate the terms
                  of transfer of its capacity shortfall to the other Party,
                  which may choose whether to accept such additional capacity
                  and on what terms in its sole discretion.

            (B)   An EC Party may use its capacity for Embedded NAND Products,
                  as defined in and subject to Section 6.5(c).


                                       15


            (C)   An EC Party may use its capacity for Proprietary NAND Flash
                  Memory Products and non-Proprietary NAND Flash Memory
                  Products, in accordance with and subject to Sections 6.5(d)
                  and (e).

            If an EC Party is not able to utilize or transfer its allotted
            capacity pursuant to Section 6.5(b), it shall pay the incremental
            cost increase to the Party not experiencing a shortfall (or pay to
            Flash Partners an under-utilization fee in accordance with a formula
            to be mutually determined by the Parties).

      (ii)  If both Parties are EC Parties because demand for both Parties' Y3
            NAND Flash Memory Products are significantly below expectations, the
            Parties will discuss in good faith whether to permit products which
            are not Y3 NAND Flash Memory Products to be produced at the Y3
            Facility; provided that (A) the inability of the Parties so to agree
            shall not constitute a Deadlock (as defined in the FP Operating
            Agreement) and (B) the foregoing shall not limit either Party's
            rights in the remainder of this Section 6.5.

(c)   Either Party shall have the right use a portion of its total allocated
      capacity with respect to the Y3 Facility to run a memory product which is
      not a Y3 NAND Flash Memory Product (solely because the NAND flash memory
      array area is equal to or less than [***] of the total die area ("Embedded
      NAND Product")) so long as such Embedded NAND Product [***]. If a Party
      exercises its option to run Embedded NAND Products, it must [***]. The
      conditions stated in Sections 6.5(d) and (e) do not apply to Embedded NAND
      Products.

(d)   Each Party may use a portion of its total allocated capacity to cause to
      be manufactured NAND Flash Memory Products which are proprietary to that
      Party ("Proprietary NAND Flash Memory Products") and which need not be
      shared with the other Party. Proprietary NAND Flash Memory Products may be
      produced at the Y3 Facility so long as such products [***]. If a Party
      exercises such option, it must [***]. No such Proprietary NAND Flash
      Memory Products may be run if doing so [***]. Each Party shall give the
      other Party at least ninety (90) days' advance written notice of its
      intention to use a portion of its allocated capacity to manufacture
      Proprietary NAND Flash Memory Products and the Parties shall refer the
      matter to the Board of Directors for consultation and planning, with the
      intention to minimize the impact of such allocation. Such notifying Party
      will limit the output volume of such Proprietary NAND Flash Memory
      Products to [***] of such Party's total allocated output at the Y3
      Facility unless it receives the consent of the other Party to an increase
      in such output volume above such limit.

(e)   Each Party (the "Originating Party") shall inform the other (the
      "Non-Originating Party") of the development plans by the Originating Party
      to develop NAND Flash Memory Products, and the Originating Party and the
      Non-Originating Party shall each refer such matter to the Coordinating
      Committee (as defined in the Product Development Agreement). If the
      Coordinating Committee unanimously decides that such planned development
      shall be undertaken jointly, then the cost

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                                       16


      of such joint development shall be borne by each Party in accordance with
      the Product Development Agreement, and the NAND Flash Memory Products
      manufactured following such joint development shall be considered
      non-Proprietary NAND Flash Memory Products for purposes of Section 6.5(d);
      provided, however, the NAND Flash Memory Products set forth in Exhibit A
      to the Product Development Agreement shall be deemed to be non-Proprietary
      NAND Flash Memory Products without any action by the Coordinating
      Committee. Subject to the foregoing, if the Coordinating Committee does
      not unanimously decide that such planned development shall be undertaken
      jointly, then the Originating Party may, at its sole discretion, either
      (i) transfer to the Non-Originating Party the technology, including the
      items in Exhibit C to the Product Development Agreement relating to such
      technology, used to manufacture such NAND Flash Memory Products on a
      royalty-free basis, whereupon such NAND Flash Memory Products shall be
      considered non-Proprietary NAND Flash Memory Products, or (ii) treat such
      NAND Flash Memory Products as Proprietary NAND Flash Memory Products for
      purposes of Section 6.5(d). In the event the Originating Party elects to
      treat any NAND Flash Memory Products as Proprietary NAND Flash Memory
      Products in accordance with the preceding sentence, but thereafter the
      Coordinating Committee unanimously determines that such Proprietary NAND
      Flash Memory Products should be developed jointly, the Originating Party
      shall transfer to the other Party the technology used to manufacture such
      NAND Flash Memory Products on reasonable terms and conditions to be
      mutually agreed upon by the Parties, whereupon such Proprietary NAND Flash
      Memory Products shall be treated as non-Proprietary NAND Flash Memory
      Products.

6.6   Engineering Wafers and Development Expense. Each Party will have full
      access to all operational and engineering data and reports related to
      engineering wafers manufactured at Y3.

(a)   Engineering wafers and development expenses are further and more
      completely defined in four categories: Common R&D Development Expenses, Y3
      Direct R&D Development Products, Evaluation Wafers, and Qualification
      Wafers (each as defined below).

      (i)   "Common R&D Development Expenses" means [***]. The Parties agree to
            set up pilot-line(s) [***]. The Parties confirm their intent that
            [***]. Notwithstanding the foregoing, the Parties shall meet from
            time to time [***]. The Parties shall meet at the end of each
            quarter to determine if any engineering activities performed during
            the quarter [***], whether agreed in advance or not [***]. If any
            activities performed [***] are agreed by the parties to [***].

      (ii)  "Y3 Direct R&D Development Products" are those products developed
            [***].

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                                       17


      (iii) "Evaluation Wafers" are those wafers manufactured [***]. Both
            parties are entitled to receive evaluation wafers [***]. The cost of
            Evaluation Wafers is [***].

      (iv)  "Qualification Wafers" are those wafers [***]. The Parties will
            discuss and agree on the appropriate quantity of Qualification
            Wafers required for each Y3 NAND Flash Memory Product. [***].

(b)   [***].

6.7   Creation of Management Committee. The management committee established by
      the Parties pursuant to the FVC Japan Master Agreement to facilitate
      management of the operations of FVC Japan (the "Management Committee")
      shall do the same for Flash Partners, as detailed in this Section 6.7.

(a)   Authority. The Management Committee shall have the authority to (i) advise
      Flash Partners with respect to policy and operating matters common to
      Toshiba and SanDisk as well as on such other matters as Flash Partners may
      refer to the Management Committee from time to time, (ii) hear and seek to
      resolve any disputes regarding operational matters or alleged breaches of
      any Master Operative Documents (including dispute resolution), and (iii)
      take the actions specified to be taken by the Management Committee in this
      Agreement or any Master Operative Document, including in this Section 6.7
      and in Section 6.1.

(b)   Members of the Management Committee; Voting; etc.

      (i)   The Management Committee shall consist of six members (the
            "Committee Representatives"), three of whom shall be appointed by
            Toshiba, and three of whom shall be appointed by SanDisk (for such
            purpose, each of the Parties is referred to in this Section 6.7 as
            an "Appointing Party"). Each Appointing Party shall be entitled to
            appoint an alternate Committee Representative to serve in the place
            of any Committee Representative appointed by such Appointing Party
            should any such Committee Representative be unable to attend a
            meeting. Each Party shall be entitled to invite a reasonable numbers
            of observers to all Management Committee meetings.

      (ii)  Each Committee Representative or alternate Committee Representative
            shall serve at the pleasure of the designating Appointing Party and
            may be removed as such, with or without cause, and his successor
            designated, by the designating Appointing Party. Each Appointing
            Party shall have the right to designate a replacement Committee
            Representative in the event of any vacancy among such Appointing
            Party's appointees.

      (iii) Each Appointing Party shall bear any cost and expense incurred by
            any Committee Representative or alternate Committee Representative
            designated by such Appointing Party to serve on the Management
            Committee, and no Committee Representative or alternate Committee

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                                       18


             Representative shall be entitled to compensation from Flash
             Partners for serving in such capacity.

      (iv)   Each Appointing Party shall notify the other Appointing Party and
             Flash Partners in writing of the name, business address and
             business telephone and facsimile numbers of each Committee
             Representative and each alternate Committee Representative that
             such Appointing Party has been appointed to the Management
             Committee. Each Appointing Party shall promptly notify the other
             Appointing Party and Flash Partners of any change in such
             Appointing Party's appointments or of any change in any such
             address or number.

      (v)    For purposes of any approval or action taken by the Management
             Committee, each Committee Representative shall have one vote. All
             of the votes eligible to be cast at any meeting must be voted in
             favor of any action to be taken by the Management Committee at such
             meeting.

      (vi)   At any meeting of the Management Committee, a Committee
             Representative, in the absence of one or more other Committee
             Representatives appointed by the same Appointing Party or an
             alternate Committee Representative, may cast the vote such absent
             Committee Representatives would otherwise be entitled to cast.

      (vii)  The quorum necessary for any meeting of the Management Committee
             shall be those Committee Representatives entitled to cast all of
             the votes held by the members of the Management Committee. A quorum
             shall be deemed not to be present at any meeting for which notice
             was not properly given under Section 6.7(c), unless the Committee
             Representative or Committee Representatives as to whom such notice
             was not properly given attend(s) such meeting without protesting
             the lack of notice or duly execute(s) and deliver(s) a written
             waiver of notice or a written consent to the holding of such
             meeting.

      (viii) Each appointment by an Appointing Party to the Management Committee
             shall remain in effect until the Appointing Party making such
             appointment notifies the other Appointing Party and Flash Partners
             in writing of a change in such appointment. The resignation or
             removal of a Committee Representative shall not invalidate any act
             of such Committee Representative taken before the giving of such
             written notice of the removal or resignation of such Committee
             Representative (or alternate Committee Representative).

(c)   Meetings, Notice, etc.

      (i)   Meetings of the Management Committee shall be held at such location
            or locations as may be selected by the Management Committee from
            time to time.

                                       19


      (ii)  Regular meetings of the Management Committee shall be held on such
            dates and at such times as shall be determined by the Management
            Committee and shall be held as required or as requested by the Board
            of Directors.

      (iii) Notice of any regular meeting or special meeting pursuant to Section
            6.7(c)(iv) shall be given to each Committee Representative at least
            ten (10) Business Days prior to such meeting in the case of a
            meeting in person or at least five (5) Business Days prior to such
            meeting in the case of a meeting by conference telephone or similar
            communications equipment pursuant to Section 6.7(c)(vi), which
            notice shall state the purpose or purposes for which such meeting is
            being called and include any supporting documentation relating to
            any action to be taken at such meeting.

      (iv)  Special meetings of the Management Committee may be called by any
            Committee Representative by notice given in accordance with the
            notice requirements set forth in this Section 6.7, which notice
            shall state in reasonable detail the purpose or purposes for which
            such meeting is being called; provided, that, the Committee
            Representatives appointed by the Appointing Party that is not
            represented by the Committee Representative calling such special
            meeting shall be entitled to in good faith select a convenient
            location for the meeting and to suggest an alternative time or times
            if the designated time is not convenient for them. Except as set
            forth in Section 6.7(c)(vi), no action may be taken and no business
            may be transacted at such special meeting which is not identified in
            such notice unless (A) such action or business is incidental to the
            action or business for which the special meeting is called or (B)
            such action or business does not materially adversely affect the
            Parties, any of their respective Affiliates which are parties to any
            of the Master Operative Documents or Flash Partners. Minutes of each
            Management Committee meeting shall be sent by facsimile to all
            Committee Representatives within ten (10) Business Days after such
            meeting. Material to be presented at any Management Committee
            meeting shall be sent by facsimile, electronic mail or delivered in
            hard copy to all Committee Representatives together with the notice
            described in Section 6.7(c)(vi).

      (v)   The actions taken by the Management Committee at any meeting,
            however called and noticed, shall be as valid as though taken at a
            meeting duly held after regular call and notice if (but not until),
            either before, at or after the meeting, any Committee Representative
            as to whom such meeting was improperly held duly executes and
            delivers a written waiver of notice or a written consent to the
            holding of such meeting; provided, however, any Committee
            Representative who is present at a meeting and does not protest the
            failure of notice shall be deemed to have received adequate notice
            thereof. A vote of the Management Committee may be taken only either
            in a meeting of the members thereof duly called and held or by the
            execution by the Committee Representatives eligible to cast all

                                       20


            the votes on the Management Committee without a meeting of a consent
            setting forth the action so taken, and identified as a consent of
            the Committee Representatives pursuant to this Section 6.7.

      (vi)  Upon the consent of all Committee Representatives, a meeting of the
            Management Committee may be held by conference telephone or similar
            communications equipment by means of which all Committee
            Representatives participating in the meeting can hear and be heard
            by all other participants, provided, that, such communications
            equipment continues to be operational throughout the meeting. Any
            Committee Representative may elect to participate in a meeting by
            conference telephone or similar communications equipment upon
            sufficient advance notice to permit arrangements therefor to be
            made. At any meeting, the Management Committee shall consider (A)
            any items added to the Management Committee agenda for discussion by
            the Parties and (B) such other matters as the Management Committee
            decides to review.

      (vii) The Management Committee shall, from time to time, elect one of its
            members to preside at its meetings, which presiding member shall
            alternate annually if requested by either Party. The Management
            Committee may establish reasonable rules and regulations to (A)
            require officers to call meetings and perform other administrative
            duties, (B) limit the number and participation of observers, if any,
            and require them to observe confidentiality obligations and (C)
            otherwise provide for the keeping and distribution of minutes and
            other internal Management Committee governance matters not
            inconsistent with the terms of this Agreement.

6.8   FP Secondees. SanDisk will have the right (after consultation with
      Toshiba) to second employees to Flash Partners ("FP Secondees"), provided
      that the numbers and responsibilities of such FP Secondees will be
      discussed by the Parties in advance of seconding such employees. [***]:

(a)   [***]

(b)   [***]

(c)   [***]

(d)   [***]

(e)   [***]

(f)   [***]

(g)   All FP Secondees will remain employees of SanDisk. Each Party will
      indemnify the other Party and Flash Partners from any claim by any of such
      Party's employees, consultants or agents (such Party being the "Employer")
      (i) based on other than willful misconduct of such Employer, its
      employees, consultants or

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                                       21


      agents; or (ii) that he or she has rights, or is owed obligations, as an
      employee of the Party that is not the Employer.

6.9   Non-solicitation of Employees. So long as the business of Flash Partners
      continues, each Party (and each of its respective Affiliates) shall not,
      without the prior written consent of the other Party, directly recruit or
      solicit any employee or director of Flash Partners to leave his or her
      employment with Flash Partners prior to the period ending twenty-four (24)
      months after the FP Termination Date; provided, however, that placement of
      employment advertisements or other general solicitation for employees not
      specifically targeted to the employees or directors of Flash Partners
      shall not constitute direct recruitment. In the event of the dissolution
      and liquidation of Flash Partners, either Party (or any Affiliate of
      either Party) may solicit any former employee of such dissolved and
      liquidated company, but neither Party (nor any of its Affiliates) shall be
      required to employ any such Person. If all of the FP Units held by one
      Party are purchased by the other Party or its designee, if requested by
      the acquiring Party the Parties shall reach agreement on a reasonable
      transition plan (without profit to the seller) in connection with the
      services provided to Flash Partners, as applicable, by employees and
      contractors of the selling Party.

6.10  Debt and Lease Financing.

(a)   Each Party shall provide or procure 50% of the financing necessary to
      enable committed or agreed capacity expansions or other investment in the
      Y3 Facility or Flash Partners.

(b)   The Parties currently intend, but are not obligated, to structure the
      financing for equipment purchases by Flash Partners necessary to implement
      the Ramp-Up Plan as follows:

      (i)   Flash Partners will enter into equipment lease or loan agreements
            and pledge the financed equipment as collateral;

      (ii)  Flash Partners will secure external financing for approximately 50%
            of the initial purchase price of its tools and each Party will
            provide equity capital contributions and loans (on a subordinated
            basis) for the remaining cash requirements of Flash Partners
            necessary to execute the Ramp-Up Plan;

      (iii) each Party will severally and not jointly and through separate
            arrangements guarantee as close as possible to 50% of Flash
            Partners' obligations under such lease or loan agreements (any
            financing separately guaranteed or provided by Toshiba for Flash
            Partners or otherwise for investment in the Y3 Facility, "Toshiba
            Financing", any such financing separately guaranteed or provided by
            SanDisk for Flash Partners or otherwise for investment in the Y3
            Facility "SanDisk Financing" and the Toshiba Financing and SanDisk
            Financing, each a "Financing"); and

                                       22


      (iv)  the Parties will attempt to obtain the foregoing financing from the
            same financial institution, but under separate agreements that
            expressly disclaim any joint and several liability of the Parties.

(c)   With respect to any Toshiba Financing or SanDisk Financing, the following
      shall apply:

      (i)   [***].

      (ii)  Unless otherwise expressly agreed by both Parties in writing in each
            case, all Toshiba Financing and all SanDisk Financing shall create
            only several obligations of the Parties and no joint and several
            obligations or liability. Toshiba (with respect to Toshiba
            Financing) and SanDisk (with respect to SanDisk Financing) hereby
            indemnifies and holds harmless the other Party and its Indemnified
            Parties from any claims by any financial institution or other Person
            that the other Party has any liabilities or obligations with respect
            to, respectively, any Toshiba Financing or SanDisk Financing (unless
            joint liability has been agreed pursuant to the first sentence of
            this Section 6.10(c)(ii)).

      (iii) Flash Partners will use commercially reasonable efforts to comply
            with the requirements of any financing sources. Flash Partners will
            make available to each Party one-half of its assets (with as near as
            practicable cost, collateral value and type) to secure such Party's
            Financing (whether external or loans from a Party or its
            Affiliates).

(d)   If the lender under the Financing for either Party (as the "Defaulting
      Party") takes significant actions to enforce its right in the collateral,
      then the other Party (as the "Non-Defaulting Party") shall have the right,
      but not the obligation, to cure the default giving rise to the lender's
      enforcement action. If the Non-Defaulting Party exercises such cure right,
      then the Non-Defaulting Party's rights in any subject collateral shall be
      superior to the Defaulting Party's and the Non-Defaulting Party may
      exercise one of the following options:

      (i)   the Non-Defaulting Party (A) shall have a claim against the
            Defaulting Party for reimbursement of any payments made by the
            Non-Defaulting Party on the Defaulting Party's behalf (which will be
            subordinate to the lender's claims and bear interest at a rate 500
            basis points in excess of the rate being charged by the lender to
            the Defaulting Party) and (B) shall have the right, until and unless
            the Defaulting Party pays in full the

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                                       23


            obligation to the Non-Defaulting Party under foregoing clause (A),
            to take over the increment of production of the Y3 Facility
            represented by the collateral with respect to which the lender took
            significant actions to enforce its rights; or

      (ii)  the Non-Defaulting Party shall have the right to terminate the
            Operating Agreement pursuant to Section 11.6 thereof (Foreclosure
            Default).

6.11  Other Activities. Except as expressed in Section 5.6 and in the Common R&D
      Agreement, neither Party nor any of their respective Affiliates shall: (i)
      fabricate NAND Flash Memory Integrated Circuits at any location other than
      the Yokkaichi Facility or any other fabrication facility agreed upon by
      the Parties in writing; (ii) have any third party fabricate NAND Flash
      Memory Integrated Circuits; or (iii) have any right to fabricate NAND
      Flash Memory Integrated Circuits beyond the capacity as limited pursuant
      to this Section 6, as such capacity limitations may be amended from time
      to time in accordance with this Section 6. For the avoidance of doubt,
      nothing contained in the foregoing shall restrict the Parties from
      engaging in any other activities, including, without limitation, (i)
      designing any NAND Flash Memory Product; (ii) selling any NAND Flash
      Memory Product to any customer; (iii) entering into any equipment purchase
      or material supply agreements; or (iv) entering into any patent licensing
      arrangement; and nothing in the foregoing shall restrict Toshiba from
      installing any manufacturing line in the Toshiba Foundry Facility subject
      to the capacity limitations set forth in Section 6 of the FVC Japan Master
      Agreement and as provided herein, as such capacity limitations may be
      amended from time to time in accordance with this Section 6. For purposes
      of this Section 6.11, "NAND Flash Memory Integrated Circuits" means ICs
      included in the definition of NAND Flash Memory Products pursuant to
      Section 3.2.

6.12  Protection of Intellectual Property. Both Parties recognize that it is
      important for the success of the Y3 NAND Flash Memory Products business to
      promote the adoption of such Y3 NAND Flash Memory Products with a wide
      variety of customers and applications, whether for card use or non-card
      use, and with such recognition, each Party shall use reasonable efforts to
      protect and enhance the value of Y3 NAND Flash Memory Products. Further,
      where feasible, each Party shall share with Flash Partners internally
      prepared analyses of competitive products prepared by either Party so as
      to allow Flash Partners to respond to such information and remain
      competitive in the marketplace; provided, that neither Party warrants as
      to the accuracy or completeness of any such analysis so provided.

6.13  Tools.

(a)   All tools for the Y3 Facility shall be purchased by Flash Partners (or a
      lessor for Flash Partners' benefit as contemplated by Section 6.10(a)) and
      all such purchases shall be agreed upon by the Parties. Toshiba shall,
      from the Toshiba Semiconductor Company headquarters and at its own
      expense, provide Flash Partners with tool purchase service support and
      negotiate with vendors on Flash

                                       24


      Partners' behalf. SanDisk shall have the right to participate in such
      negotiations or other tool purchase activities of Toshiba, at SanDisk's
      own expense.

(b)   All purchases of replacement tools for Flash Partners, to the extent the
      procedures or requirements therefor are not set forth in a Master
      Operative Document, shall be done only by agreement of the Parties.

7.    OTHER AGREEMENTS

      To supplement their agreement as expressed in certain of the Master
      Operative Documents, the Parties agree as set forth in this Section 7. To
      the extent of any conflict between this Section 7 and any other Master
      Operative Document referenced in this Section 7, the other Master
      Operative Document shall prevail.

7.1   Flash Partners Management.

(a)   As contemplated by the FP Operating Agreement, the Y3 Operating
      Committee's purpose is to give both Parties the ability to influence the
      day to day operating decisions of Flash Partners and the Y3 Facility. The
      Y3 Operating Committee is intended to be a collaborative body with
      real-time communications, respectful consultation and dispute resolution
      with the goal of making the Y3 Facility the most competitive (cost and
      technology) memory fabrication facility in the world.

(b)   If the Y3 Operating Committee is unable to decide an issue (by agreement
      of its two members) such issue shall be referred to the Board of
      Directors. Special meetings of the Board of Directors may be noticed for
      issues requiring urgent resolution. The Parties contemplate that while a
      special meeting of the Board of Directors is being noticed, their
      respective management teams will discuss any issue that the Y3 Operating
      Committee could not resolve.

(c)   If the Board of Directors is unable to decide an issue (by unanimous
      agreement), such issue shall be referred to the Management Committee for
      resolution, which shall be vested with final decision making authority.
      This Agreement separately provides for procedures if the Management
      Committee is unable to reach agreement on such issue.

7.2   Y3 Facility. Toshiba has designed and is constructing the Y3 Facility at
      its sole cost and expense. The Y3 Facility is scheduled to be completed by
      [***], provided that Toshiba shall have no liability to SanDisk,
      any SanDisk Affiliate or Flash Partners if completion is not achieved by
      such time. The depreciation charges for Y3 will be passed on to Flash
      Partners as further described in Section 7.3(d).

7.3   FP Foundry Agreement. Flash Partners and Toshiba shall enter into the FP
      Foundry Agreement at the Closing. The FP Foundry Agreement provides for
      ordering procedures, prices, delivery, cost reporting and other specific
      terms and conditions for the manufacture by Toshiba and supply to Flash
      Partners of Y3 NAND Flash Memory Products, which shall be consistent with
      the following basic terms:

[***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

                                       25



(a)   Facilities, Equipment and Raw Materials. The manufacturing facilities will
      be located at the Y3 Facility and die sort will be located [***] or such
      other place as the Parties may agree upon. Flash Partners and Toshiba will
      enter into an exclusive lease agreement with respect to the Y3 Facility
      and Flash Partners' manufacturing equipment located in the Y3 Facility to
      be used in the manufacture of Y3 NAND Flash Memory Products by Toshiba.
      Toshiba shall be responsible for obtaining the raw materials and services
      to be used in the manufacture of Y3 NAND Flash Memory Products.

(b)   Production. Toshiba will manufacture Y3 NAND Flash Memory Products at the
      Y3 Facility for Flash Partners ordered by Toshiba and SanDisk under the
      terms and conditions of the FP Purchase and Supply Agreements. Flash
      Partners and Toshiba (from the Yokkaichi Facility) will use their best
      efforts to achieve the Ramp-Up Plan manufacturing capacity (the "Y3
      Facility Target Capacity"). Wafers will be sorted between the Parties such
      that aggregate yield losses will be shared on an equal basis.

(c)   Operating Relationship. Toshiba shall provide all employees necessary for
      the manufacturing of the Y3 NAND Flash Memory Products.

(d)   Consideration to be Paid to Toshiba. Toshiba will be compensated by Flash
      Partners as provided in Section 4 of the FP Foundry Agreement.

(e)   No Duplication of Costs or Expenses. It is the intent of the Parties that
      any payments made by SanDisk under or pursuant to any Master Operative
      Documents or FVC Japan Operative Documents shall not be duplicative and
      SanDisk shall in no event be required to pay or contribute more than once
      for any service or product provided under such agreements, if such service
      is provided under more than one agreement. In addition, if SanDisk makes a
      direct payment for any service provided under any such agreement, the cost
      incurred by Toshiba (from the Yokkaichi Facility), FVC Japan or Flash
      Partners, as the case may be, in connection with the provision of such
      service shall not be included in the applicable wafer price charged to
      SanDisk.

(f)   Exclusivity. The Yokkaichi Facility shall be Flash Partners' exclusive
      manufacturing source for output of Y3 NAND Flash Memory Products. Flash
      Partners may seek external manufacturing sources for output in excess of
      the Yokkaichi Facility's capacity upon unanimous approval by the
      Management Committee.

7.4   FP Purchase and Supply Agreements. Flash Partners and each of the Parties
      or their respective Affiliates will enter into substantially identical FP
      Purchase and Supply Agreements providing for specific terms and conditions
      for the purchase by the Parties of Y3 NAND Flash Memory Products from
      Flash Partners, which shall be consistent with the following basic terms:

(a)   Manufacturing. Flash Partners shall manufacture or cause to be
      manufactured Y3 NAND Flash Memory Products as contemplated by Section 7.3.

[***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

                                       26


(b)   Purchase Commitment. Except as contemplated in Section 6.3(c)(ii), each
      Party shall (itself or through Affiliates) purchase one half (based on a
      measure of equivalent lots out per week with the equivalency being weighed
      based on the process complexity factors (as calculated by a formula to be
      mutually determined by the Parties) of the Y3 NAND Flash Memory Products)
      of the total L/M of Y3 NAND Flash Memory Products. The foregoing purchase
      commitment of each Party shall not be subject to reduction unless agreed
      in writing by the other Party, which may grant or withhold such approval
      in its sole discretion.

(c)   Sales Price for Y3 NAND Flash Memory Products Purchased by the Parties.
      The sales price charged by Flash Partners to the Parties for wafers
      manufactured at Y3 shall be the sum of:

      [***]

(d)   Other Cost Items. Other items related to the manufacture of Y3 NAND Flash
      Memory Products will be charged on a monthly basis from Flash Partners to
      the Parties and will include the following:

      [***]

7.5   Other Matters.

(a)   Forecasts/Production Planning. Each Party will submit forecasts, on a
      rolling six-month basis, directly to Flash Partners, as further provided
      in the Purchase and Supply Agreements. The one-time cost necessary for
      [***] will be borne by SanDisk, which, together with the one-time
      production control cost described in Section 7.5(b) is to be approximately
      [***]. Flash Partners production planning will hold a monthly production
      planning meeting with representatives of each Party, as further provided
      in the Purchase and Supply Agreements. At such meetings, the Parties will
      agree on a production plan for [***] which plan will be final (and the
      related forecast will be deemed to be covered by a binding purchase
      order).

(b)   Production Control. Flash Partners will provide [***] on a
      non-discriminatory basis to SanDisk with respect to [***], provided that
      the actual, one-time cost necessary for establishing a new system to
      provide [***] to SanDisk will be borne by SanDisk, which, together with
      the one-time forecast submission system cost described in Section 7.5(a),
      is estimated to be [***]. Each Party (through the Y3 Management Committee)
      will have the right to discuss the production schedule, planned wafer
      starts and planned wafer-outs for Flash Partners and make such reasonable
      requests as it deems in its respective commercial interest and Flash
      Partners, operations will honor such reasonable requests.

(c)   Operating Reports. SanDisk will have full access to any management or
      operation reports related to Flash Partners or Flash Partners' business
      through the Y3 Operating Committee (as defined in the FP Operating
      Agreement). Management and operating reports related to Flash Partners or
      Flash Partners' business as mutually agreed from time to time will be
      simultaneously made

[***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

                                       27


      available in Japanese and English to each Party. Upon request, Toshiba
      employees will explain such reports to SanDisk's employees and respond to
      questions from SanDisk's employees, but Toshiba will not be responsible
      for SanDisk's failure to understand such reports.

(d)   Insurance. Toshiba shall maintain or arrange property insurance covering
      assets owned or leased by Flash Partners and business interruption
      insurance in respect of the business of Flash Partners, the scope and
      amounts of which shall be consistent with Toshiba's practices at the
      Yokkaichi Facility and as required by any lender. This coverage shall
      provide basically full replacement value of all Flash Partners owned and
      leased equipment, subject to valuation as part of Toshiba's annual
      insurance policy renewal, and shall name Flash Partners as a beneficiary
      in respect of assets owned or leased by it and Flash Partners' employee
      expenses covered by business interruption insurance. On an annual basis,
      or when requested by either Party, the Y3 Operating Committee shall
      discuss and review the current insurance coverage and/or the need for any
      additional property or business interruption insurance in respect of Flash
      Partners' assets or business. Further, SanDisk reserves the right to seek
      to arrange additional property or business interruption insurance for its
      own account in respect of Flash Partners' assets or business. If SanDisk
      seeks such additional property or business interruption insurance, Toshiba
      shall cooperate in good faith to provide such information and access as is
      reasonably necessary for SanDisk to arrange such insurance. If Toshiba
      makes a recovery from a third party (other than an insurer per the above)
      in respect of both assets of Flash Partners and other assets, then Toshiba
      shall allocate to Flash Partners a share of the net amount of such
      recovery in proportion to the losses suffered by Flash Partners and total
      losses suffered by Flash Partners and Toshiba.

8.    TERMINATION

8.1   Termination.

(a)   Termination of any Master Operative Document by either Party shall be done
      only in good faith.

(b)   This Agreement shall be terminated automatically upon the earlier of the
      Transfer of all of a Party's FP Units to the other Party (or its
      Affiliate) or upon completion of the dissolution and liquidation of Flash
      Partners pursuant to Section 11

                                       28


      (Dissolution) of the FP Operating Agreement (the date of such Transfer or
      dissolution and liquidation, the "FP Termination Date").

(c)   Upon termination of this Agreement resulting from an event of dissolution
      of Flash Partners due to the expiration of Flash Partners pursuant to
      Section 11.1(a) (Expiration) of the FP Operating Agreement:

      (i)   the Parties shall further amend the Cross License Agreement, as then
            in effect, to specify that each Party's patents issued or issuing on
            patent applications entitled to an effective filing date prior to
            the FP Termination Date are licensed on a royalty-free basis for the
            duration of such patents. The scope of the licenses as amended
            pursuant to this Section 8.1(c)(i) shall not be greater than the
            scope of those granted under the Cross License Agreement, as in
            effect as of the FP Termination Date.

      (ii)  Toshiba shall grant to SanDisk, effective upon the FP Termination
            Date, a non-exclusive, non-transferable (except to Affiliates of
            SanDisk), non-sub-licensable, fully paid up, royalty-free license to
            make, have made, use, sell and have sold NAND Flash Memory Products
            anywhere in the world utilizing the NAND technology transferred to
            and/or utilized at the Yokkaichi Facility, and SanDisk shall have
            full access to all such know-how at the Yokkaichi Facility which has
            been transferred to the Yokkaichi Facility prior to the FP
            Termination Date.

(d)   Upon a termination of this Agreement resulting from (i) an event of
      dissolution of Flash Partners or (ii) one Party's acquisition of all of
      the other Party's FP Units (the acquirer thereof referred to hereinafter
      as the "Acquiring Party" and the seller thereof referred to hereinafter as
      the "Selling Party") pursuant to Section 11.5 (Dissolution Upon Notice) of
      the FP Operating Agreement:

      (i)   Toshiba or the Acquiring Party, as the case may be, will, upon the
            request, prior to the FP Termination Date, of (A) SanDisk (such
            request to be made at the time of its notice pursuant to Section
            11.5 of the FP Operating Agreement) in the case of the dissolution
            of Flash Partners or (B) the Selling Party (each, a "Requesting
            Party"), as the case may be, continue to manufacture NAND Flash
            Memory Products for the Requesting Party (not to exceed the
            Requesting Party's capacity allocation available from Flash Partners
            under this Agreement as of the FP Termination Date (the "Termination
            Capacity")) for a period of eighteen (18) months following the
            Termination Date in the following ramp-down manner:

            (A)   During the first six months following the FP Termination Date:
                  100% of the Termination Capacity

            (B)   During the 7th through the 12th month following the FP
                  Termination Date: 75% of the Termination Capacity

            (C)   During the 13th through the 18th month following the FP
                  Termination Date: 50% of the Termination Capacity.

                                       29


      (ii)  Toshiba and SanDisk and their respective Affiliates shall have a
            perpetual, fully paid-up, royalty-free right to use technology
            previously transferred to one another during the term of this
            Agreement.

      (iii) The Parties shall further amend the Cross License Agreement to
            specify that each Party's patents issued or issuing on patent
            applications entitled to an effective filing date prior to the FP
            Termination Date are licensed on a royalty free basis for the
            duration of such patents. The scope of the licenses as amended
            pursuant to this Section 8.1(d)(iii) shall not be greater than the
            scope of those granted under the Cross License Agreement, as in
            effect as of FP Termination Date.

      (iv)  Upon termination of this Agreement resulting from an event of
            dissolution of Flash Partners caused by Toshiba's election to
            withdraw from Flash Partners pursuant to the FP Operating Agreement,
            Toshiba hereby grants to SanDisk, effective upon the FP Termination
            Date, a non-exclusive, non-transferable (except to Affiliates of
            SanDisk), non-sub-licensable, fully paid-up, royalty-free license to
            make, have made, use, sell and have sold NAND Flash Memory Products
            anywhere in the world utilizing the NAND technology transferred to
            and/or utilized at the Yokkaichi Facility, and SanDisk shall have
            full access to all such know-how at the Yokkaichi Facility which has
            been transferred to the Yokkaichi Facility prior to the FP
            Termination Date.

(e)   Upon termination of this Agreement resulting from an event of dissolution
      of Flash Partners or Toshiba's acquisition of SanDisk's FP Units pursuant
      to Section 11.4 (Dissolution By Unilateral Option) of the FP Operating
      Agreement:

      (i)   From the Yokkaichi Facility, Toshiba will, upon request of SanDisk
            given within sixty (60) days of the notice given by SanDisk pursuant
            to Section 11.4 of the FP Operating Agreement, continue to
            manufacture products for SanDisk for a period of eighteen (18)
            months following the FP Termination Date in accordance with the
            following ramp-down manner; provided, however, such capacity
            allocation for SanDisk shall not exceed its capacity allocation
            available from Flash Partners under this Agreement as of the FP
            Termination Date (the "SanDisk Termination Capacity"):

            (A)   During the first six months following the FP Termination Date:
                  100% of the SanDisk Termination Capacity

            (B)   During the 7th through the 12th month following the FP
                  Termination Date: 75% of the SanDisk Termination Capacity

            (C)   During the 13th through the 18th month following the FP
                  Termination Date: 50% of the SanDisk Termination Capacity.

      (ii)  The Parties and their respective Affiliates shall have a perpetual,
            fully paid-up, royalty-free right to use technology previously
            transferred to one another during the term of this Agreement.

                                       30


      (iii) The Parties shall further amend the Cross License Agreement to
            specify that, with respect only to Y3 NAND Flash Memory Products and
            any other Licensed Products defined in the License Agreement and
            manufactured with 300mm wafers at any facility, each Party's patents
            issued or issuing on patent applications entitled to an effective
            filing date prior to the FP Termination Date are licensed at the
            royalty rates specified in Schedule 8.1(e) until March 31, 2013;
            provided, that after such five (5) year period, such license shall
            be on a royalty free basis and provided, further, that at any time
            during such five year period, both Parties shall negotiate in good
            faith for up to one hundred and eighty (180) days as requested by
            either Party to mutually agree on royalty rates for patents filed by
            each Party after the FP Termination Date. The scope of the licenses
            as amended pursuant to this Section 8.1(e)(iii) shall not be greater
            than the scope of those granted under the Cross License Agreement,
            as in effect as of the FP Termination Date.

(f)   Upon termination of this Agreement resulting from an event of dissolution
      of Flash Partners or one Party's acquisition of the other Party's FP Units
      following a Deadlock (as defined in the FP Operating Agreement) pursuant
      to Section 10.3 (Dispute Resolution; Deadlock) of the FP Operating
      Agreement:

      (i)   In the case of one Party's acquisition of the other Party's FP Units
            pursuant to Section 10.4(e) of the FP Operating Agreement, the
            Acquiring Party shall continue to manufacture products for the other
            Party (not to exceed the other Party's Termination Capacity) for a
            period of eighteen (18) months following the FP Termination Date in
            accordance with the following ramp down manner:

            (A)   During the first six months following the FP Termination Date:
                  100% of the Termination Capacity

            (B)   During the 7th through the 12th month following the FP
                  Termination Date: 75% of the Termination Capacity

            (C)   During the 13th through the 18th month following the FP
                  Termination Date: 50% of the Termination Capacity.

      (ii)  The Parties and their respective Affiliates shall have a perpetual,
            fully paid-up, royalty-free right to use technology previously
            transferred to one another during the term of this Agreement.

      (iii) The Parties shall further amend the Cross License Agreement to
            specify that, with respect only to Y3 NAND Flash Memory Products and
            any other Licensed Products defined in the License Agreement and
            manufactured with 300mm wafers at any facility, each Party's patents
            issued or issuing on patent applications entitled to an effective
            filing date prior to the FP Termination Date are licensed: (x) at
            the royalty rates specified in Schedule 8.1(f) until March 31, 2012;
            (y) at the royalty rates specified in Schedule 8.1(e) from April 1,
            2012 through December 31,

                                       31


            2014; and (z) thereafter, on a royalty-free basis. Both Parties
            shall negotiate in good faith for up to one hundred and eighty (180)
            days upon request of either Party at any time during the five-year
            period after the FP Termination Date to agree on royalty rates for
            patents filed by each Party after the FP Termination Date. The scope
            of the licenses as amended pursuant to this Section shall not be
            greater than the scope of those granted under the Cross License
            Agreement, as in effect as of the FP Termination Date.

      (g)   Upon termination of this Agreement resulting from an event of
            dissolution of Flash Partners or a Party's acquisition of the other
            Party's FP Units described in Section 11.3 (Dissolution Upon Event
            of Default) of the FP Operating Agreement:

            (i)   The Parties shall further amend the Cross License Agreement to
                  specify that, with respect only to Y3 NAND Flash Memory
                  Products and any other Licensed Products defined in the
                  License Agreement and manufactured with 300mm wafers at any
                  facility, each Party's patents issued or issuing on patent
                  applications entitled to an effective filing date prior to the
                  FP Termination Date are licensed at the royalty rates
                  specified in Schedule 8.1(g) for seven (7) years after the FP
                  Termination Date or until the end of calendar 2019, whichever
                  comes first, and thereafter such licenses shall be on a
                  royalty-free basis.

            (ii)  In the event that Toshiba or an Affiliate of Toshiba is the
                  Defaulting Party, Toshiba shall grant to SanDisk, effective
                  upon such date of termination, a non-exclusive,
                  non-transferable (except to Affiliates of SanDisk),
                  non-sub-licensable, fully paid-up, royalty-free license to
                  make, have made, use, sell and have sold NAND Flash Memory
                  Products anywhere in the world utilizing the NAND technology
                  transferred to and/or utilized at the Yokkaichi Facility, and
                  SanDisk shall have full access to all such know-how at the
                  Yokkaichi Facility which has been transferred to the Yokkaichi
                  Facility prior to the FP Termination Date.

      (h)   Upon termination of this Agreement resulting from an event of
            dissolution described in Section 11.1(f) (Bankruptcy Event) of the
            FP Operating Agreement:

            (i)   If such termination is caused by a Bankruptcy Event in respect
                  of Toshiba, (x) the license granted to SanDisk under Toshiba
                  Licensed Patents pursuant to the Cross License Agreement shall
                  continue on a royalty-free basis, and (y) Toshiba shall grant
                  to SanDisk, effective upon such date of termination, a
                  non-exclusive, non-transferable (except to Affiliates of
                  SanDisk), non-sub-licensable, fully paid-up, royalty-free
                  license to make, have made, use, sell and have sold NAND Flash
                  Memory Products anywhere in the world utilizing the NAND
                  technology transferred to and/or utilized at the Yokkaichi
                  Facility, and SanDisk shall have full access to all such
                  know-how at the Yokkaichi Facility which has been transferred
                  to the Yokkaichi Facility prior to the Termination Date.

                                       32


      (ii)  If such termination is caused by a Bankruptcy Event in respect of
            SanDisk, the license granted to Toshiba under SanDisk Licensed
            Patents (as defined in the Cross License Agreement) pursuant to the
            Cross License Amendment shall continue on a royalty-free basis.

(i)   Upon a termination of this Agreement resulting from a purchase and sale
      transaction described in Section 11.6 (Financing Default) of the FP
      Operating Agreement, there shall be no capacity ramp-down rights or
      obligations and:

      (i)   If such termination is caused by a financing default in respect of
            Toshiba, (x) the Parties shall further amend the Cross License
            Agreement to specify that, with respect only to Y3 NAND Flash Memory
            Products and any other Licensed Products defined in the License
            Agreement and manufactured with 300mm wafers at any facility,
            Toshiba's patents issued or issuing on patent applications entitled
            to an effective filing date prior to the FP Termination Date are
            licensed to SanDisk on a royalty-free basis, and (y) Toshiba shall
            grant to SanDisk, effective upon such date of termination, a
            non-exclusive, non-transferable (except to Affiliates of SanDisk),
            non-sub-licensable, fully paid-up, royalty-free license to make,
            have made, use, sell and have sold NAND Flash Memory Products
            anywhere in the world utilizing the NAND technology transferred to
            and/or utilized at the Yokkaichi Facility, and SanDisk shall have
            full access to all such know-how at the Yokkaichi Facility which has
            been transferred to the Yokkaichi Facility prior to the Termination
            Date.

      (ii)  If such termination is caused by a financing default in respect of
            SanDisk, the Parties shall further amend the Cross License Agreement
            to specify that, with respect only to Y3 NAND Flash Memory Products
            and any other Licensed Products defined in the License Agreement and
            manufactured with 300mm wafers at any facility, SanDisk's patents
            issued or issuing on patent applications entitled to an effective
            filing date prior to the FP Termination Date are licensed to Toshiba
            on a royalty-free basis.

(j)   Termination of this Agreement shall not affect any surviving rights or
      obligations of either Party set forth in the Product Development Agreement
      and the Common R&D Agreement.

9.    MISCELLANEOUS

9.1   Survival. Sections 1.3, 6.9, 6.10(d), 8 and 9 and Appendix A shall survive
      the termination or expiration of this Agreement.

9.2   Entire Agreement. This Agreement, together with the exhibits, schedules,
      appendices and attachments thereto, constitutes the agreement of the
      Parties to this Agreement with respect to the subject matter hereof and
      supersedes all prior written and oral agreements and understandings with
      respect to such subject matter.

                                       33


9.3   Governing Law. This Agreement shall in all respects be governed by and
      construed in accordance with the internal laws of the State of California
      applicable to agreements made and to be performed entirely within such
      state without regard to the conflict of laws principles of such state.
      Each Master Operative Document shall be governed in accordance with its
      governing law provision and, in the absence of any such provision, by the
      first sentence of this Section 9.3.

9.4   Assignment. Neither Party may transfer this Agreement or any of its rights
      hereunder (except for any transfer to an Affiliate or in connection with a
      merger, consolidation or sale of all or substantially all the assets or
      the outstanding securities of such party, which transfer shall not require
      any consent of the other party) without the prior written consent of the
      other Party (which consent may be withheld in such other Party's sole
      discretion), and any such purported transfer without such consent shall be
      void.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                                       34


      IN WITNESS WHEREOF, this Agreement has been executed and delivered by the
Parties as of the date first above written.

                                       TOSHIBA CORPORATION

                                       By: /s/ Masashi Muromachi
                                           ---------------------------
                                       Name: Masashi Muromachi

                                       Title: President and CEO
                                              Semiconductor Company
                                              Corporate Vice President

                                       SANDISK CORPORATION

                                       By: /s/ Eli Harari
                                           ---------------------------
                                       Name: Eli Harari

                                       Title: President and CEO

                                       SANDISK INTERNATIONAL LIMITED

                                       By: /s/ Eli Harari
                                           ---------------------------
                                       Name: Eli Harari

                                       Title: President

[Signature page to Flash Partners Master Agreement]

                                       35


APPENDICES

Appendix A                 -   Definitions, Rules of Construction and General
                               Terms and Conditions

EXHIBITS

(Flash Partners Documents)
Exhibit A1                 -   Unit Purchase Agreement
Exhibit A2                 -   FP Operating Agreement
Exhibit A3                 -   FP Foundry Agreement
Exhibit A4-1               -   SanDisk Purchase and Supply Agreement
Exhibit A4-2               -   Toshiba Purchase and Supply Agreement
Exhibit A5                 -   FP Patent Indemnification Agreement
Exhibit A6                 -   Mutual Environmental Indemnification Agreement
Exhibit A7                 -   Lease Agreement

(Joint Operative Documents)
Exhibit B1                 -   Common R&D and Participation Agreement
Exhibit B2                 -   Product Development Agreement
Exhibit B3                 -   Amendment No. 3 to Cross License Agreement
Exhibit B4                 -   Amendment No. 1 to Toshiba-SanDisk Services
                               Agreement

SCHEDULES

Schedule 4.5               -   Litigation; Decrees
Schedule 4.7               -   Patents and Proprietary Rights
Schedule 4.9               -   Cross License Payment Obligations
Schedule 6.1               -   Technology Transfer Costs
Schedule 6.3(b)            -   Ramp-Up Plan
Schedule 6.8               -   SanDisk FP Secondees
Schedule 8.1(d)            -   Royalty in case of SanDisk Unilateral Termination
Schedule 8.1(e)            -   Royalty in case of Deadlock Termination
Schedule 8.1(f)            -   Royalty in case of Event of Default Termination

                                   Schs., p. 1


                                  SCHEDULE 4.5

                               LITIGATION, DECREES

                                      [***]

[***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

                                   Schs., p. 1


                                  SCHEDULE 4.7
                         PATENTS AND PROPRIETARY RIGHTS

                                      [***]

[***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

                                   Schs., p. 2


                                  SCHEDULE 4.9
                        CROSS LICENSE PAYMENT OBLIGATIONS

                                      [***]

[***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

                                   Schs., p. 3



                                  SCHEDULE 6.1
                            TECHNOLOGY TRANSFER COSTS

                                      [***]

[***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

                                   Schs., p. 4


                                 SCHEDULE 6.3(b)
                                  RAMP-UP PLAN

[***]

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SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT
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                                   Schs., p. 5


                                  SCHEDULE 6.8

                              SANDISK FP SECONDEES

[***]

[***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT
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                                   Schs., p. 6


                                 SCHEDULE 8.1(e)

                ROYALTY IN CASE OF SANDISK UNILATERAL TERMINATION

                                      [***]

[***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

                                   Schs., p. 7


                                 SCHEDULE 8.1(f)

                     ROYALTY IN CASE OF DEADLOCK TERMINATION

[***]

[***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

                                   Schs., p. 8


                                 SCHEDULE 8.1(g)

                 ROYALTY IN CASE OF EVENT OF DEFAULT TERMINATION

[***]

[***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

                                   Schs., p. 9


                                   APPENDIX A

                     DEFINITIONS, RULES OF CONSTRUCTION AND
                             DOCUMENTARY CONVENTIONS

            The following shall apply unless otherwise required by the main body
of the agreement into which this Appendix A is being incorporated (as used
herein, "this Agreement"):

                                   Definitions

            The following terms shall have the specified meanings:

            "Accountants" means such firm of internationally recognized
independent certified public accountants for Flash Partners as is appointed
pursuant to the FP Operating Agreement from time to time. Initially, the
Accountants shall be Shin Nihon & Company, an affiliate of Ernst & Young LLP.

            "Affiliate" of any Person means any other Person which directly or
indirectly controls, is controlled by or is under common control with, such
Person; provided, however, that the term Affiliate, (a) when used in relation to
Flash Partners or any Subsidiary of Flash Partners, shall not include SanDisk
Corporation or Toshiba or any Affiliate of either of them, and (b) when used in
relation to SanDisk Corporation or Toshiba or any Affiliate of either of them,
shall not include Flash Partners or any Subsidiary of Flash Partners.

            "Articles" means the Articles of Incorporation of Flash Partners.

            "Bankruptcy Event" means, with respect to any Person, the occurrence
or existence of any of the following events or conditions: such Person (1) is
dissolved; (2) becomes insolvent or fails or is unable or admits in writing its
inability generally to pay its debts as they become due; (3) makes a general
assignment, arrangement or composition with or for the benefit of its creditors;
(4) institutes or has instituted against it a proceeding seeking a judgment of
insolvency or bankruptcy or any other relief under any bankruptcy or insolvency
law or other similar law affecting creditors' rights, or a petition is presented
for its winding up or liquidation and, in the case of any such proceeding or
petition instituted or presented against it, such proceeding or petition (A)
results in a judgment of insolvency or bankruptcy or the entry of an order for
relief or the making of an order for its winding up or liquidation or (B) is not
dismissed, discharged, stayed or restrained in each case within 60 days of the
institution or presentation thereof; (5) has a resolution passed by its
governing body for its winding-up or liquidation; (6) seeks or becomes subject
to the appointment of an administrator, receiver, trustee, custodian or other
similar official for it or for all or substantially all its assets (regardless
of how brief such appointment may be, or whether any obligations are promptly
assumed by another entity or whether any other event described in this clause
(6) has occurred and is continuing); (7) experiences any event which, under the
applicable laws of any jurisdiction, has an analogous effect to any of the
events specified in clauses (1) through (6) above; or (8) takes any action in

CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.

                                       1


furtherance of, or indicating its consent to, approval of, or acquiescence in,
any of the foregoing acts.

            "Board of Directors" means the board of directors of Flash Partners.

            "Burdensome Condition" means, with respect to any proposed
transaction, any action taken, or credibly threatened, by any Governmental
Authority or (except if such action or threat is frivolous) other Person to
challenge the legality of such proposed transaction, including (i) the pendency
of a governmental investigation (formal or informal) in contemplation of the
possible actions described in clauses (ii)(A), (ii)(B) or (ii)(C) below, (ii)
the institution of a suit or the written threat thereof (A) seeking to restrain,
enjoin or prohibit the consummation of such transaction or material part
thereof, to place any material condition or limitation upon such consummation or
to invalidate, suspend or require modification of any material provision of any
Operative Document, (B) challenging the acquisition by either Toshiba or SanDisk
International of its Units or (C) seeking to impose limitations on the ability
of either Toshiba or SanDisk International effectively to exercise full rights
as Unitholder of Flash Partners, including the right to act on all matters
properly presented to the parties pursuant to the FP Operating Agreement, or
(iii) an order by a court of competent jurisdiction having any of the
consequences described in (ii)(A), (ii)(B) or (ii)(C) above, or placing any
conditions or limitations upon such consummation that are unreasonably
burdensome in the reasonable judgment of the applicable Person.

            "Business Day" means any day (other than a day which is a Saturday,
Sunday or legal holiday in the State of California or Japan) on which commercial
banks are open for business in the State of California or Tokyo, Japan.

            "Business Plan" means the Initial Business Plan and each subsequent
business plan, including budgets and projections for Flash Partners for each
relevant period, approved in accordance with Section 3.4(c) of the FP Operating
Agreement and complying with Section 3.4(b) of the FP Operating Agreement.

            "Capital Contribution" means the capital contribution made by or
allocated to a Party by virtue of its ownership of Units, as indicated on
Schedule 6.1 to the FP Operating Agreement.

            "Change of Control" with respect to a Person means a transaction or
series of related transactions as a result of which (i) more than 50% of the
beneficial ownership of the outstanding common stock or other ownership
interests of such Person (representing the right to vote for the board of
directors or similar organization of such Person) is acquired by another Person
or affiliated group of Persons, whether by reason of stock acquisition, merger,
consolidation, reorganization or otherwise or (ii) the sale or disposition of
all or substantially all of a Person's assets to another Person or affiliated
group of Persons.

            "Closing" means the closing of the transactions described in
Sections 2.1 of the Master Agreement.

            "Closing Date" means the date of the Closing.

                                       2


            "Code" means the Internal Revenue Code of 1986, as amended from time
to time, or any successor statute. Any reference to a particular provision of
the Code or a treasury regulation promulgated pursuant to the Code means, where
appropriate, the corresponding provision of any successor statute or regulation.

            "Common R&D Agreement" means the Amended and Restated Common R&D and
Participation Agreement, dated as of the Effective Date, between Toshiba and
SanDisk Corporation.

            "Control" (including its correlative meanings "controlled by" and
"under common control with") means possession, directly or indirectly, of power
to direct or cause the direction of management or policies (whether through
ownership of securities or partnership or other ownership interests, by contract
or otherwise).

            "Cross License Agreement" has the meaning given in the Master
Agreement.

            "Effective Date" means September 10, 2004.

            "Environmental Indemnification Agreement" means the Mutual
Contribution and Environmental Indemnification Agreement, dated as of the
Effective Date, between Toshiba and SanDisk Corporation.

            "Event of Default" means, with respect to a Party, the occurrence or
existence of any of the following events or conditions which remains uncured for
sixty (60) days following receipt by such Party of written notice thereof:

            (a) a Bankruptcy Event in respect of such Party or any Person of
      which such Party is a Subsidiary; or

            (b) the breach by such Party of its covenant in Section 9.1 of the
      FP Operating Agreement or the breach by such Party of its covenant in
      Section 5.1(b) of the Master Agreement, provided that a Change of Control
      of a Party shall not be deemed an Event of Default.

            "Fiscal Quarter" means, unless changed by the Board of Directors, a
calendar quarter.

            "Fiscal Year" means the one year period commencing on April 1 of
each year.

            "Flash Partners" means Flash Partners, Ltd., a Japanese limited
liability company (yugen kaisha).

            "FP Foundry Agreement" means the Foundry Agreement, dated as of the
Effective Date, between Flash Partners and Yokkaichi.

            "FP Operating Agreement" means the Operating Agreement, dated as of
the Effective Date, between Toshiba and SanDisk International.

                                       3


            "FP Operative Documents" has the meaning given in the Master
Agreement.

            "FP Secondee" means an employee of SanDisk or any of its Affiliates
who is assigned to work at Flash Partners or any of its Subsidiaries by SanDisk
or such Affiliate as contemplated by Section 6.8 of the Master Agreement.

            "FVC Japan" means FlashVision Ltd., a Japanese limited liability
company (yugen kaisha).

            "FVC Japan Equipment" means any equipment which is or will, from
time to time, be owned or leased by FVC Japan.

            "FVC Japan Master Agreement" means the Master Agreement between
Toshiba and SanDisk dated as of April 10, 2002, as amended and restated as of
the Effective Date.

            "FVC Japan Operative Documents" means the FVC Japan Master Agreement
as amended to date, the New Operating Agreement between the Parties, dated as of
April 10, 2002, as amended to date, the Foundry Agreement between FVC Japan and
Toshiba, dated as of April 10, 2002, the SanDisk Foundry Agreement between the
Parties, dated as of April 10, 2002, the Purchase and Supply Agreement between
FVC Japan and SanDisk, dated as of April 10, 2002, the Purchase and Supply
Agreement between FVC Japan and Toshiba, dated as of April 10, 2002, and the
Services Agreement between FVC Japan and Toshiba dated as of April 1, 2002.

            "FVC Japan NAND Flash Memory Products" has the meaning given in
Section 3.3 of the Master Agreement.

            "Governmental Action" means any authorization, consent, approval,
order, waiver, exception, variance, franchise, permission, permit or license of,
or any registration, filing or declaration with, by or in respect of, any
Governmental Authority.

            "Governmental Authority" means any United States or Japanese
federal, state, local or other political subdivision or foreign governmental
Person, authority, agency, court, regulatory commission or other governmental
body, including the Internal Revenue Service and the Secretary of State of any
State.

            "Governmental Rule" means any statute, law, treaty, rule, code,
ordinance, regulation, license, permit, certificate or order of any Governmental
Authority or any judgment, decree, injunction, writ, order or like action of any
court or other judicial or arbitration tribunal.

            "Indebtedness" of any Person means, without duplication:

            (a) all obligations (whether present or future, contingent or
      otherwise, as principal or surety or otherwise) of such Person in respect
      of borrowed money or in respect of deposits or advances of any kind;

            (b) all obligations of such Person evidenced by bonds, debentures,
      notes or similar instruments;

                                       4


            (c) all obligations of such Person upon which interest charges are
      customarily paid, except for trade payables;

            (d) all obligations of such Person under conditional sale or other
      title retention agreements relating to property or assets purchased by
      such Person;

            (e) all obligations of such Person issued or assumed as the deferred
      purchase price of property or services (other than with respect to the
      purchase of personal property under standard commercial terms);

            (f) all Indebtedness of others secured by (or for which the holder
      of such Indebtedness has an existing right, contingent or otherwise, to be
      secured by) any Lien on property owned or acquired by such Person, whether
      or not the obligations secured thereby have been assumed;

            (g) all guarantees by such Person of Indebtedness of others;

            (h) all obligations of such Person to pay rent or other amounts
      under any lease of (or other arrangement conveying the right to use) real
      or personal property (or a combination thereof), which obligations would
      be required to be classified and accounted for as capital leases on a
      balance sheet of such Person prepared in accordance with Japanese GAAP or
      US GAAP, as applicable;

            (i) all obligations of such Person (whether absolute or contingent)
      in respect of interest rate swap or protection agreements, foreign
      currency exchange agreements or other interest or exchange rate hedging
      arrangements; and

            (j) all obligations of such Person as an account party in respect of
      letters of credit and bankers' acceptances.

            The Indebtedness of any Person shall include the Indebtedness of any
partnership in which such Person is a general partner.

            "Indemnified Parties" means the Party being indemnified's officers,
directors, employees, agents, contractors, subcontractors, and transferees
permitted pursuant to the FP Operating Agreement and the Master Agreement.

            "Japan Act" means the Japanese Limited Liability Company Act
(yugenkaisha-ho), as in effect from time to time.

            "Japanese GAAP" means generally accepted accounting principles in
Japan as in effect from time to time, consistently applied.

            "Japanese GAAS" means generally accepted auditing standards in Japan
as in effect from time to time.

            "License Agreement" means the Patent Cross License Agreement dated
July 30, 1997 by and between Toshiba and SanDisk, [***]

[***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.


                                       5


            "Lien" means, with respect to any asset, (a) any mortgage, deed of
trust, lien, pledge, encumbrance, charge or security interest in or on such
asset, (b) the interest of a vendor or a lessor under any conditional sale
agreement, capital lease or title retention agreement relating to such asset and
(c) in the case of securities, any purchase option, call or similar right with
respect to such securities.

            "L/M" means lots per month.

            "Management Committee" has the meaning given in the Master
Agreement.

            "Master Agreement" means the Flash Partners Master Agreement, dated
as of the Effective Date, by and among Toshiba, SanDisk and SanDisk
International.

            "Material" means, with respect to any Person, an event, change or
effect which is or, insofar as reasonably can be foreseen, will be material to
the condition (financial or otherwise), properties, assets, liabilities,
capitalization, licenses, businesses, operations or prospects of such Person
and, in the case of Flash Partners, the ability of Flash Partners to carry out
its then-current Business Plan.

            "NAND Flash Memory Products" has the meaning given in Section 3.2 of
the Master Agreement.

            "Net Book Value" means, with respect to any Person, the total assets
of such Person less the total liabilities of such Person, in each case as
determined in accordance with Japanese GAAP or US GAAP, as applicable.

            "Patent Indemnification Agreement" means the Patent Indemnification
Agreement dated as of the Effective Date between Toshiba and SanDisk
Corporation.

            "Percentage" means, with respect to any Unitholder (as defined in
the FP Operating Agreement), the percentage of such Unitholders' ownership
interest in Flash Partners. For the avoidance of doubt, as of the date hereof,
Percentage means with respect to Toshiba or its Affiliate, 50.1%, and with
respect to SanDisk International or its Affiliate, 49.9%; provided, however, if
either Unitholder transfers all of its Units to any Affiliate in accordance with
the FP Operating Agreement, its Percentage shall be 0% and such Affiliate
transferee shall receive the entire Percentage of the transferring Unitholder.

            "Permitted Liens" means (a) the rights and interests of Flash
Partners, either Party or any Affiliate of any such Person as provided in the FP
Operative Documents, and (b) Liens for Taxes which are not due and payable or
which may after contest be paid without penalty or which are being contested in
good faith and by appropriate proceedings and so long as such proceedings shall
not involve any substantial risk of the sale, forfeiture or loss of any part of
any relevant asset or title thereto or any interest therein.

                                       6


            "Person" means any individual, firm, company, corporation, limited
liability company, unincorporated association, partnership, trust, joint
venture, Governmental Authority or other entity, and shall include any successor
(by merger or otherwise) of such entity.

            "Product Development Agreement" means the Amended and Restated
Product Development Agreement, dated as of the Effective Date, between Toshiba
and SanDisk Corporation.

            "SanDisk Corporation" means SanDisk Corporation, a Delaware
corporation.

            "SanDisk International" means SanDisk International Limited, a
company organized under the laws of the Cayman Islands.

            "SanDisk Purchase and Supply Agreement" means the Purchase and
Supply Agreement, dated as of the Effective Date, between SanDisk International
and Flash Partners.

            "Subsidiary" of any Person means any other Person:

            (i) more than 50% of whose outstanding shares or securities
      (representing the right to vote for the election of directors or other
      managing authority) are, or

            (ii) which does not have outstanding shares or securities (as may be
      the case in a partnership, joint venture or unincorporated association),
      but more than 50% of whose ownership interest representing the right to
      make decisions (equivalent to those generally reserved for the board of
      directors of a corporation) for such other Person is,

now or hereafter owned or controlled, directly or indirectly, by such Person,
but such other Person shall be deemed to be a Subsidiary only so long as such
ownership or control exists; provided, however, that the term Subsidiary as used
in any FP Operative Document, when used in relation to a Party or any of its
Affiliates, shall not include Flash Partners or any of its Subsidiaries.

            "Tax" or "Taxes" means all United States or Japanese Federal, state,
local or other political subdivision and foreign taxes, assessments and other
governmental charges, including: (a) taxes based upon or measured by gross
receipts, income, profits, sales, use or occupation and (b) value added, ad
valorem, transfer, franchise, withholding, payroll, employment, excise or
property taxes, together with (c) all interest, penalties and additions imposed
with respect to such amounts and (d) any obligations under any agreements or
arrangements with any other Person with respect to such amounts.

            "Toshiba" means Toshiba Corporation, a Japanese corporation.

            "Toshiba Foundry Facility" means the Yokkaichi Facility, excluding
the Y3 Facility and the FVC Japan Equipment but including Toshiba's Asahi
facility and Toshiba's Oita facility.

            "Toshiba Foundry NAND Flash Memory Products" means NAND Flash Memory
Products manufactured at a Toshiba Foundry Facility.

                                       7


            "Toshiba-SanDisk Services Agreement" mean Amendment No. 1 to
Services Agreement, dated as of the Effective Date, between SanDisk Corporation
and Toshiba.

            "Toshiba Purchase and Supply Agreement" means the Purchase and
Supply Agreement, dated as of the Effective Date, between Toshiba and Flash
Partners.

            "Transfer" means any transfer, sale, assignment, conveyance,
creation of any Lien (other than a Permitted Lien), or other disposal or
delivery, including by dividend or distribution, whether made directly or
indirectly, voluntarily or involuntarily, absolutely or conditionally, or by
operation of law or otherwise.

            "Unique Activities" means production activities of Flash Partners at
the request of either Unitholder to (i) implement changes in the manufacturing
processes to be employed for Products to be manufactured for such Unitholder (or
its Affiliates) that are not agreed to by the other Unitholder, (ii) commence
manufacturing other Products for the requesting Unitholder (or its Affiliates)
that the other Unitholder does not desire to have manufactured for it and which
require a change in manufacturing processes or in the utilization of the
Facility or production resources, or (iii) implement any other change in its
operations in order to manufacture Products specifically for the requesting
Unitholder (or its Affiliates).

            "Unitholder" means the holder of any Units.

            "Units" means the units of contribution (shussi mochibun) in Flash
Partners, the par value of one Unit (shussi-hitokuchi-no-kingaku) being JPY
5,000.

            "US GAAP" means generally accepted accounting principles in the
United States as in effect from time to time, consistently applied.

            "US GAAS" means generally accepted auditing standards in the United
States as in effect from time to time.

            "Y3 Facility" has the meaning given in the Master Agreement.

            "Y3 NAND Flash Memory Products" has the meaning given in Section 3.3
of the Master Agreement.

            "Yokkaichi Facility" means Toshiba's facilities in Yokkaichi Japan,
including the FVC Japan Equipment, the Y3 Facility and Toshiba's Asahi facility.

                Rules of Construction and Documentary Conventions

2.1 Amendment and Waiver. No amendment to or waiver of this Agreement shall be
effective unless it shall be in writing, identify with specificity the
provisions of this Agreement that are thereby amended or waived and be signed by
each party hereto. Any failure of a party to comply with any obligation,
covenant, agreement or condition contained in this Agreement may be waived by
the party entitled to the benefits thereof only by a written instrument duly
executed

                                       8


and delivered by the party granting such waiver, but such waiver or failure to
insist upon strict compliance with such obligation, covenant, agreement or
condition shall not operate as a waiver of, or estoppel with respect to, any
subsequent or other failure of compliance.

2.2 Severability. If any provision of this Agreement or the application of any
such provision is invalid, illegal or unenforceable in any jurisdiction, such
invalidity, illegality or unenforceability shall not affect any other provision
of this Agreement (except as may be expressly provided in this Agreement) or
invalidate or render unenforceable such provision in any other jurisdiction. To
the extent permitted by applicable law, the parties hereto waive any provision
of law that renders any provision of this Agreement invalid, illegal or
unenforceable in any respect. The parties hereto shall, to the extent lawful and
practicable, use their reasonable efforts to enter into arrangements to
reinstate the intended benefits, net of the intended burdens, of any such
provision held invalid, illegal or unenforceable. If the intent of the Parties
for entering into the FP Operative Documents, considered as a single
transaction, cannot be preserved, the FP Operative Documents shall either be
renegotiated or terminated by mutual agreement of the Parties.

2.3 Assignment. Except as may otherwise be specifically provided in this
Agreement, no party hereto shall Transfer this Agreement or any of its rights
hereunder (except for any Transfer to an Affiliate or in connection with a
merger, consolidation or sale of all or substantially all the assets or the
outstanding securities of such party, which Transfer shall not require any
consent of the other parties) without the prior written consent of each other
party hereto (which consent may be withheld in each such other party's sole
discretion), and any such purported Transfer without such consent shall be void.

2.4 Remedies.

(a) Except as may otherwise be specifically provided in this Agreement, the
rights and remedies of the parties under this Agreement are cumulative and are
not exclusive of any rights or remedies which the parties hereto would otherwise
have.

(b) Equitable relief, including the remedies of specific performance and
injunction, shall be available with respect to any actual or attempted breach of
this Agreement; provided, however, in the absence of exigent circumstances, the
parties shall refrain from commencing any lawsuit or seeking judicial relief in
connection with such actual or attempted breach that is contemplated to be
addressed by the dispute resolution process set forth in the Master Agreement
and in Section 2.5 of this Appendix A until the parties have attempted to
resolve the subject dispute by following said dispute resolution process to its
conclusion.

(c) If the due date for any amount required to be paid under this Agreement is
not a Business Day, such amount shall be payable on the next succeeding Business
Day; provided that if payment cannot be made due to the existence of a banking
crisis or international payment embargo, such amount may be paid within the
following 30 days. If due to the occurrence of an act of God, any party is
prevented from providing training, technical assistance or other similar support
required to be provided to Flash Partners pursuant to this Agreement, such party
shall have an additional 30 day period to make alternative arrangements to
provide such support.

                                       9


2.5 Arbitration. Any dispute concerning this Agreement shall be referred to the
Management Committee and handled by it in accordance with the Master Agreement.
If the Management Committee cannot resolve such dispute in accordance with the
terms of the Master Agreement, then such dispute will be settled by binding
arbitration in San Francisco, California. The dispute shall be heard by a panel
of three arbitrators pursuant to the rules of the International Chamber of
Commerce. The awards of such arbitration shall be final and binding upon the
parties thereto. Each party will bear its own fees and expenses associated with
the arbitration. Filing fees and arbitrator fees charged by the ICC shall be
borne equally by the Parties.

2.6 Damages Limited. IN THE ABSENCE OF ACTUAL FRAUD, IN NO EVENT SHALL ANY PARTY
BE LIABLE TO OR BE REQUIRED TO INDEMNIFY ANY OTHER PARTY OR ANY OF THEIR
RESPECTIVE AFFILIATES FOR ANY SPECIAL, CONSEQUENTIAL, INCIDENTAL OR INDIRECT
DAMAGE OF ANY KIND, (INCLUDING WITHOUT LIMITATION LOSS OF PROFIT OR DATA),
WHETHER OR NOT ADVISED OF THE POSSIBILITY OF SUCH LOSS.

2.7 Parties in Interest; Limitation on Rights of Others. This Agreement shall be
binding upon and inure to the benefit of the parties hereto and their permitted
successors and assigns. Nothing in this Agreement, whether express or implied,
shall give or be construed to give any Person (other than the parties hereto and
their permitted successors and assigns) any legal or equitable right, remedy or
claim under or in respect of this Agreement, unless such Person is expressly
stated in such agreement or instrument to be entitled to any such right, remedy
or claim.

2.8 Table of Contents; Headings. The Table of Contents and Article and Section
headings of this Agreement are for convenience of reference only and shall not
affect the construction of or be taken into consideration in interpreting any
such agreement or instrument.

2.9 Counterparts; Effectiveness. This Agreement may be executed by the parties
hereto in separate counterparts, each of which when so executed and delivered
shall be an original, but all of which counterparts shall together constitute
but one and the same contract. This Agreement shall not become effective until
one or more counterparts have been executed by each party hereto and delivered
to the other parties hereto.

2.10 Entire Agreement. This Agreement, together with each other FP Operative
Documents and the Exhibits, Schedules, Appendices and Attachments hereto and
thereto, when completed, constitute the agreement of the parties to the FP
Operative Documents with respect to the subject matter thereof and supersede all
prior written and oral agreements and understandings with respect to such
subject matter.

2.11 Construction. References in this Agreement to any gender include references
to all genders, and references in this Agreement to the singular include
references to the plural and vice versa. Unless the context otherwise requires,
the term "party" when used in this Agreement means a party to this Agreement.
References in this Agreement to a party or other Person include their respective
permitted successors and assigns. The words "include", "includes" and
"including", when used in this Agreement, shall be deemed to be followed by the
phrase "without limitation". Unless the context otherwise requires, references
used in this Agreement to Articles, Sections, Exhibits, Schedules, Appendices
and Attachments shall be deemed references

                                       10


to Articles and Sections of, and Exhibits, Schedules, Appendices and Attachments
to, this Agreement. Unless the context otherwise requires, the words "hereof",
"hereby" and "herein" and words of similar meaning when used in this Agreement
refer to this Agreement in its entirety and not to any particular Article,
Section or provision of this Agreement. Any reference to a FP Operative Document
shall include such FP Operative Document as amended or supplemented from time to
time in accordance with the provisions thereof.

2.12 Official Language. The official language of this Agreement is the English
language only, which language shall be controlling in all respects, and all
versions of this Agreement in any other language shall not be binding on the
parties hereto or nor shall such other versions be admissible in any legal
proceeding, including arbitration, brought under this Agreement. All
communications and notices to be made or given pursuant to this Agreement shall
be in the English language.

2.13 Notices. All notices and other communications to be given to any party
under this Agreement shall be in writing and any notice shall be deemed received
when delivered by hand, courier or overnight delivery service, or by facsimile
(if confirmed within two Business Days by delivery of a copy by hand, courier or
overnight delivery service), or five days after being mailed by certified or
registered mail, return receipt requested, with appropriate postage prepaid and
shall be directed to the address of such party specified below (or at such other
address as such party shall designate by like notice):

         (a) If to SanDisk or SanDisk International:

         SanDisk Corporation
         140 Caspian Court
         Sunnyvale, CA 94089
         Telephone: (408) 542-0555
         Facsimile: (408) 542-0600
         Attention: President and CEO

         With a copy to:

         SanDisk Corporation
         140 Caspian Court
         Sunnyvale, CA 94089
         Telephone: (408) 548-0208
         Facsimile: (408) 548-0385
         Attention: Vice President and General Counsel

                                       11


         (b) If to Toshiba:

         Toshiba Corporation
         Semiconductor Company
         1-1 Shibaura 1-Chome
         Minato-Ku, Tokyo 105-8001 Japan
         Telephone: 011 81 3 3457 3362
         Facsimile: 011 81 3 5444 9339
         Attention: Vice President

         With a copy to:

         Toshiba Corporation
         Semiconductor Company
         Legal Affairs and Contracts Division
         1-1 Shibaura 1-Chome
         Minato-Ku, Tokyo 105-8001 Japan
         Telephone: 011-81-3-3457-3452
         Facsimile: 011-81-3-5444-9342
         Attention: General Manager

         (c) If to Flash Partners:

         Flash Partners, Ltd.
         800 Yamanoisshikicho,
         Yokkaichi, Mie, Japan
         Attention: President

                                       12


         With a copy to:

         SanDisk Corporation
         140 Caspian Court
         Sunnyvale, CA 94089
         Telephone: (408) 542-0510
         Facsimile: (408) 542-0640
         Attention: Chief Operating Officer

         And

         Toshiba Corporation
         Semiconductor Company
         Legal Affairs and Contracts Division
         1-1 Shibaura 1-Chome
         Minato-Ku, Tokyo 105-8001 Japan
         Telephone: 011-81-3-3457-3452
         Facsimile: 011-81-3-5444-9342
         Attention: General Manager

2.14 Non Disclosure Obligations. Each party hereto agrees as follows:

(a) In this Agreement, "Confidential Information" means information disclosed in
written, recorded, graphical or other tangible from which is marked as
"Confidential", "Proprietary" or in some other manner to indicate its
confidential nature, and/or orally or in other intangible form, identified as
confidential at the time of disclosure and confirmed as confidential information
in writing within thirty (30) days of its initial disclosure.

(b) For a period of [***] from the date of receipt of the Confidential
Information disclosed by one Party (the "Disclosing Party") hereunder, the
receiving Party (the "Receiving Party") agrees to safeguard the Confidential
Information and to keep it in confidence and to use reasonable efforts,
consistent with those used in the protection of its own confidential
information, to prevent its disclosure to third parties, except that the
Receiving Party shall not be obligated hereunder in any respect to information
which:

      (i)   is already known to the Receiving Party at the time of its receipt
            from the Disclosing Party as reasonably evidenced by its written
            records; or

      (ii)  is or becomes publicly available without breach of this Agreement by
            the Receiving Party; or

      (iii) is made available to a third party by the Disclosing Party without
            restriction on disclosure; or

      (iv)  is rightfully received by the Receiving Party from a third party
            without restriction and without breach of this Agreement; or

[***]INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

                                       13


      (v)   is independently developed by the Receiving Party as reasonably
            evidenced by its written records contemporaneous with such
            development; or

      (vi)  is disclosed with the prior written consent of the Disclosing Party,
            provided that each recipient from the Receiving Party shall execute
            a confidentiality agreement prohibiting further disclosure of the
            Confidential Information, under terms no less restrictive that those
            provided in this Agreement; or

      (vii) is required to be disclosed by the order of a governmental agency or
            legislative body of a court of competent jurisdiction, provided that
            the Receiving Party shall give the Disclosing Party prompt notice of
            such request so that the Disclosing Party has an opportunity to
            defend, limit or protect such disclosure; or

      (viii) is required to be disclosed by applicable securities of other laws
            or regulations, provided that SanDisk shall, prior to any such
            disclosure required by the U.S. Securities and Exchange Commission,
            provide Toshiba with notice which includes a copy of the proposed
            disclosure. Further, SanDisk shall consider Toshiba's timely input
            with respect to the disclosure.

(c) Receiving Party shall use its reasonable best efforts to limit dissemination
of the Disclosing Party's Confidential Information to such of its employees who
have a need to know such information for the purpose for which such information
was disclosed to it. Receiving Party understands that disclosure or
dissemination of the Disclosing Party's Confidential Information not expressly
authorized hereunder would cause irreparable injury to the Receiving Party, for
which monetary damages would not be an adequate remedy and the Disclosing Party
shall be entitled to equitable relief in addition to any remedies the Disclosing
Party may have hereunder or at law.

(d) Nothing contained in this Agreement shall be construed as granting or
conferring any rights, licenses or relationships by the transmission of the
Confidential Information.

(e) All Confidential Information disclosed hereunder shall remain the property
of the Disclosing Party. Upon request by the Disclosing Party, the Receiving
Party shall return all Confidential Information, including any and all copies
thereof, or certify in writing that all such Confidential Information had been
destroyed.

2.15 Definitions. The definitions set forth in Article I of this Appendix A
shall apply to this Article II.

                                       14

EX-10.2

                                                                    EXHIBIT 10.2

================================================================================

                   OPERATING AGREEMENT OF FLASH PARTNERS LTD.

                         Dated as of September 10, 2004

                                     between

                               TOSHIBA CORPORATION

                                       and

                          SANDISK INTERNATIONAL LIMITED

================================================================================

CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.



                                TABLE OF CONTENTS



                                                                                    PAGE
                                                                                 
1.       DEFINITIONS, RULES OF CONSTRUCTION AND DOCUMENTARY CONVENTIONS.........      1

         1.1      Certain Definitions...........................................      1
         1.2      Additional Definitions........................................      1
         1.3      Rules of Construction and Documentary Conventions.............      2

2.       GENERAL PROVISIONS.....................................................      2

         2.1      Ownership of Units; Capital Increase..........................      2
         2.2      Name..........................................................      3
         2.3      Principal Office..............................................      3
         2.4      Term; Extension...............................................      3
         2.5      Scope of Activity.............................................      3
         2.6      Powers........................................................      3
         2.7      Articles of Incorporation.....................................      3
         2.8      Company Actions...............................................      3

3.       BUSINESS OPERATIONS....................................................      3

         3.1      Business Dealings with the Company............................      3
         3.2      Other Activities..............................................      4
         3.3      Personnel.....................................................      4
         3.4      Business Plans and Related Matters............................      6
         3.5      Standard of Care..............................................      7
         3.6      Use of Names..................................................      7

4.       ACTIONS BY THE UNITHOLDERS.............................................      7

         4.1      Matters Requiring the Approval of the Unitholders.............      8
         4.2      General Meetings of Unitholders...............................     10
         4.3      Restrictions on Unitholders...................................     10

5.       MANAGEMENT AND OPERATIONS OF COMPANY...................................     11

         5.1      Meetings of the Board of Directors............................     11
         5.2      Officers; Employees...........................................     16
         5.3      Y3 Representatives; Y3 Operating Committee....................     16
         5.4      Insurance.....................................................     17
         5.5      Records.......................................................     17

6.       CAPITAL CONTRIBUTIONS; DISTRIBUTIONS...................................     18

         6.1      Capital Contributions.........................................     18
         6.2      Distributions.................................................     18


                                      -i-



                                TABLE OF CONTENTS
                                  (continued)



                                                                                    PAGE
                                                                                 
         6.3      No Interest...................................................     19
         6.4      Return of Capital Contributions...............................     19

7.       ADDITIONAL CONTRIBUTIONS...............................................     19

8.       ACCOUNTING AND TAXATION................................................     19

         8.1      Financial Accounting Conventions..............................     19
         8.2      Maintenance of Books of Account...............................     20
         8.3      Financial Statements..........................................     20
         8.4      Other Reports and Inspection..................................     22
         8.5      Characterization..............................................     22
         8.6      Deposit of Funds..............................................     22

9.       UNITS OF CONTRIBUTION; DISPOSITION OF UNITS............................     22

         9.1      Restrictions on Transfer of Units.............................     22
         9.2      Admission of New Unitholders..................................     24
         9.3      Withdrawal Prohibited.........................................     24
         9.4      Purchase of Additional Interest...............................     24

10.      CERTAIN AGREEMENTS OF THE UNITHOLDERS..................................     25

         10.1     Taxes and Charges; Governmental Rules.........................     25
         10.2     Further Assurances............................................     25
         10.3     Dispute Resolution; Deadlock..................................     25
         10.4     Remedies Upon Event of Default; Termination on Breach.........     27
         10.5     Mechanics of Sale.............................................     27

11.      DISSOLUTION............................................................     28

         11.1     Events of Dissolution.........................................     28
         11.2     Dissolution by Agreement......................................     28
         11.3     Dissolution Upon Event of Default.............................     28
         11.4     Dissolution by Unilateral Option..............................     29
         11.5     Dissolution upon Notice.......................................     29
         11.6     Financing Defaults............................................     29
         11.7     Winding Up....................................................     30
         11.8     Liquidation Proceeds..........................................     30

12.      INDEMNIFICATION AND INSURANCE..........................................     30

         12.1     Indemnification...............................................     30
         12.2     Insurance.....................................................     31


                                      -ii-



                                TABLE OF CONTENTS
                                  (continued)



                                                                                    PAGE
                                                                                 
         12.3     Indemnification by the Unitholders............................     31
         12.4     Assertion of Claims...........................................     32

13.      MISCELLANEOUS..........................................................     32

         13.1     Governing Law.................................................     32
         13.2     Effectiveness.................................................     32


EXHIBITS

Exhibit A         -    Articles of Incorporation of the Company

SCHEDULES

Schedule 2.1(b)   -    Committed Additional Capital Contributions
Schedule 5.3      -    Management and Operating Reports
Schedule 6.1      -    Capital Contributions
Schedule 8.3      -    Monthly Reports

                                     -iii-



          OPERATING AGREEMENT of FLASH PARTNERS LTD., a Japanese limited
liability company (yugen kaisha), dated as of September 10, 2004, between
TOSHIBA CORPORATION, a Japanese corporation ("Toshiba"), and SANDISK
INTERNATIONAL LIMITED, a company organized under the laws of the Cayman Islands
( "SanDisk").

          WHEREAS, Flash Partners Ltd. (the "Company") is a Japanese limited
company (yugen kaisha);

          WHEREAS, pursuant to that certain Unit Purchase Agreement, dated as of
the date hereof, by and between SanDisk and Toshiba, concurrently with the
execution hereof, SanDisk has acquired from Toshiba 998 units par value Y5,000
per unit of contribution (shussi mochibun) in the Company ("Units"),
representing 49.9% of all issued and outstanding Units;

          WHEREAS, Toshiba holds the remaining 1,002 Units, representing 50.1%
of all issued and outstanding Units; and

          WHEREAS, SanDisk and Toshiba (each a "Unitholder") desire to enter
into this Operating Agreement in order to provide, subject to the Japan Act and
the Articles of Incorporation of the Company (as amended from time to time, the
"Articles") for (i) the business of the Company, (ii) the conduct of the
Company's affairs and (iii) the rights, powers, preferences, limitations and
responsibilities of the Company's Unitholders, employees and Directors.

          Accordingly, Toshiba and SanDisk agree as follows:

1.    DEFINITIONS, RULES OF CONSTRUCTION AND DOCUMENTARY CONVENTIONS

1.1   Certain Definitions.

(a)   Capitalized terms used but not defined in the main body of this Agreement
      shall have the respective meanings assigned to them in that certain Flash
      Partners Master Agreement, dated as of the date hereof, among SanDisk
      International Limited, SanDisk Corporation and Toshiba (the "Master
      Agreement") or in Appendix A to the Master Agreement.

(b)   As used herein, the term "Agreement" means this Operating Agreement
      together with any Exhibits, Schedules, Appendices and Attachments hereto.

1.2   Additional Definitions. The following capitalized terms used in this
      Agreement shall have the respective meanings assigned in the sections
      indicated below:

                                       1





           Term                                      Defined in
           ----                                      ----------
                                                
"Appendix A"                                       Recitals
"Articles"                                         Recitals
"Bankruptcy Event"                                 Section 11.1(f)
"Claim"                                            Section 12.4(a)
"Company"                                          Recitals
"Deadlock"                                         Section 10.3(c)
"Deadlock Dissolution Notice"                      Section 10.3(e)
"Defaulting Unitholder"                            Section 10.4
"Designated Individuals"                           Section 10.3(b)
"Director(s)"                                      Section 3.5(a)
"Executive Vice President"                         Section 5.2(a)
"General Meeting of Unitholders"                   Section 4.1(b)
"Indemnified Party"                                Section 12.4(a)
"Indemnifying Party"                               Section 12.4(a)
"Initiating Unitholder"                            Section 10.3(e)
"Losses"                                           Section 12.1(a)
"Master Agreement"                                 Section 1.1(a)
"Nondefaulting Unitholder"                         Section 10.4
"Notified Party"                                   Section 11.5
"Notifying Party"                                  Section 11.5
"Permissible Assignee"                             Section 9.1(c)
"Permissible Assignment Agreement"                 Section 9.1(c)
"President"                                        Section 5.2(a)
"Responding Unitholder"                            Section 10.3(e)
"SanDisk Representative"                           Section 5.3(a)
"Termination Date"                                 Section 11.4
"Toshiba Representative"                           Section 5.3(a)
"Units"                                            Recitals
"Unitholder"                                       Recitals
"Y3 Operating Committee"                           Section 5.3(a)


1.3   Rules of Construction and Documentary Conventions. The rules of
      construction, documentary conventions and general terms and conditions set
      forth in Appendix A shall apply to, and are hereby incorporated in, this
      Agreement.

                                       2



2.    GENERAL PROVISIONS

2.1   Ownership of Units; Capital Increase.

(a)   The rights and obligations of the Unitholders shall be as set forth
      herein, subject to the Articles and mandatory provisions of the Japan Act.

(b)   The Unitholders shall effect the capital increases in the amounts and at
      the times stipulated in Schedule 2.1(b).

2.2   Name. The name of the Company is "Flash Partners Yugen Kaisha," which
      translates to "Flash Partners Ltd." in English, and all Company business
      shall be conducted in that name or such other name as the Unitholders
      shall mutually agree.

2.3   Principal Office. The principal office of the Company shall be located in
      Yokkaichi, Mie, or such other place as the Unitholders shall mutually
      agree.

2.4   Term; Extension. The Company shall be terminated on December 31, 2019,
      unless extended by mutual written agreement of all of the Unitholders or
      earlier terminated in accordance with Section 11 (Dissolution). Any such
      extension shall be effective only upon the written agreement of all of the
      Unitholders and shall be on such terms and for such period as set forth in
      such agreement. The Unitholders agree to meet, no later than December 31,
      2018, to discuss the possible extension of the term of the Company.

2.5   Scope of Activity. The scope of activity of the Company shall be as set
      forth in Section 3.1 (Purpose) and 6.5 (Capacity Sharing Arrangement) of
      the Master Agreement.

2.6   Powers. The Company shall have all the powers now or hereafter conferred
      by applicable law on limited liability companies formed under the Japan
      Act and may do any and all acts and things necessary, incidental or
      convenient to the purpose specified in Section 2.5 (Scope of Activity).

2.7   Articles of Incorporation. On the date hereof and immediately following
      the execution of this Agreement, the Unitholders shall hold a general
      meeting of the Unitholders and, among other matters agreed between them,
      vote their Units to amend the Articles so that they will be in the form of
      Exhibit A. In the event of any conflict between this Agreement and the
      Articles, the Unitholders confirm their intent that the terms of this
      Agreement shall prevail, and on the request of either Unitholder, the
      Unitholders shall amend the Articles to conform with this Agreement to the
      extent legally possible; provided that the inability to implement such
      amendment shall not relieve any Unitholder from liability for any breach
      of its obligations hereunder.

2.8   Company Actions. The Unitholders hereby authorize the Company, and ratify
      (including for purposes of Section 4.1 (Matters Requiring the Approval of
      the Unitholders)) all action having been taken by or on behalf of the
      Company (including by its Unitholders and Directors) prior to the date
      hereof, to execute and deliver the FP Operative Documents to which it is a
      party, including all certificates, agreements and other documents required
      in connection therewith.

                                       3



3.    BUSINESS OPERATIONS

3.1   Business Dealings with the Company. Subject to Sections 4.1(a) (Matters
      Requiring the Approval of the Unitholders) and 5.1(d) (Matters Requiring
      the Approval of the Board of Directors), the Company may enter into
      contracts or agreements, or otherwise enter into transactions or dealings,
      with any Unitholder or any of their respective Affiliates, and derive and
      retain profits therefrom. The validity of any such contract, agreement,
      transaction or dealing or any payment or profit related thereto or derived
      therefrom shall not be affected by any relationship between the Company
      and any Unitholder or any of their respective Affiliates, subject to the
      Japan Act. The Unitholders agree that where practicable and contractually
      allowable (based on competitive price, availability and other material
      terms), the Board of Directors will consider whether to utilize any
      Unitholder or any of their respective Affiliates as the preferred
      providers of products and services that may be required in the
      manufacturing operations of the Company, subject to the ability of such
      Unitholder or Affiliate to meet the Company's manufacturing requirements
      on competitive terms. Unless otherwise approved by the Unitholders or
      otherwise expressly provided in the FP Operative Documents, all business
      dealings of the Company with any Unitholder or any of their respective
      Affiliates shall be on the most beneficial standard commercial terms and
      conditions, including volume, price and credit terms, currently offered or
      made available to unaffiliated customers by such Unitholder or Affiliate,
      as the case may be, with respect to the products and services to be
      offered and provided to the Company.

3.2   Other Activities. The provisions of Section 6.11 (Other Activities) of the
      Master Agreement are hereby incorporated herein by reference.

3.3   Personnel. The provisions of Section 6.8 (FP Secondees) of the Master
      Agreement are hereby incorporated herein by reference.

3.4   Business Plans and Related Matters.

(a)   Initial and Subsequent Business Plans. The initial Business Plan of the
      Company, setting forth the Company's products, pricing, operating budget,
      capital expenditures, expense budgets, financing plans and other business
      activities of the Company through [***], will be agreed upon and certified
      by the Board of Directors as soon as practicable after the Closing.

      (i)   The initial Business Plan and each successive Business Plan will, at
            the time such Business Plan is in effect, represent the Company's
            then-current forecast of the proposed operations of the Company.

      (ii)  An updated Business Plan complying with Section 3.4(b) (Form and
            Scope) in respect of each successive Fiscal Year after the Fiscal
            year ending [***] shall be prepared under the direction of the Chief
            Executive Officer of the Company and submitted to the Board of
            Directors for review and approval not later than the [***] preceding
            the commencement of such Fiscal Year.

[***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

                                       4



      (iii) When the proposed Business Plan in respect of a Fiscal Year is
            approved by the Board of Directors, it shall constitute the Business
            Plan of the Company for such Fiscal Year and the Company and its
            directors and employees shall implement such Business Plan, which
            shall be the basis of the Company's operations for such Fiscal Year.
            Upon approval, the approved Business Plan shall constitute the
            approved operational, financing and capital expenditure budget. The
            Board of Directors shall have the authority pursuant to Section
            5.1(d) (Matters Requiring the Approval of the Board of Directors) to
            amend the most recently approved Business Plan, including the
            operating budget contained therein, and any Unitholder may request
            that the Board of Directors review the Company's operating results
            and prospects, as well as market conditions, and consider a proposal
            for amendment or review of the most recently approved Business Plan
            at any regularly scheduled or special meeting of the Board of
            Directors and upon such request, the Board of Directors shall in
            good faith make such review and/or consider such proposal.

(b)   Form and Scope. Each Business Plan shall contain a statement of long-range
      strategy and short-range tactics detailing quantitative and qualitative
      goals for the Company and relating the attainment of those goals to the
      Company's manufacturing objectives, and shall include such items as
      planned capital expenditures, planned product development, planned product
      output and projected product cost, sales forecasts, total headcount, total
      spending and revenue and profit projections, financing plans and tax
      planning. No Business Plan shall be deemed to be an amendment of this
      Agreement. Any capital commitments made in any Business Plan for a period
      after the Fiscal Year to which the Business Plan applies shall be
      considered non-binding for purposes of any FP Operative Document.

(c)   Approval. Other than the initial Business Plan (which shall be approved in
      accordance with Section 3.4(a)), the Board of Directors shall vote upon
      the proposed Business Plan, with such modifications as it may deem
      necessary, before [***] preceding the commencement of each Fiscal Year.
      Subject to Sections 10.3(c), (e) and (f) (Dispute Resolution; Deadlock),
      pending approval by the Board of Directors of any proposed Business Plan,
      the most recently approved Business Plan shall continue in effect;
      provided, however, the Board of Directors may, by unanimous vote, adopt an
      amended interim business plan for the Company's operations until it is
      able to reach agreement on the proposed Business Plan for the forthcoming
      year.

3.5   Standard of Care.

(a)   Each Unitholder, and each director of the Company, as defined in the Japan
      Act (each, a "Director"), shall be entitled to rely (unless such Person
      has knowledge or information concerning the matter in question that makes
      reliance unwarranted) on information, opinions, reports or statements,
      including financial statements and other financial data, if prepared or
      presented by:

[***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

                                       5



      (i)   one or more managers or employees of the Company who such Unitholder
            or Director believes in good faith to be reliable and competent in
            the matters presented; or

      (ii)  legal counsel, public accountants or other Persons as to matters
            that such Unitholder or Director believes to be within such Person's
            professional or expert competence.

(b)   Each Unitholder shall also be entitled to rely upon information, opinions,
      reports or statements, including financial statements and other financial
      data, prepared or presented by the Board of Directors pursuant to the
      responsibilities delegated to the Board of Directors pursuant to this
      Agreement.

3.6   Use of Names. Except as may be expressly provided in the FP Operative
      Documents, nothing in this Agreement shall be construed as conferring on
      the Company or any Unitholder the right to use in advertising, publicity
      or other promotional activities any name, trade name, trademark or other
      designation of any other Unitholder or any of its Affiliates, including
      any contraction, abbreviation or simulation of any of the foregoing.

4.    ACTIONS BY THE UNITHOLDERS

4.1   Matters Requiring the Approval of the Unitholders.

(a)   Notwithstanding any provision of the Articles to the contrary, no action
      shall be taken by or on behalf of the Company in connection with any of
      the following matters without the prior unanimous written approval of the
      Unitholders:

      (i)   any amendment, restatement or revocation of the Articles;

      (ii)  any amendment to or renewal of any FP Operative Document between the
            Company and any Unitholder or any of their respective Affiliates;

      (iii) any change in the scope of activity or strategic direction of the
            Company's business;

      (iv)  any merger, consolidation or other business combination to which the
            Company or any of its Subsidiaries is a party, or any other
            transaction to which the Company is a party resulting in a Change of
            Control of the Company;

      (v)   any sale, lease, pledge, assignment or other disposition of assets
            of the Company in an amount (in terms of consideration to be
            received by the Company) in excess of Y5,000,000 in one
            transaction or a series of related transactions, other than as
            expressly provided for in the FP Operative Documents or as set forth
            in the most recently approved Business Plan;

      (vi)  the approval of any transaction or agreement between the Company and
            any Unitholder or any of their respective Affiliates (other than
            transactions or agreements expressly provided for or authorized by
            an FP Operative Document or

                                       6



            the most recently approved Business Plan) or any amendment thereto
            (including the waiver of any material term thereof), other than any
            such transaction, agreement or amendment that contains generally
            available, arm's length commercial terms and is in an amount (in
            terms of payments to be made or the value of services or products to
            be provided or delivered) less than Y5,000,000 for any single
            transaction or agreement or for substantially identical transactions
            within a 24 month period (or a waiver that does not materially
            adversely affect the rights and benefits of the Company), other than
            as set forth in the most recently approved Business Plan;

      (vii) incurring Indebtedness in an amount in excess of Y1,000,000 or an
            increase in aggregate Indebtedness in excess of Y1,000,000 in any
            calendar quarter, other than as authorized by Section 5.1(d)
            (Matters Requiring the Approval of the Board of Directors);

     (viii) with respect to the Company or any of its Subsidiaries, (A) the
            voluntary commencement of any proceeding or the voluntary filing of
            any petition seeking relief under Japanese or foreign bankruptcy,
            insolvency, receivership or similar law, (B) the consent to the
            institution of, or the failure to contest in a timely and
            appropriate manner, any involuntary proceeding or any involuntary
            filing of any petition of the type described in clause (A) above,
            (C) the application for or consent to the appointment of a receiver,
            trustee, custodian, sequestrator, conservator or similar official
            for the Company, or for a substantial part of its property or
            assets, (D) the filing of an answer admitting the material
            allegations of a petition filed against the Company in any such
            proceeding described above, (E) the consent to any order for relief
            issued with respect to any such proceeding described above, (F) the
            making of a general assignment for the benefit of creditors, (G) the
            admission in writing of the Company's inability, or the failure of
            the Company generally, to pay its debts as they become due or (H)
            the taking of any action for the purpose of effecting any of the
            foregoing;

       (ix) subject to Section 9.1(a) and Appendix A, the granting of consent to
            the transfer of any Units;

        (x) the winding up, dissolution or liquidation of the Company or any of
            its Subsidiaries (other than the dissolution of the Company pursuant
            to and as contemplated by Section 11 (Dissolution));

       (xi) the acquisition of any business, entry into any joint venture or
            partnership, or creation of any direct or indirect Subsidiary of the
            Company;

      (xii) the commitment of the Company to any development project;

     (xiii) the sale, license, assignment or other Transfer of any of the
            Company's intellectual property owned or in its possession
            (including any technology or know-how, whether or not patented, any
            trademark, trade name or service mark, any copyright or any software
            or other method or process);

                                       7



      (xiv) any increase or decrease in the capital amount of the Company,
            whether by increasing the number of the Units or increasing the par
            value per Unit or otherwise; and

      (xv)  any other matter material to the operation, staffing, business or
            financial condition of the Company.

(b)   Each Unitholder may exercise its vote by proxy; provided, that such proxy
      shall submit to the Company, prior to the relevant General Meeting of
      Unitholders, as defined in the Japan Act (the "General Meeting of
      Unitholders"), a power of attorney duly signed by the Unitholder and/or
      other document establishing its power of representation; and provided,
      further, that the conferment of the power of proxy for one General Meeting
      of Unitholders shall not be deemed to be a conferment of the power of
      proxy for any subsequent General Meeting of Unitholders.

(c)   Notwithstanding the requirements of Section 4.1(a) (Matters Requiring the
      Approval of the Unitholders) relating to agreements between the Company
      and any Unitholder or any of their respective Affiliates, any question
      regarding a material default or alleged material default (including any
      question regarding a breach of representation or alleged breach of
      representation) under any FP Operative Document between the Company and
      any Unitholder or any of their respective Affiliates shall be subject to
      the dispute resolution process set forth in Sections 10.3(a) and (b)
      (Dispute Resolution; Deadlock).

4.2   General Meetings of Unitholders.

(a)   An annual General Meeting of Unitholders shall be held within three (3)
      months from the date immediately following the last day of each Fiscal
      Year of the Company. A special General Meeting of Unitholders may be held
      at any time and may be called by a resolution of the Board of Directors or
      in any other manner permitted by the Japan Act or the Articles. All
      General Meetings of Unitholders shall be called and held in accordance
      with the Articles and the Japan Act. The General Meetings of Unitholders
      may be held at the Company's principal office or at any other location,
      or, if all the Unitholders agree, and to the extent then permitted by the
      Japan Act, by telecommunications conferences by means of which all persons
      participating in the meeting can hear and be heard by each other, provided
      that such communications equipment continues to be operational throughout
      the meeting. To the extent then permitted by the Japan Act, the
      Unitholders may by unanimous written consent effect any resolution that
      could otherwise be resolved at a meeting of the Unitholders.

(b)   Except as otherwise provided in this Agreement, each Unitholder shall be
      entitled to one vote for each Unit owned by such Unitholder.

(c)   The minutes of every General Meeting of Unitholders shall be kept with the
      Company's records referred to in Section 5.5 (Records).

(d)   The quorum necessary for any General Meeting of Unitholders shall be those
      Persons entitled to cast all of the votes held by the Unitholders. A
      quorum shall be deemed not to

                                       8



      be present at any meeting for which notice was not properly given under
      the Articles or the Japan Act, unless the Unitholder as to whom such
      notice was not properly given attends such meeting without protesting the
      lack of notice or duly executes and delivers a written waiver of notice or
      a written consent to the holding of such meeting.

4.3   Restrictions on Unitholders. No Unitholder may, without the prior written
      consent of the other Unitholder:

(a)   confess any judgment against the Company;

(b)   enter into any agreement on behalf of or otherwise purport to bind the
      other Unitholder or the Company;

(c)   do any act in contravention of this Agreement;

(d)   except as contemplated by Section 11 (Dissolution), dispose of the
      goodwill or the business of the Company; or

(e)   assign the property of the Company in trust for creditors or on the
      assignee's promise to pay any Indebtedness of the Company.

5.    MANAGEMENT AND OPERATIONS OF COMPANY

5.1   Meetings of the Board of Directors.

(a)   General. Except as otherwise provided herein, the Board of Directors is
      vested with complete and exclusive power to direct and control the Company
      and to manage the Company as provided by the Articles and this Agreement,
      as it may be amended from time to time. The Board of Directors shall have
      the power to delegate such responsibilities as it may deem appropriate
      from time-to-time (including certain day-to-day responsibilities set forth
      in Section 5.2 (Officers; Employees) and Section 5.3 (Y3 Operating
      Committee)).

(b)   Members of the Board of Directors; Voting; etc.

      (i)   The Board of Directors of the Company shall consist of six (6)
            Directors, three (3) of which shall be nominated by Toshiba, and the
            other three (3) of which shall be nominated by SanDisk; provided
            that the total number of Directors of the Company may be changed by
            mutual agreement of the Unitholders. Each Unitholder shall vote its
            Units to elect as Directors those persons nominated by the other
            Unitholder.

      (ii)  Directors shall be elected to serve until complete adjournment of
            the annual meeting of Unitholders for the fiscal year last to end
            within one (1) year after his or her assumption of the directorship,
            and shall be eligible for re-election.

      (iii) Subject to the fiduciary duty of Directors under the Japan Act, each
            Director shall serve at the pleasure of the designating Unitholder
            and may be removed as such,

                                       9



            with or without cause, and his successor designated, by the
            designating Unitholder. Each Unitholder shall have the right to
            designate a replacement Director in the event of any vacancy among
            such Unitholder's appointees. Each Unitholder shall vote its Units
            in favor of any such removal and in favor of any such replacement
            Director.

      (iv)  Each Unitholder shall bear any cost incurred by any Director
            nominated by it to serve on the Board of Directors, and no Director
            shall be entitled to compensation from the Company for serving in
            such capacity.

      (v)   Each Unitholder shall notify the other Unitholder and the Company of
            the name, business address and business telephone, e-mail address
            and facsimile numbers of each Director that such Member has
            nominated to the Board of Directors. Each Unitholder shall promptly
            notify the other Unitholder and the Company of any change in such
            Unitholder's nominated or of any change in any such address or
            number.

      (vi)  For purposes of any approval or action taken by the Board of
            Directors, each Director shall have one vote. Unless otherwise
            required under Japanese law, unanimous agreement is required for
            valid action to be taken by the Board of Directors.

      (vii) At any meeting of the Board of Directors, each Director may exercise
            his vote by proxy; provided, that such proxy shall submit to the
            Company, prior to the relevant meeting, a power of attorney duly
            signed by the Director and/or other document establishing its power
            of representation; and provided, further, that the conferment of the
            power of proxy for one meeting of the Board of Directors shall not
            be deemed to be a conferment of the power of proxy for any
            subsequent meeting of the Board of Directors.

     (viii) The quorum necessary for any meeting of the Board of Directors
            shall be those Directors entitled to cast all of the votes held by
            the members of the Board of Directors. A quorum shall be deemed not
            to be present at any meeting for which notice was not properly given
            under Section 5.1(c) (Meetings, Notices, etc.), unless the Director
            or Directors as to whom such notice was not properly given attend
            such meeting without protesting the lack of notice or duly execute
            and deliver a written waiver of notice or a written consent to the
            holding of such meeting.

(c)   Meetings, Notice, etc. Meetings of the Board of Directors shall be held at
      such location or locations as may be selected by the Board of Directors
      from time to time.

      (i)   Regular meetings of the Board of Directors shall be held on such
            dates and at such times as shall be determined by the Board of
            Directors and shall be held at least on a quarterly basis, unless
            otherwise agreed by the Directors.

                                       10



      (ii)  Notice of any regular meeting or special meeting pursuant to Section
            5.1(c)(iii) shall be given to each Director at least ten (10)
            Business Days prior to such meeting in the case of a meeting in
            person or at least five (5) Business Days prior to such meeting in
            the case of a meeting by conference telephone or similar
            communications equipment pursuant to Section 5.1(c)(vii), which
            notice shall state the purpose or purposes for which such meeting is
            being called and include any supporting documentation relating to
            any action to be taken at such meeting.

      (iii) Special meetings of the Board of Directors may be called by any
            Director by notice given in accordance with the notice requirements
            set forth in Section 5.1(c)(ii); provided that the Directors
            appointed by the Unitholder that is not represented by the Director
            calling such special meeting shall be entitled to select a
            convenient location for the meeting and to suggest an alternative
            time or times if the designated time is not convenient for them. No
            action may be taken and no business may be transacted at such
            special meeting which is not identified in such notice unless (A)
            such action or business is incidental to the action or business for
            which the special meeting is called or (B) such action or business
            does not materially adversely affect any Unitholder or the Company.

      (iv)  Each Unitholder may invite a reasonable number of observers to all
            meetings of the Board of Directors.

      (v)   The minutes of each meeting of the Board of Directors shall be
            delivered to all Directors within twenty (20) calendar days after
            such meeting. Material to be presented at a Board of Directors
            meeting shall be delivered to all Directors ten (10) Business Days
            prior to such meeting if feasible in light of the circumstances
            giving rise to the need for such meeting, or in any event a minimum
            of five (5) Business Days prior to such meeting.

      (vi)  The actions taken by the Board of Directors at any meeting, however
            called and noticed, shall be as valid as though taken at a meeting
            duly held after regular call and notice if (but not until), either
            before, at or after the meeting, each Director as to whom such
            meeting was improperly held duly executes and delivers a written
            waiver of notice or a written consent to the holding of such
            meeting; provided, however, any Director who is present at a meeting
            and does not protest the failure of notice shall be deemed to have
            received adequate notice thereof. A vote of the Board of Directors
            may be taken only (A) at a meeting of the members thereof duly
            called and held or (B) without a meeting by the execution by the
            Directors eligible to cast all the votes on the Board of Directors
            of a consent setting forth the action so taken, and identified as a
            unanimous written consent of the Directors.

      (vii) Upon the consent of all Directors, a meeting of the Board of
            Directors may be held by conference telephone or similar
            communications equipment by means of which all Directors
            participating in the meeting can be heard by all other participants;
            provided that such communications equipment continues to be
            operational throughout the meeting. Any Director may elect to
            participate in a

                                       11



            meeting by conference telephone or similar communications equipment
            upon sufficient advance notice to permit arrangements therefor to be
            made.

     (viii) At each meeting, the Board of Directors shall consider (A) any of
            the items set forth in Section 5.1(d) (Matters Requiring the
            Approval of the Board of Directors) that may require the Board of
            Directors' attention, (B) any items added to the Board of Directors'
            agenda for discussion by any Unitholder and (C) such other matters
            as the Board of Directors decides to review; provided, however, that
            the Directors shall not be required to vote or take other action
            (other than carrying on discussions) on matters that were not placed
            on the meeting agenda at least five (5) Business Days in advance of
            the time set for the meeting unless such action or business is
            incidental to the action or business which was otherwise properly on
            the agenda and considered at such meeting.

      (ix)  The Board of Directors shall, from time to time, elect one of its
            members to preside at its meetings. The Board of Directors may
            establish reasonable rules and regulations to (A) require officers
            to call meetings and perform other administrative duties, (B) limit
            the number and participation of observers, if any, and require them
            to observe confidentiality obligations and (C) otherwise provide for
            the keeping and distribution of minutes and other internal Board of
            Directors governance matters not inconsistent with the terms of this
            Agreement.

      (x)   Subject to the Japan Act, the Board of Directors shall have the
            authority to establish subcommittees and to delegate to any such
            subcommittee any of the Board of Directors' responsibilities;
            provided, however, the power of the Board of Directors to approve
            the matters set forth in Section 5.1(d) (Matters Requiring the
            Approval of the Board of Directors) may not be delegated to a
            subcommittee.

(d)   Matters Requiring the Approval of the Board of Directors. Notwithstanding
      any provision of the Articles to the contrary, no action may be taken by
      or on behalf of the Company in connection with any of the following
      matters without the unanimous written approval of the Board of Directors:

      (i)   any sale, lease, pledge, assignment or other disposition of assets
            of the Company in an amount (in terms of consideration to be
            received by the Company) in excess of Y1,000,000 in one
            transaction or a series of related transactions, other than as set
            forth in the most recently approved Business Plan;

      (ii)  the approval of any transaction or agreement between the Company and
            any Unitholder or any of their respective Affiliates (other than
            transactions or agreements expressly provided for or authorized by
            an FP Operative Document or the most recently approved Business
            Plan) or any amendment thereto (including the waiver of any material
            term thereof), other than any such transaction, agreement or
            amendment that contains generally available, arm's length commercial
            terms and is in an amount (in terms of payments to be made or the
            value of services or products to be provided or delivered) less
            than Y1,000,000 for any single transaction or agreement or for
            substantially identical transactions

                                       12



            within a 24 month period (or a waiver that does not materially
            adversely affect the rights and benefits of the Company), other than
            as set forth in the most recently approved Business Plan;

      (iii) the purchase, lease, license or other acquisition of (A) personal
            property or services or (B) any list of capital equipment approved
            by the Unitholders, in each case in an amount (in terms of payments
            to be made or the value of services of products to be provided or
            delivered) exceeding Y1,000,000 in any one transaction or a series
            of related transactions, other than as provided for in the most
            recently approved Business Plan;

      (iv)  the selection of attorneys, accountants, auditors and financial
            advisors;

      (v)   the adoption of accounting and tax policies, procedures and
            principles;

      (vi)  incurring any Indebtedness;

      (vii) the hiring or termination of any employees referenced in Section
            5.2(a) (Officers; Employees) who are not FP Secondees, if any;

     (viii) the adoption of or changes to the forms of confidentiality,
            assignment or disclosure of intellectual property or employment
            agreements to be entered into between the Company and its employees;

      (ix)  the adoption of or changes to any employee benefit plan, including
            any incentive compensation plan;

      (x)   the amount and timing of any distributions;

      (xi)  the commencement or settlement of litigation by or against the
            Company;

      (xii) the purchase, sale or lease (as lessor or lessee) of any real
            property;

     (xiii) any acquisition of securities or any other ownership interest in
            any entity;

      (xiv) the making of any public announcements by or on behalf of the
            Company; provided, that in any case any such public announcements
            must otherwise comply with the requirements of Section 5.2 (Public
            Announcements) of the Master Agreement, if applicable;

      (xv)  the entry into or amendment of any collective bargaining
            arrangements or the waiver of any material provision or requirement
            thereof;

      (xvi) the approval of a proposed Business Plan, or the amendment to the
            most recently approved Business Plan, in each case including the
            operating budget contained therein;

                                       13



     (xvii) the incurrence of capital expenditures in excess of those provided
            for in the most recently approved Business Plan or the commitment of
            the Company to any development projects other than as provided for
            in the most recently approved Business Plan;

    (xviii) subject to Section 5.1(c)(x), the establishment of any
            subcommittees or delegation of authority of the Board of Directors;

      (xix) the authorization and approval of any filing with, public comments
            to, or negotiation/discussion with, any Governmental Authority
            (excluding regular operating filings and other routine
            administrative matters);

      (xx)  the approval of Unique Activities to be performed by the Company at
            the request of any Unitholder, in connection with which the Board of
            Directors shall be satisfied that such Unitholder has reached
            agreement with the Company as to the payment by such Unitholder of
            all costs incurred in connection with such Unique Activities and
            that adequate provision has been made by such Unitholder for the
            funding of any additional required capital expenditures required in
            conjunction with such Unique Activities;

      (xxi) the decision of the Company to negotiate external sources of
            additional wafer fabrication capacity for NAND Flash Memory
            Products;

     (xxii) any dispute referred to the Board of Directors by the Y3 Operating
            Committee pursuant to Section 5.3(b); and

    (xxiii) such other matters as the Board of Directors decides, in its sole
            discretion, to review.

5.2   Officers; Employees.

(a)   Unless otherwise mutually agreed by the Unitholders, the Directors of the
      Company with specific titles shall be designated as: the Representative
      Director/President/Chief Executive Officer ("President") and the
      Representative Director/Executive Vice President ("Executive Vice
      President"). The President and Executive Vice President shall be elected
      by the Board of Directors and serve three successive one-year terms, with
      the first such set of terms ending at complete adjournment of the annual
      meeting of Unitholders for the fiscal year last to end within one (1) year
      after his or her assumption of the officership. Toshiba shall have the
      right to nominate the first President and SanDisk shall have the right to
      nominate the first Executive Vice President, and then the Unitholders will
      then alternate such nominating rights for each three year term for such
      positions. Each nominee for the President and for the Executive Vice
      President shall be subject to the consent of the non-nominating
      Unitholder, which consent shall not unreasonably be withheld. In addition
      to the President and Executive Vice President, the Board of Directors may
      appoint such other officers from time to time as it deems necessary or
      advisable in the conduct of the business and affairs of the Company. Any
      individual may hold more than one office.

                                       14



(b)   The President shall have the authority to retain other senior management
      of the Company, subject to the prior approval of the Board of Directors.

(c)   The Company shall have agreements with and policies applicable to each of
      its officers, employees and consultants who are not FP Secondees, in forms
      acceptable to each Unitholder, and shall also have appropriate
      arrangements with its FP Secondees, in each case with respect to (i)
      protection of confidential information, (ii) patent and copyright
      assignment, (iii) invention disclosure (including improvements and
      advances) and assignments thereof and (iv) in respect of certain employees
      who are not FP Secondees, non-competition.

5.3   Y3 Representatives; Y3 Operating Committee.

(a)   The Company shall have an Operating Committee for Y3 Facility operations
      (the "Y3 Operating Committee") consisting of the general manager of Y3
      Facility, who Toshiba shall cause to be the deputy general manager of the
      Yokkaichi Facility (the "Toshiba Representative"), and a SanDisk
      representative, who shall represent SanDisk on a day-to-day basis at the
      Y3 Facility (the "SanDisk Representative"). SanDisk and Toshiba shall each
      have the sole right to appoint the SanDisk Representative and the Toshiba
      Representative, respectively; provided that each Unitholder shall notify
      the other Unitholder in advance of any replacement of its representative.
      If a Unitholder requests in good faith that the other Unitholder's
      representative be replaced with another person from the other Unitholder's
      organization, the other Unitholder shall consider and discuss in good
      faith with the requesting Unitholder such request, provided that such
      replacement, if any, shall be determined solely by such other Unitholder.
      SanDisk shall pay for all expenses of the SanDisk Representative related
      to his or her activities at the Y3 Facility, including salaries and
      traveling expenses. The Company shall pay for all expenses of the Toshiba
      Representative related to his or her activities in connection with the Y3
      Operating Committee or otherwise at the Y3 Facility, subject to anything
      to the contrary in the accounting standards and methodologies in the
      Master Agreement.

(b)   The Y3 Operating Committee shall work together and endeavor to make the Y3
      Facility the most advanced and competitive memory fabrication facility in
      the world. The Y3 Operating Committee shall have the authority to
      determine all matters concerning the day-to-day operations of the Company
      and the Y3 Facility, subject to those matters reserved herein to the Board
      of Directors or the Unitholders as well as to the requirements of this
      Agreement, the Articles and the Japan Act. The Y3 Operating Committee
      shall communicate on a day-to-day basis with respect to the status of Y3
      Facility operations and any other issues that may arise, and shall meet in
      person no less than two (2) times per week, or such other times and
      frequency as may be agreed upon by all members of such committee. If the
      members of the Y3 Operating Committee are unable to agree on any issue
      after thirty (30) days, they shall submit such matter together with their
      respective recommendations to the Board of Directors, which shall endeavor
      to immediately resolve the issue. If the Board of Directors is unable to
      agree on any such issue after ten (10) days, such issue shall be submitted
      to the Management Committee for final resolution.

                                       15



(c)   The Y3 Operating Committee shall hold a monthly review meeting in English
      at the Yokkaichi Facility on [***] of each calendar month, unless
      otherwise agreed by the Unitholders or the Y3 Operating Committee. The Y3
      Operating Committee shall prepare and distribute to each Unitholder (at
      least three Business Days in advance of the monthly review meetings)
      monthly reports in English with respect to the engineering activities,
      operations and financial affairs of the Company and the Y3 Facility.

(d)   Upon the request of either Unitholder, the Y3 Operating Committee shall
      provide the Unitholders with (i) any management or operation reports of
      the Company related to the Y3 Facility (which neither Unitholder shall
      have an obligation to translate) and (ii) simultaneously in Japanese and
      English, those management and operating reports identified on Schedule 5.3
      as mutually agreed upon from time to time by the Parties. Upon reasonable
      request from SanDisk, Toshiba employees shall explain such reports to
      SanDisk's employees and respond to questions from SanDisk's employees;
      provided, however that SanDisk acknowledges and agrees that Toshiba shall
      not be responsible for SanDisk's failure to understand any such reports.

5.4   Insurance. The Company shall maintain insurance against such liabilities
      and other risks associated with the conduct by the Company of its business
      and in such amounts and against such risks as agreed by the Unitholders,
      and in any event as is generally maintained by companies engaged in a
      business similar to that of the Company.

5.5   Records. The Company shall maintain the following records at its principal
      office:

(a)   a current list of the full name set forth in alphabetical order and last
      known business address of each Unitholder and Director;

(b)   a copy of the Articles, and all articles of amendment thereto;

(c)   a copy of this Agreement and all amendments hereto;

(d)   a copy of all financial statements of the Company for the three most
      recent Fiscal Years;

(e)   a copy of the Company's income tax or information returns and reports, if
      any, for the three most recent years;

(f)   a copy of all indentures, loan agreements, lease agreements, guarantees,
      security agreements, promissory notes, licensing or other intellectual
      property agreements, agreements that relate to the payment or receipt by
      the Company of amounts in excess of Y5,000,000 or that are not
      terminable by the Company upon ninety (90) days notice, documents, if any,
      evidencing employee compensation arrangements, employee pension or other
      benefit arrangements, and similar documents and instruments executed and
      delivered by the Company;

(g)   a list of all contributions made to the Company by the Unitholders; and

[***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

                                       16



(h)   a record of all distributions by the Company to each Unitholder.

The Unitholders and/or the Directors and/or their respective designees (which
shall be limited to its employees or professional advisers subject to
appropriate confidentiality obligations) shall have reasonable access to the
records during normal business hours upon reasonable request. Copies of records
shall be made available and delivered to the Unitholders and/or the Directors
promptly after reasonable request for same, provided the requesting party pays
for copy and delivery charges.

6.    CAPITAL CONTRIBUTIONS; DISTRIBUTIONS

6.1   Capital Contributions.

(a)   The Unitholders shall be deemed to have made Capital Contributions to the
      Company in the amounts set forth opposite their respective names on
      Schedule 6.1.

(b)   Except as provided in Section 2.1(b), no Unitholder shall be obligated to
      make any additional Capital Contributions to the Company, unless otherwise
      mutually agreed upon by the Unitholders in writing, in which case such
      additional Capital Contributions shall be made in proportion to the
      Unitholders' respective Percentages as of the date of such additional
      Capital Contribution.

6.2   Distributions.

(a)   General. Notwithstanding any provision of the Articles to the contrary,
      and subject to Section 11.8 (Liquidation Proceeds), unless otherwise
      agreed by the Unitholders, no distributions of cash (or in the case of
      Section 11.8, other property) shall be made by the Company to the
      Unitholders for a period of three (3) years from the date of this
      Agreement, and thereafter all distributions of cash (or, in the case of
      Section 11.8, other property) by the Company to the Unitholders shall be
      made in Japanese Yen at the times and in the amounts determined by the
      Board of Directors. Except as provided in Section 11.8, each distribution
      to the Unitholders shall be made on a pro rata basis based upon the
      respective Percentages of the Unitholders as of the date of such
      distribution.

(b)   Distribution for Taxes. Notwithstanding Section 6.2(a), subject to the
      Japan Act and other applicable law, the Company shall make, in respect of
      each Fiscal Year in which SanDisk must recognize taxable income of the
      Company in SanDisk's US federal, state and local income and franchise tax
      returns, a distribution to SanDisk to the extent necessary to meet
      SanDisk's aggregate US tax liability with respect to such taxable income,
      with such liability calculated at the highest US, state and local
      corporate tax rates as may be then applicable to SanDisk. SanDisk will
      make a request upon the Company for such distribution as soon as is
      practicable after the filing of SanDisk's applicable US tax returns.
      Following receipt of such request, the Company shall make the requested
      distribution on the next date on which the Company is permitted to make
      distributions pursuant to the Japan Act. Simultaneously therewith, the
      Company shall also make a distribution to Toshiba in an amount equal to
      the amount of the per Unit distribution made to SanDisk pursuant to this
      Section 6.2(b). Any such prior distributions shall be taken into account
      upon any purchase and sale of Units under Section 10 (Certain

                                       17



      Agreements of the Unitholders) or dissolution of the Company under Section
      11 (Dissolution) hereof. If necessary, the Board of Directors shall
      consider capital reductions to the extent that any such capital reduction
      will not adversely affect the Y3 Facility's operations.

6.3   No Interest. No interest shall be payable to the Unitholders on their
      Capital Contributions or otherwise in respect of the capital of the
      Company.

6.4   Return of Capital Contributions. Except as expressly provided herein, no
      Unitholder shall be entitled to the return of any part of such
      Unitholder's Capital Contributions.

7.    ADDITIONAL CONTRIBUTIONS

      No Unitholder shall be obligated under this Agreement or the Articles to
      contribute any additional amounts to the Company or otherwise to be liable
      for the debts and obligations of the Company.

8.    ACCOUNTING AND TAXATION

8.1   Financial Accounting Conventions.

(a)   The Company shall adopt and follow Japanese GAAP.

(b)   Notwithstanding anything to the contrary in Appendix A, the first Fiscal
      Year shall begin on April 1, 2004 and end on March 31, 2005.

(c)   The Company shall in principle (but subject to applicable Law) utilize a
      five-year straight line depreciation method for manufacturing equipment.

8.2   Maintenance of Books of Account. The Company shall keep or cause to be
      kept at its principal office, or such other location as the Board of
      Directors shall designate, full and complete books of account. The books
      of account shall be maintained in a manner that provides sufficient
      assurance that transactions of the Company are recorded so as to comply
      with all applicable laws and to permit (a) the preparation of the
      Company's consolidated financial statements in accordance with Japanese
      GAAP and (b) the Unitholders to account for their interest in the Company
      in accordance with Japanese GAAP.

8.3   Financial Statements.

(a)   Annual Statements. As soon as practicable following the end of each Fiscal
      Year (and in any event not later than fifty-two (52) days after the end of
      such Fiscal Year), the Company shall prepare and deliver to each
      Unitholder and each Director, audited consolidated and consolidating
      balance sheets of the Company as of the end of such Fiscal Year and the
      related audited consolidated and consolidating statements of operations,
      the Unitholders' capital accounts and cash flows of the Company for such
      Fiscal Year (or similar statements if such statements change as the result
      of changes in Japanese GAAP), together with appropriate notes to such
      consolidated financial

                                       18



      statements, and in each case setting forth in comparative form the
      corresponding figures for the preceding Fiscal Year and for the budget for
      the Fiscal Year just completed. Such financial statements shall be
      accompanied by (i) the report of the Accountants to the effect that such
      financial statements (except for the comparison to the budget) have been
      prepared in conformity with Japanese GAAP (except as otherwise specified
      in such report) and that the audit of such financial statements has been
      performed in accordance with Japanese GAAP and (ii) a report as to all
      transactions (including the nature, type and amount) between the Company
      and each Unitholder and their respective Affiliates. The Company shall
      conduct its business such that the report of the Accountants shall not
      contain any qualifications as to the scope of the audit or with respect to
      the Company's compliance with Japanese GAAP, except for changes in methods
      of accounting in which such Accountants concur and except that the
      foregoing shall not be deemed to obligate any Unitholder to contribute any
      capital to the Company. The Company shall also provide SanDisk with an
      English version of such report, which shall contain sufficient data to
      enable SanDisk to prepare a reconciliation of the Company's financial
      reports from Japanese GAAP to United States GAAP. The Company shall
      deliver to SanDisk, at SanDisk's request and expense, any other financial
      information related to the Company that is reasonably requested by SanDisk
      for US Federal, state, and local income or franchise tax purposes.

(b)   Quarterly Statements.

      (i)   As soon as practicable following the end of each Fiscal Quarter (and
            in any event not later than ten (10) days after the end of such
            Fiscal Quarter), the Company shall prepare and deliver to each
            Unitholder and each Director unaudited consolidated and
            consolidating balance sheets of the Company as of the end of such
            Fiscal Quarter and the related unaudited consolidated and
            consolidating statements of operations, the Unitholders' capital
            accounts and cash flows of the Company for such Fiscal Quarter and
            for the Fiscal Year to date (or similar statements if such
            statements change as the result of changes in Japanese GAAP), in
            each case setting forth in comparative form the corresponding
            figures for the preceding Fiscal Quarter, for the corresponding
            Fiscal Quarter of the preceding Fiscal Year and for the budget for
            the Fiscal Quarter just completed and for the Fiscal Year to date.

      (ii)  The financial statements for such Fiscal Quarter shall be
            accompanied by a certificate of the principal accounting or
            financial officer of the Company to the effect that such financial
            statements have been prepared under such officer's supervision and
            that, although such financial statements do not contain the
            footnotes and other disclosures required to be presented in interim
            financial statements by Japanese GAAP, such financial statements, in
            such officer's judgment, fairly present the financial condition and
            results of operations of the Company as of the date and for the
            periods indicated, subject to normal recurring year-end audit
            adjustments. The Company shall deliver to SanDisk, at SanDisk's
            request and expense, any other financial information related to the
            Company that is reasonably requested by SanDisk for US financial
            reporting or Federal, state, and local income or franchise tax
            purposes.

                                       19



(c)   The Company shall obtain a professional tax audit from a qualified
      accountant complying with Japanese GAAP by May 22 of each year (including
      an English translation thereof). As part of its engagement of its
      auditors, the Company shall cause its auditors to provide such English
      language financial statements, audit reports, US GAAP reconciliations and
      consents as are required (or reasonably requested by SanDisk) in
      connection with SanDisk's filings with the United States Securities and
      Exchange Commission; provided that SanDisk shall pay for all the costs
      relating to such auditors' work. SanDisk may also request that the Company
      provide SanDisk with "comfort letters" in the manner customary for
      Japanese auditors in connection with public offerings in the United
      States, at SanDisk's own expense.

(d)   Monthly Reports. Each month, the Company shall prepare and deliver to each
      Unitholder and each Director the reports and other information set forth
      on Schedule 8.3. Such reports and other information will become available
      at the respective times set forth on Schedule 8.3.

(e)   Business Plan. Subject to Sections 10.3(c), (e) and (f), and provided that
      the most recently approved Business Plan does not provide for the next
      Fiscal Year, the Company shall, not later than [***] prior to the
      commencement of each Fiscal Year, deliver to each Unitholder a copy of the
      Business Plan, including the Company's monthly budgets, for the upcoming
      Fiscal Year, as approved by the Board of Directors.

(f)   Legal Proceedings. The Company shall promptly inform each Unitholder and
      each Director with regard to litigation, governmental investigations,
      material government notices and threatened legal proceedings.

8.4   Other Reports and Inspection. The Company shall furnish promptly to each
      Unitholder such other reports, financial data and information relating to
      the Company as such Unitholder may reasonably request and shall require
      the Accountants to provide to each Unitholder copies of any document
      related to the Company in the possession of the Accountants as such
      Unitholder may reasonably request. The Company shall, upon reasonable
      prior notice and during normal business hours, make available to each
      Unitholder and their respective professional advisors, from time to time
      as requested by such Unitholder, all properties, assets, books of account,
      corporate records, contracts and documentation, if any, relating to
      employee benefits of the Company, and any other material requested by such
      Unitholder for inspection and, in the case of books of account, corporate
      records, contracts and documentation, if any, relating to employee
      benefits, copying, and shall use reasonable efforts to make available to
      such Unitholder the Accountants and the key employees of the Company for
      interviews to verify any information furnished or to enable such
      Unitholder otherwise to review the Company and its operations. The Company
      may condition such availability upon the entering into of reasonable and
      appropriate confidentiality agreements. Notwithstanding the foregoing, the
      Company will not make available to any Unitholder information provided to
      the Company on a confidential basis by any other Unitholder without the
      consent of such other Unitholder.

[***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

                                       20



8.5   Characterization. For the purposes of US federal, state and local income
      and franchise taxation, the Unitholders intend that the Company shall be
      treated as a partnership at all times, and shall take all actions,
      including the execution of other documents required to be filed by the
      Code, as may be reasonably required to qualify for and receive treatment
      as a disregarded entity and as a partnership, as the case may be, for such
      US tax purposes. SanDisk shall bear all costs and expenses incurred by the
      Company or any Unitholder in connection with any action required to be
      taken pursuant to this Section. Notwithstanding the foregoing, the Company
      shall have no obligation to take any action under this Section that would
      have an adverse effect on it or any Unitholder under any Japanese
      Governmental Rule.

8.6   Deposit of Funds. All funds of the Company and its Subsidiaries not
      otherwise employed shall be deposited from time to time to its credit in
      such banks, trust companies or other depositories, or invested in such
      other investments held as cash equivalents, as the Board of Directors
      shall authorize. The funds of the Company and its Subsidiaries shall not
      be commingled with the funds of any Unitholder or any of their respective
      Affiliates.

9.    UNITS OF CONTRIBUTION; DISPOSITION OF UNITS

9.1   Restrictions on Transfer of Units.

(a)   No Unitholder (nor any permitted transferees of any Unitholder) may
      Transfer any interest in the Company, including any of such Unitholder's
      Units, to any Person, except by a Change of Control; provided, that any
      Unitholder may Transfer all of its interest in the Company, including all
      of its Units, to any one (1) of their respective Affiliates, with the
      prior written consent of every other Unitholder, which consent shall not
      be unreasonably withheld; and provided, further, that (i) the transferee
      agrees in writing to become a party hereto and assumes all the obligations
      of the transferring Unitholder hereunder and under each other FP Operative
      Document to which the transferring Unitholder is a party (except to the
      extent the express terms of the Patent Indemnification Agreement condition
      its transferability on the consent of the non-transferring Unitholder and
      such Unitholder has not consented to Transfer thereof), and (ii)
      immediately after giving effect to such Transfer, no Event of Default or
      an event or condition that with the giving of notice or lapse of time or
      both would constitute an Event of Default with respect to the transferee
      Unitholder shall exist. Following the effectiveness of any such Transfer,
      the transferring Unitholder shall no longer have the transferred right,
      title or interest in the Company or any rights under this Agreement and
      the transferee shall be substituted as a Unitholder for all purposes of
      this Agreement. The transferring Unitholder shall, however, remain
      responsible for all obligations under this Agreement and the other FP
      Operative Documents for any transferee which is an Affiliate of the
      transferring Unitholder and shall not be released or discharged from any
      existing liability or obligation to any Person. Any subsequent Transfer of
      an ownership interest in such Affiliate by the transferring Unitholder
      shall be deemed to constitute a Transfer of Units requiring compliance
      with this Section 9.1.

                                       21



(b)   If a Unitholder Transfers its entire interest in the Company pursuant to
      Section 9.1(a), the transferee shall succeed to all the rights and
      obligations of such Unitholder under this Agreement.

(c)   Any Unitholder may agree to pay amounts equal to distributions received by
      such Unitholder from the Company to a third party in its sole discretion
      pursuant to a Permissible Assignment Agreement. "Permissible Assignment
      Agreement" means an agreement between a Unitholder and another Person (the
      "Permissible Assignee") which:

      (i)   provides for the grant by such Unitholder to the Permissible
            Assignee of the right to receive amounts equal to distributions
            received by such Unitholder from the Company pursuant to Section 6
            or 11 of this Agreement, but does not give the Permissible Assignee
            any Units or any other rights whatsoever with respect to the
            Company;

      (ii)  provides that under no circumstances (including any Bankruptcy Event
            in respect of such Unitholder) may any claim be made by the
            Permissible Assignee against the Company or any such Unitholder or
            any Affiliate of any such Unitholder or any of their respective
            assets, under or in connection with such agreement, even if such
            Unitholder defaults in performance thereunder;

      (iii) provides that the rights of the Permissible Assignee under such
            agreement may not be transferred without the prior written consent
            of each Unitholder and that any such Transfer without such consents
            shall be null and void;

      (iv)  may not be amended, nor any provision thereof waived, in a manner
            that would cause it not to be a Permissible Assignment Agreement,
            without the prior written consent of the non-assigning Unitholder;

      (v)   provides that the assigning Unitholder is authorized to Transfer its
            entire interest in the Company pursuant to Section 9.1(a) free and
            clear of any interest of the Permissible Assignee and without any
            liability on the part of the transferee thereunder to the
            Permissible Assignee; and

      (vi)  contains an express acknowledgment by the Permissible Assignee, for
            the benefit of the non-assigning Unitholder and the Company, to the
            effect of clauses (i)-(v) above.

      The assigning Unitholder shall ensure that any payment due to a
      Permissible Assignee pursuant to or in connection with a Permissible
      Assignment Agreement shall be made in full to such Permissible Assignee
      when due.

9.2   Admission of New Unitholders. No Person shall have the right to become a
      Unitholder unless and until all the following conditions are satisfied:

(a)   except in the case of a Transfer of all of a Unitholder's Units to an
      Affiliate of such Unitholder in accordance with Section 9.1(a)
      (Restrictions on Transfer of Units), such Person, the terms and conditions
      of such Person's admission as a Unitholder and the

                                       22



      rights appurtenant to the Units to be issued or Transferred, as
      applicable, to such Person are approved by all existing Unitholders and,
      if applicable, the creation of any new class or group of Units in the
      Company having different rights, powers and duties is reflected in
      amendments to the Articles and to this Agreement;

(b)   such Person executes a counterpart of this Agreement and such other
      instrument or instruments as the Company and a non-transferring Unitholder
      may reasonably deem appropriate to affirm that the representations and
      warranties contained in the Master Agreement are true and correct with
      respect to such Person and that such Person agrees to be bound as a
      Unitholder by this Agreement and all of the covenants and agreements
      herein; and

(c)   if requested by the Company, an opinion of counsel, a purchaser
      representation letter or other appropriate documentation is furnished to
      the Company establishing that the issuance or Transfer, as applicable, of
      Units to the new Unitholder will comply with the Japan Act.

      Except to the extent required by law, the Company shall have no obligation
      to recognize or to furnish information or make distributions to any new
      Unitholder or any transferee of a Unitholder who does not become a
      Unitholder in accordance with Section 9.1 (Restrictions on Transfer of
      Units) or this Section 9.2.

9.3   Withdrawal Prohibited. Except as otherwise expressly permitted by this
      Agreement, (i) no Unitholder may withdraw from the Company and (ii) no
      Unitholder may effect or cause a termination or dissolution of the Company
      without the prior written consent of all other Unitholders (which consent
      may be withheld in such other Unitholder's sole discretion).

9.4   Purchase of Additional Interest. At any time during the term of this
      Agreement and so long as SanDisk is a Unitholder, SanDisk shall have the
      right to purchase from Toshiba that number of Units which is equal to 0.1%
      of the total number of Units then issued and outstanding in the event that
      (i) Toshiba's patent umbrella does not adequately protect the Company or
      (ii) dissolution of the Company is commenced pursuant to Section 11
      hereof. The purchase price of such Units shall equal 0.1% of the Company's
      Net Book Value as of the date of such transaction.

10.   CERTAIN AGREEMENTS OF THE UNITHOLDERS

10.1  Taxes and Charges; Governmental Rules. Each Unitholder shall (a) promptly
      pay all applicable Taxes and other governmental charges imposed against
      such Unitholder except to the extent any such Taxes or other charges are
      being contested in good faith by appropriate proceedings and (b) comply
      with all applicable Governmental Rules, in each case except to the extent
      that nonpayment or noncompliance will not have a material adverse effect
      on the Company.

10.2  Further Assurances. Following the Closing, each Unitholder shall, and
      shall cause its Affiliates and the Company to take all reasonable actions
      necessary or appropriate to, effectuate the transactions contemplated by
      this Agreement, and to obtain (and cooperate

                                       23



      with the other Unitholder in obtaining) any Governmental Action or third
      party consent required to be obtained or made by it in connection with the
      transactions contemplated by this Agreement; provided, that no Burdensome
      Condition shall be made to exist with respect to such Unitholder or any of
      its Affiliates in connection therewith.

10.3  Dispute Resolution; Deadlock.

(a)   The Unitholders shall endeavor to settle, through their respective
      designees to the Board of Directors, any disputes which may arise between
      them, including without limitation, failure by the Board of Directors to
      reach agreement (or failure to take a vote) on any matter requiring Board
      of Directors approval pursuant to Section 5.1(d) (Matters Requiring the
      Approval of the Board of Directors). The Unitholders shall attempt to
      resolve the issue or proposed action in question, to the extent
      practicable, in a manner consistent with the Company's most recently
      approved Business Plan, unless the issue in dispute is the adoption of a
      new Business Plan, in which case the provisions of Sections 10.3(c), (e)
      and (f) shall apply.

(b)   If (i) the Unitholders are unable to agree on any matter requiring the
      approval of the Unitholders pursuant to Section 4.1(a) (Matters Requiring
      the Approval of the Unitholders), (ii) the Board of Directors is unable to
      agree on any matter requiring the approval of the Board of Directors
      pursuant to Section 5.1(d) (Matters Requiring the Approval of the Board of
      Directors) (other than the approval of any Business Plan, with respect to
      which the failure to agree shall be governed by Sections 10.3(c), (e) and
      (f)) or (iii) the Unitholders or the Board of Directors are otherwise
      unable to resolve a dispute on any other item (other than the approval of
      any Business Plan, with respect to which the failure to agree shall be
      governed by Sections 10.3(c), (e) and (f)), then any Unitholder may bring
      the matter to the attention of the General Manager Memory Division,
      Semiconductor Company of Toshiba, and the Chief Operating Officer of
      SanDisk (the "Designated Individuals"), who will attempt to find a
      resolution. If the matter has not been resolved within thirty (30) days of
      referral to the Designated Individuals, the matter will be referred to the
      Management Committee for a final decision, which decision will be final
      and binding on the Company and the Unitholders with respect to any matter
      specified in Sections 10.3(b)(i) and (ii) above. If an agreement is
      reached by the Management Committee, the mutually agreed resolution shall
      be implemented by the Company. Should no solution be agreed upon within
      thirty (30) days after submission of the matter to the Management
      Committee with respect to the matters specified in (iii) above, such
      matter shall be submitted to arbitration in accordance with Section 2.5 of
      the Appendix A. Should no solution be agreed upon within sixty (60) days
      after submission of the matter to the Management Committee with respect to
      the matters specified in Sections 10.3(b)(i) and (ii) above, then the
      action for which approval was requested will not occur, unless it is
      already included in the most recently approved Business Plan.

(c)   Except as provided below, if by [***] of any calendar year during the term
      of this Agreement, commencing [***], the Board of Directors and the
      Unitholders have not approved and agreed upon a Business Plan for the
      upcoming Fiscal Year, then any Unitholder may refer the dispute to the
      Management Committee for a decision, which

[***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

                                       24



      decision shall be final and binding on the Company and the Unitholders. If
      a decision is reached by agreement of the Management Committee, such
      decision shall be implemented by the Company. Should no decision be
      reached within ninety (90) days after submission of the matter to the
      Management Committee, and unless the Unitholders have agreed to continue
      operations under the most recently approved Business Plan until a new
      Business Plan is approved, then within ten (10) Business Days thereafter
      any Unitholder may elect by written notice to all other Unitholders to
      declare a deadlock ("Deadlock"), except with respect to any issue where
      the Master Agreement expressly prohibits declaration of a Deadlock.

(d)   If demand for both Unitholder's NAND Flash Memory Products is
      significantly below expectations, they shall address the matter as
      contemplated in Section 6.5(b)(ii) of the Master Agreement.

(e)   Within thirty (30) days after a Unitholder has notified the other
      Unitholder of a Deadlock, either Unitholder (the "Initiating Unitholder")
      may submit to the other Unitholder (the "Responding Unitholder") a written
      irrevocable notice (the "Deadlock Dissolution Notice") to the effect that
      the Initiating Unitholder offers to sell to the Responding Unitholder or
      its designee the Initiating Unitholder's Units for a cash payment, by wire
      transfer of immediately available Japanese Yen, in an amount equal to the
      [***] as of the date of such transaction multiplied by the Initiating
      Unitholder's Percentage as of such date.

(f)   The Responding Unitholder may accept such offer by written response to the
      Initiating Unitholder within forty-five (45) days of receipt of the
      Deadlock Dissolution Notice indicating that the Responding Unitholder
      elects to purchase the Units of the Initiating Unitholder. If the
      Responding Unitholder declines to exercise its right to purchase the Units
      of the Initiating Unitholder pursuant to this Section 10.3 or fails to
      respond to such Deadlock Dissolution Notice (or if both Unitholders submit
      Deadlock Dissolution Notices), the Company shall be dissolved pursuant to
      Section 11.1(d) (Events of Dissolution), at the end of a one-year period
      for the wind-down of operations commencing with the receipt of the
      Deadlock Dissolution Notice by the Responding Unitholder. During such
      one-year period, the Company's business shall be conducted in accordance
      with the most recently approved Business Plan except that additional
      capital expenditures will not be made except as required for line
      maintenance.

10.4  Remedies Upon Event of Default; Termination on Breach. If there has
      occurred and is continuing an Event of Default with respect to a
      Unitholder (upon such occurrence, such Unitholder is referred to herein as
      the "Defaulting Unitholder"), in addition to all other remedies available
      to the Company or the other Unitholder (the "Nondefaulting Unitholder"),
      whether under any of the FP Operative Documents or other agreements or by
      law, the Nondefaulting Unitholder shall have the option to take one or
      more of the following actions:

(a)   give written notice to the Defaulting Unitholder of its intention to
      acquire all of the Units of the Defaulting Unitholder for a cash payment,
      by wire transfer of immediately available Japanese Yen, in an amount equal
      to the [***] of the Company as of the date of

[***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

                                       25



      such transaction multiplied by the Defaulting Unitholder's Percentage as
      of such date; and/or

(b)   elect to dissolve the Company pursuant to Section 11.3 (Dissolution Upon
      Event of Default), in which case the affairs of the Company shall be wound
      up and the Company shall be dissolved in accordance with Section 11
      (Dissolution).

10.5  Mechanics of Sale.

(a)   The closing of any purchase and sale of Units pursuant to Section 10.3
      (Dispute Resolution; Deadlock), 10.4 (Remedies Upon Event of Default;
      Termination on Breach), 11.4 (Dissolution by Unilateral Option) or 11.5
      (Dissolution Upon Notice) shall take place not later than the [***]
      Business Day after notice of the purchase is given, as the case may be,
      except that such period shall be extended as necessary in order to comply
      with any Governmental Rule. The purchasing Unitholder shall pay for the
      Units being acquired by wire transfer of immediately available funds in
      Japanese Yen to an account specified by the selling Unitholder. The
      selling Unitholder shall execute all documents necessary to effect the
      conveyance of its Units, free and clear of all Liens, to the purchasing
      Unitholder. In addition, the Unitholders shall enter into an indemnity and
      release agreement, in a form reasonably satisfactory to each Unitholder,
      indemnifying and holding harmless the selling Unitholder and its
      Affiliates for liabilities or claims made after the date of the purchase
      and sale under any guarantees or other agreements supporting the
      obligations of the Company which may have been extended by the selling
      Unitholder or any of its Affiliates. The Unitholders shall also reach
      agreement on a reasonable transition plan of up to six months in
      connection with services provided to the Company by FP Secondees assigned
      to the Company by the Selling Unitholder.

(b)   If a Unitholder elects to acquire all of the Units of the other Unitholder
      pursuant to Section 10.3 (Dispute Resolution; Deadlock), 10.4 (Remedies
      Upon Event of Default; Termination on Breach), 11.4 (Dissolution by
      Unilateral Option) or 11.5 (Dissolution Upon Notice), such Unitholder
      shall be obligated to take all actions required of it to consummate the
      applicable purchase and sale on the date determined pursuant to this
      Section 10.5 (Mechanics of Sale). If any Unitholder has the right to
      purchase the Units of any other Unitholder, such Unitholder shall have the
      right to assign such right to purchase to any other Person.

11.   DISSOLUTION

11.1  Events of Dissolution. The Company shall be dissolved and shall commence
      winding up its affairs upon the first to occur of the following:

(a)   the expiration of the term of the Company pursuant to Section 2.4 (Term;
      Extension);

(b)   the agreement of the Unitholders to dissolve the Company pursuant to
      Section 11.2 (Dissolution by Agreement);

[***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

                                       26


(c)   the election of the Nondefaulting Unitholder pursuant to Section 11.3
      (Dissolution Upon Event of Default);

(d)   the first anniversary of the receipt by either Unitholder of a Deadlock
      Dissolution Notice submitted with respect to a failure of the Unitholders
      to approve and agree upon a Business Plan pursuant to Section 10.3
      (Dispute Resolution; Deadlock) if either (i) the Responding Unitholder
      declines to exercise its right to purchase the Units of the Initiating
      Unitholder or fails to respond to such Deadlock Dissolution Notice, or
      (ii) both Unitholders submit Deadlock Dissolution Notices with respect to
      such failure to agree;

(e)   the election by Toshiba to dissolve the Company pursuant to Section 11.4
      (Dissolution by Unilateral Option);

(f)   the bankruptcy, death, dissolution, expulsion or incapacity of a
      Unitholder or the occurrence of any other event which terminates the
      membership of a Unitholder in the Company ("Bankruptcy Event"); or

(g)   the election of the Notifying Party to dissolve the Company pursuant to
      Section 11.5 (Dissolution Upon Notice) unless the Notified Party elects to
      purchase the Units of the Notifying Party pursuant to Section 11.5
      (Dissolution Upon Notice).

11.2  Dissolution by Agreement. The Company may be dissolved at any time by the
      unanimous written consent of the Unitholders.

11.3  Dissolution Upon Event of Default. During the occurrence and continuation
      of an Event of Default (other than a Bankruptcy Event) with respect to a
      Unitholder, the Nondefaulting Unitholder may elect, by written notice to
      the Defaulting Unitholder, to dissolve the Company, in which event the
      Company shall be dissolved and the Unitholders shall take all actions
      necessary to wind up the affairs of the Company in accordance with Section
      11.7 (Winding Up). This Section 11.3 shall not be construed to limit the
      rights of the Nondefaulting Unitholder under Section 10.4 (Remedies Upon
      Event of Default) or to seek damages from the Defaulting Unitholder or any
      other Person for the breach of its obligations under any of the FP
      Operative Documents.

11.4  Dissolution by Unilateral Option. At any time between April 1, 2007 and
      March 31, 2008, SanDisk may, by giving written notice to Toshiba, elect to
      withdraw from the

      Company, in which case Toshiba must, directly or through any of its
      Affiliates, either (i) purchase from SanDisk all of SanDisk's Units within
      one (1) year following SanDisk's notice to withdraw for a cash payment, by
      wire transfer of immediately available Japanese Yen, in an amount equal to
      the [***] of the Company as of the FP Termination Date multiplied by
      SanDisk's Percentage as of the Termination Date (the estimated [***] of
      the Company as of the Termination Date to be agreed by the Unitholders in
      good faith and any necessary true up payments promptly after the actual
      [***] of the Company as of the Termination Date is determined), or (ii)
      cooperate with SanDisk to dissolve the Company within one (1) year of the
      notice of withdrawal and to wind-up its affairs in accordance with Section
      11.7 (Winding Up) (the date as of which any Unitholder, itself

[***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

                                       27


      or together with its Affiliates, holds all Units of the Company or the
      date the Company is dissolved in accordance with applicable Law, the
      "Termination Date," but in no event shall the Termination Date occur later
      than one (1) year following SanDisk's notice to withdraw).

11.5  Dissolution upon Notice. At any time between April 1, 2011 and March 31,
      2012, any Unitholder (the "Notifying Party") may elect, by giving notice
      to all other Unitholders (the "Notified Party"), to dissolve the Company,
      in which event the Company will be dissolved and, within the one (1) year
      period following the giving of such notice, the Unitholders shall mutually
      agree upon a plan for winding up the affairs of the Company in accordance
      with Section 11.7 (Winding Up), unless the Notified Party, directly or
      through any of its Affiliates, elects in writing within three (3) months
      of receiving such notice, to purchase from the Notifying Party all of its
      Units for a cash payment, by wire transfer of immediately available
      Japanese Yen, in an amount equal to the [***] of the Company as of the
      date of such transaction multiplied by the Notifying Party's Percentage as
      of such date.

11.6  Financing Defaults.

(a)   If pursuant to Section 6.3(c)(i) of the Master Agreement either Party, as
      the Investing Party, exercises its election to terminate this Agreement,
      the Unitholders shall cooperate in good faith to effect the purchase by
      Toshiba (or its designated Affiliate) and sale by SanDisk of all of
      SanDisk's Units, at a price equal to SanDisk's percentage share of the
      issued and outstanding Units in the Company multiplied by the [***] of the
      Company as of the date such transaction is closed (with estimated [***] as
      agreed by the Unitholders in good faith paid on the closing of such
      transaction and any true-up payment made by the appropriate Party promptly
      after determination of the actual [***] of the Company as of the closing
      of such purchase and sale transaction).

(b)   [***]

(c)   If pursuant to Section 6.10(d)(ii) of the Master Agreement either Party,
      as the Non-Defaulting Party, exercises its election to terminate this
      Agreement, the Non-Defaulting Party shall have the same rights as provided
      in Section 11.6(a) and the Unitholders shall cooperate in good faith to
      effect the purchase by the Non-Defaulting Party (or its designated
      Affiliate) and sale by the Defaulting Party of all of the Defaulting
      Party's Units.

11.7  Winding Up.

(a)   Upon the dissolution of the Company, the Unitholders shall proceed as
      promptly as practicable to (i) wind-up the affairs of the Company and
      satisfy the Company's liabilities, (ii) dispose of the Company's assets as
      quickly as possible consistent with obtaining the full fair market value
      of the Company, preferably, to the extent it is commercially practicable
      to do so, by selling the Company as a going concern (provided, however, no
      Unitholder shall be under any obligation to extend the terms of any FP
      Operative Document or to offer to enter into any other agreement with a
      prospective

[***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

                                       28


      purchaser of the Company for the purchase or sale of goods or services or
      the use of facilities or any other business arrangement), and (iii)
      distribute any net proceeds to the Unitholders in accordance with Section
      11.8 hereof and applicable Law. In connection with a sale of the Company's
      assets under clause (ii), each Unitholder or any of their respective
      Affiliates shall have a right of first offer to acquire the Company's
      tangible personal property in the liquidation process and may also acquire
      such property through participation at auction except in the event of a
      dissolution pursuant to Section 11.3 (Dissolution Upon Event of Default),
      in which event the Defaulting Unitholder and its Affiliates shall not have
      such right of first offer to acquire the Company's tangible personal
      property. Each of the Unitholders shall be furnished with a statement
      setting forth the assets and liabilities of the Company as of the date of
      the complete liquidation of the Company. The Accountants shall review the
      final accounting and shall render their opinion with respect thereto.

(b)   During the period of winding-up, the Company shall continue to operate and
      all the provisions of this Agreement shall remain in effect, except as
      otherwise expressly provided herein. The Company shall notify all known
      creditors and claimants of the dissolution of the Company in accordance
      with applicable law.

11.8  Liquidation Proceeds.

(a)   In the case of the dissolution and liquidation of the Company, the Company
      may make a distribution in kind. Any cash and all distributions in kind
      that are to be distributed shall be distributed to the Unitholders, on a
      pro rata basis based upon the respective Percentages of the Unitholders as
      of the date of such distribution.

(b)   Unless otherwise agreed by the Unitholders, and to the extent permitted
      under any agreements with third parties, all assets to be distributed upon
      the dissolution and liquidation of the Company shall be distributed as
      follows:

      (i)   first, to creditors, including Unitholders who are creditors, to the
            extent permitted by law, in satisfaction of liabilities of the
            Company, other than for distributions to Unitholders pursuant to
            Section 6.2 (Distributions); and

      (ii)  second, to the Unitholders on a pro rata basis based upon the
            respective Percentages of the Unitholders as of the date of such
            distribution.

For purposes of this Section 11.8, instruments of transfer and other documents
reasonably requested by the distributee shall be executed by the Company or the
other Unitholder, or both.

(c)   Any distribution made pursuant to this Section 11.8 shall be made as soon
      as practicable under and in accordance with applicable Japanese law.

12.   INDEMNIFICATION AND INSURANCE

12.1  Indemnification.

                                       29


(a)   Subject to Section 12.1(c), the Company shall indemnify each Person who
      was or is a party or is threatened to be made a party to any threatened,
      pending or completed action, suit or proceeding, whether civil, criminal,
      administrative or investigative (including an action by or in the right of
      a Unitholder or the Company), by reason of the fact that such Person is or
      was a Unitholder or is or was or has agreed to become a Director or is or
      was serving or has agreed to serve at the request of the Company as a
      director, officer, employee or agent of the Company or of another
      partnership, corporation, joint venture, trust or other enterprise,
      arising from any action alleged to have been taken in any such capacity or
      by reason of any liability or obligation of the Company, against any and
      all losses, damages, liabilities, costs, charges, expenses (including
      interest, penalties and reasonable attorneys' fees and expenses),
      judgments, fines and amounts paid in settlement (collectively, "Losses")
      actually and reasonably incurred by him or on his behalf in connection
      with such action, suit or proceeding and any appeal therefrom. Without
      limiting the generality of the foregoing, any of such Losses shall be
      deemed to arise out of a Company liability or obligation if it arises out
      of or is based upon the conduct of the business of the Company (or any of
      its Subsidiaries) or the ownership of the property of the Company (or any
      of its Subsidiaries).

(b)   The indemnification provided under this Section 12.1 shall inure to the
      benefit of the successors, heirs and personal representatives of any
      Person entitled to the benefit of such indemnification. Such
      indemnification shall be a contract right and shall include the right to
      be paid advances of reasonable expenses incurred by any such Person in
      connection with such action, suit or proceeding.

(c)   The indemnification provided under this Section 12.1 shall not inure to
      the benefit of any Person in respect of Losses to the extent that such
      Losses (i) arise out of or are based upon the gross negligence or willful
      misconduct of such Person or (ii) constitute a tax, levy or similar
      governmental charge not imposed upon the Company (or any of its
      Subsidiaries) or on their respective properties. The indemnification
      provided under this Section 12.1 shall also not be available to any Person
      in respect of any Losses if a judgment or other final adjudication adverse
      to such Person establishes (x) that such Person's acts were committed in
      bad faith or were the result of active and deliberate dishonesty and were
      material to the cause of action so adjudicated or (y) that such Person
      gained in fact a financial profit or other advantage to which such Person
      was not legally entitled. It is understood and agreed that, for the
      purposes of this Section 12.1, Losses shall be deemed not to arise out of
      or be based upon the gross negligence or willful misconduct of a Person
      solely because it arises out of or is based upon the gross negligence,
      willful misconduct, bad faith or active and deliberate dishonesty of a
      director, officer or employee of such Person if at the time of such gross
      negligence, willful misconduct, bad faith or active and deliberate
      dishonesty, such director, officer or employee was also a FP Secondee or a
      Director acting in his capacity as such.

(d)   The termination of any action, suit or proceeding by judgment, order,
      settlement, conviction or upon a plea of nolo contendere or its equivalent
      shall not, of itself, create a presumption that the indemnified Person did
      not meet the standard set forth in Section 12.1(c) (Indemnification).

                                       30


12.2  Insurance. The Company may, to the fullest extent permitted by law,
      purchase and maintain insurance against any liability that may be asserted
      against any Person entitled to indemnity pursuant to Section 12.1.

12.3  Indemnification by the Unitholders.

(a)   Each Unitholder agrees to, and does hereby, indemnify and hold harmless
      the Company and the other Unitholder from and against any and all Losses
      arising out of, or based upon, the gross negligence or willful misconduct
      of such Unitholder under this Agreement or such Unitholder exceeding its
      authority under this Agreement.

(b)   The provisions of this Section 12.3 shall survive each of the termination
      of this Agreement, the dissolution of the Company and the withdrawal of
      any Unitholder.

12.4  Assertion of Claims.

(a)   In the event that a Person (the "Indemnified Party") desires to assert its
      right to indemnification from a Person (an "Indemnifying Party") required
      to indemnify such Indemnified Party under this Section 12, the Indemnified
      Party will give the Indemnifying Party prompt notice of the claim giving
      rise thereto (a "Claim"), and the Indemnifying Party shall undertake the
      defense thereof (unless the Claim is asserted against or related to or
      results from any action or failure to take action by such Indemnifying
      Party). The failure to promptly notify the Indemnifying Party hereunder
      shall not relieve the Indemnifying Party of its obligations hereunder,
      except to the extent that the Indemnifying Party is actually prejudiced by
      the failure to so notify promptly.

(b)   The Indemnified Party shall not settle or compromise any Claim without the
      written consent of the Indemnifying Party unless the Indemnified Party
      agrees in writing to forego any and all claims for indemnification from
      the Indemnifying Party with respect to such Claim. However, if the
      Indemnifying Party, within a reasonable time after notice of any such
      Claim, fails to defend such Claim, the Indemnified Party shall have the
      right to undertake the defense, compromise or settlement of such Claim on
      behalf of and for the account and risk of the Indemnifying Party, subject
      to the right of the Indemnifying Party to assume the defense of such Claim
      at any time prior to settlement, compromise or final determination
      thereof.

(c)   If the Indemnifying Party has undertaken the defense of a Claim and (i) if
      there is a reasonable expectation that (x) a Claim may materially and
      adversely affect the Indemnified Party other than as a result of money
      damages or other money payments or (y) the Indemnified Party or
      Unitholders may have legal defenses available to it or them that are
      different from or additional to the defenses available to the Indemnifying
      Party, or (ii) if the Indemnifying Party shall not have employed counsel
      reasonably satisfactory to the Indemnified Party, the Indemnified Party
      shall nevertheless have the right, at the Indemnifying Party's cost and
      expense, to defend such Claim.

                                       31


13.   MISCELLANEOUS

13.1  Governing Law. Notwithstanding anything to the contrary in Appendix A,
      this Agreement shall in all respects be governed by and construed in
      accordance with the laws of Japan, without regard to the conflict of laws
      principles.

13.2  Effectiveness. This Agreement shall be effective as of the date first
      written above and shall remain in effect until the Termination Date.
      Sections 7, 11.7, 11.8 and 13 shall survive the Termination Date.

                     [REST OF PAGE INTENTIONALLY LEFT BLANK]

                                       32


            IN WITNESS WHEREOF, this Agreement has been executed and delivered
by each party as of the date first above written.

                                        TOSHIBA CORPORATION

                                        By:   /s/ Masashi Muromachi
                                           -------------------------------------
                                           Name:    Masashi Muromachi
                                           Title:   President and CEO
                                                    Semiconductor Company
                                                    Corporate Vice President

                                        SANDISK INTERNATIONAL LIMITED

                                        By:   /s/ Eli Harari
                                           -------------------------------------
                                           Name:    Eli Harari
                                           Title:   President

[Signature Page to Flash Partners Operating Agreement]

                                       33


                                    EXHIBIT A

                    ARTICLES OF INCORPORATION OF THE COMPANY

[***]

[***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

                                       34


                         Unofficial English Translation

                            ARTICLES OF INCORPORATION
                                       OF
                              FLASH PARTNERS, LTD.

[***]

[***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

                                       35


                                 Schedule 2.1(b)

                   Committed Additional Capital Contributions

[***]

[***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

                                       36


                                  Schedule 5.3

                        Management and Operating Reports

[***]

[***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

                                       37


                                  Schedule 6.1

                              Capital Contributions

[***]

[***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

                                       38


                                  Schedule 8.3

                                 Monthly Reports

This Schedule provides a list of Unitholder required reports, pursuant to
Section 8.3(d) (Monthly Reports), that are required to be transmitted to the
Unitholders by the dates listed. Any Unitholder may modify this list
periodically as requirements for data change. When a Unitholder requests a
report, a sample format for the report will be provided to the Company by the
requesting Unitholder.

REPORTS TO UNITHOLDERS



              REPORT TITLE                                    DATE DUE
                                                   
A.   Monthly Flash Report                             3 days after month close
B.   Monthly Measurement Report                       7 days after month close
C.   Monthly Cash Flow Report                         7 days after month close
D    Monthly Balance sheets                           7 days after month close
E.   Monthly Profit & Loss                            7 days after month close
F.   Monthly Operational Spending Summary             7 days after month close


                                       39

EX-10.3

                                                                    EXHIBIT 10.3

                              AMENDED AND RESTATED

                     COMMON R&D AND PARTICIPATION AGREEMENT

This AMENDED AND RESTATED COMMON R&D AND PARTICIPATION AGREEMENT, dated as of
September 10, 2004, is made and entered into by and between Toshiba Corporation,
a Japanese corporation with a principal place of business at 1-1, Shibaura
1-chome, Minato-ku, Tokyo 105-8001, Japan (hereinafter "Toshiba"), and SanDisk
Corporation, a Delaware corporation, with a principal place of business at 140
Caspian Court, Sunnyvale, CA 94089, U. S. A. (hereinafter "SanDisk" and
collectively with Toshiba, the "Parties").

WHEREAS, Toshiba and SanDisk Corporation entered into a Common R&D and
Participation Agreement, dated as of May 9, 2000, which was amended as of April
10, 2002 and which has been modified by correspondence between SanDisk
Corporation and Toshiba (collectively, the "Prior Agreement"); and

WHEREAS, Toshiba and SanDisk desire to amend the Prior Agreement with the effect
of superceding the Prior Agreement from and after the date of this Agreement.

NOW, THEREFORE, the parties agree as follows:

ARTICLE 1. DEFINITIONS

            1.1   "Contract Technology" shall mean [***].

            1.2   "AMC" shall mean the Advanced Microelectronics Center,
Toshiba's development engineering facility located in Yokohama, Japan.

            1.3   "Assignees" shall mean SanDisk's engineers from the technology
areas of process/device/design, assigned to participate in the Development Work
(as defined in Section 2.1 to be performed at AMC or other Toshiba facilities to
be mutually agreed upon by the parties hereto.

            1.4   "Effective Date" shall mean September 10, 2004.

            1.5   "Solely Developed Patents" shall mean patents, utility models
(excluding design patents) and any applications therefor which arise out of the
inventions made solely by the employees of either Party during the performance
of the Development Work hereunder.

            1.6   "Jointly Developed Patents" shall mean patents, utility models
(excluding design patents) and any applications therefor which arise out of the
inventions jointly made by the employees of Toshiba and SanDisk during the
performance of Development Work hereunder.

CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.

[***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.



            1.7   "Agreement" shall mean this Amended and Restated Common R&D
and Participation Agreement together with any Exhibits, Schedules, Appendices
and Attachments hereto including Appendix A to the Master Agreement, which is
incorporated herein by this reference.

            1.8   "Master Agreement" shall mean that certain Flash Partners
Master Agreement, dated as of the date hereof, by and among Toshiba, SanDisk and
SanDisk International.

            1.9   "Residuals" shall mean that technical information which may be
retained in the memories of Assignees who have had rightful access to Toshiba's
proprietary information and Contract Technology.

            1.10  "Common R&D Effective Date" shall mean May 9, 2000.

ARTICLE 2. DEVELOPMENT COLLABORATION

            2.1   SanDisk will send, and Toshiba will receive, such number of
Assignees as are mutually agreed upon, at AMC or other Toshiba facilities during
the term of this Agreement in order for SanDisk to participate in the
development work of the Contract Technology as set forth in Exhibit B (the
"Development Work"), which may be modified by Toshiba and SanDisk from time to
time, and in accordance with the direction of Toshiba; provided that such
modification to the Development Work shall not materially affect SanDisk's
permitted access to the Contract Technology. For avoidance of doubt, it is
agreed by the parties that SanDisk shall not have any right to have access to,
and its Assignees shall not have access to, any technical information or data
which are not relevant or necessary to perform the Development Work or any
technical information or data for which access by Assignees is prohibited by any
binding contract of Toshiba and any third party, and that no right or license is
granted to SanDisk with respect to said technical information or data. The
project managers of SanDisk and Toshiba shall periodically discuss, determine
and monitor the details of the Development Work; provided that in case of any
dispute between the respective project managers, the manager of Toshiba may
determine such details, taking into consideration the reasonable input made by
SanDisk. In order to perform the Development Work, Toshiba shall(at its sole
expense) provide the Assignees with sufficient office equipment, including
personal computers and telephones.

            2.2   SanDisk shall ensure that its Assignees comply with the
safety, security and all other applicable practices, regulations of Toshiba and
specific instructions or directions to be made by Toshiba while such Assignees
are in Toshiba's facilities. Except as provided in the Master Agreement, SanDisk
agrees to be responsible for all salaries, benefits, expense reimbursements and
other payments to its Assignees and workers insurance for Assignees and shall
indemnify and hold Toshiba harmless from any claims against Toshiba arising out
of any injury to any Assignee.

            2.3   Except as provided in the Master Agreement, SanDisk shall be
responsible for the living, traveling and all other out-of-pocket expenses for
its Assignees.

                                        2



            2.4   The amendment and restatement in Section 5 is conditioned upon
(a) Flash Partners' 300 millimeter production beginning [***] and (b) Toshiba
considering in good faith SanDisk's requests (i) to provide SanDisk with the
opportunity to manage the Common R&D expenditure base (project selection, team
development, etc.) (ii) to have SanDisk actively participate in the entire
Development Work and (iii) to ensure to the maximum extent practicable the
cooperation between SanDisk and Toshiba's engineering, development and
technology teams (e.g. open communication, joint planning of experiments, timely
sharing of wafers (for first hand analysis by SanDisk) and Toshiba's results of
wafer testing), it being understood that the final determination regarding such
requests is to be made by Toshiba. SanDisk shall take appropriate action to
preserve the confidentiality of (and restrict the distribution within SanDisk
of) the information learned in the course of Development Work or any activities
contemplated hereunder.

            2.5   [***].

ARTICLE 3. OWNERSHIP

            3.1   All technical information provided by any Party in the course
of the development of the Contract Technology shall remain the exclusive
property of said Party; provided that, Toshiba shall have a non-exclusive,
worldwide and royalty-free license to use, reproduce and otherwise dispose of
such technical information for any purpose.

            3.2   All technical information, inventions and intellectual
property rights resulting therefrom (but specifically exclude patents) made or
generated by Toshiba and/or Assignees in the course of the Development Work
shall be the exclusive property of Toshiba; provided that, SanDisk shall have
the right and license set forth in Section 4.

            3.3   Any Solely Developed Patent of Toshiba shall be and remain the
exclusive property of Toshiba, subject to the licenses granted to SanDisk in
accordance with Section 4.1.

            3.4   Any Solely Developed Patent of SanDisk shall be and remain the
exclusive property of SanDisk, subject to the licenses granted to Toshiba in
accordance with Section 4.3.

            3.5   Any right, title and interest in, to and under Jointly
Developed Patents shall be jointly owned by Toshiba and SanDisk. Each Party
shall be free to use such Jointly Developed Patents for any purpose and shall
have the right to grant non-exclusive licenses to any third party without the
consent of the other Party and shall have no duty to account to the other Party
for any revenue therefrom. Both parties shall promptly agree on which of them
shall file and prosecute the first patent application and which countries'
corresponding applications shall be filed and by whom. All expenses incurred in
obtaining and maintaining such patents shall be equally shared by the parties;
provided that if one Party elects not to seek or maintain such patents in any
particular country or not to share equally in the expense thereof, the other
Party shall have the right to seek or maintain such patents in said country at
its own expense and shall have full control over the prosecution and maintenance
thereof even though title to any patent issuing thereon shall be joint. The
Party electing not seek or maintain such patents shall give the

[***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

                                        3


other Party any necessary assistance required for the preparation and
prosecution of such patents filed or maintained by the other Party.

            3.6   It is understood by the parties that either Party may perform
development of any products or process independently of the development of the
Contract Technology hereunder. This Agreement is not intended to limit such
independent development involving technology or information of a similar nature
to the Contract Technology.

ARTICLE 4. LICENSE

            4.1   Toshiba grants to SanDisk a non-exclusive, non-transferable,
worldwide and royalty-free license, without the right to sublicense, under its
Solely Developed Patents to develop, have developed, make, have made, use, sell,
modify and otherwise dispose of any semiconductor products.

            4.2   Subject to SanDisk's confidentiality obligations under Section
8 and the provisions of Sections 3, 6, 7 and 10, SanDisk shall be free to use,
improve or modify without additional compensation to Toshiba the Residuals,
including the use, improvement or modification of such Residuals in the
development and manufacture of SanDisk's products; provided that this Section,
by itself, shall not be deemed to grant to SanDisk any rights or licenses under
any patents of Toshiba nor shall this Section operate to waive SanDisk's
confidentiality obligations under Section 8. In no event shall such Assignee or
SanDisk publish or disseminate said Residuals to any third party.

            4.3   SanDisk grants to Toshiba a non-exclusive, non-transferable,
worldwide and royalty-free license, without the right to sublicense, under its
Solely Developed Patents to develop, have develop, make, have made, use, sell,
modify and otherwise dispose of any semiconductor products.

            4.4   Toshiba shall prepare and transfer to the Yokkaichi Facility
(as defined in Appendix A) documentation for NAND process concerning the
Contract Technology for production at the Yokkaichi Facility; provided, however,
that SanDisk may have access to such documentation at such facilities but shall
have no right to disclose or transfer it to any third party.

                                        4



ARTICLE 5. COMMON R&D EXPENDITURE

            5.1   Unless otherwise mutually agreed upon by the Parties, no
Common R&D for non-NAND Flash Memory technology shall be performed at the Y3
Facility. Provided Toshiba continues to develop and advance NAND Flash Memory
technology for the benefit of both parties pursuant to the FVC Japan Operative
Documents, the Flash Partners Operative Documents and the other Joint Operative
Documents, SanDisk hereby agrees to share Toshiba's Common R&D expenditures and
shall pay to Toshiba its portion of such Common R&D expenditures in accordance
with this Section 5.1:

                  (a)   From the second quarter of calendar year 2000 through
and including March 31, 2002:

                  SanDisk will share in Toshiba's Common R&D expenditures as set
forth in Table A below, and SanDisk shall pay Toshiba for such Common R&D
expenditures in the amounts and on or prior to the dates provided in Table B as
follows:

                                    Table A
                  SanDisk's Allocation of Common R&D Expenses



           2000                               2001                     2002
- ----------------------------------------------------------------------------
  2Q        3Q        4Q        1Q        2Q        3Q        4Q        1Q
- ----------------------------------------------------------------------------
                   (amounts incurred in millions of Yen)
                                                  
[***]      [***]     [***]     [***]     [***]     [***]     [***]     [***]
- ----------------------------------------------------------------------------


                                  Table B
                 Payment by SanDisk for Common R&D Expenses



                      2002                                    Total
- -------------------------------------------------------------------
June 30           September 30         December 31
- -------------------------------------------------------------------
                (amounts payable in millions of Yen)
                                                     
 [***]                [***]               [***]               [***]
- -------------------------------------------------------------------


                  Notwithstanding the foregoing, in the event of the termination
of this Agreement (i) on or before March 31, 2002, SanDisk shall be obligated
immediately to pay its share of the allocated Common R&D expenses accrued
through the date of such termination (pro-rated in the event such termination
occurs prior to the end of a quarter) as set forth in Table A, (ii) after March
31, 2002 but prior to December 31, 2002, SanDisk's shall be obligated
immediately to pay any unpaid amount set forth in Table B.

                  The parties acknowledge that after March 31, 2002, it will be
difficult to predetermine Toshiba's total Common R&D expenditures and a fixed
allocation of Common R&D expenditures for SanDisk. Therefore, after March 31,
2002, the payment by SanDisk to Toshiba for Common R&D expenditures will be
based on a percentage of SanDisk's Net Sales of NAND Flash Memory Products (as
hereinafter defined), and calculated and paid as follows:

[***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

                                        5


                  (b)   After March 31, 2002 and within thirty (30) days of the
end of each calendar quarter based on SanDisk's Net Sales of NAND Flash Memory
Products for the quarter just ended as follows:

                        (i)   [***] of the first US $100 million for the quarter
reported;

                        (ii)  [***] of the next US $100 million for the quarter
reported; and

                        (iii) [***] of SanDisk's Net Sales of NAND Flash memory
Products in excess of US $200 million per quarter.

                  (c)   For purposes of this Section 5.1, "Net Sales of NAND
Flash Memory Products" shall mean [***]; provided, however, that:

                        (i)   from January 1, 2003 until December 31, 2005, the
amount calculated pursuant to Section 5.1(b) shall not exceed [***] per quarter;

                        (ii)  from January 1, 2006 to December 31, 2006, the
amount calculated pursuant to Section 5.1(b) shall not exceed [***] per quarter;

                        (iii) from January 1, 2007 to December 31, 2007, the
amount calculated pursuant to Section 5.1(b) shall not exceed [***] per quarter;
and

                        (iv)  from January 1, 2008 to December 31, 2008, the
amount calculated pursuant to Section 5.1(b) shall not exceed [***] per quarter;

                  (d)   Notwithstanding Section 5.1(b) and subject to Section
5.1(e), SanDisk's quarterly contribution for Common R&D pursuant to Sections
5.1(a) and 5.1(b) shall not exceed the sum of (i) [***] of the total Common R&D
annual expenditure of the Semiconductor Company of Toshiba, as notified to
SanDisk by Toshiba at the beginning of each of Toshiba fiscal year ("Total R&D
Budget") for the first [***] of the Total R&D Budget and (ii) [***] of the
portion of such Total R&D Budget in excess of [***].

                  (e)   In the event that any Common R&D activities have been
done [***] pursuant to Section 6.6(a)(i) of the FP Master Agreement, SanDisk
shall bear any and all charges incurred by Flash Partners from such Common R&D
activities [***] at the ratio of [***], and SanDisk's total contribution for
Common R&D charges pursuant to (b), (c), and (d) of this Section 5.1 shall be
reduced by such SanDisk Y3 Common R&D Charges; in the event such SanDisk Y3
Common R&D Charges exceed in any given quarter the amount for such quarter set
forth in paragraphs (b), (c) and (d) of this Section 5.1, unless otherwise
agreed upon by the Parties, [***] of SanDisk Y3 Common R&D Charges shall be
borne directly by SanDisk and no payment by SanDisk to Toshiba for any such
Common R&D expenditures shall be made for that given quarter pursuant to (b),
(c) or (d) of this Section 5.1, provided, however, that, to the extent of any
such excess amount that has been incurred from Common R&D activities [***]
performed without consent of SanDisk, [***] of the applicable portion of such
amount shall be borne by Toshiba.

[***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

                                        6


                  (f)   The amount of the Total R&D Budget shall be subject to
verification if requested by SanDisk by disclosing internal Toshiba documents to
an independent certified public accountant appointed by SanDisk which shall
verify the stated amount of the Total R&D Budget, by written certification to
SanDisk by the appropriate officer of the Semiconductor Company of Toshiba. Such
verification shall be conducted, at SanDisk's cost and expense, during normal
business hours of Toshiba and not more frequently than annually.

                  (g)   Within 45 days of the start of each of its fiscal years,
Toshiba shall provide SanDisk with a 1-2 day detailed presentation of Toshiba's
process development activity at AMC and other Toshiba facilities for the
previous calendar year and forecasted activity for the new fiscal year as such
activity relates to or affects NAND Flash Memory. Any expenses incurred for such
presentation shall be borne by the Party incurring such expenses.

            5.2   Payments made pursuant to this Agreement shall constitute
SanDisk's sole financial obligation with respect to any and all Common R&D
charges from (or through) any Toshiba source.

            5.3   Payments of the fees provided for in Section 5.1 (other than
Section 5.1(a) and 5.1(b)), which payments shall be made on or before the dates
specified therein) shall be made by SanDisk within sixty (60) days after
receiving the invoice to be issued by Toshiba at the end of each applicable
calendar quarter. For the purpose of Toshiba's issuance of such invoices,
SanDisk shall submit to Toshiba, within 30 days following the end of each
quarter after April 1, 2002, a written report stating the quantity and Net Sales
of NAND Flash Memory Products sold or otherwise disposed of by SanDisk during
the applicable quarter.

            5.4   All payments under Section 5.1 shall be made in Japanese yen
by wire transfer of immediately available funds to the following account or such
other account as may be designated by Toshiba to SanDisk in writing:

      [***]

      Where the provisions of this Agreement require the conversion of an amount
initially computed in another currency into Japanese Yen, the Japanese Yen
amount payable shall be calculated using the New York foreign exchange mid range
rates (Currency per US Dollars) published in The Wall Street Journal, Western
Edition, on the last day such journal is published in the calendar quarter
immediately preceding the date of payment.

            5.5   All payments provided for in Section 5.1 shall be made without
deduction of taxes; provided, however, that in the event any withholding income
tax is imposed by U.S. tax authorities on any amount payable to Toshiba
hereunder, SanDisk may withhold such income tax from such amount to the extent
that Toshiba may obtain a tax credit against its Japanese income tax. SanDisk
shall without undue delay obtain and send to Toshiba tax certificates evidencing
the tax amount withheld and paid to U.S. tax authorities.

            5.6   In the event any compensation payable to Toshiba by SanDisk
under this Agreement becomes overdue other than as a result of any action or
inaction on the part of

[***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

                                        7


Toshiba, Toshiba shall be entitled to request SanDisk to pay interest at twelve
percent (12%) per annum until such compensation is paid.

            5.7   Toshiba shall have the right, at its sole cost and expense, to
have an independent certified public accountant conduct during normal business
hours and not more frequently than annually, an audit of the appropriate records
of SanDisk to verify the number of units of Toshiba Foundry NAND Flash Memory
Products, FVC Japan NAND Flash Memory Products and Y3 NAND Flash Memory Products
sold or otherwise disposed of by SanDisk and SanDisk's calculation of the fees
and Net Sales pursuant to Section 5.1.

ARTICLE 6. WARRANTY

            6.1   Each Party provides to the other Party its technical
information on an "as-is" basis only, and does not make any warranty or
representation with respect to such technical information for any purpose.

            6.2   Nothing contained in this Agreement shall be construed as:

                  (a)   a warranty or representation that the manufacture, use,
sale or other disposal of semiconductor products by the other Party using any
technical information received under this Agreement will be free from
infringement of patents or any other intellectual property rights of any third
Party;

                  (b)   conferring the other Party any right to use in
advertising, publicity or otherwise any trademark, trade name or names, or any
contraction, abbreviation or simulations thereof of either Party;

                  (c)   conferring the other Party, by implication, estoppel or
otherwise, any license or other right, except for the licenses and rights
expressly granted hereunder; and

                  (d)   an obligation to furnish any technical information or
know-how except as otherwise specifically provided herein.

ARTICLE 7. LIMITATION OF LIABILITY

IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR ANY SPECIAL,
CONSEQUENTIAL, INCIDENTAL OR INDIRECT DAMAGE OF ANY KIND, (INCLUDING LOSS OF
PROFIT OR DATA) WHETHER OR NOT ADVISED OF THE POSSIBILITY OF SUCH LOSS.

                                        8



ARTICLE 8. CONFIDENTIALITY

            8.1   As used in this Agreement, the term "Confidential Information"
shall mean any information disclosed by Toshiba to SanDisk pursuant to this
Agreement which is in written, graphic, machine readable or other tangible form
and is marked "Confidential", "Proprietary" or in some other manner to indicate
its confidential nature. Confidential Information may also include oral
information disclosed by Toshiba to SanDisk pursuant to this Agreement, provided
that such information is designated in a manner to indicate its confidential
nature at the time of disclosure and reduced to a written summary by Toshiba
within thirty (30) days after its oral disclosure. For avoidance of doubt, all
information observed by or disclosed to Assignees at Toshiba's facilities shall
be treated as Toshiba Confidential Information.

            8.2   During the [***] period following receipt of such information,
the receiving Party shall keep any Confidential Information, including the
technical information SanDisk has access to at AMC during the course of the
development of the Contract Technology hereunder, in strict confidence, and
shall not disclose such Confidential Information to any third party without
prior written consent of the disclosing Party. The receiving Party shall
maintain the Confidential Information with at least the same degree of care that
the receiving Party uses to protect its own strictly confidential information,
but no less care than is reasonable under the circumstances. Further, the
receiving Party shall not use the Confidential Information for any purposes
other than for the development of the Contract Technology hereunder, except as
otherwise provided herein.

            8.3   Neither Party shall disclose the terms and conditions of this
Agreement to any third party other than in compliance with any government
regulation, without prior written consent of the other Party.

            8.4   The confidentiality obligation set forth in Sections 8.2 and
8.3 above shall not apply to any information which:

      (a) is already known to the receiving Party at the time of disclosure;

      (b) is or becomes publicly through no fault of the receiving Party;

      (c) is rightfully received by the receiving Party from a third party
          without any restriction on disclosure;

      (d) is independently developed by the receiving Party;

      (e) is disclosed with the prior written consent of the disclosing Party
          hereunder; or

      (f) is disclosed pursuant to applicable laws, regulations or court order;
          provided, that the receiving Party shall give the disclosing Party
          prompt notice of such request so that the disclosing Party has an
          opportunity to defend, limit or protect such disclosure.

            8.5   Each Party understands that disclosure or dissemination of the
other Party's Confidential Information not expressly authorized hereunder would
cause irreparable

[***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

                                        9


injury to such other Party, for which monetary damages would not be an adequate
remedy and said other Party shall be entitled to equitable relief in addition to
any remedies the other Party may have hereunder or at law. In the event SanDisk
is to enter into any joint development work with any third party, SanDisk
warrants that Toshiba Confidential Information provided to SanDisk in connection
with the development of the Contract Technology shall neither be used for such
joint development work nor be disclosed to any third party unless expressly
otherwise provided hereunder.

ARTICLE 9. TERM AND TERMINATION

            9.1   This Agreement shall become effective on the Common R&D
Effective Date and continue in full force and effect until the later of the
termination of the FVC Japan Master Agreement or the Master Agreement, unless
earlier terminated as hereinafter provided. The term of this Agreement may be
extended by mutual agreement of both parties. This Agreement shall automatically
terminate upon termination of the FVC Japan Master Agreement or the Master
Agreement, whichever is later.

            9.2   If either Party fails to perform or breaches any of its
material obligations under this Agreement, then, upon sixty (60) days written
notice specifying such failure or breach, the non-defaulting Party shall have
the right to terminate this Agreement forthwith, unless the failure or breach
specified in the notice has been cured during the sixty (60) day period.
Termination of this Agreement pursuant to this Section 9.2 shall not relieve the
breaching Party from any liability arising from any breach of this Agreement and
such termination shall be without prejudice to any other rights and remedies of
the non-breaching Party provided at law or in equity, in addition to the rights
and remedies set forth in this Agreement.

            9.3   Either Party shall have the right to terminate this Agreement
by giving written notice to the other Party upon the occurrence of any of the
following events:

                  (a)   the filing by the other Party of a voluntary petition in
bankruptcy or insolvency;

                  (b)   any adjudication that such other Party is bankrupt or
insolvent;

                  (c)   the filing by such other Party of any legal action or
document seeking reorganization, readjustment or arrangement of its business
under any law relating to bankruptcy or insolvency;

                  (d)   the appointment of a receiver for all or substantially
all of the property of such other Party; or

                  (e)   the making by such other Party of any assignment of
whole or substantial assets for the benefit of creditors.

      This Agreement shall terminate on the thirtieth (30th) day after such
notice of termination is given.

                                       10



            9.4   The provisions of Sections 3, 6, 7, 8, 9 and 10 and Appendix A
shall survive any termination or expiration of this Agreement. The provision of
Section 4 shall survive the expiration of this Agreement; provided that SanDisk
has paid to Toshiba the total amount of fees required to be paid in Section 5.

ARTICLE 10. GENERAL PROVISIONS

            10.1  Neither Party is required to disclose any information of which
disclosure is prohibited by laws of the country of such Party.

            10.2  Neither Party shall export or re-export, directly or
indirectly, any technical information disclosed hereunder or direct product
thereof to any destination prohibited or restricted by the export control
regulations of Japan and the United States, including the U.S. Export
Administration Regulations, without the prior authorization from the appropriate
governmental authorities. SanDisk hereby certifies that SanDisk will not use
technical information supplied by Toshiba hereunder for any purpose to develop
or manufacture nuclear, chemical, biological weapons or missiles (hereafter
"weapons of mass destruction"). SanDisk further certifies that it will not sell
any products manufactured using Toshiba's technical information to any Party if
it knows that the end-user of the products will use them for the development
and/or manufacture of the weapons of mass destruction.

            10.3  The rules of construction and documentary conventions set
forth in Appendix A to the Master Agreement shall apply to, and are hereby
incorporated in, this Agreement.

                       [Rest of Page Intentionally Blank]


                                       11


            IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed in duplicate, as of the date first written above, by their duly
authorized officers or representatives.

Toshiba Corporation                     SanDisk Corporation

By: /s/ Masashi Muromachi               By: /s/ Eli Harari
   --------------------------------        -------------------------------------

Name:  Masashi Muromachi                Name:  Eli Harari

Title: President and CEO                Title: President and CEO
       Semiconductor Company
       Corporate Vice President

                                       12



                                    EXHIBIT A

                              (Contract Technology)

[***]

[***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

                                       13


                                    EXHIBIT B

                   (Development Work for Contract Technology)

[***]

[***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

                                       14

EX-10.4

                                                                    EXHIBIT 10.4

               AMENDED AND RESTATED PRODUCT DEVELOPMENT AGREEMENT

This AMENDED AND RESTATED PRODUCT DEVELOPMENT AGREEMENT, dated as of September
10, 2004, is made and entered into by and between Toshiba Corporation, a
Japanese corporation with a principal place of business at 1-1, Shibaura
1-chome, Minato-ku, Tokyo 105-8001, Japan ("Toshiba"), and SanDisk Corporation,
a Delaware corporation with a principal place of business at 140 Caspian Court,
Sunnyvale, CA 94089, U. S. A. ("SanDisk").

WHEREAS, Toshiba and SanDisk entered into a Product Development Agreement, dated
as of May 9, 2000, which was amended as of April 10, 2002 and which has been
modified by correspondence between SanDisk and Toshiba (collectively, the "Prior
Agreement"); and

WHEREAS, Toshiba and SanDisk desire to amend the Prior Agreement with the effect
of superceding the Prior Agreement from and after the date of this Agreement;

NOW, THEREFORE, the parties agree as follows:

ARTICLE 1. DEFINITIONS

1.1   "Products" shall mean the NAND Flash Memory devices developed hereunder,
      including the NAND Flash Memory devices specified in Exhibit A attached
      hereto, but excluding Flash Memory Controllers.

1.2   "Flash Memory Controller" shall mean any firmware, hardware and/or
      software that is necessary to operate a NAND Flash Memory device.

1.3   "Developed Products" shall mean Products solely developed by either party
      during the term of this Agreement, including solely developed derivatives
      of Jointly Developed Products; provided however, that Developed Products
      shall not include cut-downs of Jointly Developed Products.

1.4   "Jointly Developed Products" shall mean Products jointly developed by
      Toshiba and SanDisk during the term of this Agreement.

1.5   "Toshiba Developed Controller" shall mean a Flash Memory Controller solely
      developed by Toshiba during the term of this Agreement, including solely
      developed derivatives of Jointly Developed Controllers.

1.6   "SanDisk Developed Controller" shall mean a Flash Memory Controller solely
      developed by SanDisk during the term of this Agreement, including solely
      developed derivatives of Jointly Developed Controllers.

1.7   "Jointly Developed Controller" shall mean a Flash Memory Controller
      developed by Toshiba and SanDisk during the term of this Agreement.

1.8   "Development Project" shall mean all development activities undertaken
      pursuant to Article 2.

1.9   "Background Technology" shall mean the Technology which has been or will
      be developed by or for either party independently of the Development
      Projects and

CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.



      owned or controlled by such party prior to or during the term of this
      Agreement, and which shall be deemed reasonably necessary for the other
      party to perform the Development Projects. Background Technology may be
      either SanDisk Background Technology or Toshiba Background Technology, as
      the context requires.

1.10  "Technology" shall mean all developments, ideas, inventions, Test
      Technology and other technical information (whether or not patentable)
      relating to Products as well as intellectual property rights relating
      thereto, including trade secrets, copyrights and maskwork rights, but
      specifically excluding Patents.

1.11  "Developed Technology" shall mean Technology solely developed by either
      party in the course of the Development Projects.

1.12  "Jointly Developed Technology" shall mean Technology jointly developed by
      Toshiba and SanDisk in the course of the Development Projects.

1.13  "Test Technology" shall mean all developments, ideas, inventions, test
      programs, test methods, configured and developed hardware and other
      technical information (whether or not patentable) for all stages of
      product manufacture, as well as intellectual property rights relating
      thereto, but specifically excluding Patents, concerning testing of
      Products and Flash Memory Controllers.

1.14  "Controller Technology" shall mean all developments, ideas, inventions and
      technical information (whether or not patentable) relating to Flash Memory
      Controllers and intellectual property rights relating thereto, including,
      but not limited to, trade secrets, copyrights and maskwork rights, but
      specifically excluding Patents.

1.15  "Jointly Developed Controller Technology" shall mean Controller Technology
      developed by Toshiba and SanDisk during the term of this Agreement.

1.16  "Developed Controller Technology" shall mean Controller Technology solely
      developed by either party during the term of this Agreement.

1.17  "SanDisk Controllers" shall mean SanDisk Developed Controllers, Jointly
      Developed Controllers, SanDisk Developed Controller Technology and Jointly
      Developed Controller Technology.

1.18  "SanDisk Products and Technology" shall mean SanDisk Developed Products,
      SanDisk Background Technology, SanDisk Developed Technology and SanDisk
      Controllers.

1.19  "Toshiba Products and Technology" shall mean Toshiba Developed Products,
      Toshiba Background Technology, Toshiba Developed Technology, Toshiba
      Developed Controller Technology and Toshiba Developed Controllers.

1.20  "Joint Products and Technology" shall mean Jointly Developed Products and
      Jointly Developed Technology.

                                       2


1.21  "Patents" shall mean all classes of types of patents, utility models
      (excluding design patents) and any applications therefor in all countries
      of the world, which are, now or hereafter, owned or controlled by either
      party hereto.

1.22  "Jointly Developed Patents" shall mean Patents which arise out of the
      inventions jointly made by the employees of Toshiba or SanDisk in the
      course of the Development Projects.

1.23  "Effective Date" shall be September 10, 2004.

1.24  "Agreement" means this Amended and Restated Product Development Agreement
      together with any Exhibits, Schedules, Appendices and Attachments hereto
      and Appendix A.

1.24  "Master Agreement" shall mean that certain Flash Partners Master
      Agreement, dated as of the date hereof, by and among Toshiba, SanDisk and
      SanDisk International, a company organized under the laws of the Cayman
      Islands.

1.25  "Appendix A" shall mean the Definitions, Rules of Construction and
      Documentary Conventions, attached as Appendix A to the Master Agreement.

1.26  "Direct R&D Effective Date" shall mean May 9, 2000.

ARTICLE 2. DEVELOPMENT

2.1   Except as expressed in the Common R&D Agreement, each party agrees to
      undertake at Toshiba's or SanDisk's facilities (such facility or
      facilities to be determined by the Coordinating Committee prior to
      commencement of the applicable Development Project) the Development
      Projects specified in Exhibit A in accordance with a development schedule
      and activity allocations to be determined by the Coordinating Committee.
      During the term of this Agreement, the parties will use reasonable efforts
      to continually identify and pursue joint development of new products and
      Exhibit A may be amended from time to time, in accordance with the
      approval of the Coordinating Committee, to reflect such new Development
      Projects.

2.2   Each party shall, from time to time during the term of this Agreement and
      to the extent reasonably necessary to perform the Development Projects,
      provide the other party with technical information relating to its
      Background Technology.

2.3   Each party shall, from time to time during the term of this Agreement,
      provide the other party with technical information relating to Jointly
      Developed Technology and Jointly Developed Controller Technology.

2.4   A party that is in possession of Jointly Developed Technology, Jointly
      Developed Controller Technology or other technical information, including
      the items specified in Exhibit C, shall, upon request of the other party
      made at any time during the term of this Agreement or for a period of one
      year thereafter, promptly deliver to the other party copies of such
      information as requested. When requested by either party, such exchange of
      information, shall include test flow conditions and related know-how.

                                       3


2.5   During the term of this Agreement, upon request by either party and
      subject to the availability of the other party's engineers, the other
      party shall (i) delegate its qualified engineers to advise and consult
      with such requesting party at the requesting party's facilities or (ii)
      receive qualified engineers of the requesting party to train and advise at
      its own facilities. The details of such delegation or reception of the
      engineers shall be decided by the Coordinating Committee as described in
      Article 3.

2.6   This Agreement shall not encompass or include products or technology
      developed jointly or solely by the parties, utilizing or based on Toshiba
      NOR flash technology or other Toshiba non-NAND Flash technologies, or
      SanDisk NOR flash technology or other SanDisk non-NAND flash technologies.

2.7   Either party may propose to disclose (the "proposing party") Jointly
      Developed Controller Technology to any Qualified Design House under a
      written agreement of confidentiality and non-use, for a period of
      restriction generally to be discussed and agreed upon by the Coordinating
      Committee, but if not so discussed or agreed upon, then for a period of at
      least seven years, for the purpose of engaging such Qualified Design House
      to design a solely developed Flash Memory Controller for the account of
      the proposing party to be manufactured and sold by the proposing party.
      Prior to making such disclosure to a Qualified Design House, the proposing
      party shall give the other party to this Agreement (the "reviewing party")
      the opportunity to jointly develop such product with the proposing party.
      The opportunity should be presented in detail at a meeting of the
      Coordinating Committee and the reviewing party will be given a reasonable
      amount of time to consider the proposal. If the reviewing party accepts
      the opportunity to enter into such joint development, the proposing party
      shall not make the disclosure to the Qualified Design House. For the
      purpose of this section, "Qualified Design House" shall mean a company
      which offers services to design devices similar to Flash Memory
      Controllers but which does not make or sell flash memory devices or flash
      cards.

2.8   Each of Toshiba and SanDisk agree to provide to the other party certain
      information relating to product development, including the information set
      forth in Exhibit D attached hereto

ARTICLE 3. COORDINATING COMMITTEE

3.1   Immediately after the Effective Date, the parties shall jointly establish
      the "Coordinating Committee" which shall be comprised of six (6)
      representatives; three (3) of which shall be appointed by Toshiba and
      three (3) of which shall be appointed by SanDisk, which appointments shall
      have been approved by each of the parties; provided that such approval
      shall not be unreasonably withheld.

3.2   The Coordinating Committee shall be responsible for:

      (a)   Determining new Products and Flash Memory Controllers to be jointly
            developed, including product design and manufacturing
            specifications. All Product development projects, including Flash
            Memory Controller development projects, and projects considered by
            either party for sole development, shall be disclosed to the
            Coordinating Committee prior to the start of development;

                                       4


      (b)   Reviewing the progress of the Development Projects against the
            development schedule and evaluating the Development Projects;

      (c)   Discussing necessary changes to the scope or the schedules of the
            Development Projects and actions to be taken;

      (d)   Resolving any differences in opinions between the parties which may
            arise during the course of the Development Projects;

      (e)   Allocation of wafer processing costs as specified in Article 5;

      (f)   Discussing inventorship of patents conceived by the parties as a
            result of any joint development activity hereunder; and

      (g)   Any other matters as agreed upon by both parties.

      All decisions by the Coordinating Committee, including any decision to
      jointly develop Products or Flash Memory Controllers, shall be made
      unanimously and shall be set forth in writing. If any matter is not
      determined by unanimous consent of the Coordinating Committee, such matter
      shall be referred to Management Committee (as defined in the Master
      Agreement) for its final decision. In connection with discussing
      inventorship of patents pursuant to Section 3.2(f), the parties agree to
      notify the Coordinating Committee as soon as possible, but not later than
      three months after such party's knowledge of the filing date of the
      particular patent.

3.3   The Coordinating Committee shall have periodical meetings which shall be
      led by the Technical Coordinator of both parties on a quarterly basis, or
      at such other intervals, alternatively in the United States and in Japan
      or such other places as mutually agreed upon by the Technical Coordinators
      of each party. Either party may invite other of its employees to attend
      such meetings.

ARTICLE 4. TECHNICAL COORDINATORS

Each party shall designate from time to time its Technical Coordinator from its
three members of the Coordinating Committee to be appointed in accordance with
Section 3.1. The Technical Coordinator shall be responsible for supervision of
transmittal and receipt of technical information hereunder, coordinating the
site visits by engineers and coordination of the training and consultation to be
performed hereunder. The incumbent Technical Coordinators for each party are as
follows:

For Toshiba: [To be determined]

For SanDisk: Khandker Quader

ARTICLE 5. COST

Each party shall bear all costs and expenses incurred by such party in
performing the Development Projects which will include the salaries of its
engineers involved in joint development projects hereunder. Notwithstanding the
foregoing, in order to balance each party's cost for Jointly Developed Products
and Jointly Developed Flash Memory Controllers, SanDisk shall share Toshiba's
direct costs of processing certain wafers to be

                                       5


made for the purpose of such Product design verification (including mask costs)
in the amounts set forth in Exhibit B. If either party believes there are
significant additional costs (beyond direct costs) that should be shared (i.e.
other material costs such as subcontractors fees for packaging and analysis),
the Parties will discuss in good faith if any appropriate amount of such
additional costs is to be shared between the Parties. Similarly, Toshiba shall
share the direct costs of processing certain wafers to be made for the purpose
of Flash Memory Controller verification (including mask costs) and other
material costs relating thereto, such as subcontractor fees for packaging and
analysis, in a manner as determined by the Coordinating Committee but
conceptually similar to the nature of the expenses shared by SanDisk for
Products.

ARTICLE 6. OWNERSHIP

6.1   Toshiba Products and Technology shall be and remain the exclusive property
      of Toshiba, subject to the license granted in accordance with Section 7.1.
      From time to time, upon request of SanDisk, Toshiba shall offer SanDisk,
      based upon reasonable terms, a non-exclusive, worldwide, non-transferable
      license, without right to sublicense, to develop, have developed, make,
      have made, use, sell, modify and otherwise dispose of all or a portion of
      the Toshiba Products and Technology.

6.2   Toshiba Patents shall be and remain the exclusive property of Toshiba,
      subject to the licenses granted in accordance with the Patent Cross
      License Agreement between SanDisk Corporation and Toshiba Corporation, as
      amended from time to time, the "Patent Agreement").

6.3   SanDisk Products and Technology shall be and remain the exclusive property
      of SanDisk, subject to the licenses granted in accordance with Sections
      7.2 and 7.3 hereof. From time to time, upon request of Toshiba, SanDisk
      shall offer Toshiba, based upon reasonable terms, a non-exclusive,
      worldwide, non-transferable license, without right to sublicense, to
      develop, have developed, make, have made, use, sell, modify and otherwise
      dispose of all or a portion of the SanDisk Products and Technology.

6.4   SanDisk Patents shall be and remain the exclusive property of SanDisk,
      subject to the licenses granted in accordance with the Patent Agreement.

6.5   Any right, title and interest in and to Joint Products and Technology
      shall be jointly owned by Toshiba and SanDisk. With the exception that
      neither party may sublicense or transfer Joint Products and Technology
      without the prior written consent of the other party, Toshiba and SanDisk
      each has the right to use, fully exploit, disclose or otherwise dispose of
      such Joint Products and Technology for any purpose without consent of nor
      accounting to the other party.

6.6   Any right, title and interest in and to Jointly Developed Patents shall be
      jointly owned by Toshiba and SanDisk. Each party shall be free to use such
      Jointly Developed Patents for any purpose and shall have the right to
      grant non-exclusive licenses to any third party without the consent of nor
      accounting to the other party. Both parties shall promptly agree on which
      of them shall file and prosecute the first patent application and which
      countries' corresponding applications shall be filed and by whom. All
      expenses incurred in obtaining and maintaining such patents shall be
      shared equally by the parties; provided that if one party elects not to
      seek or maintain such patents in

                                       6


      any particular country or not to share equally in the expense thereof, the
      other party shall have the right to seek or maintain such patents in said
      country at its own expense and shall have full control over the
      prosecution and maintenance thereof even though title to any patent
      issuing thereon shall be joint. The party electing not to seek or maintain
      such patents shall give the other party any necessary assistance required
      for the preparation and prosecution of such patents filed or maintained by
      the other party. Jointly Developed Patents shall not be considered
      "SanDisk Licensed Patents" or "Toshiba Licensed Patents" as defined in the
      Patent Agreement.

ARTICLE 7. LICENSE

7.1   Subject to the terms and conditions of this Agreement, Toshiba hereby
      grants to SanDisk a non-exclusive, non-transferable, worldwide and
      royalty-free license, without the right to sublicense, to use Toshiba
      Background Technology provided to SanDisk hereunder to develop, have
      developed, make, have made, use, sell, modify and otherwise dispose of
      Products, SanDisk Controllers and any other controller products designed
      by or for SanDisk.

7.2   Subject to the terms and conditions of this Agreement, SanDisk hereby
      grants to Toshiba a non-exclusive, non-transferable, worldwide and
      royalty-free license, without the right to sublicense, to use SanDisk
      Background Technology provided to Toshiba hereunder to develop, have
      developed, make, have made, use, sell, modify and otherwise dispose of
      Products, Toshiba Developed Controllers and other controller products not
      designed or used for file storage.

7.3   Subject to the terms and conditions of this Agreement, SanDisk hereby
      grants to Toshiba a non-exclusive, non-transferable, worldwide and
      royalty-free license, without the right to sublicense, to make, have made,
      use, sell, modify and otherwise dispose of any Jointly Developed
      Controllers.

7.4   It is understood that SanDisk has the right to use, fully exploit,
      disclose, sublicense, transfer or otherwise dispose of SanDisk Controllers
      and any other controller product designed by or for SanDisk without
      consent from or accounting to Toshiba, even if such SanDisk Controllers or
      other controller products incorporate any Toshiba Background Technology.

ARTICLE 8. WARRANTY

8.1   Toshiba and SanDisk each provides to the other party its Background and
      Developed Technology on an "as-is" basis only, and neither makes any
      warranty or representation with respect to the Background Technology or
      Developed Technology for any purpose.

8.2   Nothing contained in this Agreement shall be construed as:

      (a)   a warranty or representation that the manufacture, use, sale or
            other disposal of semiconductor products by the other party using
            any technical information received under this Agreement will be free
            from infringement of patents or any other intellectual property
            rights of third party;

                                       7


      (b)   conferring to the other party any right to use in advertising,
            publicity or otherwise any trademark, trade name or names, any
            contraction, abbreviation or simulations thereof of either party;

      (c)   conferring to the other party, by implication, estoppel or
            otherwise, any license or other right except for the licenses and
            rights expressly granted hereunder; or

      (d)   an obligation to furnish any technical information or know-how
            except as otherwise specifically provided herein.

ARTICLE 9. LIMITATION OF LIABILITY

Neither party shall be responsible to the other party in respect of any action
taken or reliance upon any information furnished to the other party under this
Agreement, except to the extent of any breach of the warranties or agreements
set forth in this Agreement. IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE
OTHER PARTY FOR ANY SPECIAL, CONSEQUENTIAL, INCIDENTAL OR INDIRECT DAMAGE OF ANY
KIND, (INCLUDING LOSS OF PROFIT OR DATA) WHETHER OR NOT ADVISED OF THE
POSSIBILITY OF SUCH LOSS.

ARTICLE 10. CONFIDENTIALITY

10.1  As used in this Agreement, the term "Confidential Information" shall mean
      any information disclosed by one party to other party pursuant to this
      Agreement which is in written, graphic, machine readable or other tangible
      form and is marked Confidential, Proprietary or in some other manner to
      indicate its confidential nature. Confidential Information may also
      include oral information disclosed by one party to the other party
      pursuant to this Agreement; provided that such information is designated
      in a manner to indicate its confidential nature at the time of disclosure
      and reduced to a written summary by the disclosing party within thirty
      (30) days after its oral disclosure.

10.2  During the [***] period following receipt of such information, the
      receiving party shall keep, and cause its Subsidiaries, its sublicensees
      and subcontractors who have access to Confidential Information as
      permitted in this Agreement to keep any Confidential Information,
      including but not limited to Background Technology and Developed
      Technology provided by the disclosing party hereunder, in strict
      confidence, and shall not disclose such Confidential Information to any
      third party without the prior written consent of the disclosing party. The
      receiving party shall maintain the Confidential Information with at least
      the same degree of care that the receiving party uses to protect its own
      strictly confidential information, but no less than a reasonable degree of
      care under the circumstances. Further, the receiving party shall not use
      the Confidential Information for any purpose other than for the
      Development Projects, except as otherwise provided herein.

10.3  Each party shall not disclose the terms and conditions of this Agreement
      to any third party without the prior written consent of the other party.

10.4  The confidentiality obligation set forth in Articles 10.2 and 10.3 above
      shall not apply to any information which:

[***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

                                       8


      (a)   is already known by the receiving party at the time of disclosure;

      (b)   is or becomes publicly known through no fault of the receiving
            party;

      (c)   is rightfully received by the receiving party from a third party
            without any restriction on disclosure;

      (d)   is independently developed by the receiving party;

      (e)   is disclosed with the prior written consent of the disclosing party
            hereto; or

      (f)   is disclosed pursuant to applicable laws, regulations or court
            order, provided that the receiving party shall give the disclosing
            party prompt notice of such request so that the disclosing party has
            an opportunity to defend, limit or protect such disclosure.

10.5  Each party understands that disclosure or dissemination of the other
      party's Confidential Information, specifically Toshiba Background
      Technology provided to SanDisk in connection with the Development
      Projects, not expressly authorized hereunder would cause irreparable
      injury to such other party, for which monetary damages would not be an
      adequate remedy and said other party shall be entitled to equitable relief
      in addition to any remedies the other party may have hereunder or at law.
      In the event SanDisk is to enter into any joint development work with any
      third party, SanDisk warrants that Toshiba Background Technology provided
      to SanDisk in connection with the Development Projects shall neither be
      used for such joint development work nor be disclosed to any third party
      unless expressly otherwise provided hereunder.

10.6  The Technical Coordinator of each party shall ensure that the other
      party's Technical Coordinator is informed of and receives in sufficient
      detail and completeness the Background and Developed Technology that is
      exchanged under Article 2. Each Technical Coordinator shall also monitor
      within their company the distribution of Confidential Information received
      from the other party only to those who have a need to know and, further,
      to assist in preventing the unauthorized disclosure of the Confidential
      Information to personnel within the company who do not have a need to
      know, or to third parties. The Technical Coordinator for each party shall
      maintain pertinent records and the like, and acknowledge the receipt from
      the other party of all Confidential Information.

ARTICLE 11. TERM AND TERMINATION

11.1  This Agreement shall become effective on the Direct R&D Effective Date and
      continue in full force and effect until later of the termination of the
      FVC-Japan Master Agreement or the Master Agreement, unless earlier
      terminated as hereinafter provided. The term of this Agreement may be
      extended by mutual agreement of both parties.

11.2  If either party fails to perform or breaches any of its material
      obligations under this Agreement, then, upon sixty (60) days advanced
      written notice specifying such failure or breach, the non-defaulting party
      shall have the right to terminate this Agreement forthwith, unless the
      failure or breach specified in the notice has been cured during

                                       9


      the sixty (60) day period. Termination of this Agreement pursuant to this
      Section 11.2 shall not relieve the breaching party from any liability
      arising from any breach of this Agreement and such termination shall be
      without prejudice to any other rights and remedies of the non-breaching
      party provided at law or in equity, in addition to the rights and remedies
      set forth in this Agreement.

11.3  Either party shall have the right to terminate this Agreement by giving
      written notice to the other party upon the occurrence of any of the
      following events:

      (a)   the filing by the other party of a voluntary petition in bankruptcy
            or insolvency;

      (b)   any adjudication that such other party is bankrupt or insolvent;

      (c)   the filing by such other party of any legal action or document
            seeking reorganization, readjustment or arrangement of its business
            under any law relating to bankruptcy or insolvency;

      (d)   the appointment of a receiver for all or substantially all of the
            property of such other party; or

      (e)   the making by such other party of any assignment of whole or
            substantial assets for the benefit of creditors.

      This Agreement shall terminate on the thirtieth (30th) day after such
      notice of termination is given.

11.4  In the event of termination or expiration of this Agreement, the rights
      and licenses granted to each party specified in Article 7 shall survive
      such termination or expiration, except that if this Agreement is
      terminated by either party for any of the events specified in Sections
      11.2 and 11.3, then the licenses granted to the defaulting party or the
      non-terminating party, as the case may be, shall thereupon terminate. The
      provisions of Articles 6, 8, 9, 10, 11 and 12 shall survive any
      termination or expiration of this Agreement.

ARTICLE 12. GENERAL PROVISIONS

12.1  Neither party is required to disclose any information of which disclosure
      is prohibited by laws of the country of such party.

12.2  In the event that the parties will, after the Effective Date, make an
      announcement regarding this transaction and their business relationship,
      such announcement shall be in a mutually agreeable form and at a mutually
      agreeable time; provided that any information to be disclosed and/or
      announced by either party shall be identified through consultation with
      the other party and be agreed upon between the parties before the
      disclosure and announcement.

12.3  Neither party shall export or re-export, directly or indirectly, any
      technical information disclosed hereunder or direct product thereof to any
      destination prohibited or restricted by the export control regulations of
      Japan and the United

                                       10


      States, including the U.S. Export Administration Regulations, without the
      prior authorization from the appropriate governmental authorities. SanDisk
      hereby certifies that SanDisk will not use technical information supplied
      by Toshiba hereunder for any purpose to develop or manufacture nuclear,
      chemical, biological weapons or missiles (hereafter "weapons of mass
      destruction"). SanDisk further certifies that it will not sell any
      products manufactured using Toshiba's technical information to any party
      if it knows that the end-user of the products will use them for the
      development and/or manufacture of the weapons of mass destruction.

12.4  The rules of construction and documentary conventions set forth in
      Appendix A to this Agreement shall apply to, and are hereby incorporated
      in, this Agreement.

                             [signatures next page]

                                       11


      IN WITNESS WHEREOF, each of the parties hereto have caused this Agreement
to be executed in duplicate, as of the date first written above, by their
respective duly authorized officers or representatives.

       Toshiba Corporation                              SanDisk Corporation

By: /s/ Masashi Muromachi                          By: /s/ Eli Harari
    ----------------------                             -------------------------
Name:  Masashi Muromachi                           Name:  Eli Harari
Title: President and CEO                           Title: President and CEO
       Semiconductor Company
       Corporate Vice President

[signature page to Amended and Restated Product Development Agreement]



                                    Exhibit A

      Jointly Developed Products and Jointly Developed Flash Memory Controllers

1.    256 M       NAND Flash Memory

2.    512 M       NAND Flash Memory

3.    1 G         NAND Flash Memory

4.    2 G         NAND Flash Memory

5.    4 G         NAND Flash Memory

6.    [***]

Note 1: The Coordinating Committee will determine (i) the best process
technology to utilize for all products to be jointly developed pursuant to this
Agreement (e.g. 0.16 micron, 0.13 micron, 90 nanometer and smaller sizes), (ii)
whether such products shall use [***] or [***] and (iii) detail product
specifications, such as, but not limited to, voltage operating range [***].

Note 2: The Coordinating Committee shall be responsible for determining
development responsibilities of each party with respect to jointly developed
products.

Note 3: All Products and Flash Memory Controllers jointly developed hereunder
shall include the development of wafer test products. A "wafer test product" is
a test system used to test semiconductor wafers.

[***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.



                                    Exhibit B

                       SHARING OF WAFER PROCESSING COSTS -
       (For Jointly Developed Products and Jointly Developed Controllers)

                           Jointly Developed Products

            [***]

                          Jointly Developed Controllers

      (1) Wafer processing cost associated with Jointly Developed Controllers
      will be shared by the parties as determined by the Coordinating Committee
      in accordance with Section 3.2.

      Note 1: All costs charged pursuant to this Exhibit B are direct costs and
      have been referred to by the parties as Direct R&D charges. Original
      back-up information and financial detail of all such charges shall be made
      available to the party paying the shared expense, and all such charges are
      subject to financial audit by the external auditors of the party paying
      the charge. The party receiving payment shall cooperate with all
      reasonable requests to view and make copies of financial back-up and
      financial detail material associated with the charges.

      Note 2: Payments specified above shall be made within sixty (60) days
      after receipt of invoice issued at the end of each calendar half year.

[***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.



                                    Exhibit C

[***]

[***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.



                                    Exhibit D

                              Information Exchange

[***]

[***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

EX-10.5

                                                                    EXHIBIT 10.5

                               MUTUAL CONTRIBUTION
                   AND ENVIRONMENTAL INDEMNIFICATION AGREEMENT

This MUTUAL CONTRIBUTION AND ENVIRONMENTAL INDEMNIFICATION AGREEMENT, dated as
of September 10, 2004, is entered into by and among, on one side, Toshiba
Corporation, a Japanese corporation ("Toshiba"), and, on the other side, SANDISK
CORPORATION, a Delaware corporation, and SanDisk International Limited, a
company organized under the laws of the Cayman Islands ("SanDisk International",
and collectively with SanDisk Corporation, "SanDisk," and SanDisk together with
Toshiba, the "Parties").

                                    RECITALS

      WHEREAS, Toshiba and SanDisk are parties to that certain Flash Partners
Master Agreement, dated as of the date hereof (the "Master Agreement");

      WHEREAS, pursuant to the terms of the Master Agreement and other Operative
Documents, Flash Partners Y.K., a Japanese yugen kaisha (the "Company"), will
have Y3 NAND Flash Memory Products manufactured at the Y3 Facility; and

      WHEREAS, Toshiba and SanDisk have agreed to mutually contribute to, and
indemnify each other and the Company for, environmental remediation costs or
liability resulting from such manufacturing operations as set forth below.

      NOW, THEREFORE, the Parties agree as follows:

1.    DEFINITIONS AND INTERPRETATION.

1.1   Master Agreement. Appendix A to the Master Agreement is hereby
      incorporated into this Agreement. Capitalized terms used but not defined
      in this Agreement shall have the meanings given to them in Appendix A.

1.2   Definitions. The following terms used in this Agreement shall have the
      following respective meanings:

(a)   "Environmental Laws" means all Applicable Laws in Japan, including, but
      not limited to, the Soil Contamination Control Law (Dojyouosen Taisaku Ho,
      Law No. 53 of 2002), now or hereafter in effect relating to the protection
      of human health, safety, and the environment from emissions, discharges,
      releases or threatened releases of pollutants, contaminants (chemical or
      industrial), toxic or Hazardous Substances or wastes into the environment
      (including, ambient air, soil, surface water, ground water, wetlands, land
      or subsurface strata), or otherwise relating to the manufacture,
      processing, distribution, use, treatment, storage, disposal, transport or
      handling or investigation or remediation of pollutants, contaminants,
      chemicals or industrial, toxic or hazardous substances or wastes.

(b)   "Hazardous Substances" means petroleum, petroleum hydrocarbons or
      petroleum products, petroleum by-products, radioactive materials, asbestos
      or asbestos-containing

CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.

                                       1


      materials, gasoline, diesel fuel, pesticides, radon, urea formaldehyde,
      lead or lead-containing materials, polychlorinated biphenyls; and any
      other chemicals, materials, substances or wastes in any amount or
      concentration which are now or hereafter become defined as or included in
      the definition of "hazardous substances," "hazardous materials,"
      "hazardous wastes," "extremely hazardous wastes," "restricted hazardous
      wastes," "toxic substances," "toxic pollutants," "pollutants," "regulated
      substances," "solid wastes," or "contaminants" or words of similar import,
      under any Environmental Law.

2.    ENVIRONMENTAL INVESTIGATIONS.

2.1   Environmental Consultants. The Parties acknowledge that each of SanDisk
      and Toshiba has engaged an environmental consulting company to conduct an
      environmental investigation on its behalf as to the surface and subsurface
      conditions existing on the proposed site of the Y3 Facility (each a
      "Consultant" and the Consultant engaged by SanDisk, the "SanDisk
      Consultant" and the Consultant engaged by Toshiba (the "Toshiba
      Consultant"). SanDisk shall be solely responsible for the fees and costs
      charged by the SanDisk Consultant and shall indemnify and hold harmless
      Toshiba and the Company from any claims for compensation or damages made
      by the SanDisk Consultant. Toshiba shall be solely responsible for the
      fees and costs charged by the Toshiba Consultant and shall indemnify and
      hold harmless SanDisk and the Company from any claims for compensation or
      damages made by the Toshiba Consultant; provided, however, that fees and
      costs incurred by the Toshiba Consultant after the Closing and other than
      in connection with finalizing the Baseline Environmental Report (as
      defined below) shall be chargeable to and payable by the Company, which
      fees and costs shall be chargeable to and payable by the Parties through
      wafer price increases.

2.2   Scope of Review. Each Consultant has performed the activities customarily
      associated with Phase I (tochirireki chosa) and Phase II (osen jokyo
      kakunin chosa) studies. Such activities were performed at the Y3 Facility
      and elsewhere at the Yokkaichi Facility as identified in the Toshiba
      Consultant's reports and the SanDisk Consultant's reports; provided,
      however, that the Parties acknowledge that due to construction activities
      at the Y3 Facility the SanDisk Consultant was not permitted to obtain soil
      or water samples from those areas identified on Exhibit A (such areas, the
      "Untested Areas").

2.3   Information from Monitoring Activities. Toshiba shall share, or cause to
      be shared, with SanDisk and, upon SanDisk's request, the SanDisk
      Consultant, the results of any monitoring activities conducted by Toshiba
      or its Affiliates with respect to the surface and subsurface conditions on
      the site of the Y3 Facility on or after the Effective Date and until the
      FP Termination Date; provided that if as of the FP Termination Date any
      claims have been made against SanDisk with respect to its indemnification
      obligations hereunder, on SanDisk's request, Toshiba shall continue to
      provide SanDisk the results of any monitoring activities to the extent
      such results may affect the evaluation or determination of alleged
      liability of SanDisk hereunder. The Parties acknowledge and agree that any
      such information concerning the Y3 Facility shall be considered
      Confidential Information of the Company and any such information
      concerning the

                                       2


      Yokkaichi Facility (including the Y3 Facility) shall be considered
      Confidential Information of Toshiba.

3.    BASELINE ENVIRONMENTAL REPORT.

      Each Party shall direct the Consultant retained by it to (i) provide the
      other Consultant and other Party with its initial environmental report on
      the Y3 Facility and (ii) discuss the reports in good faith with the other
      Consultant with the intent of the Parties and their Consultants agreeing
      upon a single, combined report (the "Baseline Environmental Report"). If
      Toshiba, SanDisk and the Consultants are unable to agree upon a single
      report within sixty (60) days after the Closing, then the draft reports of
      both Consultants (or combined report indicating areas of disagreement)
      shall collectively be considered to be the Baseline Environmental Report.

4.    ENVIRONMENTAL COMPLIANCE.

4.1   The Parties confirm their intent that the Y3 Facility and all operations
      of the Company be maintained in compliance with all Environmental Laws,
      including by having remedial measures taken as required by any
      Governmental Authority or otherwise reasonably necessary to ensure that
      the Y3 Facility and all operations of the Company will remain in
      compliance with all Environmental Laws.

4.2   Each Party shall promptly notify the other of any circumstances of which
      it becomes aware that require or could reasonably be expected to require
      remediation or other actions to ensure that the Company and its operations
      are and will be maintained in compliance with all Environmental Laws and
      to minimize the aggregate Covered Environmental Costs (as defined below)
      that may be incurred. Upon any such notice being given and received, the
      Parties shall promptly discuss in good faith and seek to agree upon the
      measures to be taken in response to such circumstances. Pending their
      agreement, nothing shall prevent or limit Toshiba, acting in good faith on
      its own initiative or upon SanDisk's reasonable request, from
      investigating the circumstances of any releases of Hazardous Substances or
      taking steps reasonably appropriate to limit or prevent ongoing releases,
      to limit the effects of a release, or to prevent or limit any exposure or
      damage resulting from, arising out of or otherwise by virtue of a release,
      including taking immediate or urgent steps as appropriate in light of the
      circumstances then known, provided, that nothing in this paragraph shall
      require either Party to take any step except as required by applicable
      Environmental Law.

5.    INDEMNIFICATION OBLIGATIONS.

5.1   Mutual Responsibility and Indemnity for Environmental Costs.

(a)   Subject to Section 5.1(b), each of SanDisk and Toshiba shall:

      (1)   be responsible for bearing 50% of all costs, expenses or liability
            (including claims by third parties or any Governmental Authority)
            resulting from any contamination from the release or discharge of
            Hazardous Substances resulting from, arising out

                                       3


            of or otherwise by virtue of the operation of the Y3 Facility from
            the Closing until the FP Termination Date, including any and all
            costs to investigate, remove or remediate any release of Hazardous
            Substances or otherwise reasonably necessary to assure that the
            Company and the Y3 Facility are and will (until the FP Termination
            Date) remain in compliance with then applicable Environmental Laws
            ("Environmental Costs"); and

      (2)   indemnify, defend and hold harmless the other Party and the Company
            (and their respective Indemnified Parties) for its 50% share of all
            Environmental Costs.

(b)   Each of SanDisk's and Toshiba's responsibility for 50% of Environmental
      Costs under Section 5.1(a) shall be subject to each of the following
      limitations (Environmental Costs not excluded from the one or both
      Parties' responsibility under this Section 5.1(b), "Covered Environmental
      Costs"):

      (1)   Except as provided in Section 5.2(a), neither Party shall be
            responsible for conditions identified in the Baseline Environmental
            Report, including responsibility for any Environmental Costs
            resulting from, arising out of or otherwise by virtue of remediation
            or removal of pre-existing conditions. However, if remedial measures
            otherwise taken in accordance with this Agreement incidentally
            result in remediation or removal of conditions not resulting from
            operation of the Y3 Facility, only the Environmental Costs paid for
            the remedial measures taken with respect to the Y3 Facility
            (including amounts paid for remedial measures taken with respect to
            the Y3 Facility that return the Y3 Facility to a condition better
            than that identified in the Baseline Environmental Report) shall
            constitute Covered Environmental Costs.

      (2)   Neither Party shall be responsible for Environmental Costs to the
            extent such Environmental Costs are incurred as a result of the
            willful misconduct of employees, agents or representatives of the
            other Party.

      (3)   Environmental Costs incurred for remediation shall only constitute
            Covered Environmental Costs to the extent reasonably necessary to
            ensure that the Company fulfills the Prudent Operator Standard. The
            "Prudent Operator Standard" means taking all such remedial measures
            (i) as are required to be in compliance with all then effective
            Environmental Laws, (ii) that have been required by a Governmental
            Authority or (iii) that a prudent operator of a similar facility
            would then take or begin to take to ensure that its continuing
            operations and facilities will remain in compliance with then
            effective Environmental Laws and with Environmental Laws as they are
            then scheduled to go into effect or are anticipated to be changed in
            the next [***].

      (4)   No Environmental Costs shall constitute Covered Environmental Costs
            with respect to either Party to the extent such Party's liability
            limit under Section 5.5 has been exceeded.

[***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

                                       4


(c)   If the Parties are not able to agree on whether any given Environmental
      Costs constitute Covered Environmental Costs (including whether
      remediation is necessary to fulfill the Prudent Operator Standard, such
      dispute shall be resolved by the mediation and arbitration provisions of
      Appendix A.

5.2   Toshiba Indemnity. Toshiba shall indemnify SanDisk and its Indemnified
      Parties from any environmental costs, expenses or liabilities of SanDisk
      resulting from, arising out of or otherwise by virtue of:

(a)   environmental conditions existing at the Yokkaichi Facility, including the
      Y3 Facility, prior to the Closing;

(b)   the actions or omissions of Toshiba, its Affiliates or its or their
      respective employees, directors, agents or representatives (other than in
      connection with the operation of the Y3 Facility), for which Toshiba shall
      be solely responsible; provided however, that Toshiba shall have no
      indemnification obligation under this Section 5.2(b) to the extent that
      any Environmental Costs result from, arise out of or otherwise occur by
      virtue of actions or omissions of SanDisk, its Affiliates or its or their
      respective employees, directors, agents or representatives, for which
      SanDisk shall be solely responsible; or

(c)   from the operations of the Y3 Facility after the FP Termination Date
      (unless SanDisk is the Buyer for purposes of Section 5.3, in which case
      this Section 5.2(c) shall not apply).

5.3   Buyer Indemnity. If either of Toshiba or SanDisk (as "Buyer") acquires the
      interests of the other (as "Seller") in the Company and the Y3 Facility
      (whether through acquiring its Units in the Company, by an asset sale and
      liquidation or by other means), then, subject to Section 7, Buyer shall
      indemnify Seller and its Indemnified Parties from any environmental costs,
      expenses or liability of Seller resulting from, arising out of or
      otherwise by virtue of, operations of the Y3 Facility after the FP
      Termination Date. However, Buyer shall have no indemnification obligation
      under this Section 5.3 to the extent that any Seller environmental costs,
      expenses or liabilities result from, arise out of or otherwise by virtue
      of actions or omissions of Seller, its Affiliates or its or their
      respective employees, directors, agents or representatives.

5.4   Control by Indemnifying Party.

(a)   The indemnifying Party under Section 5.2 or 5.3 shall have the sole right
      to control the defense of any claim and the method and scope of
      remediation with respect to which the indemnified Party seeks
      indemnification, provided that the indemnifying Party shall not enter into
      any settlement that would materially affect the operations of the
      indemnified Party at the Yokkaichi Facility unless the indemnified Party
      has granted its prior written consent.

(b)   The Parties shall cooperate in good faith to seek to agree upon the means
      of joint defense of any third party claim giving rise to Covered
      Environmental Costs (with any disagreement to be resolved by the mediation
      and arbitration provisions set forth in Appendix A).

                                       5


5.5   Liability Limit. Neither Party's aggregate liability for Covered
      Environmental Costs or indemnification obligations under Sections 5.1, 5.2
      and 5.3 shall exceed the greater of US$5 million or the aggregate purchase
      price of Y3 NAND Flash Memory Products by such Party from the Company
      during the six years prior to the date of the applicable claim. (or in the
      case of liability arising after the FP Termination Date, for the six year
      period immediately preceding the FP Terminate Date).

6.    SATISFACTION OF INDEMNIFICATION OBLIGATIONS.

6.1   Prompt Payment. Each Party shall promptly pay its 50% share of any Covered
      Environmental Costs paid by the Company or by the other Party in excess of
      its obligation to bear 50% of the Covered Environmental Costs. In
      principle, Toshiba and SanDisk shall bear their respective 50% shares of
      any given Covered Environmental Costs via adjustments to the purchase
      prices they pay Company for Y3 NAND Flash Memory Products, pursuant to the
      applicable Master Operative Documents. The Parties shall discuss in good
      faith the means and the timing of payment of their respective 50% share of
      Covered Environmental Costs, taking into account when the Covered
      Environmental Costs are paid by the Company or by the other Party and the
      amount of such Covered Environmental Costs. To the extent the obligations
      of either Party will not be timely or fully retired by wafer price
      increases, the Parties shall directly pay their respective 50% share of
      Covered Environmental Costs.

6.2   Action in the Name of the Company. Either Party making a demand for
      indemnification or contribution pursuant to this Agreement shall be
      entitled, notwithstanding anything to the contrary in the Master Agreement
      or FP Operating Agreement, to cause the Company to make such demand, if
      doing so is appropriate to fulfill the intent of this Section 6 (e.g., if
      the Company has borne the Covered Environmental Costs and the claiming
      Party has already reimbursed the Company 50% of the same).

7.    POST TERMINATION ENVIRONMENTAL COSTS AND EXIT ENVIRONMENTAL REPORT.

7.1   Environmental Costs Paid Post Termination. Except as otherwise set forth
      in this Section 7, the Parties' obligations under Section 5.1 shall expire
      as of the FP Termination Date:

(a)   In respect of Environmental Costs for remediation, to the extent the Exit
      Environmental Report identifies contamination at the Y3 Facility and a
      good faith claim concerning shared responsibility for such remediation
      costs is made by one of the Parties before the FP Termination Date, any
      obligations of the Parties under Section 5.1(a) (subject to Section
      5.1(b)) in respect of remediation of such contamination shall survive the
      FP Termination Date, but only for so long and to the extent the Prudent
      Operator Standard continues to require remediation in respect of such
      contamination.

                                       6


(b)   In respect of Covered Environmental Costs resulting from a bona fide third
      party claim, the Parties obligations under Section 5.1(a) (subject to
      Section 5.1(b)) shall survive [***].

7.2   Exit Environmental Report.

(a)   Promptly upon (i) the exercise by either Party of any right under the FP
      Operating Agreement and/or Master Agreement to acquire the Units of the
      other Party in the Company, to sell its Unit in the Company to the other
      Party or to cause the dissolution of the Company, or (ii) entering into
      any letter of intent or agreement for the sale of the Y3 Facility or all
      or substantially all of the assets (leased or owned) of the Company, the
      Parties shall engage an environmental consultant from an internationally
      recognized environmental investigation firm that has experience in Japan
      and that is mutually acceptable to the Parties (the "Exit Consultant") to
      conduct and complete Phase I and Phase II investigations of the Y3
      Facility as of a date as close as practicable to but in any event in
      advance of the FP Termination Date. Toshiba shall facilitate the Exit
      Consultant's access to the Yokkaichi Facility as reasonably necessary to
      conduct such investigations.

(b)   The Exit Consultant shall be directed to prepare a draft report based on
      its Phase I and Phase II investigations and to deliver the draft report to
      SanDisk and Toshiba (and if either so directs, to any environmental
      consultant either Party has engaged for its own account). SanDisk and
      Toshiba, directly and/or through their respective consultants, shall have
      60 days from receipt to comment on the draft report (any such comment
      shall be delivered both to the Exit Consultant and the other Party and any
      consultant it engages for its own account). The Exit Consultant shall then
      be directed to issue to the Parties its final report (the "Exit
      Environmental Report"), which shall be final and binding on the Parties.

(c)   Covered Environmental Costs arising from the Exit Environmental Report
      process shall be payable as provided in Section 6.1.

(d)   Unless all payments due for Covered Environmental Costs in connection with
      the Exit Environmental Report process have been made before the FP
      Termination Date, the Buyer shall be entitled to withhold from the
      purchase price payable (or distributable) to Seller and place into third
      party escrow up to [***] of such purchase price (but not to exceed the
      balance of Seller's liability limit in Section 5.5), which shall serve as
      security for Seller's responsibility for Covered Environmental Costs
      determined pursuant to this Section 7.

7.3   [***]

8.    MISCELLANEOUS.

8.1   Survival. Sections 5, 6, 7 and 8 and Appendix A shall survive the
      termination or expiration of this Agreement.

[***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

                                       7


8.2   Entire Agreement. This Agreement, together with the exhibits, schedules,
      appendices and attachments thereto, constitutes the agreement of the
      Parties to this Agreement with respect to the subject matter hereof and
      supersedes all prior written and oral agreements and understandings with
      respect to such subject matter.

8.3   Governing Law. This Agreement shall be governed and construed as to all
      matters including validity, construction and performance by and under the
      substantive laws of Japan.

8.4   Dispute Concerning Prudent Operator Standard. Notwithstanding anything to
      the contrary in Section 2.5 of Appendix A, if the Parties are not able to
      agree upon what application of the Prudent Operator Standard requires with
      respect to any given proposed remediation hereunder, at the request of
      either of them they shall engage a neutral and independent environmental
      consultant acceptable to both Parties (the "Independent Consultant") to
      facilitate resolution of such dispute. The Parties (and at the option of
      each of them their own environmental consultants) shall meet and discuss
      the matter with the Independent Consultant and seek in good faith to
      resolve the dispute. If the Parties are not able to resolve the dispute
      within 60 days after initiating discussions with the Independent
      Consultant, then at any time after such 60 day period either Party may
      bring an arbitration claim pursuant to Section 2.5 of Appendix A to
      resolve the dispute concerning application of the Prudent Operator
      Standard.

8.5   Assignment. Neither party hereto may transfer this Agreement or any of its
      rights hereunder (except for any transfer to an Affiliate or in connection
      with a merger, consolidation or sale of all or substantially all the
      assets or the outstanding securities of such party, which transfer shall
      not require any consent of the other party) without the prior written
      consent of the other party hereto (which consent may be withheld in such
      other party's sole discretion), and any such purported transfer without
      such consent shall be void.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                                       8


      IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed
and delivered as of the date and year first above written.

                                               TOSHIBA CORPORATION

                                               By:    /s/ Masashi Muromachi
                                                      --------------------------
                                               Name:  Masashi Muromachi
                                               Title: President and CEO
                                                      Semiconductor Company
                                                      Corporate Vice President

                                               SANDISK CORPORATION

                                               By:    /s/ Eli Harari
                                                      --------------------------
                                               Name:  Eli Harari
                                               Title: President and CEO

                                               SANDISK INTERNATIONAL LIMITED

                                               By:    /s/ Eli Harari
                                                      --------------------------
                                               Name:  Eli Harari
                                               Title: President

[Signature page to Mutual Contribution and Environmental Indemnification
Agreement]

                                       9


                                    EXHIBIT A

                                      [***]

                                       10

EX-10.6

                                                                    EXHIBIT 10.6

                        PATENT INDEMNIFICATION AGREEMENT

This PATENT INDEMNIFICATION AGREEMENT, dated and effective as of September 10,
2004, is entered into by and among, on one side, Toshiba Corporation, a Japanese
corporation ("Toshiba"), and, on the other side, SanDisk Corporation, a Delaware
corporation ("SanDisk Corporation") [***] "SanDisk," and SanDisk together with
Toshiba, the "Parties").

      WHEREAS, Toshiba and SanDisk are parties to that certain Flash Partners
Master Agreement, dated as of the date hereof (the "Master Agreement");

      [***]

      WHEREAS, recognizing that the products SanDisk will acquire from the
Company will have been manufactured using Toshiba patents and technology, and
recognizing that SanDisk, as an owner of the equity interests in the Company,
will benefit from Toshiba's making available its patents and technology to the
Company, the Parties have determined to enter into this Agreement, which is
required by the Master Agreement.

      NOW, THEREFORE, the Parties agree as follows:

1.    INDEMNIFICATION.

1.1   Patent Infringement. With regard to any and all sales of Y3 NAND Flash
      Memory Products by the Company to SanDisk ("Company Products"):

(a)   Subject to the terms and conditions listed below, Toshiba agrees to
      indemnify and defend SanDisk in any legal proceeding, lawsuit or other
      judicial action, and [***] against SanDisk [***], for [***] claims that
      the Company Products supplied by the Company infringe any [***] patent(s).
      With regard to any claim of patent infringement for which Toshiba has
      indemnification obligations hereunder, Toshiba's obligations are subject
      to the following conditions:

      (i)   SanDisk shall notify Toshiba in writing of such claim [***];

      (ii)  SanDisk shall also notify Toshiba, in writing [***] by a third party
            which claims that the Company Products infringe such third party's
            patents or threatens legal action against SanDisk, [***];

      (iii) SanDisk shall provide Toshiba with notice of any other written
            communication indicating potential patent infringement claims
            against the Company Products [***]; provided, however, SanDisk's
            failure to provide such notice shall in no way constitute a breach
            of this Agreement by SanDisk nor in any way excuse Toshiba's
            obligations under this Agreement;

CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.

[***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

                                       1



      (iv)  [***], Toshiba shall have the sole and exclusive control of the
            defense or settlement of such claim, [***]; and

      (v)   SanDisk shall provide all reasonable assistance in defending such
            claim.

(b)   Notwithstanding the foregoing, Toshiba shall not be obligated to indemnify
      or defend SanDisk in the event that such infringement arises from:

      (i)   [***]

      (ii)  [***]

      (iii) [***]

(c)   [***]

(d)   [***]

(e)   In addition to the obligations set forth above, should any third party
      patent claim result in a temporary or permanent injunction against the
      manufacture, use, sale, offer for sale, importation or otherwise disposal
      of the Company Products by SanDisk, Toshiba shall use best efforts to
      undertake one of the following actions:

      [***]

(f)   The total cumulative liability of Toshiba under this Agreement, exclusive
      of the remedy set forth in subparagraph (e), above, shall be limited to an
      amount not to exceed the greater of (x) [***] (y) [***].

1.2   [***]

(a)   If either Party receives a notice of a [***] or becomes aware that the
      Company has received such a notice, it shall promptly notify the other
      Party. Promptly following the notified Party's receipt of such notice from
      the notifying Party, the Parties shall meet and discuss in good faith
      whether and how [***], in accordance with the principles set forth in
      Section 1.2(b).

(b)   In discussing and evaluating [***], Toshiba and SanDisk shall discuss and
      agree upon [***].

(c)   If despite their good faith efforts the Parties are not able to agree upon
      [***] pursuant to Section 1.2(b) for [***], the matter shall be resolved
      in accordance with the dispute resolution procedures set forth in the
      Master Agreement.

(d)   [***].

1.3   [***]

[***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

                                       2


2.    TERMINATION

      This Agreement shall terminate [***] and upon such termination, this
      Agreement shall be of no further force and effect, and Toshiba and SanDisk
      shall thereafter have no liability hereunder.

3.    MISCELLANEOUS

3.1   Certain Definitions and Interpretive Rules.

(a)   As used herein, the term "Agreement" means this Patent Indemnification
      Agreement together with any exhibits, schedules, appendices and
      attachments hereto.

(b)   Capitalized terms used but not defined in the main body of this Agreement
      shall have the respective meanings assigned to them in attached Appendix
      A. If any capitalized term used in this Agreement is not defined in either
      the main body of this Agreement or Appendix A, it shall have the meaning
      assigned to it in the Master Agreement.

(c)   The rules of construction and documentary conventions and general terms
      and conditions set forth in Appendix A shall apply to this Agreement.

3.2   [***]

3.3   Survival. Except as otherwise specifically provided in this Agreement, all
      covenants, agreements, representations and warranties of the Parties made
      in or pursuant to such agreement or instrument shall survive the execution
      and delivery of such agreement or instrument and the closing of the
      transactions contemplated thereby, notwithstanding any investigation by or
      on behalf of any party. Further, the provisions set forth in this Article
      III shall survive and shall apply with respect to this Agreement following
      termination thereof pursuant to Article II hereof.

3.4   Assignment. Neither Party shall transfer, or grant or permit to exist any
      Lien (except Permitted Liens) on, this Agreement or any of its rights
      hereunder, (except for any transfer to an Affiliate or in connection with
      a merger, consolidation or sale of all or substantially all the assets or
      the outstanding securities of such Party, which transfer shall not require
      any consent of the other Party) without the prior written consent of the
      other Party (which consent may be withheld in each such other Party's sole
      discretion), and any such purported transfer or Lien without such consent
      shall be void. [***].

3.5   Governing Law. This Agreement shall be governed and construed as to all
      matters including validity, construction and performance by and under the
      substantive laws of the State of California.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

[***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

                                       3


IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed and
delivered as of the date and year first above written.

                                           TOSHIBA CORPORATION

                                           By:    /s/ Masashi Muromachi
                                                  ------------------------------
                                           Name:  Masashi Muromachi
                                           Title: President and CEO
                                                  Semiconductor Company
                                                  Corporate Vice President

                                           SANDISK CORPORATION

                                           By:    /s/ Eli Harari
                                                  ------------------------------
                                           Name:  Eli Harari
                                           Title: President and CEO

                                           [***]

[Signature page to Patent Indemnification Agreement]

[***] INDICATES THAT CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24B-2. CONFIDENTIAL TREATMENT
HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

                                       4

EX-10.7

                                                                    EXHIBIT 10.7

June 29, 2004

Michael Gray
11992 Brookridge Drive
Saratoga, CA  95070

                      RE: Settlement and Release Agreement

Dear Michael:

            This letter confirms the terms of our agreement regarding the
termination of your employment with SanDisk Corporation. ("SanDisk" or the
"Company"). We agree that your employment with the Company will terminate on
October 4, 2004 (such termination date referred to in this letter as your
"Termination Date"). Commencing on June 21, 2004 and continuing through your
Termination Date, you will report to Eli Harari on a regular part-time basis (of
at least 20 hours per week) as Senior Vice President and your job will be to
assist Ms. Bruner with transitional duties as reasonably requested by the
Company and such other duties as we may agree upon with you. You will be
provided with an office, computer, cell phone and other normal office tools
through your Termination Date.

            On your Termination Date, you will be paid your accrued but unused
vacation pay as well as your pay through the Termination Date, less applicable
deductions and withholdings. On the eighth day following our receipt of your
signed Supplement to General Release (to be signed by you in the form attached
as Exhibit A on or after your Termination Date, but not later than 30 days
following your Termination Date), the Company will provide you with the
following benefits. On such eighth day, the Company will pay you a lump sum,
representing your base salary, less applicable deductions and withholdings, with
no accrual of vacation pay, covering the period October 5, 2004 through December
31, 2004. The Company also agrees to pay your COBRA premium through October 31,
2005, or until you commence full-time employment or commence a full-time
consulting arrangement with another entity, company or individual that provides
regular medical benefits, whichever occurs first. You are obligated to notify
the Company within five days of commencing such an employment or consulting
arrangement. As used herein, full-time employment or full-time consulting shall
mean at least 40 hours of service per week. Your access to company email and
voicemail will terminate on the Termination Date. Your rights to all Company
benefits, other than our payment of your COBRA premium as specified above,



Michael Gray
June 29, 2004
Page 2

including without limitation, life insurance, 401K participation (however, you
may continue to keep your 401k funds at SanDisk without further contribution on
your part in accordance with the rules of the Company, as may be amended from
time to time), ESPP participation, disability insurance and bonus pay for 2004
shall cease as of the Termination Date. You agree you will not receive bonus pay
for 2004.

            Your outstanding stock options will continue to vest on their
regularly scheduled vesting dates through and until your Termination Date.
Attached as Exhibit B is a chart which identifies each of your outstanding
option grants, the shares that are currently exercisable, the expiration date of
each option, and your last date to exercise assuming an October 4, 2004
Termination Date. Exhibit B also shows the number of additional shares that will
vest under each of your outstanding stock options from the date you sign this
Agreement through October 4, 2004 pursuant to the current vesting schedule in
effect for each such option. The shares set out in Exhibit B will be exercisable
by you according to the terms of your existing stock option agreements and the
plan. All shares that are currently exercisable under these options or that will
vest prior to your Termination Date will remain exercisable only through the end
of the applicable exercise period following your Termination Date, and no
additional shares under your options will vest following your Termination Date.
The applicable exercise period following your Termination Date will be two (2)
months for any options granted to you before June 20, 2001 and will be three (3)
months for any options granted to you on or after June 20, 2001.

            To the extent your options are incentive stock options (ISOs) under
the federal tax laws, you will recognize immediate taxable income, for
alternative minimum tax purposes, upon exercise in an amount equal to the fair
market value of the shares purchased under those options less the exercise price
paid for those shares, and you may thereby incur alternative minimum tax
liability for the year or years in which you exercise those ISOs.

            To the extent any of those options are non-statutory or
non-qualified stock options (NQSOs) under the federal tax laws, you will
recognize immediate taxable income upon exercise in an amount equal to the fair
market value of the shares purchased under those NQSOs less the exercise price
paid for those shares. This income will be taxable as wages, whether or not you
are a Company employee at the time of exercise. Accordingly, you must, at the
time of exercise, pay the Company not only the exercise price for the purchased
shares but also all applicable federal, state and local income and employment
withholding taxes.

            You agree to return to the Company all Company property and
documents in your possession on or before the Termination Date, including
without limitation, your computer, cell phone and files. If you like, the
Company will discuss selling your



Michael Gray
June 29, 2004
Page 3

existing laptop to you, once data files have been removed. You also understand
and agree that you may not utilize any proprietary information, confidential
information and/or trade secrets of the Company, other than for the purposes of
the Company, at any time in the future and you will comply with any and all
other obligations you may have regarding the Company's proprietary,
confidential, and/or trade secret information. Specifically, you agree that you
will continue to be bound to the terms of the Company's Proprietary Information
and Inventions Agreement, a copy of which is attached as Exhibit C.

            In exchange for the promises and covenants herein and payment of
severance and receipt of the other benefits described above and subject to the
paragraph below, "Duty to Indemnify", you hereby forever fully release SanDisk
and any and all of its respective predecessors, successors, subsidiaries,
officers, directors, agents, attorneys, employees and assigns (hereafter
collectively referred to as "Releasees"), and covenant not to sue or otherwise
institute or cause to be instituted or in any way participate in (except at the
request of SanDisk or to the extent required by a legal process not initiated by
you) legal or administrative proceedings against Releasees with respect to any
matter arising out of or connected with your relationship with SanDisk or the
termination of that relationship from the beginning of time to the present,
including any and all liabilities, claims, demands, contracts, debts,
obligations and causes of action of every nature, kind and description, in law,
equity, or otherwise, whether or not now known or ascertained, which heretofore
do or may exist. You agree that on your Termination Date you will execute the
Supplement to General Release, attached as Exhibit A and deliver it to the
office of the Company's Vice President and General Counsel.

            You further agree that you are waiving any rights you may have had
or now have, to pursue any and all remedies available to you against Releasees,
including without limitation, breach of contract, fraud, stock fraud, claims of
wrongful discharge, emotional distress, defamation, breach of the covenant of
good faith and fair dealing, violation of the provisions of the California Labor
Code, the Employee Retirement Income Security Act, and any other laws and
regulations relating to employment. You further acknowledge and expressly agree
that you are waiving any and all rights you may have had or now have to pursue
any claim of discrimination, including but not limited to, any claim of
discrimination or harassment based on sex, age, race, national origin,
disability or on any other basis, under Title VII of the Civil Rights Act of
1964, as amended, the California Fair Employment and Housing Act, Worker
Adjustment and Retraining Notification Act of 1988, the California Constitution,
the Equal Pay Act of 1963, and all other laws and regulations relating to
employment. You further agree that you are not and will not be entitled to any
benefits under any severance plan that the Company has or may adopt in the
future.



Michael Gray
June 29, 2004
Page 4

            Finally, you agree that this letter agreement extends to all claims
of every nature and kind, known or unknown, suspected or unsuspected, past or
present, and that any and all rights granted to you under Section 1542 of the
California Civil Code or any analogous state law or federal law or regulation
are hereby expressly waived. Section 1542 of the California Civil Code reads as
follows:

            A general release does not extend to claims which the creditor does
            not know or suspect to exist in his favor at the time of executing
            the release, which, if known by him, must have materially affected
            his settlement with the debtor.

            This Agreement shall be entered into in the State of California and
shall be construed and interpreted in accordance with the laws of the State of
California, excluding any conflicts or choice of law rule or principle that
might otherwise refer construction or interpretation of this Agreement to the
substantive laws of another jurisdiction.

            You agree that you will not, without compulsion of legal process,
disclose to others the terms of this Agreement, except that you may disclose
them to your attorneys, accountants or other professional advisors to whom
disclosure is necessary to effect the purposes for which you have consulted such
professional advisors.

            Any controversy involving the construction or application of any
terms, covenants or conditions of this Agreement, or any claims arising out of
or relating to this Agreement or the breach thereof will be submitted to and
settled by final and binding arbitration in Santa Clara County, California in
accordance with the rules of the American Arbitration Association under its
California Employment Dispute Resolution Rules then in effect or by rules
mutually agreed upon in writing by the parties. The parties further understand
and agree that the arbitration shall be instead of any civil litigation and that
the arbitrator's decision shall be final and binding to the fullest extent
permitted by law and enforceable by any court having jurisdiction thereof.
Unless the law provides otherwise, each party will be responsible for its own
attorney fees in connection with the arbitration proceeding.

            Duty to Indemnify. The releases set forth above shall not release
the Company from its obligation to indemnify Mr. Gray against any claims which
are brought in accordance with and subject to the terms of (i) that certain
"Indemnification Agreement" entered into between the Company and Mr. Gray on
October 23, 2003, or (ii) the Bylaws of the Company.



Michael Gray
June 29, 2004
Page 5

            You understand and agree that you:

            A.    Have had a full twenty-one (21) days (or have voluntarily
                  chosen a shorter period of time, upon advice of your counsel)
                  within which to consider this Agreement before executing it;

            B.    Have carefully read and fully understand all of the provisions
                  of this Agreement;

            C.    Are, through this Agreement, releasing SanDisk from any and
                  all claims that you may have against SanDisk;

            D.    Are knowingly and voluntarily agreeing to all of the terms set
                  forth in this Agreement;

            E.    Were advised to consider the terms of this Agreement and
                  consult with an attorney of your choice prior to executing
                  this agreement. You will be responsible for any attorneys fees
                  incurred by you in connection with reviewing this Agreement
                  with an attorney of your choosing;

            F.    Have a full seven (7) days following the execution of this
                  Agreement to revoke this Agreement and have been and hereby
                  are advised in writing that this Agreement shall not become
                  effective or enforceable until the revocation period has
                  expired (the "Effective Date"). Said revocation shall be in
                  writing and shall be sent by certified mail, return receipt
                  requested, to me;

            G.    Understand that any rights or claims under the Age
                  Discrimination in Employment Act of 1967 (29 U.S.C. Section
                  621 et seq.) that may arise after the date this Agreement is
                  executed are not waived; and

            H.    Are, by reason of this Agreement and the release of claims
                  herein, receiving from SanDisk consideration in addition to
                  anything of value to which you were already entitled.

            This Agreement can only be modified by a written document signed by
you and by an authorized officer of the Company.



Michael Gray
June 29, 2004
Page 6

            Please indicate your agreement with the above terms by signing
below.

                                          Sincerely,

                                          SANDISK CORPORATION

                                          By: /s/ Charles Van Orden
                                              -------------------------
                                              Charles Van Orden
                                              Vice President and General Counsel

            My agreement with the above terms is signified by my signature
below. I acknowledge that I have read and understand this letter and that I sign
with full appreciation that at no time in the future may I pursue any of the
rights I have waived pursuant to the release provisions of this agreement
herein.

Dated: June 29, 2004.                                   /s/ Michael Gray
                                                --------------------------------
                                                          Michael Gray



                                    EXHIBIT A

                          SUPPLEMENT TO GENERAL RELEASE

            I, Michael Gray, hereby affirm that, by signing below:

            1.    I intend that the releases and waivers contained in the letter
agreement between me and SanDisk Corporation dated June 29, 2004, shall be and
are effective as of and through the effective date of this Supplement to General
Release and for the rest of time.

            2.    I understand and agree that for the period of seven (7) days
after I sign this Supplement to General Release, I may revoke it by delivering a
written notice of my revocation to the office of the Vice President and General
Counsel of the Company.

            3.    This Supplement to General Release shall become effective on
the eighth day after I signed it provided that I have delivered it to the office
of the Vice President and General Counsel of the Company and have not revoked it
during the seven days after I have signed it.

Date: 10/4/04                                      /s/ Michael Gray
      -------------------                          ---------------------
                                                   Michael Gray

EX-31.1

                                                                    Exhibit 31.1


I, Eli Harari, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of SanDisk Corporation;

2.   Based on my knowledge, this report does not contain any untrue statement of
     a material fact or omit to state a material fact necessary to make the
     statements made, in light of the circumstances under which such statements
     were made, not misleading with respect to the period covered by this
     report;

3.   Based on my knowledge, the financial statements, and other financial
     information included in this report, fairly present in all material
     respects the financial condition, results of operations and cash flows of
     the registrant as of, and for, the periods presented in this report;

4.   The registrant's other certifying officer and I are responsible for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

     a)  Designed such disclosure controls and procedures, or caused such
         disclosure controls and procedures to be designed under our
         supervision, to ensure that material information relating to the
         registrant, including its consolidated subsidiaries, is made known to
         us by others within those entities, particularly during the period in
         which this report is being prepared;

b)       Evaluated the effectiveness of the registrant's disclosure controls and
         procedures and presented in this report our conclusions about the
         effectiveness of the disclosure controls and procedures, as of the end
         of the period covered by this report based on such evaluation; and

c)       Disclosed in this report any change in the registrant's internal
         control over financial reporting that occurred during the registrant's
         most recent fiscal quarter (the registrant's fourth fiscal quarter in
         the case of an annual report) that has materially affected, or is
         reasonably likely to materially affect, the registrant's internal
         control over financial reporting; and

5.   The registrant's other certifying officer and I have disclosed, based on
     our most recent evaluation of internal control over financial reporting, to
     the registrant's auditors and the audit committee of the registrant's board
     of directors (or persons performing the equivalent functions):

     a)  All significant deficiencies and material weaknesses in the design or
         operation of internal control over financial reporting which are
         reasonably likely to adversely affect the registrant's ability to
         record, process, summarize and report financial information; and

     b)  Any fraud, whether or not material, that involves management or other
         employees who have a significant role in the registrant's internal
         control over financial reporting.

Date: November 5, 2004



                                               /s/ Eli Harari
                                               ---------------------------
                                               Eli Harari
                                               Chief Executive Officer

EX-31.2

                                                                    Exhibit 31.2



I, Judy Bruner, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of SanDisk Corporation;

2.   Based on my knowledge, this report does not contain any untrue statement of
     a material fact or omit to state a material fact necessary to make the
     statements made, in light of the circumstances under which such statements
     were made, not misleading with respect to the period covered by this
     report;

3.   Based on my knowledge, the financial statements, and other financial
     information included in this report, fairly present in all material
     respects the financial condition, results of operations and cash flows of
     the registrant as of, and for, the periods presented in this report;

4.   The registrant's other certifying officer and I are responsible for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)       Designed such disclosure controls and procedures, or caused such
         disclosure controls and procedures to be designed under our
         supervision, to ensure that material information relating to the
         registrant, including its consolidated subsidiaries, is made known to
         us by others within those entities, particularly during the period in
         which this report is being prepared;

b)       Evaluated the effectiveness of the registrant's disclosure controls and
         procedures and presented in this report our conclusions about the
         effectiveness of the disclosure controls and procedures, as of the end
         of the period covered by this report based on such evaluation; and

c)       Disclosed in this report any change in the registrant's internal
         control over financial reporting that occurred during the registrant's
         most recent fiscal quarter (the registrant's fourth fiscal quarter in
         the case of an annual report) that has materially affected, or is
         reasonably likely to materially affect, the registrant's internal
         control over financial reporting; and

5.   The registrant's other certifying officer and I have disclosed, based on
     our most recent evaluation of internal control over financial reporting, to
     the registrant's auditors and the audit committee of the registrant's board
     of directors (or persons performing the equivalent functions):

     a)  All significant deficiencies and material weaknesses in the design or
         operation of internal control over financial reporting which are
         reasonably likely to adversely affect the registrant's ability to
         record, process, summarize and report financial information; and

     b)  Any fraud, whether or not material, that involves management or other
         employees who have a significant role in the registrant's internal
         control over financial reporting.

Date: November 5, 2004



                                         /s/ JUDY BRUNER
                                         ---------------------------------------
                                         Judy Bruner
                                         Executive Vice President Administration
                                         Chief Financial Officer

EX-32.1

                                                                    Exhibit 32.1


CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Eli Harari, Chief Executive Officer of SanDisk Corporation, certify, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that the Annual Report of SanDisk Corporation on
Form 10-Q for the three months ended September 26, 2004 (the "Report") fully
complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 and that the information contained in the Report fairly
presents, in all material respects, the financial condition and results of
operations of SanDisk Corporation.


By: /s/ Eli Harari
   -----------------------------------------
        Eli Harari
        Chief Executive Officer
        November 5, 2004


A signed original of this written statement required by Section 906 has been
provided to SanDisk Corporation and will be retained by SanDisk Corporation and
furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

                                                                    Exhibit 32.2


CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Judy Bruner, Chief Financial Officer of SanDisk Corporation, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that the Report of SanDisk Corporation on Form 10-Q
for the three months ended September 26, 2004 (the "Report") fully complies with
the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934 and that the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of SanDisk
Corporation.


By: /s/ JUDY BRUNER
    ---------------------------------
    Judy Bruner
    Executive Vice President Administration
    Chief Financial Officer
    November 5, 2004


A signed original of this written statement required by Section 906 has been
provided to SanDisk Corporation and will be retained by SanDisk Corporation and
furnished to the Securities and Exchange Commission or its staff upon request.