10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended July 2, 2006

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number: 000-26734

SANDISK CORPORATION

(Exact name of registrant as specified in its charter)

DELAWARE	77-0191793
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
601 McCarthy Blvd.
Milpitas, California	95035
(Address of principal executive offices)	(Zip Code)

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

     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 þ                      No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ Accelerated filer o Non-accelerated filer o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o                      No þ

     Number of shares outstanding of the issuer’s common stock $0.001 par value, as of July 2, 2006: 195,956,991.

SanDisk Corporation

Index

	Page No.
PART I. FINANCIAL INFORMATION
Item 1.      Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of July 2, 2006 and January 1, 2006		3
Condensed Consolidated Statements of Income for the three and six months ended July 2, 2006 and July 3, 2005		4
Condensed Consolidated Statements of Cash Flows for the six months ended July 2, 2006 and July 3, 2005		5
Notes to Condensed Consolidated Financial Statements		6
Item 2.      Management’s Discussion and Analysis of Financial Condition and Results of Operations		30
Item 3.      Quantitative and Qualitative Disclosures About Market Risk		40
Item 4.      Controls and Procedures		40
PART II. OTHER INFORMATION
Item 1.      Legal Proceedings		41
Item 1A.   Risk Factors		42
Item 2.      Unregistered Sales of Equity Securities and Use of Proceeds		59
Item 3.      Defaults upon Senior Securities		59
Item 4.      Submission of Matters to a Vote of Security Holders		59
Item 5.      Other Information		59
Item 6.      Exhibits		60
Signatures		61
Exhibit Index		62
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

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (in thousands)

SANDISK CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

	July 2, 2006		January 1, 2006*
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	1,318,479	$	762,058
Short-term investments		960,995		935,639
Investment in foundries		18,990		18,338
Accounts receivable, net		311,921		329,014
Inventories		378,196		331,584
Deferred taxes		107,283		95,518
Other current assets		121,164		103,584
Total current assets		3,217,028		2,575,735
Long-term investments		405,714		—
Property and equipment, net		254,695		211,092
Notes receivable and investments in flash ventures		499,024		265,074
Deferred tax asset		143,630		—
Goodwill		167,248		5,415
Intangibles, net		97,232		4,608
Other non-current assets		56,038		58,263
Total assets	$	4,840,609	$	3,120,187
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	110,864	$	231,208
Accounts payable to related parties		86,153		74,121
Other accrued liabilities		139,947		115,525
Deferred income on shipments to distributors and retailers and deferred revenue		143,678		150,283
Total current liabilities		480,642		571,137
Convertible senior notes		1,150,000		—
Deferred revenue and other non-current liabilities		40,850		25,259
Total liabilities		1,671,492		596,396
Commitments and contingencies
Stockholders’ equity:
Preferred stock		—		—
Common stock		196		188
Capital in excess of par value		2,120,567		1,621,819
Retained earnings		1,037,380		906,624
Accumulated other comprehensive income		10,974		2,635
Deferred compensation		—		(7,475	)
Total stockholders’ equity		3,169,117		2,523,791
Total liabilities and stockholders’ equity	$	4,840,609	$	3,120,187

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

3

SANDISK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three months ended						Six months ended
	July 2, 2006			July 3, 2005			July 2, 2006			July 3, 2005
	(In thousands, except per share amounts)
Revenues:
Product	$	636,675		$	453,762		$	1,174,403		$	853,441
License and royalty		82,510			61,134			168,042			112,430
Total revenues		719,185			514,896			1,342,445			965,871
Cost of product revenues		430,177			300,797			815,044			551,985
Gross profit		289,008			214,099			527,401			413,886
Operating expenses:
Research and development		73,785			61,404			137,547			107,351
Sales and marketing		45,067			27,034			88,442			51,631
General and administrative		37,182			19,617			67,198			35,341
Write-off of acquired in-process technology		—			—			39,600			—
Amortization of acquisition-related intangible assets		4,432			—			8,147			—
Total operating expenses		160,466			108,055			340,934			194,323
Operating income		128,542			106,044			186,467			219,563
Equity in income (loss) of business ventures		193			(360	)		362			(55	)
Interest income		22,670			9,710			38,527			17,694
Gain (loss) on investment in foundries		764			(5,224	)		2,253			(9,253	)
Interest expense and other income (expense), net		(1,614	)		1,728			(665	)		2,229
Total other income		22,013			5,854			40,477			10,615
Income before taxes		150,555			111,898			226,944			230,178
Provision for income taxes		54,914			41,402			96,188			85,166
Net income	$	95,641		$	70,496		$	130,756		$	145,012
Net income per share:
Basic	$	0.49		$	0.39		$	0.67		$	0.80
Diluted	$	0.47		$	0.37		$	0.65		$	0.76
Shares used in computing net income per share:
Basic		195,527			181,469			194,302			181,050
Diluted		202,980			190,256			202,522			190,127

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

4

SANDISK CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six months ended
	July 2, 2006			July 3, 2005
	(In thousands)
Cash flows from operating activities:
Net income	$	130,756		$	145,012
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred taxes		(17,395	)		1,076
(Gain) loss on investment in foundries		(1,195	)		9,253
Depreciation and amortization		57,666			29,413
Provision for doubtful accounts		1,001			(163	)
Stock-based compensation expense		44,688			1,069
Tax benefit from share-based compensation		(61,023	)		—
Write-off of acquired in-process technology		39,600			—
Other non-cash charges		(4,744	)		2,274
Changes in operating assets and liabilities:
Accounts receivable		23,048			(47,800	)
Inventories		(39,976	)		(33,171	)
Other assets		(8,743	)		(15,241	)
Accounts payable trade		(123,758	)		30,132
Accounts payable, related party		13,065			15,947
Other liabilities		58,798			55,676
Net cash provided by operating activities		111,788			193,477
Cash flows from investing activities:
Purchases of short-term investments		(805,300	)		(295,582	)
Proceeds from sale of short-term investments		375,446			281,608
Investment in Flash Partners		(127,919	)		—
Acquisition of property and equipment, net		(89,722	)		(56,218	)
Notes receivable from FlashVision		—			(22,222	)
Notes receivable from Flash Partners		(95,445	)		—
Cash acquired in business combination with Matrix, net of acquisition costs		9,432			—
Net cash (used in) investing activities		(733,508	)		(92,414	)
Cash flows from financing activities:
Proceeds from issuance of convertible senior notes, net of issuance costs		1,125,500			—
Purchase of convertible bond hedge		(386,090	)		—
Proceeds from issuance of warrants		308,672			—
Proceeds from employee stock programs		68,850			15,853
Tax benefit from share-based compensation		61,023			—
Net cash provided by financing activities		1,177,955			15,853
Effect of changes in foreign currency exchange rates on cash		186			378
Net increase in cash and cash equivalents		556,421			117,294
Cash and cash equivalents at beginning of the year		762,058			463,795
Cash and cash equivalents at end of the six months ended July 2, 2006	$	1,318,479		$	581,089
Supplemental disclosures of cash flow information:
Issuance of stock for acquisition	$	260,908		$	—

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

5

SANDISK CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Organization and Summary of Significant Accounting Policies

     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 July 2, 2006, the statements of income for the three and six months ended July 2, 2006 and July 3, 2005 and the statements of cash flows for the six months ended July 2, 2006 and July 3, 2005. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles, or GAAP, have been omitted in accordance with the rules and regulations of the Securities and Exchange Commission, or SEC. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s most recent annual report on Form 10-K, as amended. Certain prior period amounts have been reclassified to conform to the current period presentation. The results of operations for the three and six months ended July 2, 2006 are not necessarily indicative of the results to be expected for the entire fiscal year.

     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, respectively. The second quarters of fiscal 2006 and fiscal 2005 ended on July 2, 2006 and July 3, 2005, respectively. Fiscal year 2006 ends on December 31, 2006 and fiscal year 2005 ended on January 1, 2006.

     Organization and Nature of Operations. SanDisk Corporation (together with its subsidiaries, the Company) was incorporated in Delaware on June 1, 1988. The Company designs, develops and markets flash storage card products used in a wide variety of consumer electronics products. The Company operates in one segment, flash memory storage products.

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

     Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The estimates and judgments affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to customer programs and incentives, product returns, bad debts, inventories and related reserves, investments, income taxes, warranty obligations, restructuring and contingencies, stock compensation and litigation. The Company bases estimates on historical experience and on other assumptions that its management believes are reasonable under the circumstances. These estimates form the basis for making judgments about the carrying values of assets and liabilities when those values are not readily apparent from other sources. Actual results could differ from these estimates.

     Short and Long-Term Investments. Short and long-term investments are designated as available-for-sale and reported at fair value, with unrealized gains and losses, net of tax, recorded in accumulated other comprehensive income. In connection with the issuance of the Company’s 1% Convertible Senior Notes (see Note 8, “Financing Arrangements”) and evaluation of future cash requirements, investments with original maturities greater than three months and remaining maturities less than one year are classified as short-term investments. Investments with remaining maturities greater than one year as of the balance sheet date are classified as long-term investments.

     Recent Accounting Pronouncements. In June 2006, the FASB issued FASB Interpretation No. 48, or FIN 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with Financial Accounting Standards Board Statement No. 109, or FAS 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 will be effective for fiscal years beginning after December 15, 2006. Earlier adoption is permitted as of the beginning of an enterprise’s fiscal year, provided the enterprise has not yet issued financial statements, including financial statements for any interim period, for that fiscal year. The Company will adopt FIN 48 in the first quarter of fiscal 2007 and is currently evaluating the effect that the adoption of FIN 48 will have on its consolidated results of operations and financial condition.

6

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

2. Stock-Based Compensation

Stock-Based Benefit Plans

     2005 Incentive Plan. In May 2005, the Company’s board of directors adopted the 2005 Stock Incentive Plan, which was amended in May 2006 and renamed the 2005 Incentive Plan (the “2005 Plan”). Shares of the Company’s common stock may be issued under the 2005 Plan pursuant to three separate equity incentive programs: (i) the discretionary grant program under which stock options and stock appreciation rights may be granted to officers and other employees, non-employee board members and independent consultants, (ii) the stock issuance program under which shares may be awarded to such individuals through restricted stock or restricted stock unit awards or as a stock bonus for services rendered to the Company, and (iii) an automatic grant program for the non-employee board members pursuant to which such individuals will receive option grants or other stock awards at designated intervals over their period of board service. The 2005 Plan also includes a performance-based cash bonus awards program for employees classified under Section 16. Grants and awards under the discretionary grant program generally vest as follows: 25% of the shares will vest on the first anniversary of the vesting commencement date and the remaining 75% will vest proportionately each quarter over the next 16 quarters of continued service. Awards under the stock issuance program generally vest in equal annual installments over a 4 year period. Grants under the automatic grant program will vest in accordance with the specific vesting provisions set forth in that program. A total of 21,236,150 shares of the Company’s common stock have been reserved for issuance under this plan. The share reserve may increase by up to an additional 10,000,000 shares of common stock to the extent that outstanding options under the 1995 Stock Option Plan and the 1995 Non-Employee Directors Stock Option Plan expire or terminate unexercised, of which as of July 2, 2006, 708,352 shares of common stock has been added to the 2005 Plan reserve. All options granted under the 2005 Plan were granted with an exercise price equal to the fair market value of the common stock on the date of grant and will expire seven years from the date of grant. Through July 2, 2006, options to purchase a total of 6,476,699 shares of common stock were granted to employees under the 2005 Plan, net of cancellations. For the three and six months ended July 2, 2006, awards of 759,863 and 4,812,886 shares of common stock, respectively, were granted to employees under the 2005 Plan, net of cancellations.

     1995 Stock Option Plan and 1995 Non-Employee Directors Stock Option Plan. Both of these plans terminated on May 27, 2005, and no further option grants were made under the plans after that date. However, options that were outstanding under these plans on May 27, 2005 will continue to be governed by their existing terms and may be exercised for shares of the Company’s common stock at any time prior to the expiration of the ten-year option term or any earlier termination of those options in connection with the optionee’s cessation of service with the Company. Grants and awards under this discretionary grant and stock issuance programs will generally vest as follows: 25% of the shares will vest on the first anniversary of the vesting commencement date and the remaining 75% will vest proportionately each quarter over the next 36 months of continued service. As of July 2, 2006, options had been granted, net of cancellations, to purchase 38,393,887 and 1,616,000 shares of common stock under the 1995 Stock Option Plan and the 1995 Non-Employee Directors Stock Option Plan, respectively.

     2005 Employee Stock Purchase Plan. The 2005 Employee Stock Purchase Plan (“ESPP”) was approved by the stockholders on May 27, 2005. The ESPP plan consists of two components: a component for employees residing in the United States and an international component for employees who are non-U.S. residents. The ESPP plan allows eligible employees to purchase shares of the Company’s common stock at the end of each six-month offering period at a purchase price equal to 85% of the lower of the fair market value per share on the start date of the offering period or the fair market value per share on the purchase date. As of July 2, 2006, a total of 5,000,000 shares were reserved for issuance and for the three and six months ended July 2, 2006, 113,909 shares of common stock were issued under the ESPP plan.

Adoption of SFAS 123(R)

     Effective January 2, 2006, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123(R), SFAS 123(R), Share-Based Payment, using the modified-prospective transition method, and therefore, has not restated its financial statements for prior periods. For awards expected to vest, compensation cost recognized in the three and six months ended July 2, 2006 includes the following: (a) compensation cost, based on the grant-date estimated fair value and expense attribution method elected upon the Company’s adoption of SFAS 123(R), related to any share-based awards granted through, but not yet vested as of January 1, 2006, and (b) compensation cost for any share-based awards granted on or subsequent to January 2, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). The

7

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

Company recognizes compensation expense for the fair values of these awards, which have graded vesting, on a straight-line basis over the requisite service period of each of these awards, net of estimated forfeitures.

     The Company estimates the fair value of stock options granted using the Black-Scholes-Merton option-pricing formula and a single-option award approach. The Company’s expected term represents the period that the Company’s stock-based awards are expected to be outstanding and was determined based on historical experience regarding similar awards, giving consideration to the contractual terms of the stock-based awards. The Company’s expected volatility is based on the implied volatility of its traded options and the Company considered the guidance provided by the U.S. Securities and Exchange Commission’s Staff Accounting Bulletin 107 to place exclusive reliance on implied volatilities to estimate our stock volatility over the expected term of the awards. The Company has historically not paid dividends and has no foreseeable plans to issue dividends. The risk-free interest rate is based on the yield from U.S. Treasury zero-coupon bonds with an equivalent term.

     As a result of adopting SFAS 123(R), the impact to the Condensed Consolidated Financial Statements for the three and six months ended July 2, 2006 to income before income taxes and net income was $30.3 million, $92.4 million, $21.9 million and $76.8 million lower, respectively, than if the Company had continued to account for share-based compensation under APB 25. The basic and diluted earnings per share for the three and six months ended July 2, 2006 was $0.11, $0.11, $0.40 and $0.37 lower, respectively, than if the Company had continued to account for share-based compensation under APB 25. In addition, prior to the adoption of SFAS 123(R), the Company presented the tax benefit of stock option exercises as operating cash flows. Upon the adoption of SFAS 123(R), tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options are classified as financing cash flows and a corresponding deduction from operating cash flows.

Stock Options

     The fair value of the Company’s stock options granted to employees for the three and six months ended July 2, 2006 and July 3, 2005 was estimated using the following weighted average assumptions:

	Three months ended						Six months ended
	July 2, 2006			July 3, 2005			July 2, 2006			July 3, 2005
Dividend yield	None			None			None			None
Expected volatility		0.51 - 0.55			0.52			0.51 - 0.55			0.53
Risk-free interest rate		4.89% - 5.08	%		3.87	%		4.35% - 5.08	%		3.89	%
Expected lives	3.6 years			4.7 years			3.7 years			4.7 years
Weighted average fair value at grant date	$	28.14		$	12.14		$	27.50		$	11.83

     A summary of option activity under all of the Company’s share-based compensation plans as of July 2, 2006 and changes during the six months ended July 2, 2006 is presented below:

						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
				Exercise		Contractual		Intrinsic
	Shares			Price		Term (Years)		Value
	(In thousands, except exercise price and contractual term)
Options outstanding at January 1, 2006		20,316		$	21.57
Granted		4,964			56.79
Exercised		(3,869	)		16.96
Forfeited		(508	)		37.06
Expired		(4	)		47.57
Options outstanding at July 2, 2006		20,899			30.41		6.7	$	477,850
Options vested and expected to vest after July 2, 2006		19,650			29.50		6.7		463,761
Options exercisable at July 2, 2006		8,506		$	16.64		5.9	$	292,802

     During the three and six months ended July 2, 2006 and July 3, 2005, the aggregate intrinsic value of options exercised under the Company’s share-based compensation plans was $58.6 million, $176.3 million, $11.4 million and $29.2 million, respectively. At July 2, 2006, the total compensation cost related to options granted to employees under the Company’s share-based compensation plans but not yet

8

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

recognized was approximately $199.0 million, net of estimated forfeitures. This cost will be amortized on a straight-line basis over a weighted average period of approximately 2.6 years.

Restricted Stock

     Restricted stock and restricted stock units are converted into shares of the Company’s common stock upon vesting on a one-for-one basis. Typically, vesting of restricted stock is subject to the employee’s continuing service to the Company. The cost of these awards is determined using the fair value of the Company’s common stock on the date of the grant, and compensation is recognized on a straight-line basis over the requisite vesting period.

     A summary of the changes in restricted stock units outstanding under the Company’s share-based compensation plan during the six months ended July 2, 2006 is presented below:

				Weighted
				Average Grant		Aggregate
				Date		Intrinsic
	Shares			Fair Value		Value
Non-vested share units at January 1, 2006		105,188		$	42.19
Granted		601,007			62.11
Vested		(17,040	)		31.54
Forfeited		(14,114	)		59.04
Non-vested share units at July 2, 2006		675,041		$	59.14	$	34,413,590

     As of July 2, 2006, the Company had $32.4 million of total unrecognized compensation expense, net of estimated forfeitures, related to restricted stock, which will be recognized over a weighted average estimated remaining life of 3.0 years.

Employee Stock Purchase Plans (ESPP)

     The fair value of grants under the employee stock purchase plans was estimated on the first date of the purchase period, with the following weighted average assumptions:

	Three months ended						Six months ended
	July 2, 2006			July 3, 2005			July 2, 2006			July 3, 2005
Dividend yield	None			None			None			None
Expected volatility		0.54			0.42			0.51			0.45
Risk-free interest rate		4.69	%		2.77	%		4.53	%		2.60	%
Expected lives	1/2 year			1/2 year			1/2 year			1/2 year
Weighted average fair value at exercise date	$	20.45		$	6.74		$	18.50		$	6.89

     At July 2, 2006, there was $0.3 million of total unrecognized compensation cost related to the ESPP that is expected to be recognized over a period of approximately 0.1 years.

9

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

Stock Compensation Expense

     The Company recorded $25.9 million and $44.7 million of share-based compensation for the three and six months ended July 2, 2006 that included the following:

	Three months ended		Six months ended
	July 2, 2006		July 2, 2006
	(In thousands)
Share-based compensation expense by caption:
Cost of sales	$	2,478	$	2,478
Research and development		10,421		19,206
Sales and marketing		5,125		9,165
General and administrative		7,846		13,807
Total	$	25,870	$	44,656
Share-based compensation expense by type of award:
Stock options	$	21,694	$	37,748
Restricted stock		3,202		5,239
ESPP		974		1,669
Total	$	25,870	$	44,656

     Share-based compensation expense of $2.6 million related to manufacturing personnel was capitalized into inventory as of July 2, 2006.

     Prior to fiscal 2006, the Company followed the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, or SFAS 123, Accounting for Stock-Based Compensation, as amended. The following table illustrates the effect on net income and earnings per share for the three months and six months ended July 3, 2005 if the fair value recognition provisions of SFAS 123, as amended, had been applied to options granted under the Company’s share-based compensation plans. For purposes of this pro forma disclosure, the estimated value of the share-based compensation is recognized over the vesting periods. If the Company had recognized the expense of share-based compensation in the condensed consolidated statement of income, additional paid-in capital would have increased by a corresponding amount, net of applicable taxes.

	Three months ended			Six months ended
	July 3, 2005			July 3, 2005
	(In thousands, except per share amounts)
Net income, as reported	$	70,496		$	145,012
Fair value method expense, net of related tax		(10,396	)		(20,707	)
Pro forma net income	$	60,100		$	124,305
Earnings per share as reported:
Basic	$	0.39		$	0.80
Diluted	$	0.37		$	0.76
Pro forma earnings per share:
Basic	$	0.33		$	0.69
Diluted	$	0.32		$	0.65

     Disclosures for the three and six months ended July 2, 2006 are not presented because share-based compensation was accounted for under SFAS 123(R) fair-value method during this period.

10

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

3. Warranty

     Changes to the Company’s warranty reserve activity were as follows (in thousands):

	Three months ended						Six months ended
	July 2, 2006			July 3, 2005			July 2, 2006			July 3, 2005
Balance, beginning of period	$	8,423		$	10,332		$	11,258		$	11,380
Additions (reductions) to costs of product revenue		4,599			3,909			1,992			4,488
Usage		(3,361	)		(2,516	)		(3,589	)		(4,143	)
Balance, end of period	$	9,661		$	11,725		$	9,661		$	11,725

     The majority of the Company’s products have a warranty ranging from 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 customer and consumer returns, product failures and repair or replacement costs incurred.

11

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

4. Balance Sheet Detail

Inventories

     Inventories were as follows (in thousands):

	July 2, 2006		January 1, 2006
Raw material	$	117,638	$	99,006
Work-in-process		72,020		61,900
Finished goods		188,538		170,678
Total inventories	$	378,196	$	331,584

     In the three and six months ended July 2, 2006 and July 3, 2005, the Company sold approximately $5.2 million, $9.2 million, $4.7 million and $4.9 million, respectively, of inventory that had been fully written-off or reserved in previous periods.

Notes Receivables and Investments in Flash Ventures

     Notes receivable and investments in flash ventures were as follows (in thousands):

	July 2, 2006		January 1, 2006
Notes receivable, FlashVision	$	63,750	$	61,927
Notes receivable, Flash Partners		96,061		—
Investment in FlashVision		164,888		161,080
Investment in Flash Partners		174,325		42,067
Total notes receivable and investments in flash ventures	$	499,024	$	265,074

Other Non-current Assets

     Other non-current assets were as follows (in thousands):

	July 2, 2006		January 1, 2006
Investment in foundries	$	16,364	$	11,013
Deposits		6,437		4,709
Other non-current assets		33,237		42,541
Total other non-current assets	$	56,038	$	58,263

Other Accrued Liabilities

     Other accrued liabilities were as follows (in thousands):

	July 2, 2006		January 1, 2006
Accrued payroll and related expenses	$	45,035	$	55,614
Income taxes payable		12,994		2,165
Research and development liability, related party		5,984		4,200
Other accrued liabilities		75,934		53,546
Total other accrued liabilities	$	139,947	$	115,525

12

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

5. Goodwill and Other Intangible Assets

Goodwill

     Goodwill balance is as follows (in thousands):

Balance at January 1, 2006	$	5,415
Goodwill adjustment		25
Goodwill acquired (Note 11)		161,808
Balance at July 2, 2006	$	167,248

     In accordance with Statement of Financial Accounting Standards No. 142, or SFAS 142, Goodwill and Other Intangible Assets, goodwill is not amortized, but instead is reviewed and tested for impairment at least annually and whenever events or circumstances occur which indicate that goodwill might be impaired. Impairment of goodwill is tested at the Company’s reporting unit level by comparing the carrying amount, including goodwill, to the fair value. In performing the analysis, the Company uses the best information available, including reasonable and supportable assumptions and projections. If the carrying amount of the reporting unit exceeds its implied fair value, goodwill is considered impaired and a second step is performed to measure the amount of impairment loss, if any. The Company will perform an annual review of goodwill with an effective date of the first day of the fourth fiscal quarter of every fiscal year.

Other Intangible Assets

     Other intangible assets balances were as follows (in thousands):

	July 2, 2006							January 1, 2006
	Gross					Net		Gross					Net
	Carrying		Accumulated			Carrying		Carrying		Accumulated			Carrying
	Amount		Amortization			Amount		Amount		Amortization			Amount
Core technology	$	76,300	$	(4,996	)	$	71,304	$	—	$	—		$	—
Developed product technology		12,900		(1,538	)		11,362		1,500		(542	)		958
Customer relationships		14,100		(2,154	)		11,946		—		—			—
Acquisition-related intangible assets		103,300		(8,688	)		94,612		1,500		(542	)		958
Technology licenses		7,389		(4,769	)		2,620		7,389		(3,739	)		3,650
Total	$	110,689	$	(13,457	)	$	97,232	$	8,889	$	(4,281	)	$	4,608

     Other intangible assets increased by $101.8 million in the first quarter of fiscal 2006 as a result of the Company’s acquisition of Matrix Semiconductor, Inc., or Matrix. Technology licenses represent technology licenses purchased from third parties.

     The annual amortization expense of other intangible assets that existed as of July 2, 2006 is expected to be as follows:

	Estimated Amortization Expenses
	Acquisition-
	Related Intangible		Technology
	Assets		License
	(In thousands)
Fiscal periods:
2006 (remaining six months)	$	8,864	$	1,091
2007		17,687		903
2008		17,229		626
2009		12,724		—
2010		12,529		—
2011 and thereafter		25,579		—
Total	$	94,612	$	2,620

13

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

6. Accumulated Other Comprehensive 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 foundries, as well as currency translation adjustments relating to local currency denominated subsidiaries and equity investees.

	July 2, 2006			January 1, 2006
	(In thousands)
Accumulated net unrealized gain (loss) on:
Available-for-sale short-term investments	$	(2,908	)	$	(4,233	)
Available-for-sale investments in foundries		1,832			(383	)
Foreign currency translation		12,050			7,251
Total accumulated other comprehensive income	$	10,974		$	2,635

     Comprehensive income is as follows:

	Three months ended						Six months ended
	July 2, 2006			July 3, 2005			July 2, 2006		July 3, 2005
	(In thousands)
Net income	$	95,641		$	70,496		$	130,756	$	145,012
Unrealized income on available-for-sale investment in foundries		238			1,675			2,215		1,213
Unrealized income (loss) on available-for-sale short-term investments		(412	)		965			1,325		(1,018	)
Currency translation gain (loss)		6,164			(4,224	)		4,799		(8,032	)
Comprehensive net income	$	101,631		$	68,912		$	139,095	$	137,175

14

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

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				Six months ended
	July 2, 2006		July 3, 2005		July 2, 2006		July 3, 2005
Numerator for basic net income per share:
Net income, as reported	$	95,641	$	70,496	$	130,756	$	145,012
Denominator for basic net income per share:
Weighted average common shares outstanding		195,527		181,469		194,302		181,050
Basic net income per share	$	0.49	$	0.39	$	0.67	$	0.80
Numerator for diluted net income per share:
Net income, as reported	$	95,641	$	70,496	$	130,756	$	145,012
Denominator for basic net income per share:
Weighted average common shares outstanding		195,527		181,469		194,302		181,050
Effect of dilutive options and restricted stock		7,453		8,787		8,220		9,077
Shares used in computing diluted net income per share		202,980		190,256		202,522		190,127
Diluted net income per share	$	0.47	$	0.37	$	0.65	$	0.76

     Basic net income per share excludes any dilutive effects of options, unvested stock units, warrants and convertible securities. Diluted net income per share includes the dilutive effects of stock options, unvested stock units, warrants and convertible securities. For the three and six months ended July 2, 2006 and July 3, 2005, a total of 33,188,789, 31,921,634 and 6,038,067 and 6,013,628 shares of common stock issuable under stock options, warrants and the 1% Convertible Senior Notes, respectively, have been omitted from the diluted net income per share calculation because their inclusion would be antidilutive.

15

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

8. Financing Arrangements

     The following table reflects the carrying value of our long-term borrowings as of July 2, 2006 and January 1, 2006:

	July 2, 2006		January 1, 2006
	(In millions)
1% Convertible Senior Notes due 2013	$	1,150.0	$	—

     In May 2006, the Company issued and sold $1.15 billion in aggregate principal amount of 1% Convertible Senior Notes due 2013 (the “1% Notes”) at par. The 1% Notes may be converted, under certain circumstances described below, based on an initial conversion rate of 12.1426 shares of common stock per $1,000 principal amount of notes (which represents an initial conversion price of approximately $82.36 per share). The net proceeds to the Company from the offering of the 1% Notes were $1.13 billion.

     The 1% Notes may be converted prior to the close of business on the scheduled trading day immediately preceding February 15, 2013, in multiples of $1,000 principal amount at the option of the holder under any of the following circumstances 1) during the five business-day period after any five consecutive trading-day period (the “measurement period”) in which the trading price per note for each day of such measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such day; 2) during any calendar quarter after the calendar quarter ending June 30, 2006, if the last reported sale price of the Company’s common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds 120% of the applicable conversion price in effect on the last trading day of the immediately preceding calendar quarter; or 3) upon the occurrence of specified corporate transactions. On and after February 15, 2013 until the close of business on the scheduled trading day immediately preceding the maturity date of May 15, 2013, holders may convert their notes at any time, regardless of the foregoing circumstances.

     Upon conversion, a holder will receive the conversion value of the 1% Notes to be converted equal to the conversion rate multiplied by the volume weighted average price of the Company’s common stock during a specified period following the conversion date. The conversion value of each 1% Note will be paid in: 1) cash equal to the lesser of the principal amount of the note or the conversion value, as defined, and 2) to the extent the conversion value exceeds the principal amount of the note, a combination of common stock and cash. The conversion price will be subject to adjustment in some events but will not be adjusted for accrued interest. In addition, upon a fundamental change at any time, as defined, the holders may require the Company to repurchase for cash all or a portion of their notes upon a “designated event” at a price equal to 100% of the principal amount of the notes being repurchased plus accrued and unpaid interest, if any.

     The Company will pay cash interest at an annual rate of 1%, payable semi-annually on May 15 and November 15 of each year, beginning November 15, 2006. Debt issuance costs of approximately $24.5 million are being amortized to interest expense over the term of the 1% Notes.

     Concurrently with the issuance of the 1% Notes, the Company purchased a convertible bond hedge and sold warrants. The separate convertible bond hedge and warrant transactions are structured to reduce the potential future economic dilution associated with the conversion of the 1% Notes and to increase the initial conversion price to $95.03 per share. Each of these components are discussed separately below:

• Convertible Bond Hedge. Counterparties agreed to sell to the Company up to approximately 14.0 million shares of the Company’s common stock, which is the number of shares initially issuable upon conversion of the 1% Notes in full, at a price of $82.36 per share. The convertible bond hedge transaction will be settled in net shares and will terminate upon the earlier of the maturity date of the 1% Notes or the first day none of the 1% Notes remain outstanding due to conversion or otherwise. Settlement of the convertible bond hedge in net shares, based on the number of shares issued upon conversion of the 1% Notes, on the expiration date would result in the Company receiving net shares equivalent to the number of shares issuable by the Company upon conversion of the 1% Notes. Should there be an early unwind of the convertible bond hedge transaction, the number of net shares potentially received by the Company will depend upon 1) the then existing overall market conditions, 2) the Company’s stock price, 3) the volatility of the Company’s stock, and 4) the amount of time remaining before expiration of the convertible bond hedge. The convertible bond hedge transaction cost of $386.1 million has been accounted for as an equity transaction in accordance with Emerging Issues Task Force No. 00-19, or EITF 00-19, Accounting for Derivative Financial Statements Indexed to, and Potentially Settled

16

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

in, a Company’s Own Stock. The Company recorded a tax benefit of approximately $145.6 million in stockholders’ equity from the deferred tax assets related to the convertible bond hedge.

•

Sold Warrants. The Company received $308.7 million from the same counterparties from the sale of warrants to purchase up to approximately 14.0 million shares of the Company’s common stock at an exercise price of $95.03 per share. The warrants have an expected life of 7.25 years and expire in August 2013. At expiration, the Company may, at its option, elect to settle the warrants on a net share basis. As of July 2, 2006, the warrants had not been exercised and remained outstanding. The value of the warrants has been classified as equity because they meet all the equity classification criteria of EITF 00-19.

17

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

9. Commitments, Contingencies and Guarantees

Commitments

     FlashVision. The Company has a 49.9% ownership interest in FlashVision Ltd., or FlashVision, a business venture with Toshiba Corporation, or Toshiba, formed in fiscal 2000. In the venture, the Company and Toshiba have collaborated in the development and manufacture of NAND flash memory products. These NAND flash memory products are manufactured by Toshiba at its 200-millimeter wafer fabrication facilities, located in Yokkaichi, Japan, using the semiconductor manufacturing equipment owned or leased by FlashVision. FlashVision purchases wafers from Toshiba at cost and then resells those wafers to the Company and Toshiba at cost plus a mark-up. Toshiba owns 50.1% of this venture. The Company accounts for its 49.9% ownership position in FlashVision under the equity method of accounting. The terms of the FlashVision venture contractually obligate the Company to purchase half of FlashVision’s NAND wafer supply. The Company cannot estimate the total amount of this commitment as of July 2, 2006, because it is based upon future costs and volumes. In addition, the Company is committed to fund 49.9% of FlashVision’s costs to the extent that FlashVision’s revenues from wafer sales to the Company and Toshiba are insufficient to cover these costs.

     As of July 2, 2006, the Company had notes receivable from FlashVision of 7.3 billion Japanese yen, or approximately $64 million based upon the exchange rate at July 2, 2006. These notes are secured by the equipment purchased by FlashVision using the note proceeds. 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. See “Off Balance Sheet Liabilities.”

     Flash Partners. The Company has a 49.9% ownership interest in Flash Partners Ltd., or Flash Partners, a business venture with Toshiba, formed in fiscal 2004. In the venture, the Company and Toshiba have collaborated in the development and manufacture of NAND flash memory products. These NAND flash memory products are manufactured by Toshiba at the 300-millimeter wafer fabrication facility, Fab 3, located in Yokkaichi, Japan, using the semiconductor manufacturing equipment owned or leased by Flash Partners. Flash Partners purchases wafers from Toshiba at cost and then resells those wafers to the Company and Toshiba at cost plus a mark-up. Toshiba owns 50.1% of this venture. The Company accounts for its 49.9% ownership position in Flash Partners under the equity method of accounting. The Company is committed to purchase half of Flash Partners’ NAND wafer supply. The Company cannot estimate the total amount of this commitment as of July 2, 2006, because it is based upon future costs and volumes. In addition, the Company is committed to fund 49.9% of Flash Partners’ costs to the extent that Flash Partners’ revenues from wafer sales to the Company and Toshiba are insufficient to cover these costs.

     As of July 2, 2006, the Company and Toshiba had committed to expand Flash Partners’ capacity to 90,000 wafer starts per month. The Company currently estimates the total equipment funding obligation at the 90,000 wafer starts per month level to be approximately 430.0 billion Japanese yen, or approximately $3.8 billion based upon the exchange rate at July 2, 2006. Of this amount, the Company is obligated to fund 215.0 billion Japanese yen, or approximately $1.9 billion based upon the exchange rate at July 2, 2006, of which approximately $0.9 billion was left to fund as of July 2, 2006. After considering the commitments between the Company and Toshiba to expand capacity at Flash Partners, the Company continues to not be the primary beneficiary of Flash Partners. On July 27, 2006, the Company and Toshiba agreed to accelerate the expansion of Fab 3, which is expected to bring Fab 3 wafer capacity from the previously planned 90,000 wafers per month to 110,000 wafers per month by July 2007. See Note 14, “Subsequent Events.”

     As of July 2, 2006, Flash Partners had utilized operating lease facilities of 117.0 billion Japanese yen, or approximately $1.02 billion based on the exchange rate at July 2, 2006. As of July 2, 2006, the Company’s guarantee of the Flash Partners’ operating lease obligation, net of accumulated lease payments, was approximately 54.3 billion Japanese yen, or approximately $474 million based upon the exchange rate at July 2, 2006. In addition, Flash Partners expects to secure additional equipment lease facilities over time, which the Company may be obligated to guarantee in whole or in part.

18

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

     Flash Alliance. The Company has a 49.9% ownership interest in Flash Alliance Ltd., or Flash Alliance, a business venture with Toshiba, formed on July 7, 2006. In the venture, Company and Toshiba will collaborate in the development and manufacture of NAND flash memory products. These NAND flash memory products will be manufactured by Toshiba at the proposed 300-millimeter wafer fabrication facility, Fab 4, located in Yokkaichi, Japan, using the semiconductor manufacturing equipment that will be owned or leased by Flash Alliance. Flash Alliance will purchase wafers from Toshiba at cost and then resell those wafers to the Company and Toshiba at cost plus a mark-up. Toshiba owns 50.1% of this venture. The Company accounts for its 49.9% ownership position in Flash Alliance under the equity method of accounting. The Company is committed to purchase half of Flash Alliance’s NAND wafer supply.

     The capacity of Fab 4 at full expansion is expected to be greater than 150,000 wafers per month and the timeframe to reach full capacity is to be mutually agreed by the parties. To date, the parties have agreed to an expansion plan to 67,500 wafers per month for which the total investment in Fab 4 is currently estimated at approximately $3.0 billion through the end of 2008, of which the Company’s share is currently estimated to be approximately $1.5 billion. Initial NAND production is currently scheduled for the end of 2007. For expansion beyond 67,500 wafers per month, it is expected that investments and output would 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. The Company is committed to fund 49.9% of Flash Alliance’s costs to the extent that Flash Alliance’s revenues from wafer sales to the Company and Toshiba are insufficient to cover these costs.

     As a part of the FlashVision, Flash Partners and Flash Alliance venture agreements, the Company is required to fund direct and common research and development expenses related to the development of advanced NAND flash memory technologies. As of July 2, 2006, the Company had accrued liabilities related to these expenses of $6.0 million.

     Toshiba Foundry. The Company has the ability to purchase additional capacity under a foundry arrangement with Toshiba. Under the terms of this agreement, the Company is required to provide Toshiba with a purchase order commitment based on a six-month rolling forecast.

     Business Ventures and Foundry Arrangement with Toshiba. Purchase orders placed under the Toshiba ventures and foundry arrangement with Toshiba relating to the first three months of the six-month forecast are binding and cannot be canceled. At July 2, 2006, the Company had approximately $155.1 million of noncancelable purchase orders for flash memory wafers outstanding to FlashVision, Flash Partners and Toshiba.

     Other Silicon Sources. The Company’s contracts with its other sources of silicon wafers generally require the Company to provide purchase order commitments based on six-month rolling forecasts. The purchase orders placed under these arrangements relating to the first three months of the six-month forecast are generally binding and cannot be canceled. Outstanding purchase commitments for other sources of silicon wafers are included as part of the total “Noncancelable production purchase commitments” in the “Contractual Obligations” table below.

     Subcontractors. 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. Accordingly, the Company may be committed to certain costs over and above its open noncancelable purchase orders with these subcontractors. Outstanding purchase commitments for subcontractors are included as part of the total “Noncancelable production purchase commitments” in the “Contractual Obligations” table below.

19

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

Off Balance Sheet Liabilities

     The following table details the Company’s portion of the remaining indemnification or guarantee obligation under each of the FlashVision and Flash Partners master lease facilities in both Japanese yen and United States dollar equivalent based upon the exchange rate at July 2, 2006.

	Lease Amounts(1)				Expiration
Master Lease Agreement	(Yen in billions)		(Dollars in millions)
FlashVision
June 2006	¥	7.5	$	65.6		2009
Flash Partners
December 2004		21.6		188.5		2010
December 2005		16.7		145.6		2011
June 2006		16.0		139.7		2011
Total Flash Partners		54.3		473.8
Total indemnification or guarantee obligation	¥	61.8	$	539.4

⁽¹⁾ The maximum amount of the Company’s contingent indemnification or guarantee obligation, net of payments and any lease adjustments.

     FlashVision. In May 2002, FlashVision secured an equipment lease arrangement of approximately 37.9 billion Japanese yen, or approximately $331 million based upon the exchange rate at July 2, 2006, with Mizuho Leasing, and other financial institutions. On May 31, 2006, FlashVision refinanced the remaining balance of this equipment lease arrangement. The refinanced arrangement was approximately 15.0 billion Japanese yen, or approximately $131 million based upon the exchange rate at July 2, 2006. Lease payments are due quarterly and are scheduled to be completed in February 2009 and a residual payment of 3.1 billion Japanese yen, or $27 million based upon the exchange rate at July 2, 2006, will be due in February 2009. Under the terms of the refinanced 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 July 2, 2006, the maximum amount of the Company’s contingent indemnification obligation, which reflects payments and any lease adjustments, was approximately 7.5 billion Japanese yen, or approximately $66 million based upon the exchange rate at July 2, 2006.

     Flash Partners. Flash Partners intends to sell and lease-back from a consortium of financial institutions a portion of its tools and has entered into three equipment lease agreements of approximately 117.0 billion Japanese yen, or approximately $1.02 billion based upon the exchange rate at July 2, 2006. As of July 2, 2006, Flash Partners had drawn down the entire amounts from each of the three master lease facilities. The Company and Toshiba have each guaranteed, on a several basis, 50% of Flash Partners’ obligations under the master lease agreements. Lease payments are due quarterly and are scheduled to be completed in stages through 2011. At the end of each of the lease terms, Flash Partners has the option of purchasing the tools from the lessors. Flash Partners is obligated to insure the equipment, maintain the equipment in accordance with the manufacturers’ recommendations and comply with other customary terms to protect the leased assets. The master lease agreements contains covenants that require the Company to maintain a minimum shareholder equity balance of $1.16 billion as well as a long-term loan rating of BB- or Ba3, based on a named independent rating service. In addition, the master lease agreements contain customary events of default for a Japanese lease facility. The master lease agreements are exhibits to the Company’s most recent annual report for Form 10-K and the most recent lease facility is an exhibit to this quarterly report on Form 10-Q. These agreements should be read carefully in its entirety for a comprehensive understanding of its terms and the nature of the obligations the Company guaranteed. The fair value of the Company’s guarantee of Flash Partners’ lease obligation was insignificant at inception of the guarantee. In addition, Flash Partners expects to secure additional equipment lease facilities over time, which the Company may be required to guarantee in whole or in part. As of July 2, 2006, the maximum amount of the Company’s guarantee obligation of the Flash Partners master lease agreements, which reflects payments and any lease adjustments, was approximately 54.3 billion Japanese yen, or approximately $474 million based upon the exchange rate at July 2, 2006.

20

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

Guarantees

     Indemnification Agreements. The Company has 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. 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. Although the liability is not remote, 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. Historically, the Company has not made any significant indemnification payments under any such agreements. As of July 2, 2006, no amount has been accrued in the accompanying condensed 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 July 2, 2006 or January 1, 2006, as this liability is not reasonably estimable even though liability under these agreements is not remote.

     The Company and Toshiba have agreed to mutually contribute to, and indemnify each other, Flash Partners and Flash Alliance for, environmental remediation costs or liability resulting from Flash Partners or Flash Alliance’s manufacturing operations in certain circumstances. In 2004 and 2006, respectively, the Company and Toshiba each engaged consultants to perform a review of the existing environmental conditions at the site of the facility at which Flash Partners operations are located and Flash Alliance operations will be located to establish a baseline for evaluating future environmental conditions. 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 or Flash Alliance infringe third-party patents. The Company has not made any indemnification payments under any such agreements and as of July 2, 2006, no amounts have been accrued in the accompanying condensed consolidated financial statements with respect to these indemnification guarantees.

21

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

Contractual Obligations and Off Balance Sheet Arrangements

     Contractual Obligations. The following summarizes the Company’s contractual cash obligations, commitments and off balance sheet arrangements at July 2, 2006, and the effect such obligations are expected to have on its liquidity and cash flows in future periods (in thousands). In addition to the summarization below, on July 7, 2006, the Company agreed to invest $1.5 billion through the end of fiscal 2008 in Flash Alliance. See Note 14, “Subsequent Events.”

										More than 5
				Less than		2 - 3 Years		3 –5 Years		Years
				1 Year		(Fiscal 2007		(Fiscal 2009		(Beyond
	Total			(6 months 2006)		and 2008)		and 2010)		Fiscal 2010)
Operating leases	$	41,325		$	2,646	$	10,932	$	10,578	$	17,169
FlashVision, fabrication capacity expansion costs, and reimbursement for certain other costs including depreciation		263,538	(4)		49,290		142,063		69,420		2,765
Flash Partners fabrication capacity expansion and start-up costs, and reimbursement for certain other costs including depreciation (1)		2,559,206	(4)		102,836		1,521,447		616,263		318,660
Toshiba research and development		93,762	(4)		18,762		75,000		—		—
Capital equipment purchases commitments		38,811			38,811		—		—		—
1% Convertible Senior Notes principal and interest (2)		1,229,016			5,750		23,000		23,000		1,177,266
Operating expense commitments		80,291			80,291		—		—		—
Noncancelable production purchase commitments (3)		528,436	(4)		528,436		—		—		—
Total contractual cash obligations	$	4,834,385		$	826,822	$	1,772,442	$	719,261	$	1,515,860

Off Balance Sheet Arrangements.
	As of
	July 2, 2006
Indemnification of FlashVision foundry equipment lease (5)	$	65,555
Guarantee of Flash Partners lease (6)	$	473,827

(1)	In July 2006, the Company and Toshiba agreed to accelerate the expansion of Fab 3 to 110,000 wafers per month and agreed to an additional investment in Fab 3 of approximately $350 million.
(2)	In May 2006, the Company issued and sold $1.15 billion in aggregate principal amount of 1% Convertible Senior Notes due May 15, 2013. The Company will pay cash interest at an annual rate of 1%, payable semi-annually on May 15 and November 15 of each year, beginning November 15, 2006.
(3)	Includes Toshiba foundries, FlashVision, Flash Partners, related parties vendors and other silicon sources vendors purchase commitments.
(4)	Includes amounts denominated in Japanese yen which are subject to fluctuation in exchange rates prior to payment and have been translated using the exchange rate at July 2, 2006.
(5)	The Company’s contingent indemnification obligation is 7.5 billion Japanese yen, or approximately $66 million based upon the exchange rate at July 2, 2006.
(6)	The Company’s guarantee obligation, net of cumulative lease payments, is 54.3 billion Japanese yen, or approximately $474 million based upon the exchange rate at July 2, 2006.

22

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

Foreign Currency Exchange Contracts

     The Company’s objective for holding derivatives is to minimize the material risks associated with non-functional currency transactions. The Company does not enter into derivatives for speculative or trading purposes. The Company’s derivative instruments are recorded at fair value on the balance sheet with changes in fair value recorded in other income (expense). The Company had foreign currency exchange contract lines available in the amount of $1.24 billion at July 2, 2006 to enter into foreign currency forward contracts. As of July 2, 2006, the Company had foreign currency forward contracts in place with a notional amount of 14.8 billion Japanese yen, or approximately $129 million based upon the exchange rate at July 2, 2006. The fair value of these foreign currency forward contracts as of July 2, 2006 was immaterial. The realized gains and losses on foreign currency forward contracts for the three and six months ended July 2, 2006 were immaterial.

23

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

10. Related Parties and Strategic Investments

     Toshiba. The Company and Toshiba have collaborated in the development and manufacture of NAND flash memory products. These NAND flash memory products are manufactured by Toshiba at Toshiba’s Yokkaichi, Japan operations using the semiconductor manufacturing equipment owned or leased by FlashVision or Flash Partners. See also Note 9, “Commitments, Contingencies and Guarantees.” The Company purchased NAND flash memory wafers from FlashVision, Flash Partners and Toshiba, made payments for shared research and development expenses, made loans to FlashVision and Flash Partners and made investments in Flash Partners totaling approximately $367.5 million, $562.6 million, $121.7 million and $251.0 million in the three and six months ended July 2, 2006 and July 3, 2005, respectively. The purchases of NAND flash memory wafers are ultimately reflected as a component of the Company’s cost of product revenues. At July 2, 2006 and January 1, 2006, the Company had accounts payable balances due to FlashVision of $20.1 million and $23.0 million, respectively, balances due to Flash Partners of $38.0 million and $27.0 million, respectively, and balances due to Toshiba of $16.7 million and $11.7 million, respectively. At July 2, 2006 and January 1, 2006, the Company had accrued current liabilities due to Toshiba for shared research and development expenses of $6.0 million and $4.2 million, respectively.

     Tower Semiconductor. The Company owns approximately 13% of the outstanding shares of Tower Semiconductor Ltd., or Tower, one of its suppliers of wafers for its controller components, has prepaid wafer credits issued by Tower, and has convertible debt and a warrant to purchase Tower ordinary shares. The Company’s Chief Executive Officer is also a member of the Tower board of directors. The Company has sourced controller wafers from Tower since the third quarter of fiscal 2003. As of July 2, 2006, the Company owned approximately 11.1 million Tower shares with a carrying value and market value of $15.0 million and $15.6 million, respectively, a warrant to purchase 0.4 million Tower ordinary shares at an exercise price of $7.50 per share, with a carrying value of zero and Tower prepaid wafer credits with a carrying value of zero. In addition, the Company holds a Tower convertible debenture with a carrying value and market value of $4.1 million. The Company purchased controller wafers and related non-recurring engineering, or NRE, of approximately $10.1 million, $16.6 million, $4.6 million and $14.7 million in the three and six months ended July 2, 2006 and July 3, 2005, respectively. These purchases of controller wafers are ultimately reflected as a component of the Company’s cost of product revenues. At July 2, 2006 and January 1, 2006, the Company had amounts payable to Tower of approximately $5.1 million and $2.4 million, respectively, related to the purchase of controller wafers and related NRE. On August 2, 2006, the Company entered in to a non-binding memorandum of understanding to loan $10 million to Tower to fund a portion of the overall expansion of Tower’s 0.13 micron logic wafer capacity. See Note 14, “Subsequent Events.”

     Flextronics. The Chairman of Flextronics International, Ltd., or Flextronics, has served on the Company’s Board of Directors since September 2003. For the three and six months ended July 2, 2006 and July 3, 2005, the Company recorded revenues related to Flextronics and its affiliates of $29.8 million, $49.0 million, $3.4 million and $7.2 million, respectively, and at July 2, 2006 and January 1, 2006, the Company had receivables from Flextronics and its affiliates of $30.3 million and $12.5 million, respectively. In addition, the Company purchased from Flextronics and its affiliates $6.2 million, $20.6 million, $8.7 million and $19.3 million of services for card assembly and testing in the three and six months ended July 2, 2006 and July 3, 2005, respectively, which are ultimately reflected as a component of the Company’s cost of product revenues. At July 2, 2006 and January 1, 2006, the Company had amounts payable to Flextronics and its affiliates of approximately $0.7 million and $5.4 million, respectively, for these services.

     U3, LLC. The Company and msystems Ltd., or msystems, each own 50% of U3, LLC, an entity established to develop and market a next generation platform for universal serial bus flash drives. The Company has consolidated the statement of financial position and the results of operations of U3 since the first quarter of fiscal 2005. The Company’s total investment in U3 as of July 2, 2006 was $6.3 million.

24

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

11. Business Acquisition

     Matrix Semiconductor. On January 13, 2006, the Company completed the acquisition of Matrix Semiconductor, Inc., or Matrix, a designer and developer of three-dimensional (3-D) integrated circuits. Matrix^® 3-D Memory is used for one-time programmable storage applications that complement the Company’s existing flash storage memory products. The Company acquired 100% of the outstanding shares of Matrix for a total purchase price of $296.4 million, consisting of $20.0 million in cash, 3,722,591 shares of common stock valued at $242.3 million, assumed equity instruments to issue 567,704 shares of common stock valued at $33.2 million and transaction expenses of $0.9 million primarily for accounting and legal fees. The assumed stock options were valued using the Black-Scholes-Merton valuation model with the following assumptions: stock price of $65.09; a weighted average volatility rate of 52.8%; a risk-free interest rate of 4.3%; a dividend yield of zero and a weighted average expected remaining term of 1.4 years. The fair value of unvested assumed stock options, which was valued at the consummation date, will be recognized as compensation expenses, net of forfeitures, over the remaining vesting period.

     The preliminary allocation of Matrix purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed is summarized below (in thousands). The preliminary allocation was based on management’s estimates of fair value, which included a third-party appraisal. The allocation of the purchase price may be subject to change based on final estimates of fair value, primarily related to deferred taxes.

Cash	$	9,432
Accounts receivable		6,956
Inventory		4,010
Property and equipment, net		1,919
Other assets		1,786
Total assets acquired		24,103
Accounts payable		(2,302	)
Other liabilities		(23,081	)
Total liabilities assumed		(25,383	)
Net tangible liabilities acquired	$	(1,280	)

     The allocation of the purchase price to the tangible and intangible assets acquired and liabilities assumed is as follows (in thousands):

Net tangible liabilities acquired	$	(1,280	)
Acquired in-process technology		39,600
Acquisition-related restructuring		(17,543	)
Deferred income tax liability		(38,379	)
Deferred income tax asset		35,810
Goodwill		161,808
Other intangible assets:
Core technology		76,300
Developed product technology		11,400
Customer relationships		14,100
		281,816
Assumed unvested equity instrument to be expensed		14,563
Purchase price	$	296,379

     The core and developed product technology as a result of the acquisition of Matrix are being amortized over an estimated useful life of seven years, and the customer relationships are being amortized over an estimated useful life of three years. No residual value has been estimated for the intangible assets. In accordance with SFAS 142, the Company will not amortize the goodwill, but will evaluate it at least annually for impairment.

25

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

     Acquisition-Related Restructuring. During the first quarter of fiscal 2006, the Company established its plans to integrate the Matrix operations which included exiting duplicative facilities and recorded $17.5 million for acquisition-related restructuring activities, of which $17.4 million relates to excess lease obligations. The lease obligations extend through the end of the lease term in 2016. These acquisition-related restructuring liabilities were included in the purchase price allocation of the cost to acquire Matrix.

     In-process Technology. As part of the Matrix purchase agreement, a certain amount of the purchase price was allocated to acquired in-process technology which was determined through established valuation techniques in the high-technology computer industry and written-off in the first quarter of fiscal 2006 because technological feasibility had not been established and no alternative future uses existed. The value was determined by estimating the net cash flows and discounting forecasted net cash flows to their present values. The Company wrote-off the acquired in-process technology of $39.6 million in the first quarter of fiscal 2006. As of July 2, 2006, it was estimated that these in-process projects would be completed over the next one to three years at an estimated total cost of $16.0 million.

     The net cash flows from the identified projects were based on estimates of revenues, costs of revenues, research and development expenses, including costs to complete the projects, selling, marketing and administrative expenses, and income taxes from the projects. The Company believes the assumptions used in the valuations were reasonable at the time of the acquisition. The estimated net revenues and gross margins were based on management’s projections of the projects and were in line with industry averages. Estimated total net revenues from the projects were expected to grow through fiscal 2009 and decline thereafter as other new products are expected to become available. Estimated operating expenses included research and development expenses and selling, marketing and administrative expenses based upon historical and expected direct expense level and general industry metrics. Estimated research and development expenses included costs to bring the projects to technological feasibility and costs associated with ongoing maintenance after a product is released. These activities range from 0% to 5% of net Matrix’s portion of the Company’s revenues for the in-process technologies.

     The effective tax rate used in the analysis of the in-process technologies reflects a historical industry-specific average for the United States federal income tax rates. Discount rates (the rates utilized to discount the net cash flows to their present values) ranging from 12.5% to 15.5% were used in computing the present value of net cash flows for the projects. The percentage of completion was determined using costs incurred by Matrix prior to the acquisition date compared to the estimated remaining research and development to be completed to bring the projects to technological feasibility.

     Pro Forma Results. The following unaudited pro forma financial information for the six months ended July 2, 2006 and three and six months ended July 3, 2005, presents the combined results of the Company and Matrix, as if the acquisition had occurred at the beginning of the periods presented. Certain adjustments have been made to the combined results of operations, including amortization of acquired other intangible assets; however, charges for acquired in-process technology were excluded as these items were non-recurring.

	Three months
	ended		Six months ended
	July 3, 2005		July 2, 2006		July 3, 2005
	(In thousands, except per share amounts)
Net revenues	$	516,584	$	1,343,287	$	972,409
Net income	$	58,594	$	160,048	$	123,365
Net income per share
Basic	$	0.32	$	0.82	$	0.67
Diluted	$	0.30	$	0.79	$	0.63

     The pro forma financial information does not necessarily reflect the results of operations that would have occurred had the Company and Matrix constituted a consolidated entity during such periods.

26

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

12. Income Taxes

     The Company recorded tax provisions of $54.9 million, $96.2 million, $41.4 million and $85.2 million for the three and six months ended July 2, 2006 and July 3, 2005, respectively, or effective tax rates of 36.5%, 42.4%, 37.0%, and 37.0% for the three and six months ended July 2, 2006 and July 3, 2005, respectively. The Company’s effective tax rate for the second quarter of fiscal 2006 differed from the statutory federal rate of 35.0% primarily due to the impact of state taxes, non-deductible stock option compensation expense recorded under FAS 123(R), non-deductible amortization of intangibles, and the tax impact of non-U.S. operations.

     The tax benefits associated with stock option activity for the three and six months ended July 2, 2006 and July 3, 2005 reduced taxes payable by $19.1 million, $61.0 million, $3.7 million and $9.1 million, respectively. Such benefits are credited to capital in excess of par value when realized.

27

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

13. Litigation

     From time-to-time, it has been and may continue to be necessary to initiate or defend litigation against third parties. These and other parties could bring suit against the Company. In each case listed below where the Company is the defendant, the Company intends to vigorously defend the action.

     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 Case No. CV 01 4063 VRW, the Company seeks damages and injunctions against these companies from making, selling, importing or using flash memory cards that infringe its U.S. Patent No. 5,602,987. The court granted summary judgment of non-infringement in favor of defendants Ritek, Pretec and Memorex and entered judgment on May 17, 2004. On June 2, 2004, the Company filed a notice of appeal of the summary judgment rulings to the United States Court of Appeals for the Federal Circuit. On July 8, 2005, the Federal Circuit held in favor of the Company, vacating the judgment of non-infringement and remanding the case back to district court.

     On or about June 9, 2003, the Company received written notice from Infineon Technologies AG, or Infineon, that it believes the Company has infringed its U.S. Patent No. 5,726,601 (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, et al., Civil Case No. C 03 02931 BZ. On October 6, 2003, Infineon filed an answer and counterclaim: (a) denying that the Company is entitled to the declaration sought by the Company’s complaint; (b) 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 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 February 9, 2006, the Company filed a second amended complaint to include claims for declaratory judgment that the ‘002, ‘894 and ‘219 patents are unenforceable. On March 17, 2006, the Court granted a stipulation by the parties withdrawing all claims and counterclaims regarding the ‘002 patent.

     On October 2, 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 a number of its shareholders and directors, including the Company and Dr. Harari, who is a Tower board member, and asserted 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 alleged 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 sought unspecified damages and attorneys’ and experts’ fees and expenses. On August 19, 2004, the court granted the Company’s and the other defendants’ motion to dismiss the complaint in its entirety with prejudice. On September 29, 2004, plaintiffs appealed the dismissal to the United States Court of Appeals for the Second Circuit. On June 1, 2006, the Court of Appeals issued its ruling affirming the dismissal of the case.

     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., Civil Case No. GCG 04 428953, 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. The parties have reached a settlement of the case, which is pending final court approval.

     On October 15, 2004, the Company filed a complaint for patent infringement and declaratory judgment of non-infringement and patent invalidity against STMicroelectronics N.V. and STMicroelectronics, Inc. in the United States District Court for the Northern District of California, captioned SanDisk Corporation v. STMicroelectronics, Inc., et al., Civil Case No. C 04 04379JF. The complaint alleges that STMicro’s products infringe one of the Company’s U.S. patents and seeks damages and an injunction. The complaint further seeks a declaratory judgment that the Company does not infringe several of STMicro’s U.S. patents. By order dated January 4, 2005, the court

28

stayed the Company’s claim that STMicro infringes the Company’s patent pending an outcome in the ITC investigation initiated on November 15, 2004 (discussed below). On January 20, 2005, the court issued an order granting STMicro’s motion to dismiss the declaratory judgment causes of action. The Company has appealed this decision to the U.S. Court of Appeals for the Federal Circuit. The remainder of the case, including the Company’s infringement claim against STMicro, is stayed pending the outcome of the appeal.

     On February 4, 2005, STMicro filed two complaints for patent infringement against the Company in the United States District Court for the Eastern District of Texas, captioned STMicroelectronics, Inc. v. SanDisk Corporation, Civil Case No. 4:05CV44 (the “'44 Action”), and STMicroelectronics, Inc. v. SanDisk Corporation, Civil Case No. 4:05CV45 (the “'45 Action”), respectively. The complaints seek damages and injunctions against certain SanDisk products. On April 22, 2005, the Company filed counterclaims on two patents against STMicroelectronics N.V. and STMicroelectronics, Inc. in the '45 Action. The counterclaims seek damages and injunctive relief against STMicroelectronics N.V. and STMicroelectronics, Inc. flash memory products. In the '44 Action, the Magistrate Judge has issued a Report and Recommendation that the Company’s motion for summary judgment of non-infringement on all accused products be granted. STMicro has asked the U.S. District Court Judge to reject that Report and Recommendation. The '45 Action, previously scheduled for trial in November, 2006, is now expected to have a trial date in the first quarter of 2007.

     On October 15, 2004, the Company filed a complaint under Section 337 of the Tariff Act of 1930 (as amended) (Case No. 337-TA 526) 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. (“STMicro”) as respondents. In the complaint, the Company alleges that STMicro’s NAND flash memory infringes U.S. Patent No. 5,172,338 (the ‘338 patent), and seek an order excluding their products from importation into the United States. In the complaint, the Company alleges that STMicro’s NAND flash memory infringes the ‘338 patent and seeks an order excluding their products from importation into the United States. On November 15, 2004, the ITC instituted an investigation pursuant to 19 U.S.C. Section 1337 against STMicro in response to the Company’s complaint. A hearing was held from August 1-8, 2005. On October 19, 2005, the Administrative Law Judge issued an initial determination confirming the validity and enforceability of the Company’s United States Patent 5,172,338 (‘338 patent) by rejecting STMicro’s claims that the patent was invalidated by prior art. The initial determination, however, found that STMicro’s NAND flash memory chips did not infringe three claims of the ‘338 patent. On October 31, 2005, the Company filed a petition with the International Trade Commission to review and reverse the finding of non-infringement. Also, on October 31, 2005, STMicro filed a petition for review with the International Trade Commission to review and reverse the finding that the patent was valid and enforceable. On December 6, 2005, the ITC issued its decision. The ITC declined to review the finding of non-infringement, and, after reviewing the finding of validity, declined to take any position on the issue of validity. The Company is appealing the ITC’s decision to the U.S. Court of Appeals for the Federal Circuit.

     On October 14, 2005, STMicroelectronics, Inc. filed a complaint against the Company and the Company’s CEO Eli Harari, in the Superior Court of the State of California for the County of Alameda, captioned STMicroelectronics, Inc. v. Harari, Case No. HG 05237216. The complaint alleges that STMicroelectronics, Inc., as the successor to Wafer Scale Integration, Inc.’s (“WSI”) legal rights, has an ownership interest in several SanDisk patents that issued from applications filed by Dr. Harari, a former WSI employee. The complaint seeks the assignment or co-ownership of certain inventions and patents conceived of by Harari, including some of the patents asserted by the Company in its litigations against STMicro, as well as damages in an unspecified amount. On November 15, 2005, Harari and the Company removed the case to the U.S. District Court for the Northern District of California, where it was assigned case number C05-04691. On November 23, 2005, Harari and the Company filed counterclaims, asserting the Company’s ownership of the patents and applications raised in the complaint. On December 13, 2005, STMicroelectronics, Inc. filed a motion to remand the case back to the Superior Court of Alameda County. STMicro’s remand motion was denied by the Court in March 2006. On April 24, 2006, Dr. Harari and the Company filed a motion for summary judgment on statute of limitations and other grounds that, if granted, would result in dismissal of all of STMicro’s claims. The court did not rule on the motion for summary judgment. On July 18, 2006, the case was remanded to the Superior Court of Alameda County after briefing and oral argument on a motion by STMicro for reconsideration of the order denying remand. Case No. HG 05237216 is now scheduled for an initial case management conference on September 15, 2006.

     On December 6, 2005, the Company filed a complaint for patent infringement in the United States District Court for the Northern District of California against STMicroelectronics, Inc. and STMicroelectronics, NV (“STMicro”) (Case No. C0505021 JF). In the suit, the Company seeks damages and injunctions against STMicro from making, selling, importing or using flash memory chips or products that infringe the Company’s U.S. Patent No. 5,991,517. The case is presently stayed, pending the termination of the ITC investigation instituted February 8, 2006, discussed below.

     On January 10, 2006, the Company filed a complaint under Section 337 of the Tariff Act of 1930 (as amended) (Case No. 337-TA-560) titled, “In the matter of certain NAND flash memory circuits and products containing same” in the ITC, naming STMicro as respondents. In the complaint, the Company alleges that: (i) STMicro’s NOR flash memory infringes the ‘338 patent; (ii) STMicro’s NAND flash memory infringes U.S. Patent No. 6,542,956; and (iii) STMicro’s NOR flash memory and NAND flash memory infringe U.S. Patent No. 5,991,517. The complaint seeks an order excluding STMicro’s NOR and NAND flash memory products from importation into the United States. The ITC instituted an investigation, based on the Company’s complaint, on February 8, 2006. On March 31, 2006, STMicro filed a motion for partial summary determination or termination of the investigation with respect to the ‘338 patent. On May 1, 2006, the Administrative Law Judge denied STMicro’s motion in an order that is not subject to review by the ITC. On May 17, 2006, SanDisk filed a motion to voluntarily terminate the investigation with respect to U.S. Patent No. 6,542,956. The motion was granted June 1, 2006.

     On or about July 15, 2005, Societa’ Italiana Per Lo Sviluppo Dell’electtronica, S.I.Sv.El., S.p.A., (“Sisvel”) filed suit against the Company and others in the district court of the Netherlands in The Hague in a case captioned Societa’ Italiana Per Lo Sviluppo Dell’electtronica, S.I.Sv.El., S.p.A. adverse to SanDisk International Sales, Moduslink B.V. and UPS SCS (Nederland) B.V., Case No. 999.131.1804 (Cause List numbers 2006/167 and 2006/168). Sisvel alleges that certain of the Company’s MP3 products infringe three European patents of which Sisvel claims to be a licensee with the right to bring suit. Sisvel seeks an injunction and unspecified damages. Sisvel has previously publicly indicated that it will license these and other patents under reasonable and nondiscriminatory terms, and it has specifically offered the Company a license under the patents. The Company has submitted pleadings asking the court to strike Sisvel’s pleadings as legally insufficient and seeking other procedural relief. The court is still addressing these procedural matters and the Company will not be required to answer on the substance of Sisvel’s claim until September 2006 at the earliest.

     In a related action, on March 9, 2006, the Company filed an action in the English High Court, Chancery Division, Patents Court, in London, against Sisvel and the owners of the patents Sisvel has asserted against the Company in the Netherlands. The case is SanDisk Corporation v. Koninklijke Philips Electronics N.V. (a Dutch corporation), France Télécom (a French corporation), Télédiffusion de France S.A. (a French corporation), Institut für Rundfunktechnik GmbH (a German corporation) and Societa’ Italiana Per Lo Sviluppo Dell’electtronica, S.I.Sv.El., S.p.A., Case No. HC 06 C 00835. In this action, the Company seeks a declaration of non-infringement of the patents asserted by Sisvel in connection with the Company’s MP3 products. The Company also seeks a declaration that the patents are not “essential” to the technology of MP3 players, as Sisvel presently contends in the case filed in the Netherlands. The defendants have submitted their formal defense and counterclaimed for infringement. The trial in this matter is expected to take place along with the trial for Case No. HC 06 C 00615 in March 2007.

     In another related action, on April 13, 2006, Audio MPEG filed a complaint alleging patent infringement in the District Court for the Eastern District of Virginia. The case is Audio MPEG v. SanDisk Corporation, Case No. 2:06cv209 WDK/JEB. Audio MPEG holds itself out to be the U.S. subsidiary of Sisvel and purports to have the right to enforce certain patents in the U.S. on subject matter related to the patents asserted by Sisvel in the Netherlands. Specifically, Audio MPEG asserts U.S. Patent No. 5,214,678 (entitled “Digital transmission system using subband coding of a digital signal”), U.S. Patent No. 5,323,396 (entitled “Digital transmission system, transmitter and receiver for use in the transmission system”), U.S. Patent No. 5,539,829 (entitled “Subband coded digital transmission system using some composite signals”), and U.S. Patent No. 5,777,992 (entitled “Decoder for decoding and encoded digital signal and a receiver comprising the decoder”). The complaint seeks damages and injunctive relief. The Company responded promptly, filing a motion to dismiss on April 20, 2006, asking the court to dismiss the complaint on the grounds that Audio MPEG failed to join the patent holders as co-plaintiffs. Audio MPEG responded by voluntarily joining the patent owners as defendants. Thereafter, the Company sought to have

the case dismissed or transferred to the Northern District of California. The court has not yet decided the transfer or dismissal motions.

     In another related action, on April 13, 2006, Sisvel filed suit against the Company’s subsidiary, SanDisk GmbH, for patent infringement in the Mannheim District Court in Germany, S.I.Sv.El., S.p.A. v. SanDisk GmbH, file no. 7 O 90/06, which was served on the Company on or about May 10, 2006. The plaintiffs allege that certain of the Company’s MP3 products infringe four German patents of which Sisvel claims to be a licensee with the right to bring suit. Sisvel seeks an injunction and unspecified damages. Sisvel has previously publicly stated that it will license these and other patents under reasonable and nondiscriminatory terms, and it has specifically offered the Company a license under the patents.

     In another related action, on April 13, 2006, Sisvel filed suit against the Company for patent infringement in the Mannheim District Court in Germany, S.I.Sv.El., S.p.A. v. SanDisk Corporation, file no. 7 O 89/06, which was served on the Company in or about July, 2006. The plaintiffs allege that certain of the Company’s MP3 products infringe four German patents of which Sisvel claims to be a licensee with the right to bring suit. Sisvel seeks an injunction and unspecified damages. Sisvel has previously publicly stated that it will license these and other patents under reasonable and nondiscriminatory terms, and it has specifically offered the Company a license under the patents.

     On August 7, 2006 two lawsuits were filed against the Company and others in the California Superior Court for Santa Clara County, captioned Dashiell v. SanDisk Corporation, et al., Case No. 1-06-CV-068759 and Capovilla v. SanDisk Corporation, et al, Case No. 1-06-CV-068760. Each complaint purports to assert a class action claim on behalf of shareholders of msystems Ltd. (“msystems”) and further purports to assert derivative claims on behalf of msystems. Defendants include the Company, msystems, and several officers and directors of msystems. The complaints allege breaches of fiduciary duties by officers and directors of msystems relating to alleged option backdating and to allegedly furthering their own interests in connection with the merger, and that these alleged breaches were aided and abetted by the Company. The complaints further allege that the terms of the announced merger between the Company and msystems are not fair to msystems’ shareholders. The complaints seek compensatory damages, an accounting, imposition of a constructive trust, punitive damages, a declaration that the merger agreement is unlawful and unenforceable, an injunction against consummation of the merger, rescission of the merger agreement, and other relief.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

14. Subsequent Events

     On July 7, 2006, the Company closed a transaction with Toshiba under which the Company and Toshiba created a new semiconductor company, Flash Alliance Ltd., or Flash Alliance, a Japanese tokurei yugen kaisha, owned 49.9% by the Company and 50.1% by Toshiba, and agreed to cooperate in the construction and equipping of an additional 300-millimeter NAND wafer fabrication facility (Fab 4), to produce NAND flash memory products for the parties. See Note 9, “Commitments, Contingencies and Guarantees.”

     On July 27, 2006, the Company and Toshiba agreed to accelerate the expansion of Fab 3, which is expected to bring Fab 3 wafer capacity from the previously planned 90,000 wafers per month to 110,000 wafers per month by July 2007. The incremental investment by the Company for 50% of this higher Fab 3 output is currently estimated at approximately 40 billion Japanese yen, or $350 million based upon the exchange rate at July 2, 2006, over the next 12 months. The Company’s total investment to bring Fab 3 wafer capacity to 110,000 wafers per month is expected to be approximately $2.2 billion. The Company expects to fund its portion of the investment through cash on hand as well as other financing sources.

     On July 30, 2006, the Company entered into agreements to acquire msystems Ltd., or msystems, in an all stock transaction. This combination will join together two flash memory companies with complementary products, customers and channels. In the transaction, each msystems ordinary share will be converted into 0.76368 of a share of the Company’s common stock. The closing of the transaction is subject to conditions, including, among others, Israeli court approval, regulatory approval and msystems’ shareholder approval. The transaction is expected to close as early as the fourth quarter of 2006.

     On August 2, 2006, the Company entered in to a non-binding memorandum of understanding to loan $10 million to Tower to fund a portion of the overall expansion of Tower’s 0.13 micron logic wafer capacity. Furthermore, the Company has committed to purchase, upon such expansion, volume production quantities of 0.13 micron wafers during 2007 and 2008 and will have right of first refusal on the use of the extra capacity produced by the equipment related to this loan through 2009.

29

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

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

Overview

     We are the worldwide leader in flash storage card products. We design, develop and market flash storage devices used in a wide variety of consumer electronics products. Flash storage allows data to be stored in a compact format that retains the data for an extended period of time after the power has been turned off. Our flash storage card products are designed to enable mass-market adoption of digital cameras, feature phones, MP3 players and other digital consumer devices. Our products include flash cards, Universal Serial Bus, or USB, flash drives and digital audio players.

     As a supplier to this industry, our results are primarily driven by worldwide demand for flash storage devices, which in turn depends on end-user demand for electronic products. We believe the market for flash storage is price elastic. We expect that as we reduce the price of our flash devices, consumers will demand an increasing number of megabytes of memory. In order to profitably capitalize on price elasticity in the market for flash storage products, we must reduce our cost per megabyte at a rate similar to the change in selling price per megabyte to the consumer. We achieve these cost reductions through technology improvements primarily focused on increasing the amount of memory stored in a given area of silicon.

     In January 2006, we acquired Matrix Semiconductor, Inc., or Matrix, a designer and developer of three-dimensional (3-D) integrated circuits. Matrix^® 3-D Memory is used for one-time programmable storage applications that complement our existing flash storage memory products. Matrix 3-D Memory is used for storage applications that do not require rewriteable memory and where low cost is the paramount consideration, such as video games, music and other content, or for archiving. The acquisition of Matrix resulted in a $39.6 million write-off of in-process acquired technology during the first quarter of fiscal 2006.

     In May 2006, we issued and sold $1.15 billion in aggregate principal amount of 1% Convertible Senior Notes due 2013 (the “1% Notes”). The 1% Notes were issued at par and pay interest at a rate of 1% per annum. The 1% Notes may be converted, under certain circumstances, based on an initial conversion rate of 12.1426 shares of common stock per $1,000 principal amount of notes (which represents an initial conversion price of approximately $82.36 per share). The conversion price will be subject to adjustment in some events but will not be adjusted for accrued interest. The net proceeds to us from the offering of the 1% Notes were $1.13 billion. Concurrently with the issuance of the 1% Notes, we purchased a convertible bond hedge and sold warrants. The separate convertible bond hedge and warrant transactions are structured to reduce the potential future economic dilution associated with the conversion of the 1% Notes and to increase the initial conversion price to $95.03 per share. Net proceeds from this offering will be used for general corporate purposes, including capital expenditures for new and existing manufacturing facilities, development of new technologies, general working capital and other non-manufacturing capital expenditures. The net proceeds may also be used to fund strategic investments or acquisitions of products, technologies or complementary businesses or obtain the right or license to use additional technologies.

     On July 7, 2006, we and Toshiba Corporation, or Toshiba, entered into a business venture, Flash Alliance Ltd., or Flash Alliance, to build Fab 4, a proposed new advanced 300-millimeter wafer fabrication facility at Toshiba’s Yokkaichi, Japan operations, to meet the anticipated fast growing demand for NAND flash memory in 2008 and beyond. We own 49.9% and Toshiba owns 50.1% of Flash Alliance. Both we and Toshiba will collaborate in the development and manufacture of NAND flash memory products. These NAND flash memory products will be manufactured by Toshiba at Fab 4 using the semiconductor manufacturing equipment owned or leased by Flash Alliance. Flash Alliance will purchase wafers from Toshiba at cost and then resell those wafers to us and Toshiba at cost plus a mark-up. We account for our 49.9% ownership position in Flash Alliance under the equity method of accounting. We are committed to purchase half of Flash Alliance’s NAND wafer supply.

30

     The capacity of Fab 4 at full expansion is currently expected to be approximately 150,000 wafers per month and the timeframe to reach full capacity is to be mutually agreed by the parties. To date, the parties have agreed to an expansion plan to 67,500 wafers per month for which the total investment in Fab 4 is currently estimated at approximately $3.0 billion through the end of 2008, of which our share is currently estimated to be approximately $1.5 billion. Initial NAND production is currently scheduled for the end of 2007. For expansion beyond 67,500 wafers per month, it is expected that investments and output would 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 are also committed to fund 49.9% of Flash Alliance’s costs to the extent that Flash Alliance’s revenues from wafer sales to us and Toshiba are insufficient to cover these costs.

     On July 30, 2006, we entered into agreements to acquire msystems Ltd., or msystems, in an all stock transaction. This combination will join together two flash memory companies with complementary products, customers and channels. In the transaction, each msystems ordinary share will be converted into 0.76368 of a share of our common stock. The closing of the transaction is subject to conditions, including, among others, Israeli court approval, regulatory approvals and msystems’ shareholder approval. The transaction is expected to close as early as the fourth quarter of 2006.

     Beginning in the first quarter of fiscal 2006, we adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123(R), or SFAS 123(R), Share Based Payments, using the modified-prospective transition method. Under that transition method, compensation cost recognized in the six months ended July 2, 2006 included the following: (a) compensation cost based on the grant date fair value related to any share-based awards granted through, but not yet vested as of January 1, 2006, and (b) compensation cost for any share-based awards granted on or subsequent to January 2, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). As a result of adopting SFAS 123(R), we recognized share-based compensation expense of $25.9 million and $44.7 million during the three months and six months ended July 2, 2006, which affected our reported cost of sales, research and development, selling and marketing and general and administrative expenses. In addition, at July 2, 2006, we capitalized to inventory $2.6 million of compensation cost for share-based awards that were issued to manufacturing personnel. We calculate this share-based compensation expense based on the fair values of the share-based compensation awards as estimated using the Black-Scholes-Merton closed-form option valuation model. As of July 2, 2006, total unrecognized compensation expense related to unvested share-based compensation arrangements already granted under our various plans was $231.5 million, which we expect will be recognized over a weighted-average period of 2.7 years.

31

Results of Operations

	Three months ended										Six months ended
			% of					% of					% of					% of
	July 2, 2006		Revenue			July 3, 2005		Revenue			July 2, 2006		Revenue			July 3, 2005		Revenue
	(In millions, except percentages)
Product revenues	$	636.7		88.5	%	$	453.8		88.1	%	$	1,174.4		87.5	%	$	853.5		88.4	%
License and royalty revenues		82.5		11.5	%		61.1		11.9	%		168.0		12.5	%		112.4		11.6	%
Total revenues		719.2		100.0	%		514.9		100.0	%		1,342.4		100.0	%		965.9		100.0	%
Cost of product revenues		430.2		59.8	%		300.8		58.4	%		815.0		60.7	%		552.0		57.1	%
Gross margins		289.0		40.2	%		214.1		41.6	%		527.4		39.3	%		413.9		42.9	%
Operating expenses Research and development		73.8		10.3	%		61.4		11.9	%		137.5		10.2	%		107.4		11.1	%
Sales and marketing		45.1		6.3	%		27.0		5.2	%		88.4		6.6	%		51.6		5.4	%
General and administrative		37.2		5.2	%		19.6		3.9	%		67.2		5.0	%		35.3		3.7	%
Write-off of acquired in-process technology		—		—			—		—			39.6		3.0	%		—		—
Amortization of acquisition related intangible assets		4.4		0.5	%		—		0.0	%		8.2		0.6	%		—		—
Total operating expenses		160.5		22.3	%		108.0		21.0	%		340.9		25.4	%		194.3		20.2	%
Operating income		128.5		17.9	%		106.1		20.6	%		186.5		13.9	%		219.6		22.7	%
Non-operating income, net		22.0		3.0	%		5.8		1.1	%		40.5		3.0	%		10.6		1.1	%
Income before taxes		150.5		20.9	%		111.9		21.7	%		227.0		16.9	%		230.2		23.8	%
Provision for income taxes		54.9		7.6	%		41.4		8.0	%		96.2		7.2	%		85.2		8.8	%
Net income	$	95.6		13.3	%	$	70.5		13.7	%	$	130.8		9.7	%	$	145.0		15.0	%

Product Revenues

	Three months ended							Six months ended
					Percent							Percent
	July 2, 2006		July 3, 2005		Change			July 2, 2006		July 3, 2005		Change
	(In millions, except percentages)
Retail	$	446.2	$	376.5		19	%	$	818.2	$	693.1		18	%
OEM		190.5		77.3		146	%		356.2		160.4		122	%
Product revenues	$	636.7	$	453.8		40	%	$	1,174.4	$	853.5		38	%

     The increase in our product revenues for the three months ended July 2, 2006 compared to the three months ended July 3, 2005 was comprised of a 178% increase in the number of megabytes sold, partially offset by a 49% reduction in our average selling price per megabyte. Our product revenues for the six months ended July 2, 2006 compared to the six months ended July 3, 2005 was comprised of a 172% increase in the number of megabytes sold, partially offset by a 49% reduction in our average selling price per megabyte. Our year-over-year product revenue growth for the three and six months ended July 2, 2006 was primarily due to increased sales of cards for handsets, digital audio players, cards for gaming devices and high performance cards for cameras, primarily our SanDisk Ultra^® and our SanDisk Extreme^® cards. We expect to continue to reduce our price per megabyte as technology advances allow us to further reduce our cost per megabyte.

     Our top ten customers represented approximately 52% and 51% of our total revenues in the three and six months ended July 2, 2006, respectively, compared to 50% and 58% in three and six months ended July 3, 2005, respectively. No customer exceeded 10% of our total revenues in either of the three and six months ended July 2, 2006 and July 3, 2005 except Samsung Electronics Co. Ltd., which was 11% and 12% in the three and six months ended July 2, 2006, respectively, including sales of our products and royalty revenues.

32

Geographical Product Revenues

	Three months ended													Six months ended
	July 2, 2006					July 3, 2005								July 2, 2006					July 3, 2005
			Pct of					Pct of			Percent					Pct of					Pct of		Percent
	Revenue		Revenue			Revenue		Revenue			Change			Revenue		Revenue			Revenue		Revenue		Change
	(In millions, except percentages)
North America	$	276.2		43	%	$	235.5		52	%		17	%	$	493.4		42	%	$	438.4	51	%	13	%
EMEA		153.3		24	%		122.0		27	%		26	%		293.6		25	%		233.2	27	%	26	%
Other foreign countries		207.2		33	%		96.3		21	%		115	%		387.4		33	%		181.9	22	%	113	%
	$	636.7		100	%	$	453.8		100	%		40	%	$	1,174.4		100	%	$	853.5	100	%	38	%

     The geographic breakdown of our product revenues for the three and six month periods ended July 2, 2006 over the comparable periods in fiscal 2005 reflects higher sales to the Asia-Pacific based locations for handset OEM customers that are bundling our flash memory cards with music and camera enabled handsets.

License and Royalty Revenues

	Three months ended							Six months ended
					Percent							Percent
	July 2, 2006		July 3, 2005		Change			July 2, 2006		July 3, 2005		Change
	(In millions, except percentages)
License and royalty revenues	$	82.5	$	61.1		35	%	$	168.0	$	112.4		49	%

     The increase in our license and royalty revenues for the three and six months ended July 2, 2006 was primarily driven by increased overall sales by our licensees as well as increased royalties related to the sale of multi-level-cell (MLC) based products.

Gross Margin

	Three months ended									Six months ended
							Percent									Percent
	July 2, 2006			July 3, 2005			Change			July 2, 2006			July 3, 2005			Change
	(In millions, except percentages)
Product gross margin	$	206.5		$	153.0			35	%	$	359.4		$	301.5			19	%
Product gross margin (as a percent of product revenues)		32.4	%		33.7	%					30.6	%		35.3	%
Total gross margin (as a percent of total revenues)		40.2	%		41.6	%					39.3	%		42.9	%

     The decrease in product gross margin percentage for the three and six months ended July 2, 2006 over the comparable period in fiscal 2005 was primarily due to a reduction in the average selling price per megabyte that was not fully offset by a decrease in the cost per megabyte and stock compensation expense of $2.5 million related to the adoption of SFAS 123(R). Stock compensation expense of $2.6 million was capitalized in inventory at July 2, 2006 and will be recognized as cost of sales as product is sold.

Research and Development

	Three months ended									Six months ended
							Percent									Percent
	July 2, 2006			July 3, 2005			Change			July 2, 2006			July 3, 2005			Change
	(In millions, except percentages)
Research and development	$	73.8		$	61.4			20	%	$	137.5		$	107.4			28	%
Percent of revenue		10.3	%		11.9	%					10.2	%		11.1	%

     Our research and development expense growth for the three and six months ended July 2, 2006 was primarily due to stock compensation expense of $10.4 million and $19.2 million, respectively, related to the adoption of SFAS 123(R), increased payroll costs of $11.4 million and $19.2 million, respectively, primarily related to our acquisition of Matrix and higher engineering consulting costs of $3.1 million and $5.5 million, respectively, partially offset by the elimination of initial design and development costs for Flash Partners’ 300-millimeter fab, recorded in the first and second quarters of fiscal 2005.

33

Sales and Marketing

	Three months ended									Six months ended
							Percent									Percent
	July 2, 2006			July 3, 2005			Change			July 2, 2006			July 3, 2005			Change
	(In millions, except percentages)
Sales and marketing	$	45.1		$	27.0			67	%	$	88.4		$	51.6			71	%
Percent of revenue		6.3	%		5.2	%					6.6	%		5.3	%

     Our sales and marketing expense growth for the three and six months ended July 2, 2006 was primarily due to stock compensation expense of $5.1 million and $9.2 million, respectively, related to the adoption of SFAS 123(R), increased payroll costs of $4.5 million and $8.4 million, respectively, related to increased headcount, increased merchandising expenses of $4.4 million and $10.5 million, respectively, and higher consulting and outside services costs of $1.6 million and $4.2 million, respectively.

General and Administrative

	Three months ended									Six months ended
							Percent									Percent
	July 2, 2006			July 3, 2005			Change			July 2, 2006			July 3, 2005			Change
	(In millions, except percentages)
General and administrative	$	37.2		$	19.6			90	%	$	67.2		$	35.3			90	%
Percent of revenue		5.2	%		3.8	%					5.0	%		3.7	%

     Our general and administrative expense growth for the three and six months ended July 2, 2006 was primarily due to increased stock compensation expense of $7.8 million and $13.8 million, respectively, related to the adoption of SFAS 123(R), increased patent and other litigation costs of $2.9 million and $8.1 million, respectively, and increased payroll costs of $3.0 million and $5.2 million, respectively.

Write-off of Acquired In-process Technology

	Three months ended						Six months ended
					Percent							Percent
	July 2, 2006		July 3, 2005		Change		July 2, 2006			July 3, 2005		Change
	(In millions, except percentages)
Write-off of acquired in-process technology	$	—	$	—		n/a	$	39.6		$	—		n/a
Percent of revenue		—		—				2.9	%		—

     As part of the Matrix purchase agreement, a certain amount of the purchase price was allocated to acquired in-process technology which was determined through established valuation techniques in the high-technology computer industry and written-off in the first quarter of fiscal 2006 because technological feasibility had not been established and no alternative future uses existed. The value was determined by estimating the net cash flows and discounting forecasted net cash flows to their present values. As of July 2, 2006, it was estimated that these in-process projects would be completed over the next one to three years at an estimated total cost of $16 million. See Note 11, “Business Acquisition.”

Amortization of Acquisition Related Intangible Assets

	Three months ended							Six months ended
						Percent							Percent
	July 2, 2006			July 3, 2005		Change		July 2, 2006			July 3, 2005		Change
	(In millions, except percentages)
Amortization of acquisition related intangible assets	$	4.4		$	—		n/a	$	8.2		$	—		n/a
Percent of revenue		0.6	%		—				0.6	%		—

     Our three and six months ended July 2, 2006 amortization of acquisition related intangible assets was primarily related to costs incurred from our acquisition of Matrix in January 2006.

34

Non-Operating Income (Loss), net

	Three months ended									Six months ended
							Percent									Percent
	July 2, 2006			July 3, 2005			Change			July 2, 2006			July 3, 2005			Change
	(In millions, except percentages)
Equity in income (loss) of business ventures	$	0.2		$	(0.3	)		167	%	$	0.4		$	(0.1	)		500	%
Interest income		22.7			9.7			134	%		38.5			17.7			118	%
Gain (loss) in investment in foundries		0.8			(5.2	)		115	%		2.3			(9.3	)		125	%
Interest expense and other income (loss), net		(1.7	)		1.7			(200	)%		(0.7	)		2.3			(130	)%
Total non-operating income (loss), net	$	22.0		$	5.9			273	%	$	40.5		$	10.6			282	%

     The increase in non-operating income for the three and six months ended July 2, 2006 was primarily due to increased interest income of $22.7 million and $38.5 million, respectively, as a result of higher interest rates and higher cash and investment balances partially offset by interest expense related to the issuance and sale of our 1% Notes totaling $1.15 billion in May 2006.

Provision for Income Taxes

	Three months ended					Six months ended
	July 2, 2006			July 3, 2005		July 2, 2006			July 3, 2005
Provision for income taxes		36.5	%		37.0		42.4	%		37.0	%

     We recorded tax provisions of $54.9 million, $96.2 million, $41.4 million and $85.2 million for the three and six months ended July 2, 2006 and July 3, 2005, respectively, or effective tax rates of 36.5%, 42.4%, 37.0%, and 37.0% for the three and six months ended July 2, 2006 and July 3, 2005, respectively. Our effective tax rate for the second quarter of fiscal 2006 differed from the statutory federal rate of 35.0% primarily due to the impact of state taxes, non-deductible stock option compensation expense recorded under FAS 123(R), non-deductible amortization of intangibles, and the tax impact of non-U.S. operations.

     The tax benefits associated with stock option activity for the three and six months ended July 2, 2006 and July 3, 2005 reduced taxes payable by $19.1 million, $61.0 million, $3.7 million and $9.1 million, respectively. Such benefits are credited to capital in excess of par value when realized.

35

Liquidity and Capital Resources

     Cash Flows. Operating activities generated $111.8 million of cash during the six months ended July 2, 2006. The primary sources of operating cash flow for the six months ended July 2, 2006 were (1) net income, adjusted to exclude the effect of non-cash charges including depreciation, amortization, share-based compensation and write-off of acquired in-process technology, which were partially offset by tax benefit from share-based compensation and loss on investment in foundries, and (2) reductions in accounts receivable and increases in other liabilities, which were partially offset by increases in inventories and in other assets and decreases in accounts payable.

     We used $733.5 million for investing activities during the six months ended July 2, 2006. Purchases of short and long-term investments, net of proceeds from sales and maturities of short-term investments, totaled $429.9 million. Capital expenditures totaling $89.7 million and our loans and investment in Flash Partners of $223.4 million to purchase equipment for Fab 3 was partially offset by cash acquired of $9.4 million as a result of our acquisition of Matrix.

     We generated $1.18 billion of cash from financing activities due to $1.13 billion of cash from the issuance of the 1% Convertible Senior Notes, net of issuance costs, partially offset by the purchase of the convertible bond hedge of $386.1 million. We received $308.7 million from the issuance of warrants and $68.9 million from exercises of stock incentives. Additionally, we received a tax benefit of $61.0 million on employee stock programs during the six months ended July 2, 2006.

     Liquid Assets. At July 2, 2006, we had cash, cash equivalents and short-term investments of $2.28 billion. As of July 2, 2006, the cost basis of our investment in 24.5 million UMC shares was $13.4 million with a market value of $14.7 million. In addition, at July 2, 2006, we held 11.1 million Tower shares, of which the carrying value and market value was $15.0 million and $15.6 million, respectively. As of July 2, 2006, we remained subject to certain restrictions on the sale or transfer of our Tower ordinary shares including certain rights of first refusal, and through January 2008, have agreed to maintain minimum shareholdings.

     Short-Term Liquidity. As of July 2, 2006, our working capital balance was $2.74 billion. We do not expect any liquidity constraints in the next twelve months. We currently expect to loan, make investments or guarantee future operating leases for fab expansion of approximately $750 million over the next twelve months. We also expect to spend approximately $250 million over the next twelve months on property and equipment, which includes assembly and test equipment as well as engineering equipment, and spending related to facilities and information systems.

     Long-Term Requirements. Depending on the demand for our products, we may decide to make additional investments, which could be substantial, in wafer fabrication foundry capacity and assembly and test manufacturing equipment to support our business in the future. We may also make equity investments in other companies or engage in merger or acquisition transactions. These additional investments may require us to raise additional financing, which could be difficult to obtain, and which if not obtained in satisfactory amounts may prevent us from funding the ventures with Toshiba, 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.

     Financing Arrangements. In May 2006, we issued and sold $1.15 billion in aggregate principal amount of 1% Notes due 2013. The 1% Notes were issued at par and pay interest at a rate of 1% per annum. The 1% Notes may be converted, under certain circumstances, based on an initial conversion rate of 12.1426 shares per $1,000 principal amount of notes (which represents an initial conversion price of approximately $82.36 per share). The conversion price will be subject to adjustment in some events but will not be adjusted for accrued interest. The net proceeds to us from the offering of the 1% Notes were $1.13 billion.

     Concurrently with the issuance of the 1% Notes, we purchased a convertible bond hedge and sold warrants. The separate convertible bond hedge and warrant transactions are structured to reduce the potential future economic dilution associated with the conversion of the 1% Notes and to increase the initial conversion price to $95.03 per share. Each of these components are discussed separately below:

• Convertible Bond Hedge. Counterparties agreed to sell to us up to approximately 14.0 million shares of our common stock, which is the number of shares initially issuable upon conversion of the 1% Notes in full, at a price of $82.36 per share. The convertible bond hedge transaction will be settled in net shares and will terminate upon the earlier of the maturity date of the 1% Notes or the first day none of the 1% Notes remain outstanding due to conversion or otherwise. Settlement of the convertible bond hedge in net

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shares on the expiration date would result in us receiving net shares equivalent to the number of shares issuable by us upon conversion of the 1% Notes. Should there be an early unwind of the convertible bond hedge transaction, the number of net shares potentially received by us will depend upon 1) the then existing overall market conditions, 2) our stock price, 3) the volatility of our stock, and 4) the amount of time remaining before expiration of the convertible bond hedge. The convertible bond hedge transaction cost of $386.1 million has been accounted for as an equity transaction in accordance with Emerging Issues Task Force No. 00-19, or EITF 00-19, Accounting for Derivative Financial Statements Indexed to, and Potentially Settled in, a Company’s Own Stock. We recorded a tax benefit of approximately $145.6 million in stockholders’ equity from the deferred tax assets related to the convertible bond hedge.

•

Sold Warrants. We received $308.7 million from the same counterparties from the sale of warrants to purchase up to approximately 14.0 million shares of our common stock at an exercise price of $95.03 per share. The warrants have an expected life of 7.25 years and expire in August 2013. At expiration, we may, at option, elect to settle the warrants on a net share basis. As of July 2, 2006, the warrants had not been exercised and remained outstanding. The value of the warrants has been classified as equity because they meet all the equity classification criteria of EITF 00-19.

     Contingent Obligations. We agreed to reimburse Toshiba for 49.9% of losses it sustains under its guarantee of FlashVision’s operating lease with Mizuho Leasing. As of July 2, 2006, the maximum exposure for both us and Toshiba under that guarantee was 15.0 billion Japanese yen, or approximately $131 million based upon the exchange rate at July 2, 2006, and our maximum exposure was 7.5 billion Japanese yen, or approximately $66 million based upon the exchange rate at July 2, 2006.

     Toshiba Ventures. We are a 49.9% percent owner in, FlashVision and Flash Partners. We and Toshiba have collaborated in the development and manufacture of NAND flash memory products. These NAND flash memory products are manufactured by Toshiba at Toshiba’s Yokkaichi, Japan operations using the semiconductor manufacturing equipment owned or leased by FlashVision or Flash Partners. This equipment is funded by investments in or loans to the ventures from us and Toshiba. Toshiba owns 50.1% of each of these ventures. Individually, FlashVision and Flash Partners purchases wafers from Toshiba at cost and then resells those wafers to us and Toshiba at cost plus a mark-up. We are contractually obligated to purchase half of FlashVision and Flash Partners NAND wafer supply. We cannot estimate the total amount of the wafer purchase commitment as of July 2, 2006 because our price is determined by reference to the future cost to produce the semiconductor wafers. In addition to the semiconductor assets owned by FlashVision and Flash Partners, we directly own certain semiconductor manufacturing equipment in Toshiba’s Yokkaichi operations for which we receive 100% of the output from this equipment. From time-to-time, we and Toshiba mutually approve increases in wafer supply capacity of Flash Partners that may contractually obligate us to increased capital funding. We and Toshiba each pay the cost of our own design teams and 50% of the wafer processing and similar costs associated with this direct design and development of flash memory.

     The cost of the wafers we purchase from FlashVision and Flash Partners is recorded in inventory and ultimately cost of sales. FlashVision and Flash Partners are variable interest entities and we are not the primary beneficiary of either venture because we are entitled to less than a majority of any residual gains and are obligated with respect to less than a majority of residual losses with respect to both ventures. Accordingly, we account for our investments under the equity method and do not consolidate. Our share of the net income or loss of FlashVision and Flash Partners is included in our Condensed Consolidated Statements of Income as “Equity in income of business ventures.”

     As part of the FlashVision and Flash Partners agreements, we agreed to share in Toshiba’s costs associated with NAND product development and its common semiconductor research and development activities. As of July 2, 2006, we had accrued liabilities related to those expenses of $6.0 million. Our common research and development obligation related to FlashVision and Flash Partners is variable but capped at increasing fixed quarterly amounts through 2008. Our direct research and development contribution is determined based on a variable computation. The common research and development participation agreement and the product development agreement are exhibits to our most recent annual report on Form 10-K and should be read carefully in their entirety for a more complete understanding of these arrangements.

     For semiconductor fixed assets that are leased by FlashVision or Flash Partners, we and Toshiba guaranteed, in whole or in part, a portion of the outstanding lease payments under each of those leases through various methods. These obligations are denominated in Japanese yen and are non-cancelable. Under the terms of the FlashVision lease, Toshiba guaranteed these commitments on behalf of FlashVision and we agreed to indemnify Toshiba for certain liabilities Toshiba incurs as a result of its guarantee of the FlashVision equipment lease arrangement. As of July 2, 2006, the maximum amount of our contingent indemnification obligation, which reflects payments and any lease adjustments, was approximately 7.5 billion Japanese yen, or

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approximately $66 million based upon the exchange rate at July 2, 2006. Under the terms of the Flash Partners leases, we guaranteed on an unsecured and several basis 50% of Flash Partners’ lease obligations under master lease agreements entered into in December 2004, December 2005 and June 2006. Our total lease obligation guarantee, net of lease payments as of July 2, 2006, was 54.3 billion Japanese yen, or approximately $474 million based upon the exchange rate at July 2, 2006.

     We also have a 49.9% ownership interest in Flash Alliance, a business venture with Toshiba, formed on July 7, 2006 to develop and manufacture NAND flash memory products. These NAND flash memory products will be manufactured by Toshiba at the proposed 300-millimeter wafer fabrication facility, Fab 4, located in Yokkaichi, Japan, using the semiconductor manufacturing equipment to be owned or leased by Flash Alliance. Flash Alliance will purchase wafers from Toshiba at cost and then resell those wafers to us and Toshiba at cost plus a mark-up. Toshiba owns 50.1% of this venture. We account for our 49.9% ownership position in Flash Alliance under the equity method of accounting. We are committed to purchase half of Flash Alliance’s NAND wafer supply.

     The capacity of Fab 4 at full expansion is expected to be greater than 150,000 wafers per month and the timeframe to reach full capacity is to be mutually agreed by the parties. To date, the parties have agreed to an expansion plan to 67,500 wafers per month for which the investment in Fab 4 is currently estimated at approximately $3.0 billion through the end of 2008, of which our share is currently estimated to be approximately $1.5 billion. Initial NAND production is currently scheduled for the end of 2007. For expansion beyond 67,500 wafers per month, it is expected that investments and output would continue to be shared 50/50 between us and Toshiba. We expect to fund our portion of the investment through cash as well as other financing sources. We are committed to fund 49.9% of Flash Alliance’s costs to the extent that Flash Alliance’s revenues from wafer sales to us and Toshiba are insufficient to cover these costs.

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Contractual Obligations and Off Balance Sheet Arrangements

     Our contractual obligations and off balance sheet arrangements at July 2, 2006, and the effect those contractual obligations are expected to have on our liquidity and cash flow over the next five years is presented in textual and tabular format in Note 9 to our condensed consolidated financial statements included in Item 1.

Critical Accounting Policies

     The preparation of consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported. Certain of these significant accounting policies are considered to be critical accounting policies, as defined below.

     A critical accounting policy is defined as one that is both material to the presentation of our consolidated financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect on our financial condition or results of operations. Specifically, these policies have the following attributes: 1) we are required to make assumptions about matters that are highly uncertain at the time of the estimate; and 2) different estimates we could reasonably have used, or changes in the estimate that are reasonably likely to occur, would have a material effect on our financial condition or results of operations.

     Estimates and assumptions about future events and their effects cannot be determined with certainty. We base our estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may change as new events occur, as additional information is obtained and as our operating environment changes. These changes have historically been minor and have been included in the consolidated financial statements as soon as they became known. In addition, management is periodically faced with uncertainties, the outcomes of which are not within its control and will not be known for prolonged periods of time. These uncertainties are discussed in the section below entitled “Risk Factors.” Based on a critical assessment of its accounting policies and the underlying judgments and uncertainties affecting the application of those policies, management believes that our consolidated financial statements are fairly stated in accordance with accounting principles generally accepted in the United States of America, and provide a meaningful presentation of our financial condition and results of operations.

     On January 2, 2006, we implemented the following new critical accounting policy:

     Equity-Based Compensation — Employee Incentive Plans and Employee Stock Purchase Plans. Beginning on January 2, 2006, we began accounting for stock awards and ESPP shares under the provisions of Statement of Financial Accounting Standards No. 123(R), or SFAS 123(R), Share-Based Payments, which requires the recognition of the fair value of equity-based compensation. The fair value of stock awards and ESPP shares was estimated using a Black-Scholes-Merton closed-form option valuation model. This model requires the input of assumptions in implementing SFAS 123(R), including expected stock price volatility, expected term and estimated forfeitures of each award. The parameters used in the model are reviewed and adjusted on a quarterly basis. We elected the modified-prospective method for adoption of SFAS 123(R). We recognized compensation expense for the fair values of these awards, which have graded vesting, on a straight-line basis over the requisite service period of each of these awards, net of estimated forfeitures. We make quarterly assessments of the adequacy of the APIC credit pool to determine if there are any tax deficiencies which require recognition in the condensed consolidated statements of income. Prior to the implementation of SFAS 123(R), we accounted for stock awards and ESPP shares under the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and made pro forma footnote disclosures as required by SFAS No. 148, Accounting For Stock-Based Compensation — Transition and Disclosure, which amended SFAS No. 123, Accounting For Stock-Based Compensation. Pro forma net income and pro forma net income per share disclosed in the footnotes to the consolidated condensed financial statements were estimated using a Black-Scholes-Merton closed-form option valuation model to determine the estimated fair value and by attributing such fair value over the requisite service period on a straight-line basis for those awards that actually vested. The fair value of restricted stock units was calculated based upon the fair market value of our common stock on the date of grant.

     For further information about other critical accounting policies, see the discussion of critical accounting policies in our Annual Report on Form 10-K for the fiscal year ended January 1, 2006.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

     There have been no material changes to the disclosures in our Form 10-K for the fiscal year ended January 1, 2006.

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.

     There were no changes in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the quarter ended July 2, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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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. In each case listed below where we are the defendant, we intend to vigorously defend the action.

     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 Case No. CV 01 4063 VRW, the Company seeks damages and injunctions against these companies from making, selling, importing or using flash memory cards that infringe its U.S. Patent No. 5,602,987. The court granted summary judgment of non-infringement in favor of defendants Ritek, Pretec and Memorex and entered judgment on May 17, 2004. On June 2, 2004, the Company filed a notice of appeal of the summary judgment rulings to the United States Court of Appeals for the Federal Circuit. On July 8, 2005, the Federal Circuit held in favor of the Company, vacating the judgment of non-infringement and remanding the case back to district court.

     On or about June 9, 2003, the Company received written notice from Infineon Technologies AG, or Infineon, that it believes the Company has infringed its U.S. Patent No. 5,726,601 (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, et al., Civil Case No. C 03 02931 BZ. On October 6, 2003, Infineon filed an answer and counterclaim: (a) denying that the Company is entitled to the declaration sought by the Company’s complaint; (b) 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 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 February 9, 2006, the Company filed a second amended complaint to include claims for declaratory judgment that the ‘002, ‘894 and ‘219 patents are unenforceable. On March 17, 2006, the Court granted a stipulation by the parties withdrawing all claims and counterclaims regarding the ‘002 patent.

     On October 2, 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 a number of its shareholders and directors, including the Company and Dr. Harari, who is a Tower board member, and asserted 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 alleged 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 sought unspecified damages and attorneys’ and experts’ fees and expenses. On August 19, 2004, the court granted the Company’s and the other defendants’ motion to dismiss the complaint in its entirety with prejudice. On September 29, 2004, plaintiffs appealed the dismissal to the United States Court of Appeals for the Second Circuit. On June 1, 2006, the Court of Appeals issued its ruling affirming the dismissal of the case.

     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., Civil Case No. GCG 04 428953, 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. The parties have reached a settlement of the case, which is pending final court approval.

     On October 15, 2004, the Company filed a complaint for patent infringement and declaratory judgment of non-infringement and patent invalidity against STMicroelectronics N.V. and STMicroelectronics, Inc. in the United States District Court for the Northern District of California, captioned SanDisk Corporation v. STMicroelectronics, Inc., et al., Civil Case No. C 04 04379JF. The complaint alleges that STMicro’s products infringe one of the Company’s U.S. patents and seeks damages and an injunction. The complaint further seeks a declaratory judgment that the Company does not infringe several of STMicro’s U.S. patents. By order dated January 4, 2005, the court

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stayed the Company’s claim that STMicro infringes the Company’s patent pending an outcome in the ITC investigation initiated on November 15, 2004 (discussed below). On January 20, 2005, the court issued an order granting STMicro’s motion to dismiss the declaratory judgment causes of action. The Company has appealed this decision to the U.S. Court of Appeals for the Federal Circuit. The remainder of the case, including the Company’s infringement claim against STMicro, is stayed pending the outcome of the appeal.

     On February 4, 2005, STMicro filed two complaints for patent infringement against the Company in the United States District Court for the Eastern District of Texas, captioned STMicroelectronics, Inc. v. SanDisk Corporation, Civil Case No. 4:05CV44 (the “‘44 Action”), and STMicroelectronics, Inc. v. SanDisk Corporation, Civil Case No. 4:05CV45 (the “‘45 Action”), respectively. The complaints seek damages and injunctions against certain SanDisk products. On April 22, 2005, the Company filed counterclaims on two patents against STMicroelectronics N.V. and STMicroelectronics, Inc. in the ‘45 Action. The counterclaims seek damages and injunctive relief against STMicroelectronics N.V. and STMicroelectronics, Inc. flash memory products. In the ‘44 Action, the Magistrate Judge has issued a Report and Recommendation that the Company’s motion for summary judgment of non-infringement on all accused products be granted. STMicro has asked the U.S. District Court Judge to reject that Report and Recommendation. The ‘45 Action, previously scheduled for trial in November, 2006, is now expected to have a trial date in the first quarter of 2007.

     On October 15, 2004, the Company filed a complaint under Section 337 of the Tariff Act of 1930 (as amended) (Case No. 337-TA 526) 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. (“STMicro”) as respondents. In the complaint, the Company alleges that STMicro’s NAND flash memory infringes U.S. Patent No. 5,172,338 (the ‘338 patent), and seek an order excluding their products from importation into the United States. In the complaint, the Company alleges that STMicro’s NAND flash memory infringes the ‘338 patent and seeks an order excluding their products from importation into the United States. On November 15, 2004, the ITC instituted an investigation pursuant to 19 U.S.C. Section 1337 against STMicro in response to the Company’s complaint. A hearing was held from August 1-8, 2005. On October 19, 2005, the Administrative Law Judge issued an initial determination confirming the validity and enforceability of the Company’s United States Patent 5,172,338 (‘338 patent) by rejecting STMicro’s claims that the patent was invalidated by prior art. The initial determination, however, found that STMicro’s NAND flash memory chips did not infringe three claims of the ‘338 patent. On October 31, 2005, the Company filed a petition with the International Trade Commission to review and reverse the finding of non-infringement. Also, on October 31, 2005, STMicro filed a petition for review with the International Trade Commission to review and reverse the finding that the patent was valid and enforceable. On December 6, 2005, the ITC issued its decision. The ITC declined to review the finding of non-infringement, and, after reviewing the finding of validity, declined to take any position on the issue of validity. The Company is appealing the ITC’s decision to the U.S. Court of Appeals for the Federal Circuit.

     On October 14, 2005, STMicroelectronics, Inc. filed a complaint against the Company and the Company’s CEO Eli Harari, in the Superior Court of the State of California for the County of Alameda, captioned STMicroelectronics, Inc. v. Harari, Case No. HG 05237216. The complaint alleges that STMicroelectronics, Inc., as the successor to Wafer Scale Integration, Inc.’s (“WSI”) legal rights, has an ownership interest in several SanDisk patents that issued from applications filed by Dr. Harari, a former WSI employee. The complaint seeks the assignment or co-ownership of certain inventions and patents conceived of by Harari, including some of the patents asserted by the Company in its litigations against STMicro, as well as damages in an unspecified amount. On November 15, 2005, Harari and the Company removed the case to the U.S. District Court for the Northern District of California, where it was assigned case number C05-04691. On November 23, 2005, Harari and the Company filed counterclaims, asserting the Company’s ownership of the patents and applications raised in the complaint. On December 13, 2005, STMicroelectronics, Inc. filed a motion to remand the case back to the Superior Court of Alameda County. STMicro’s remand motion was denied by the Court in March 2006. On April 24, 2006, Dr. Harari and the Company filed a motion for summary judgment on statute of limitations and other grounds that, if granted, would result in dismissal of all of STMicro’s claims. The court did not rule on the motion for summary judgment. On July 18, 2006, the case was remanded to the Superior Court of Alameda County after briefing and oral argument on a motion by STMicro for reconsideration of the order denying remand. Case No. HG 05237216 is now scheduled for an initial case management conference on September 15, 2006.

     On December 6, 2005, the Company filed a complaint for patent infringement in the United States District Court for the Northern District of California against STMicroelectronics, Inc. and STMicroelectronics, NV (“STMicro”) (Case No. C0505021 JF). In the suit, the Company seeks damages and injunctions against STMicro from making, selling, importing or using flash memory chips or products that infringe the Company’s U.S. Patent No. 5,991,517. The case is presently stayed, pending the termination of the ITC investigation instituted February 8, 2006, discussed below.

     On January 10, 2006, the Company filed a complaint under Section 337 of the Tariff Act of 1930 (as amended) (Case No. 337-TA-560) titled, “In the matter of certain NAND flash memory circuits and products containing same” in the ITC, naming STMicro as respondents. In the complaint, the Company alleges that: (i) STMicro’s NOR flash memory infringes the ‘338 patent; (ii) STMicro’s NAND flash memory infringes U.S. Patent No. 6,542,956; and (iii) STMicro’s NOR flash memory and NAND flash memory infringe U.S. Patent No. 5,991,517. The complaint seeks an order excluding STMicro’s NOR and NAND flash memory products from importation into the United States. The ITC instituted an investigation, based on the Company’s complaint, on February 8, 2006. On March 31, 2006, STMicro filed a motion for partial summary determination or termination of the investigation with respect to the ‘338 patent. On May 1, 2006, the Administrative Law Judge denied STMicro’s motion in an order that is not subject to review by the ITC. On May 17, 2006, SanDisk filed a motion to voluntarily terminate the investigation with respect to U.S. Patent No. 6,542,956. The motion was granted June 1, 2006.

     On or about July 15, 2005, Societa’ Italiana Per Lo Sviluppo Dell’electtronica, S.I.Sv.El., S.p.A., (“Sisvel”) filed suit against the Company and others in the district court of the Netherlands in The Hague in a case captioned Societa’ Italiana Per Lo Sviluppo Dell’electtronica, S.I.Sv.El., S.p.A. adverse to SanDisk International Sales, Moduslink B.V. and UPS SCS (Nederland) B.V., Case No. 999.131.1804 (Cause List numbers 2006/167 and 2006/168). Sisvel alleges that certain of the Company’s MP3 products infringe three European patents of which Sisvel claims to be a licensee with the right to bring suit. Sisvel seeks an injunction and unspecified damages. Sisvel has previously publicly indicated that it will license these and other patents under reasonable and nondiscriminatory terms, and it has specifically offered the Company a license under the patents. The Company has submitted pleadings asking the court to strike Sisvel’s pleadings as legally insufficient and seeking other procedural relief. The court is still addressing these procedural matters and the Company will not be required to answer on the substance of Sisvel’s claim until September 2006 at the earliest.

     In a related action, on March 9, 2006, the Company filed an action in the English High Court, Chancery Division, Patents Court, in London, against Sisvel and the owners of the patents Sisvel has asserted against the Company in the Netherlands. The case is SanDisk Corporation v. Koninklijke Philips Electronics N.V. (a Dutch corporation), France Télécom (a French corporation), Télédiffusion de France S.A. (a French corporation), Institut für Rundfunktechnik GmbH (a German corporation) and Societa’ Italiana Per Lo Sviluppo Dell’electtronica, S.I.Sv.El., S.p.A., Case No. HC 06 C 00835. In this action, the Company seeks a declaration of non-infringement of the patents asserted by Sisvel in connection with the Company’s MP3 products. The Company also seeks a declaration that the patents are not “essential” to the technology of MP3 players, as Sisvel presently contends in the case filed in the Netherlands. The defendants have submitted their formal defense and counterclaimed for infringement. The trial in this matter is expected to take place along with the trial for Case No. HC 06 C 00615 in March 2007.

     In another related action, on April 13, 2006, Audio MPEG filed a complaint alleging patent infringement in the District Court for the Eastern District of Virginia. The case is Audio MPEG v. SanDisk Corporation, Case No. 2:06cv209 WDK/JEB. Audio MPEG holds itself out to be the U.S. subsidiary of Sisvel and purports to have the right to enforce certain patents in the U.S. on subject matter related to the patents asserted by Sisvel in the Netherlands. Specifically, Audio MPEG asserts U.S. Patent No. 5,214,678 (entitled “Digital transmission system using subband coding of a digital signal”), U.S. Patent No. 5,323,396 (entitled “Digital transmission system, transmitter and receiver for use in the transmission system”), U.S. Patent No. 5,539,829 (entitled “Subband coded digital transmission system using some composite signals”), and U.S. Patent No. 5,777,992 (entitled “Decoder for decoding and encoded digital signal and a receiver comprising the decoder”). The complaint seeks damages and injunctive relief. The Company responded promptly, filing a motion to dismiss on April 20, 2006, asking the court to dismiss the complaint on the grounds that Audio MPEG failed to join the patent holders as co-plaintiffs. Audio MPEG responded by voluntarily joining the patent owners as defendants. Thereafter, the Company sought to have

the case dismissed or transferred to the Northern District of California. The court has not yet decided the transfer or dismissal motions.

     In another related action, on April 13, 2006, Sisvel filed suit against the Company’s subsidiary, SanDisk GmbH, for patent infringement in the Mannheim District Court in Germany, S.I.Sv.El., S.p.A. v. SanDisk GmbH, file no. 7 O 90/06, which was served on the Company on or about May 10, 2006. The plaintiffs allege that certain of the Company’s MP3 products infringe four German patents of which Sisvel claims to be a licensee with the right to bring suit. Sisvel seeks an injunction and unspecified damages. Sisvel has previously publicly stated that it will license these and other patents under reasonable and nondiscriminatory terms, and it has specifically offered the Company a license under the patents.

     In another related action, on April 13, 2006, Sisvel filed suit against the Company for patent infringement in the Mannheim District Court in Germany, S.I.Sv.El., S.p.A. v. SanDisk Corporation, file no. 7 O 89/06, which was served on the Company in or about July, 2006. The plaintiffs allege that certain of the Company’s MP3 products infringe four German patents of which Sisvel claims to be a licensee with the right to bring suit. Sisvel seeks an injunction and unspecified damages. Sisvel has previously publicly stated that it will license these and other patents under reasonable and nondiscriminatory terms, and it has specifically offered the Company a license under the patents.

     On August 7, 2006 two lawsuits were filed against the Company and others in the California Superior Court for Santa Clara County, captioned Dashiell v. SanDisk Corporation, et al., Case No. 1-06-CV-068759 and Capovilla v. SanDisk Corporation, et al, Case No. 1-06-CV-068760. Each complaint purports to assert a class action claim on behalf of shareholders of msystems Ltd. (“msystems”) and further purports to assert derivative claims on behalf of msystems. Defendants include the Company, msystems, and several officers and directors of msystems. The complaints allege breaches of fiduciary duties by officers and directors of msystems relating to alleged option backdating and to allegedly furthering their own interests in connection with the merger, and that these alleged breaches were aided and abetted by the Company. The complaints further allege that the terms of the announced merger between the Company and msystems are not fair to msystems’ shareholders. The complaints seek compensatory damages, an accounting, imposition of a constructive trust, punitive damages, a declaration that the merger agreement is unlawful and unenforceable, an injunction against consummation of the merger, rescission of the merger agreement, and other relief.

Item 1A. Risk Factors

     The following description of the risk factors associated with our business includes any material changes to and supersedes the description of the risk factors associated with our business previously disclosed in Item 1A of our annual report on Form 10-K for the fiscal year ended January 1, 2006 and our most recent quarterly report on Form 10-Q.

     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, among others, the following:

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

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

• timing, volume and cost of wafer production from the FlashVision, Flash Partners and Flash Alliance ventures as impacted by fab start-up delays and costs, technology transitions, yields or production interruptions due to natural disasters, power outages, equipment failure or other factors;

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

• excess supply from captive sources due to ramping output faster than the growth in demand;

• insufficient supply from captive and non-captive sources or insufficient capacity from our test and assembly sub-contractors to meet demand;

• continued development of new markets and products for NAND flash memory and acceptance of our products in these markets;

• our license and royalty revenues may decline significantly in the future as our existing license agreements and key patents expire;

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

• increased purchases of flash memory products from our non-captive sources, which typically cost more than products from our captive sources;

• difficulty in forecasting and managing inventory levels; particularly due to noncancelable contractual obligations to purchase materials such as flash memory and controllers, and the need to build finished product in advance of customer purchase orders;

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

• disruption in the manufacturing operations of captive, non-captive and other suppliers, including for sole sourced controller wafers;

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

• expensing of share-based compensation;

• adverse changes in product and customer mix;

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• risks related to our proposed acquisition of msystems; and

• the factors listed elsewhere under “Risk Factors.”

     Sales to a small number of customers represent a significant portion of our revenues and, if we were to lose one of our major licensees or customers or experience any material reduction in orders from any of our customers, our revenues and operating results would suffer. Sales to our top 10 customers and licensees accounted for more than 51%, 50%, 55% and 48% of our total revenues during the six months ended July 2, 2006 and the fiscal years of 2005, 2004 and 2003, respectively. No customer exceeded 10% of total revenues in any of these periods except Samsung Electronics Co. Ltd., which accounted for 12% of our total revenues in the first six months of fiscal 2006 and Best Buy Company, Inc., which accounted for 11% of our total revenues in fiscal 2005. If we were to lose one of our major licensees or customers or experience any material reduction in orders from any of our customers or in sales of licensed products by our licensees, our revenues and operating results would suffer. Additionally, our license and royalty revenues may decline significantly in the future as our existing license agreements expire. Our sales are generally made from standard purchase orders rather than long-term contracts. Accordingly, our customers may generally terminate or reduce their purchases from us at any time without notice or penalty. In addition, the composition of our major customer base changes from year-to-year as we enter new markets.

     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. A significant portion of our sales are made through retailers, either directly or through distributors. Sales through these channels typically include rights to return unsold inventory and protection against price declines. As a result, we do not recognize revenue until after the product has been sold through to the end user, in the case of sales to retailers, or to our distributors’ customers, in the case of sales to distributors. If our distributors and retailers are not successful in this market, we could experience 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 forecast retail product revenues. Our arrangements with our customers also provide them price protection against declines in our recommended selling prices, which has the effect of reducing our deferred revenue and eventually revenue. Except in limited circumstances, we do not have exclusive relationships with our retailers or distributors, and therefore, must rely on them to effectively sell our products over those of our competitors.

     Our average selling prices, net of promotions, may decline due to excess supply, competitive pricing pressures and strategic price reductions initiated by us or our competitors. The market for NAND flash products is competitive and characterized by rapid price declines. Price declines may be influenced by, among other factors, strategic price decreases by us or our competitors such as those implemented by us in 2006, supply in excess of demand from existing or new competitors, technology transitions, including adoption of multi-level cell, or MLC, by other competitors, new technologies or other strategic actions by competitors to gain market share. If our technology transitions take longer or are more costly than anticipated to complete, our cost reductions fail to keep pace with the rate of price declines or our price decreases fail to generate sufficient additional demand, our gross margin and operating results will be negatively impacted.

     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 OEMs, who bundle our flash memory products with their products, such as cameras or handsets. Our sales to these customers are dependent upon the OEM choosing our products over those of our competitors and on the OEM’s ability to create, introduce, market and sell its products successfully in its markets. Should our OEM customers be unsuccessful in selling their current or future products that include our product, or should they decide to discontinue bundling our products, our results of operation and financial condition could be harmed.

     The continued growth of our business depends on the development of new markets and products for NAND flash memory and continued elasticity in our existing markets. Over the last several years, we have derived the majority of our revenues from the digital camera market. This market continues to experience slower growth rates and continues to represent a declining percentage of our total revenue, and therefore, our growth will be increasingly dependent on the development of new markets, new applications and new products for NAND flash memory. For example, in 2005, our revenue from the digital camera market grew by only 4% over the prior year, and it is possible that our revenue from this market could decline in future years. Newer markets for flash memory include handsets, USB drives, gaming and digital audio players. 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 in general or our

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products in particular, to enable us to continue our growth. There can be no assurance that the increase in average product capacity demand in response to price reductions will continue to generate revenue growth for us as it has in the past.

     We continually seek to develop new applications, products, technologies and standards, which may not be widely adopted by consumers or, if adopted, may reduce demand by consumers for our older products. We continually seek to develop new applications, products and standards and enhance existing products and standards with higher memory capacities and other enhanced features. New applications, such as the adoption of flash memory cards in mobile handsets, can take several years to develop. Early successes in working with handset manufacturers to add card slots to their mobile phones does not guarantee that consumers will adopt memory cards used for storing songs, images and other content in mobile handsets. Our new products may not gain market acceptance and we may not be successful in penetrating the new markets that we target, such as handsets, digital audio players or pre-recorded flash memory cards. As we introduce new standards or technologies, such as TrustedFlash™, it can take time for these new standards or technologies to be adopted, for consumers to accept and transition to these new standards or technologies and for significant sales to be generated from them, if this happens at all. Moreover, broad acceptance of new standards, technologies or products by consumers may reduce demand for our older products. If this decreased demand is not offset by increased demand for our other form factors or our new products, our results of operations could be harmed. Any new applications, products, technologies or standards we develop may not be commercially successful.

     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 themselves or to our flash card competitors at a low cost. Some of our competitors may sell their flash memory chips at or below their true manufacturing costs to gain market share and to cover their fixed costs. Such practices have been common in the DRAM industry during periods of excess supply, and have resulted in substantial losses in the DRAM industry. In addition, many semiconductor companies have begun to bring up substantial new capacity of flash memory, including MLC flash memory. For example, Samsung began shipping its first MLC chips in the third quarter of 2005 and continues to ramp its MLC output. In addition, Hynix Semiconductor, Inc., or Hynix, is aggressively ramping NAND output and IM Flash Technologies, LLC is expected to produce significant NAND output in the future. 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 flash memory technology.

     Our primary semiconductor competitors continue to include our historical competitors Renesas Technology Corporation, or Renesas, Samsung and Toshiba. New competitors include Hynix, Infineon Technologies AG, or Infineon, Micron Technology, Inc., or Micron and STMicroelectronics N.V., which began shipping NAND or NAND-competitive memory in 2004. If any of these competitors increase their memory output, as Hynix recently has, it will likely result in a decline in the prevailing prices for packaged NAND semiconductor components.

     We also compete with flash memory card manufacturers and resellers. These companies purchase, or have a captive supply of, flash memory components and assemble memory cards. These companies include, among others, Dane-Elec Manufacturing, Delkin Devices, Inc., Fuji Photo Film Co., Ltd., Hagiwara Sys-Com Co., Ltd., Hama Corporation, Inc., I/O Data Device, Inc., Infineon, Jessops PLC, Kingmax, Inc., Kingston Technology Company, Inc., msystems Ltd., or msystems, Matsushita Battery Industrial Co., Ltd., Matsushita Electric Industries, Ltd., or Matsushita, Micron, including through its acquired subsidiary, Lexar Media, Inc., or Lexar, Memorex Products, Inc., or Memorex, Panasonic (a brand owned by Matsushita), PNY Technologies, Inc., or PNY, PQI Corporation, Pretec Electronics Corporation (USA), Renesas, Samsung Electronics Co. Ltd., or Samsung, Sharp Electronics KK, SimpleTech, Inc., Sony Corporation, Toshiba Corporation and Viking Components, Inc.

     Some of our competitors have substantially greater resources than we do, have well recognized brand names or have the ability to operate their business on lower margins than we do. The success of our competitors may adversely affect our future sales revenues and may result in the loss of our key customers. For example, Samsung, with significant manufacturing capacity, brand recognition and access to broad distribution channels, provides competing flash cards, such as the MMC micro^™ that competes directly with our microSD™ mobile card. Lexar markets a line of flash cards bearing the Kodak brand name, which competes with our flash memory cards. Our handset card products also face competition from embedded solutions from competitors including Intel, msystems and Samsung. Our digital audio players face competition from similar products offered by

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other companies, including Apple Computer, Inc., Creative Technologies, Ltd., iriver America, Inc. and Samsung. Our USB flash drives face competition from Lexar, msystems, Memorex, and PNY, among others. If our products cannot compete effectively, our market share and profitability will be adversely impacted.

     Furthermore, 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 cost, 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. Under these agreements, we have enabled competitors to manufacture and sell products that incorporate technology covered by our patents. If we continue to license our patents to our competitors, competition may increase and may harm our business, financial condition and results of operations.

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

• price, quality and on-time delivery to our customers;

• product performance, availability and differentiation;

• success in developing new applications and new market segments;

• sufficient availability of supply;

• efficiency of production;

• timing of new product announcements or introductions by us, our customers and our competitors;

• the ability of our competitors to incorporate standards or develop formats which we do not offer;

• the number and nature of our competitors in a given market;

• successful protection of intellectual property rights; and

• general market and economic conditions.

     We may not be able to successfully compete in the marketplace.

     The semiconductor industry is subject to significant downturns that have harmed our business, financial condition and results of operations in the past and may do so in the future. The semiconductor industry is highly cyclical and is characterized by constant and rapid technological change, rapid product obsolescence and price declines, evolving standards, short product life cycles and wide fluctuations in product supply and demand. The industry has experienced significant downturns, often in connection with, or in anticipation of, maturing product cycles of both semiconductor companies’ and their customers’ products and declines in general economic conditions. These downturns have been characterized by diminished product demand, production overcapacity, high inventory levels and accelerated declines in selling prices. We have experienced these conditions in our business in the past and may experience such downturns in the future.

     Our business and the markets we address are subject to significant fluctuations in supply and demand and our commitments to our ventures with Toshiba may result in losses. Through Flash Partners’ increased production, we expect our 2006 captive memory supply to increase by a higher percentage than our captive flash memory supply increased in either of the last two years. Our obligation to purchase 50% of the supply from FlashVision, Flash Partners and Flash Alliance, the ventures with Toshiba, could harm our business and results of operations if our committed supply exceeds demand for our products. The adverse effects could include, among other things, significant decreases in our product prices, significant excess, obsolete or lower of cost or market inventory write-downs and the impairment of our investments in the ventures with Toshiba. These effects will be magnified once the Fab 4 venture commences production. Any future excess supply could have a material adverse effect on our business, financial condition and results of operations.

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     We depend on third-party foundries for silicon supply and any shortage or disruption in our supply from these sources will reduce our revenues, earnings and gross margins. All of our flash memory card products require silicon supply for the memory and controller components. The substantial majority of our flash memory is currently supplied by our ventures with Toshiba and by Toshiba pursuant to our foundry agreement, and to a lesser extent by Renesas and Samsung. Any disruption in supply of flash memory from our captive or non-captive sources would harm our operating results. We intend to increase production at Fab 3, commence production at Fab 4 and continue to procure wafers from non-captive sources. If the Fab 3 production ramp does not increase as anticipated, we fail to commence production at Fab 4 as planned, Fab 4 does not meet anticipated manufacturing output, or our non-captive sources fail to supply wafers in the amounts and at the times we expect, we may not have sufficient supply to meet demand and our operating results will be harmed. Currently, our controller wafers are only manufactured by Tower and UMC, and some of these controllers are sole-sourced at either UMC or Tower. 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 three or more quarters to complete. In times of significant growth in global demand for flash memory, demand from our customers may outstrip the supply of flash memory and controllers available to us from our current sources. If our silicon vendors are unable to satisfy our requirements on competitive terms or at all due to lack of capacity, technological difficulties, natural disaster, financial difficulty, power failure, labor unrest, their refusal to do business with us, their relationships with our competitors or other causes, we may lose potential sales and our business, financial condition and operating results may suffer. In addition, these risks are magnified at Toshiba’s Yokkaichi operations, where the current ventures are operated, Fab 4 will be located, and Toshiba’s foundry capacity is located. Earthquakes and power outages have resulted in production line stoppage and loss of wafers in Yokkaichi and similar stoppages and losses may occur in the future. For example, in the first quarter of fiscal 2006, a brief power outage in Fab 3 resulted in a loss of wafers and significant costs associated with bringing the fab back on line. Also, the Tower fabrication facility, from which we source controller wafers, is facing financial challenges and is located in Israel, an area of political and military turmoil. Any disruption or delay in supply from our silicon sources could significantly harm our business, financial condition and results of operations.

     Our actual manufacturing yields may be lower than our expectations resulting in increased costs and product shortages. The fabrication of our products requires wafers to be produced in a highly controlled and ultra clean environment. Semiconductor manufacturing yields and product reliability are a function of both design technology and manufacturing process technology and production delays may be caused by equipment malfunctions, fabrication facility accidents or human errors. Yield problems may not be identified or improved until an actual product is made and can be tested. As a result, yield problems may not be identified until the wafers are well into the production process. We have from time-to-time experienced yields which have adversely affected our business and results of operations. We have experienced adverse yields on more than one occasion when we have transitioned to new generations of products. If actual yields are low, we will experience higher costs and reduced product supply, which could harm our business, financial condition and results of operations. For example, if the production ramp and/or yield of the 70-nanometer, 300-millimeter Flash Partners wafers do not increase as expected, we may not have enough supply to meet demand and our cost competitiveness, business, financial condition and results of operations will be harmed.

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

     In transitioning to new processes, products and silicon sources, we face production and market acceptance risks that have caused, and may in the future cause significant product delays that could harm our business. Successive generations of our products have incorporated semiconductors with greater memory capacity per chip. The transition to new generations of products, such as the 56-nanometer 8 and 16 gigabit MLC chip which we expect to begin shipping in volume in 2007, is highly complex and requires new controllers, new test procedures and modifications of numerous aspects of manufacturing, as well as

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extensive qualification of the new products by both us and our OEM customers. In addition, Flash Partners is currently ramping the 70-nanometer 8 gigabit MLC chip in the Yokkaichi 300-millimeter fab and this transition is subject to yield, quality and output risk. Furthermore, procurement of MLC wafers from non-captive sources requires us to develop new controller technology and may result in inadequate quality or performance in our products that integrate these MLC components. Any material delay in a development or qualification schedule could delay deliveries and adversely impact our operating results. We periodically have experienced significant delays in the development and volume production ramp-up of our products. Similar delays could occur in the future and could harm our business, financial condition and results of operations.

     Our products may contain errors or defects, which could result in the rejection of our products, product recalls, damage to our reputation, lost revenues, diverted development resources and increased service costs and warranty claims and litigation. Our products are complex, must meet stringent user requirements, may contain errors or defects and the majority of our products are warrantied for one to five years. Errors or defects in our products may be caused by, among other things, errors or defects in the memory or controller components, including components we procure from non-captive sources such as the MLC products we procure from a third-party supplier. These factors could result in the rejection of our products, damage to our reputation, lost revenues, diverted development resources, increased customer service and support costs and warranty claims and litigation. We record an allowance for warranty and similar costs in connection with sales of our product, but actual warranty and similar costs may be significantly higher than our recorded estimate and result in an adverse effect on our results of operations and financial condition.

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

     We and Toshiba plan to continue to expand the wafer fabrication capacity of the Flash Partners business venture as well as start a new venture, Flash Alliance, 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 are making, and plan to continue to make, substantial investments in new capital assets to expand the wafer fabrication capacity of our Flash Partners business venture in Japan. We and Toshiba recently announced our intention to accelerate expansion at Fab 3 to bring wafer capacity to 110,000 wafers per month by July 2007 and in addition, we and Toshiba recently announced the creation of Flash Alliance, owned 49.9% by us and 50.1% by Toshiba, and agreed to cooperate in the construction and equipping of an additional 300-millimeter NAND wafer fabrication facility (Fab 4), to produce NAND flash memory products for the parties. Moreover, 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.

     There is no assurance that Flash Partners’ 300-millimeter NAND flash memory facility will perform as expected, in particular as we transition to new lithography feature sizes. The Flash Partners’ 300-millimeter fab, Fab 3, is currently transitioning from 90-nanometer to 70-nanometer feature sizes. There can be no assurance that this transition will occur on schedule or at the yields or costs that we anticipate. In addition, in 2007, Fab 3 is scheduled to transition to wafers with a 56-nanometer feature size. Each of these technology transitions is more difficult and subject to significant risks in terms of schedule, yield and cost If Flash Partners, or in the future, Flash Alliance, encounters difficulties in transitioning to new technologies, our cost per megabyte may not remain competitive with the costs achieved by other NAND flash memory producers. Also, Samsung is licensed under our patents to use MLC technology, which enhances its manufacturing capabilities. Samsung began shipping NAND/MLC products in the third quarter of 2005 and 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 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 as well as guarantee obligations with respect to Flash Partners. Toshiba has guaranteed FlashVision’s lease arrangement with third-party lessors. The total minimum remaining lease payments as of July 2, 2006 were 15.0 billion Japanese yen, or approximately $131 million based upon the exchange rate at July 2, 2006. If Toshiba makes payments under its guarantee, we have agreed to indemnify Toshiba for 49.9% of its costs.

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     In December 2004, December 2005 and June 2006, Flash Partners entered into three separate equipment lease facilities totaling approximately 117.0 billion Japanese yen, or approximately $1.021 billion based upon the exchange rate at July 2, 2006, which, as of July 2, 2006, had been drawn down in their entirety. As of July 2, 2006, our cumulative guarantee under the equipment leases, net of cumulative lease payments, was approximately 54.3 billion Japanese yen, or approximately $474 million based on the exchange rate at July 2, 2006. If our corporate rating is significantly downgraded by any rating agency, it may impair the ability of our ventures with Toshiba to obtain future equipment lease financings on terms consistent with current leases and would cause a default under certain current leases, either of which could harm our business and financial condition.

     We and Toshiba have also agreed to mutually contribute to, and indemnify each other, Flash Partners and Flash Alliance for, environmental remediation costs or liability resulting from Flash Partners and Flash Alliance’s 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 or Flash Alliance infringe third-party patents.

     None of the foregoing obligations are reflected as liabilities on our consolidated balance sheets. If we have to perform our obligations under these agreements, our business will be harmed and our financial condition and results of operations will be adversely affected.

     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 lose market share or procure excess inventory or inappropriately increase or decrease our operating expenses, any of which could harm our business, financial condition and results of operations. This seasonality also may lead to higher volatility in our stock price, the need for significant working capital investments in receivables and inventory and our need to build up inventory levels in advance of our most active selling seasons.

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

     Under conditions of tight flash memory supply, we may be unable to adequately increase our production volumes or secure sufficient supply in order to maintain our market share. If we are unable to maintain market share, our results of operations and financial condition could be harmed. Conversely, 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.

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

     We are sole sourced for a number of our critical components and the absence of a back-up supplier exposes our supply chain to unanticipated disruptions. We rely on our vendors, some of which are a sole source of supply, for many 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.

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     We are exposed to foreign currency risks. Our purchases of NAND flash memory from the Toshiba ventures and our investments in those ventures are denominated in Japanese yen. Our sales, however, are primarily denominated in U.S. dollars or other foreign currencies. Additionally, we expect over time to increase the percentage of our sales denominated in currencies other than the U.S. dollar. This exposes us to significant risk from foreign currency fluctuations. Management of these foreign exchange exposures and the foreign currency forward contracts used to mitigate these exposures is complex and if we do not successfully manage our foreign exchange exposures, our business, results of operations and financial condition could be harmed.

     Terrorist attacks, war, threats of war and government responses thereto may negatively impact our operations, revenues, costs and stock price. Terrorist attacks, U.S. military responses to these attacks, war, threats of war and any corresponding decline in consumer confidence could have a negative impact on consumer retail demand, which is the largest channel for our products. Any of these events may disrupt our operations or those of our customers and suppliers and may affect the availability of materials needed to manufacture our products or the means to transport those materials to manufacturing facilities and finished products to customers. Any of these events could also increase volatility in the U.S. and world financial markets, which could harm our stock price and may limit the capital resources available to us and our customers or suppliers or adversely affect consumer confidence. In addition, we have a development center in Northern Israel, near the border with Lebanon, an area currently experiencing significant violence and political unrest. Recently, our employees in this area have been relocated to other facilities. Continued turmoil and unrest in this area could cause delays in the development of our products. This could harm our business and results of operations.

     Natural disasters or epidemics in the countries in which we or our suppliers or subcontractors operate could negatively impact our operations. Our operations, including those of our suppliers and subcontractors, are concentrated in Milpitas, California, Yokkaichi, Japan, Hsinchu and Taichung, Taiwan and Dongguan, Shanghai and Shenzen, China. In the past, these areas have been affected by natural disasters such as earthquakes, tsunamis and typhoons, and some areas have been affected by epidemics, such as avian flu. If a natural disaster or epidemic were to occur in one or more or these areas, our disaster recovery processes may not provide adequate business continuity. In addition, we do not have insurance for most natural disasters, including earthquakes. This could harm our business and results of operations.

     We may be unable to protect our intellectual property rights, which would harm our business, financial condition and results of operations. We rely on a combination of patents, trademarks, copyright and trade secret laws, confidentiality procedures and licensing arrangements to protect our intellectual property rights. In the past, we have been involved in significant and expensive disputes regarding our intellectual property rights and those of others, including claims that we may be infringing third parties’ patents, trademarks and other intellectual property rights. We expect that we may be involved in similar disputes in the future. We cannot assure you that:

• any of our existing patents will not be invalidated;

• patents will be issued for any of our pending applications;

• any claims allowed from existing or pending patents will have sufficient scope or strength;

• our patents will be issued in the primary countries where our products are sold in order to protect our rights and potential commercial advantage; or

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

     In addition, our competitors may be able to design their products around our patents and other proprietary rights.

     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 countersue 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 patent infringement case, we could be required to pay substantial damages, cease the manufacture, use and sale of infringing products, expend significant resources to develop non-infringing technology, discontinue the use of specific processes or obtain licenses to the infringing technology.

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     We may be unable to license intellectual property to or from third parties as needed, or renew existing licenses, which could expose us to liability for damages, increase our costs or limit or prohibit us from selling products. If we incorporate third-party technology into our products or if we are found to infringe others’ intellectual property, we could be required to license intellectual property from a third party. We may also need to license some of our intellectual property to others in order to enable us to obtain important cross-licenses to third-party patents. We cannot be certain that licenses will be offered when we need them, 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 may not be successful in redesigning our products, the necessary licenses may not be available under reasonable terms, our existing licensees may not renew their licenses upon expiration and we may not be successful in signing new licensees in the future.

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

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

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

     Moreover, from time-to-time we agree to indemnify certain of our suppliers and customers for alleged patent infringement. The scope of such indemnity varies but generally includes indemnification for direct and consequential damages and expenses, including attorneys’ fees. We may from time-to-time be engaged in litigation as a result of these indemnification obligations. Third-party claims for patent infringement are excluded from coverage under our insurance policies. A future obligation to indemnify our customers or suppliers may have a material adverse effect on our business, financial condition and results of operations. For additional information concerning legal proceedings, see Part II, Item 1, “Legal Proceedings.”

     Because of our international business and operations, we must comply with numerous international laws and regulations, and we are vulnerable to political instability, currency fluctuations and other risks related to international operations. Currently, all of our products are produced overseas in China, Israel, Japan, Taiwan and South Korea. We may, therefore, be affected by the political, economic and military conditions in these countries.

     Specifically, China does not currently have a comprehensive and highly developed legal system, particularly with respect to the protection of intellectual property rights. This results, among other things, in the prevalence of counterfeit goods in China. The enforcement of existing and future laws and contracts remains uncertain, and the implementation and interpretation of such

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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.

     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;

• inability to successfully manage our foreign exchange exposures;

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

• adverse tax rules and regulations;

• weak protection of our intellectual property rights; and

• delays in product shipments due to local customs restrictions.

     Tower Semiconductor’s Financial Situation is Challenging. Tower supplies a significant portion of our controller wafers from its Fab 2 facility and is currently a sole source of supply for some of our controllers. Tower’s Fab 2 is operational but has not been completed and a continued supply of controllers to us from Tower on a cost-effective basis may be dependent on this completion. Tower’s completion of the equipment installation, technology transfer and ramp-up of production at Fab 2 is dependent upon Tower (a) having, or being able to raise, sufficient funds to complete the Fab 2 project; (b) meeting the conditions to receive Israeli government grants and tax benefits approved for Fab 2; and (c) obtaining the approval of the Israeli Investment Center to extend the five-year investment period under its Fab 2 approved enterprise program. In addition, Tower recently entered into an amendment to the credit facility agreement with its banks. If Tower fails to raise funds in the amounts and at the times required under the amended credit facility agreement or otherwise fails to comply with the revised financial ratios and covenants to avoid being in default under its amended bank credit agreements, Tower may have to cease operations. If this occurs, we will be forced to source our controllers from another supplier and our business, financial condition and results of operations may be harmed. Specifically, our ability to supply a number of products would be disrupted until we were able to transition manufacturing and qualify a new foundry with respect to controllers that are currently sole sourced at Tower, which could take three or more quarters to complete.

     We have recognized cumulative losses of approximately $54.1 million as a result of the other-than-temporary decline in the value of our investment in Tower ordinary shares, $9.2 million as a result of the impairment in value on our prepaid wafer credits and $1.3 million of losses on our warrant to purchase Tower ordinary shares as of July 2, 2006. We are subject to certain restrictions on the transfer of our approximately 11.1 million Tower ordinary shares including certain rights of first refusal, and through January 2008, have agreed to maintain minimum shareholdings. It is possible that we will record further write-downs of our investment, which was carried on our consolidated balance sheet at $15.0 million as of July 2, 2006, which would harm our results of operations and financial condition.

     Our stock price has been, and may continue to be, volatile, which could result in investors losing all or part of their

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

     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 continually evaluate and explore strategic opportunities as they arise, including business combinations, strategic partnerships, collaborations, capital investments and the purchase, licensing or sale of assets. If we issue equity securities in connection with an acquisition, the issuance may be dilutive to our existing stockholders. Alternatively, acquisitions made entirely or partially for cash would reduce our cash reserves.

     Acquisitions may require significant capital infusions, typically entail many risks and could result in difficulties in assimilating and integrating the operations, personnel, technologies, products and information systems of acquired companies. In order to realize the intended benefits of our recent acquisition of Matrix Semiconductor, Inc. and our proposed acquisition of msystems Ltd., or msystems, we will have to successfully integrate and retain key Matrix personnel and msystems personnel, respectively. We may experience delays in the timing and successful integration of acquired technologies and product development through volume production, unanticipated costs and expenditures, changing relationships with customers, suppliers and strategic partners, or contractual, intellectual property or employment issues. In addition, key personnel of an acquired company may decide not to work for us. The acquisition of another company or its products and technologies may also result in our entering into a geographic or business market in which we have little or no prior experience. These challenges could disrupt our ongoing business, distract our management and employees, harm our reputation, subject us to an increased risk of intellectual property and other litigation and increase our expenses. These challenges are magnified as the size of the acquisition increases, and we cannot assure you that we will realize the intended benefits of any acquisition. Acquisitions may require large one-time charges and can result in increased debt or contingent liabilities, adverse tax consequences, substantial depreciation or deferred compensation charges, the amortization of identifiable purchased intangible assets or impairment of goodwill, any of which could have a material adverse effect on our business, financial condition or results of operations. Furthermore, our acquisition of msystems could cause us to re-evaluate the accounting classification for our FlashVision, Flash Partners and Flash Alliance ventures, including consolidating the ventures which may have an adverse result in our consolidated financial reports.

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

     Our success depends on key personnel, including our executive officers, the loss of who 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 may not be successful in hiring or retaining key personnel and our key personnel may not remain employed with us.

     To manage our growth, we may need to improve our systems, controls and procedures and relocate portions of our business to new or larger facilities. We have experienced and may continue to experience rapid growth, which has placed, and could continue to place a significant strain on our managerial, financial and operations resources and personnel. We expect that our number of employees, including management-level employees, will continue to increase for the foreseeable future. We must continue to improve our operational, accounting and financial systems and managerial controls and procedures, including fraud

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procedures, and we will need to continue to expand, as well as, train and manage our workforce. From time-to-time, we may need to relocate portions of our business to new or larger facilities which could result in disruption of our business or operations. For example, in May 2006, we plan to relocate our corporate headquarters and significant engineering operations, including labs and data centers, to new facilities. If we do not manage our growth effectively, including transitions to new or larger facilities, our business could be harmed.

     We may raise additional financing, which could be difficult to obtain, and which if not obtained in satisfactory amounts may prevent us from funding the ventures with Toshiba, 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. We currently believe that we have sufficient cash resources to fund our operations as well as our investments in the ventures with Toshiba for at least the next twelve months; however, we may in the future raise additional funds, including funds to meet our obligations with respect to Flash Partners and Flash Alliance, 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, equity or lease financings. If we issue additional equity securities, our stockholders will experience dilution and the new equity securities may have rights, preferences or privileges senior to those of existing holders of common stock. If we raise funds through debt or lease financing, we will have to pay interest and may be subject to restrictive covenants, which could harm our business. If we cannot raise funds on acceptable terms, if and when needed, we may not be able to develop or enhance our products, fulfill our obligations to Flash Partners and Flash Alliance, 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.

     Anti-takeover provisions in our charter documents, stockholder rights plan and in Delaware law could discourage or delay a change in control and, as a result, negatively impact our stockholders. We have taken a number of actions that could have the effect of discouraging a takeover attempt. For example, we have a stockholders’ rights plan that would cause substantial dilution to a stockholder, and substantially increase the cost paid by a stockholder, who attempts to acquire us on terms not approved by our board of directors. This could discourage an acquisition of us. In addition, our certificate of incorporation grants our board of directors the authority to fix the rights, preferences and privileges of and issue up to 4,000,000 shares of preferred stock without stockholder action (2,000,000 of which have already been reserved under our stockholder rights plan). Issuing preferred stock could have the effect of making it more difficult and less attractive for a third-party to acquire a majority of our outstanding voting stock. Preferred stock may also have other rights, including economic rights senior to our common stock that could have a material adverse effect on the market value of our common stock. In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law. This section provides that a corporation may not engage in any business combination with any interested stockholder during the three-year period following the time that a stockholder became an interested stockholder. This provision could have the effect of delaying or discouraging a change of control of SanDisk.

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

     Changes in securities laws and regulations have increased our costs; further, in the event we are unable to satisfy regulatory requirements relating to internal control, or if our internal control over financial reporting is 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 number of rules and regulations applicable to us has increased and will continue to increase our legal and financial compliance costs, and has 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

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with Section 404 of that law regarding internal control over financial reporting. These laws and regulations and perceived increased risk of liability 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 cannot estimate the timing or magnitude of additional costs we may incur as a result.

     In connection with our certification process under Section 404 of the Sarbanes-Oxley Act of 2002, we have identified and will from time-to-time identify deficiencies in our internal control over financial reporting. We cannot assure you that individually or in the aggregate these deficiencies would not be deemed to be a material weakness. Furthermore, we may not be able to implement enhancements on a timely basis in order to prevent a failure of our internal controls or enable us to furnish future unqualified certifications. A material weakness or deficiency in internal control over financial reporting could materially impact our reported financial results and the market price of our stock could significantly decline. Additionally, adverse publicity related to the disclosure of a material weakness or deficiency in internal controls over financial reporting could have a negative impact on our reputation, business and stock price. Any internal control or procedure, no matter how well designed and operated, can provide only reasonable assurance of achieving desired control objectives.

We may experience significant fluctuations in our stock price, which may, in turn, significantly affect the trading price of our convertible notes. Our stock has experienced substantial price volatility, particularly as a result of quarterly variations in our operating results, the published expectations of analysts, and as a result of announcements by our competitors and us. In addition, the stock market has experienced price and volume fluctuations that have affected the market price of many technology companies, in particular, and that have often been unrelated to the operating performance of such companies. In addition, the price of our securities may also be affected by general global, economic and market conditions and the cost of operations in one or more of our product markets. While we cannot predict the individual effect that these factors may have on the price or our securities, these factors, either individually or in the aggregate, could result in significant variations in the price of our common stock during any given period of time. These fluctuations in our stock price also impact the price of our outstanding convertible securities and the likelihood of the convertible securities being converted into our common stock.

     We have significant financial obligations related to our ventures with Toshiba which could impact our ability to comply with our obligations under the notes. We have entered into agreements to guarantee, indemnify or provide financial support with respect to lease and certain other obligations of our ventures with Toshiba in which we have a 49.9% ownership interest. In addition, we may enter into future agreements to increase manufacturing capacity, including further expansion of Fab 3 and development of Fab 4. As of July 2, 2006 we had commitments of approximately $2.9 billion to fund our various obligations under the FlashVision and Flash Partners ventures with Toshiba. As of July 2, 2006, we had indemnification and guarantees obligations for these ventures of approximately $539 million. Due to these and our other commitments, we may not have sufficient funds to make payments under or repurchase the notes.

     Our debt service obligations may adversely affect our cash flow. While the 1% Notes are outstanding, we will have debt service obligations on the holders of the 1% Notes of approximately $11.5 million per year in interest payments. If we issue other debt securities in the future, our debt service obligations will increase. If we are unable to generate sufficient cash to meet these obligations and must instead use our existing cash or investments, we may have to reduce, curtail or terminate other 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. We may also in the future enter into other financial instruments that could increase our debt service obligations.

     Our indebtedness could have significant negative consequences to you. For example, it could:

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

• limit our ability to obtain additional financing;

• require the dedication of a substantial portion of any cash flow from operations to the payment of principal of, and interest on, our indebtedness, thereby reducing the availability of such cash flow to fund our growth strategy, working capital, capital expenditures and other general corporate purposes;

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

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• place us at a competitive disadvantage relative to our competitors with less debt.

     The 1% Notes rank junior in right of payment to any future secured debt and the liabilities of our subsidiaries. The notes are our general unsecured obligations and rank junior in right of payment to any future secured debt to the extent of the value of the assets securing such debt. The 1% Notes are equal in right of payment with any future unsubordinated, unsecured debt. As of July 2, 2006, we had $1.15 billion of debt outstanding, and we expect from time-to-time to incur additional indebtedness and other liabilities.

     In addition, the 1% Notes are not be guaranteed by any of our existing or future subsidiaries. Our subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay any amounts due with respect to the notes or to make any funds available therefore, whether by dividends, loans or other payments. As a result, the 1% Notes effectively rank junior in right of payment to all existing and future debt and other liabilities, including trade payables, of our subsidiaries. As of July 2, 2006, our subsidiaries had no outstanding debt, but had total trade and other payables of $110.9 million.

     The net share settlement feature of the1% Notes may have adverse consequences. The 1% Notes are subject to net share settlement, which means that we will satisfy our conversion obligation to holders by paying cash in settlement of the lesser of the principal amount and the conversion value of the 1% Notes and by delivering shares of our common stock in settlement of any and all conversion obligations in excess of the daily conversion values. Accordingly, upon conversion of a note, holders might not receive any shares of our common stock, or they might receive fewer shares of common stock relative to the conversion value of the 1% Note. In addition, any settlement of a conversion of notes into cash and shares of our common stock will be delayed until at least the 24th trading day following our receipt of the holder’s conversion notice. Accordingly, holders may receive fewer proceeds than expected because the value of our common stock may decline, or fail to appreciate as much as holders may expect, between the day that the holders exercise their conversion right and the day the conversion value of the 1% Notes is determined.

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

     We may be unable to repurchase 1% Notes upon the occurrence of a designated event; a designated event may adversely affect us or the 1% Notes. Holders of the 1% Notes have the right to require us to repurchase their 1% Notes upon the occurrence of a designated event. If a designated event occurs, it cannot be assured that we will have enough funds to repurchase all the 1% Notes. In addition, future debt we incur or other agreements we may enter may limit our ability to repurchase the 1% Notes upon a designated event. Moreover, holders of our 1% Notes exercise the repurchase right for a designated event, it may cause a default under our other debt, even if the designated event itself does not cause a default, because of the potential financial effect on us that would be caused by such a repurchase.

     A fundamental change or change in control transaction involving us could have a negative effect on us and the trading price of our common stock and could negatively impact the trading price of the 1% Notes. Furthermore, the designated event provisions, including the provisions requiring the increase to the conversion rate for conversions in connection with a fundamental change in some cases, may make more difficult or discourage a takeover of our company and the removal of incumbent management.

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

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

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

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

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

     There are numerous risks associated with our recent entry into an agreement to acquire msystems. On July 30, 2006 we announced that we had entered into an agreement to acquire msytems in a transaction in which the outstanding msystems ordinary shares would be exchanged for shares of our common stock. There are numerous risks associated with our having entered into this agreement, including the risks described below.

     All conditions to the merger may not be completed and the merger may not be consummated. The merger is subject to the satisfaction of numerous closing conditions that are beyond either company’s control and may prevent or delay its completion. Neither we nor msystems can predict whether and when these other conditions will be satisfied. These conditions include the approval of msystems’ shareholders and possibly creditors, as well as Israeli court approval. The merger is also subject to antitrust, competition and other regulatory review in the United States, Israel and other jurisdictions. Due to these conditions or other factors, the merger may not be completed. In the event the merger is not completed, we may be subject to many risks, including the costs related to the proposed merger, such as legal, accounting and advisory fees, which must be paid even if the merger is not completed. In addition, if the merger is not completed due to the failure to obtain antitrust regulatory approval, we may be obligated to make a substantial investment in msystems ordinary shares. If the merger is not completed, the market price of our common stock could decline. As noted in the section entitled “Legal Proceedings,” actions purporting to be class and derivative actions on behalf of msystems shareholders have recently been filed in California state court. SanDisk may be required to expend significant resources to defend these actions and could be subject to damages or settlement costs related to same.

     Completion of the merger may result in the dilution of our per share operating results. The completion of the merger may not improve our per share operating results or result in a financial condition superior to that which we would have achieved on a stand-alone basis. The merger could fail to produce the benefits that we anticipate, or could have other adverse effects that we currently do not foresee. In addition, some of the assumptions that we have relied upon, such as the achievement of operating synergies, may not be realized. In this event, the merger could result in a reduction of our per-share earnings as compared to the per-share earnings that would have been achieved by us if the merger had not occurred.

     Although we expect that the merger will result in benefits to us, those benefits may not occur because of integration and other challenges. If the merger is completed, achieving the expected benefits of the merger will depend on the timely and efficient integration of our and msystems’ technology, operations, business culture and personnel. This will be particularly challenging due to the fact that msystems is located in Israel and we are located in California. The integration may not be completed as quickly as expected, and if we fail to effectively integrate the companies or the integration takes longer than expected, we may not achieve the expected benefits of the merger. The challenges involved in this integration include, among others:

• incorporating msystems’ technology and products into our business and future product lines;

• continuing to effectively sell msystems’ products through msystems OEM distribution channels;

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• integrating msystems’ sales force into our worldwide product sales and distribution network;

• demonstrating to msystems customers that the merger will not result in adverse changes in customer service standards or product support;

• coordinating research and development activities to enhance introduction of new products and technologies;

• integrating msystems’ internal control over financial reporting with our internal control over financial reporting;

• migrating both companies to a common enterprise resource planning information system to integrate all operations, sales and administrative activities for the combined companies in a timely and cost effective way;

• integrating msystems’ international operations with ours;

• potentially incurring impairment charges to write down the carrying amount of intangible assets generated as a result of the merger;

• potentially having to reevaluate the accounting classification for our FlashVision, Flash Partners and Flash Alliance ventures with Toshiba in order to consolidate the financial results of these ventures, which could have an adverse effect on our consolidated financial position and results of operations;

• persuading the employees of both companies that the companies’ business cultures are compatible;

• maintaining employee morale and retaining key employees; and

• ensuring there are no delays in releasing new products to market.

     Our integration with msystems will be international in scope, complex, time consuming and expensive, and may disrupt our respective businesses or result in the loss of customers or key employees or the diversion of the attention of management. This will be particularly difficult because certain key members of msystems’ senior management will not remain with the combined companies after the merger. Some of msystems’ suppliers, distributors, customers and licensors are our competitors or work with our competitors and may reduce or terminate their business relationships with msystems as a result of the merger. In addition, the integration process may strain our financial and managerial controls and reporting systems and procedures. This may result in the diversion of management and financial resources from our core business objectives. There can be no assurance that we and msystems will successfully integrate our respective businesses or that we will realize the anticipated benefits of the merger.

     In addition, msystems’ headquarters and significant operations are located in Israel. Therefore, political, economic and military conditions in Israel directly affect its business and operations. We cannot predict the effect of continued or increased violence in Lebanon or Gaza, or the effect of military action elsewhere in the Middle East. Continued armed conflicts or political instability in the region would harm business conditions and could adversely affect the combined company’s results of operations. Furthermore, several countries continue to restrict or ban business with Israel and Israeli companies. These restrictive laws and policies may limit the combined company’s ability to make sales in those countries.

     The acquisition may result in a loss of customers. We and msystems operate in a highly competitive market, and our future performance will be affected by our ability to retain each company’s existing customers. We and msystems currently sell to several of the same large customers. The combined company’s ability to maintain the current level of sales of each company prior to the merger to these common customers may be limited by the desire of these customers to minimize their dependence on a single supplier. If, following the merger, common customers seek alternative suppliers for at least a portion of the products and services currently provided by both us and msystems, our combined business may be harmed. In addition, msystems has a broad base of OEM customers and has substantial experience selling to those customers. In order to achieve the expected benefits of the merger, we must continue to successfully sell, and expand sales levels, to the OEM market.

     Third parties may terminate or alter existing contracts or relationships with msystems or us. msystems has contracts with some of its suppliers, distributors, customers, licensors and other business partners. Some of these contracts require msystems to

57

obtain consent from these parties in connection with the merger. If these consents cannot be obtained, msystems may suffer a loss of potential future revenue and may lose rights that are material to msystems’ business and the business of the combined companies. In addition, third parties with whom msystems or we currently have relationships may terminate or otherwise reduce the scope of their relationship with msystems or us in anticipation of the merger. In order to achieve the expected benefits of the merger, the combined company may renegotiate contracts with some of its suppliers and other third parties, and there is no assurance that such negotiations will be successful.

     General uncertainty related to the merger could harm the combined company. Our or msystems’ existing customers may, in response to the announcement of the proposed merger, delay or defer purchasing decisions. If either company’s customers delay or defer purchasing decisions, the revenues of the combined company following the merger could be lower than expected. Similarly, our and msystems’ employees may experience or perceive uncertainty about their future roles with the combined company following the merger. This may harm our and msystems’ ability to attract and retain key management, marketing, sales and technical personnel. Also, speculation regarding the likelihood of the completion of the merger could increase the volatility of our and msystems’ share prices prior to the closing.

     A prolonged delay in completing the planned merger may create uncertainty among our customers, suppliers or partners, which could have an adverse effect on our results of operations. In addition, a prolonged delay could affect our operational planning, budgeting, capital expenditures and hiring decisions, which could harm our business and results of operations.

     There are risks related to msystems’ prior option grant practices. As a result of an investigation by a special committee of its board of directors into its option grant practices, on July 17, 2006, msystems filed a Form 20-F with the U.S. Securities and Exchange Commission, or SEC, in which it restated its financial statements for each of the fiscal years ended December 31, 1999 through 2005 and, in a separate report on Form 6-K, restated its financial statements for each of the four quarters of fiscal 2005 and the first quarter of fiscal 2006. In addition, msystems has disclosed that the SEC is conducting an informal investigation into msystems’ option grant practices and the restatement of its financials. If this investigation is not resolved before the closing of the merger, the combined company’s independent registered public accountants may be unable to complete their accounting review of our unaudited quarterly financial statements or the pro forma financial statements of the combined companies, which may delay our filing of required reports with the SEC. Any such delay could cause material harm to our business and operations including, among other things, the initiation of delisting proceedings by the NASDAQ Global Market; the termination of our timely filer status with the SEC, which would make it more difficult for us to raise capital through a public offering of our securities; the potential suspension of our SEC registration statements; a decrease in our stock price; negative financial analyst coverage and media exposure; lawsuits by our stockholders and other third parties; and potential breaches of various agreements to which we are a party.

     Under the merger agreement, the combined company after the closing of the transaction will be responsible for liabilities associated with msystems’ prior stock option grant practices, including indemnification of directors and certain members of management of msystems. These liabilities could be substantial and may include, among other things, the costs of defending lawsuits against msystems and its directors, officers, employees and former employees by stockholders and other third parties; the cost of defending any shareholder derivative suits; the cost of governmental, law enforcement or regulatory investigations; civil or criminal fines and penalties; expenses associated with further financial restatements; auditor, legal and other expenses; and expenses associated with the remedial measures to be effected by msystems.

58

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     None.

Item 3. Defaults upon Senior Securities

     None.

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

     At our Annual Meeting of Stockholders held on May 25, 2006, the following individuals were elected to the Board of Directors:

	Votes For		Votes Withheld
Irwin Federman		164,084,462		2,557,323
Dr. Eli Harari		164,037,397		2,604,388
Steven J. Gomo		165,539,770		1,102,015
Eddy W. Hartenstein		165,535,073		1,106,712
Catherine P. Lego		165,552,475		1,089,310
Michael E. Marks		162,432,540		4,209,245
Dr. James D. Meindl		161,752,610		4,889,175

     The following proposals were also approved at our Annual Meeting:

	Shares		Shares		Shares
	Voted For		Voted Against		Abstaining		Not Voted
Approve amendments to the SanDisk Corporation 2005 Incentive Plan.		79,360,033		53,393,198		260,715		34,441,551
Approve an amendment to the SanDisk Corporation’s Certificate of Incorporation, increasing the authorized Common Stock from 400,000,000 shares to 800,000,000 shares		144,047,864		22,456,040		137,881		813,712
Ratify the appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2006		164,555,483		1,991,648		94,654		813,712

Item 5.Other Information

     None.

59

Item 6. Exhibits

Exhibit
Number	Exhibit Title
2.1	Agreement and Plan of Merger, dated as of October 20, 2005, by and among SanDisk Corporation, Mike Acquisition Company LLC, Matrix Semiconductor, Inc. and Bruce Dunlevie as the stockholder representative for the stockholders of Matrix Semiconductor, Inc.(1)
3.1	Restated Certificate of Incorporation of the Registrant.(2)
3.2	Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant dated December 9, 1999.(3)
3.3	Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant dated May 11, 2000.(4)
3.4	Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Registrant dated May 26, 2006.(5)
3.5	Restated Bylaws of the Registrant, as amended to date.(6)
3.6	Certificate of Designations for the Series A Junior Participating Preferred Stock, as filed with the Delaware Secretary of State on July 24, 1997.(7)
3.7	Amendment to Certificate of Designations for the Series A Junior Participating Preferred Stock, as filed with the Delaware Secretary of State on September 24, 2003.(8)
4.1	Reference is made to Exhibits 3.1, 3.2 and 3.3.(2), (3), (4)
4.2	Rights Agreement, dated as of September 15, 2003, between the Registrant and Computershare Trust Company, Inc.(8)
10.1	Guarantee Agreement, dated as of June 20, 2006, by and between the Registrant, IBJ Leasing Co., Ltd., Sumisho Lease Co., Ltd. and Toshiba Finance Corporation.(*)
10.2	Basic Lease Contract, dated as of June 20, 2006, by and between Flash Partners Yuken Kaisha, IBJ Leasing Co., Ltd., Sumisho Lease Co., Ltd. and Toshiba Finance Corporation.(*), (+)
10.3	Sublease (Building 3), dated as of December 21, 2005 by and between Maxtor Corporation and the Registrant. (*)
10.4	Sublease (Building 4), dated as of December 21, 2005 by and between Maxtor Corporation and the Registrant. (*)
10.5	Sublease (Building 6), dated as of December 21, 2005 by and between Maxtor Corporation and the Registrant. (*)
10.6	Amendment No. 2 to Indemnification and Reimbursement Agreement, dated as of May 29, 2006, by and between the Registrant and Toshiba Corporation. (*)
10.7	Amended and Restated SanDisk Corporation 2005 Incentive Plan.(*)
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*Filed herewith.
+ Confidential treatment has been requested with respect to certain portions hereof.
(1)	Previously filed as an Exhibit to the Registrant’s Current Report on Form 8-K filed with the SEC on January 20, 2006.
(2)	Previously filed as an Exhibit to the Registrant’s Registration Statement on Form S-1 (No. 33-96298).
(3)	Previously filed as an Exhibit to the Registrant’s Form 10-Q for the quarter ended June 30, 2000.
(4)	Previously filed as an Exhibit to the Registrant’s Registration Statement on Form S-3 (No. 333-85686).
(5)	Previously filed as an Exhibit to the Registrant’s Current Report on Form 8-K filed with the SEC on June 1, 2006.
(6)	Previously filed as an Exhibit to the Registrant’s Current Report on Form 8-K filed with the SEC on April 10, 2006.
(7)	Previously filed as an Exhibit to the Registrant’s Current Report on Form 8-K/A filed with the SEC on May 16, 1997.
(8)	Previously filed as an Exhibit to the Registrant’s Registration Statement on Form 8-A dated September 25, 2003.

60

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: August 10, 2006	By:	/s/ JUDY BRUNER
		Judy Bruner
		Executive Vice President, Administration and Chief Financial Officer (On behalf of the Registrant and as Principal Financial and Accounting Officer)

61

EXHIBIT INDEX

Exhibit
Number	Exhibit Title
2.1	Agreement and Plan of Merger, dated as of October 20, 2005, by and among SanDisk Corporation, Mike
	Acquisition Company LLC, Matrix Semiconductor, Inc. and Bruce Dunlevie as the stockholder
	representative for the stockholders of Matrix Semiconductor, Inc.(1)
3.1	Restated Certificate of Incorporation of the Registrant.(2)
3.2	Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant dated
	December 9, 1999.(3)
3.3	Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant dated May
	11, 2000.(4)
3.4	Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the
	Registrant dated May 26, 2006.(5)
3.5	Restated Bylaws of the Registrant, as amended to date.(6)
3.6	Certificate of Designations for the Series A Junior Participating Preferred Stock, as filed with
	the Delaware Secretary of State on July 24, 1997.(7)
3.7	Amendment to Certificate of Designations for the Series A Junior Participating Preferred Stock, as
	filed with the Delaware Secretary of State on September 24, 2003.(8)
4.1	Reference is made to Exhibits 3.1, 3.2 and 3.3.(2), (3), (4)
4.2	Rights Agreement, dated as of September 15, 2003, between the Registrant and Computershare Trust
	Company, Inc.(8)
10.1	Guarantee Agreement, dated as of June 20, 2006, by and between the Registrant, IBJ Leasing Co.,
	Ltd., Sumisho Lease Co., Ltd. and Toshiba Finance Corporation.(*)
10.2	Basic Lease Contract, dated as of June 20, 2006, by and between Flash Partners Yuken Kaisha,
	IBJ Leasing Co., Ltd., Sumisho Lease Co., Ltd. and Toshiba Finance Corporation.(*), (+)
10.3	Sublease (Building 3), dated as of December 21, 2005 by and between Maxtor Corporation and the Registrant.(*)
10.4	Sublease (Building 4), dated as of December 21, 2005 by and between Maxtor Corporation and the Registrant.(*)
10.5	Sublease (Building 6), dated as of December 21, 2005 by and between Maxtor Corporation and the Registrant.(*)
10.6	Amendment No. 2 to Indemnification and Reimbursement Agreement, dated as of May 29, 2006, by and between the Registrant and Toshiba Corporation.(*)
10.7	Amended and Restated SanDisk Corporation 2005 Incentive Plan.(*)
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant
	to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant
	to Section 906 of the Sarbanes-Oxley Act of 2002.

*Filed herewith.
+ Confidential treatment has been requested with respect to certain portions hereof.
(1)	Previously filed as an Exhibit to the Registrant’s Current Report on Form 8-K filed with the SEC on January 20, 2006.
(2)	Previously filed as an Exhibit to the Registrant’s Registration Statement on Form S-1 (No. 33-96298).
(3)	Previously filed as an Exhibit to the Registrant’s Form 10-Q for the quarter ended June 30, 2000.
(4)	Previously filed as an Exhibit to the Registrant’s Registration Statement on Form S-3 (No. 333-85686).
(5)	Previously filed as an Exhibit to the Registrant’s Current Report on Form 8-K filed with the SEC on June 1, 2006.
(6)	Previously filed as an Exhibit to the Registrant’s Current Report on Form 8-K filed with the SEC on April 10, 2006.
(7)	Previously filed as an Exhibit to the Registrant’s Current Report on Form 8-K/A filed with the SEC on May 16, 1997.
(8)	Previously filed as an Exhibit to the Registrant’s Registration Statement on Form 8-A dated September 25, 2003.

62

EX-10.1

Exhibit 10.1

Guarantee Agreement

June 20, 2006

SanDisk Corporation

IBJ Leasing Co., Ltd.

Sumisho Lease Co., Ltd.

Toshiba Finance Corporation

Guarantee Agreement

     SanDisk Corporation (the “Guarantor”) and IBJ Leasing Co., Ltd., Sumisho Lease Co., Ltd., and Toshiba Finance Corporation as SD Lessor (in such capacity, collectively, the “SD Lessors”) hereby enter into this guarantee agreement (the “Agreement”) with respect to the Master Lease Agreement dated June 20, 2006 and the related individual agreements entered into thereunder (collectively, the “Lease Agreement”), in each case entered into by and between the SD Lessors and IBJ Leasing Co., Ltd. and Sumisho Lease Co., Ltd. as Toshiba Lessor thereunder (in such capacity, collectively, the “Toshiba Lessors”) and Flash Partners Yugen Kaisha (the “Lessee”).

     Unless as otherwise specified in this Agreement, the words defined in the Lease Agreement shall have the same meaning in this Agreement.

Article 1. (Guarantee)

     The Guarantor shall guarantee the performance, from time to time, of the obligations subject to the guarantee below (the “Guaranteed Obligation”) to the SD Lessors, jointly and severally (rentai-hosho) with the Lessee (the “Guarantee”).

(Guaranteed Obligation)

     Guaranteed Obligation shall mean payment obligations of lease rental (lease-ryo), stipulated loss payment (kitei-songaikin), purchase option exercise price (konyu-sentakuken-koshikagaku), terminal return adjustment amount (henkanji-choseikin), break funding cost, late charges (chien-songaikin), and any and all payment obligations of other amounts concerning SD Tranche I and SD Tranche II in individual transactions pursuant to the Lease Agreement; provided that the Guarantor and the SD Lessors may consult in the event of any doubt concerning “other amounts” as mentioned above.

     In any event, the Guarantor shall not pay any obligation concerning Toshiba Tranche 1 and Toshiba Tranche 2, and all amounts owing from Lessee to the Toshiba Lessors in relation to Toshiba Tranche 1 or Toshiba Tranche 2 or otherwise are expressly excluded from the Guaranteed Obligations.

Article 2. (Period of Request for the Performance of Guarantee Obligation)

     In the event the SD Lessors demand performance of the Guarantee to the Guarantor, the SD Lessors must make a written demand to the Guarantor for performance of the Guaranteed Obligation which the Lessee has failed to duly and punctually perform. The SD Lessors may, upon each failure of due and punctual performance of the Guaranteed Obligation, make demand pursuant to this Article; any delay in making such demand will not exempt the Guarantor from the obligations under this Guarantee.

Article 3. (Performance of Guaranteed Obligation)

3.1 The Guarantor shall, in the event the Lessee fails to perform all or any part of its obligations under the Guaranteed Obligation within 10 business days from each due date, perform the Guarantee in favor of the SD Lessors within 20 business days from the receipt of the written demand from the SD Lessors.

3.2	If there is any Guaranteed Obligation upon the occurrence of any termination event (kaijo-jiyu) under the Lease Agreement, the Guarantor shall perform the Guarantee within 20 business days from the receipt of the written demand from the SD Lessors.
3.3	If any termination event under the Lease Agreement occurs, the Guarantor may, pursuant to Article 26, Paragraph 8 or Article 26, Paragraph 9 of the Lease Agreement, succeed the rights, obligations and legal title of the Lessee under the Lease Agreement or the rights, obligations and legal title of Other Guarantor (defined below) under the guarantee agreement dated the same date hereof by and between Toshiba Corporation (the “Other Guarantor”) and the Toshiba Lessors, whereupon such termination event shall be deemed cured.
3.4	The Guarantor may not exercise the right of subrogation, prior indemnity and post indemnity with respect to the Guarantee against the Lessee until any and all receivables of the SD Lessors and Toshiba Lessors against the Lessee in respect of this Agreement and the Lease Agreement have been paid in full.

Article 4. (Relationship with Other Security Rights)

4.1

The guarantee under this Agreement shall be granted in addition to other security interests or guarantees held by the SD Lessors in connection with the Guaranteed Obligation, and the effectiveness of such other securities or guarantees shall not be affected by the security interests pursuant to this Agreement.

4.2

The Guarantor shall not claim exemption even if the SD Lessors, in their reasonable discretion, alter or terminate other security interests or guarantees securing the Guaranteed Obligations, provided, however, that the SD Lessors shall give at least fifteen (15) days prior notice to the Guarantor in case of such alteration or termination unless the same is contemplated by the Related Agreements (honken-kanren-keiyaku).

Article 5. (Transfer of Rights and Obligations)

     The SD Lessors and the Guarantor shall not, without obtaining prior written consent of the other party, transfer or pledge the rights and obligations under this Agreement to any third party, provided, however, this Article shall not prohibit any assignment by the Guarantor to persons who acquire all or substantial part of the assets, business and shares of or in the Guarantor by means of sale, merger, acquisition or other change in management control. In addition, in each individual transaction, (i) pursuant to the SD Receivables Sale and Purchase Agreement (Honken-SD-Saiken-Baibai-Keiyaku), the SD Lessors may transfer the right to demand the performance of the Guaranteed Obligation with respect to SD Tranche I hereunder to the SD Borrower (Honken-SD-Kariirenin) and (ii) pursuant to the SD Receivables Security Assignment Agreement

(Honken-SD-Saiken-Joto-Tampo-Keiyaku), the SD Borrower may transfer the right to demand performance of the Guaranteed Obligation with respect to SD Tranche I hereunder to the SD Lenders (Honken-SD-Kashitsukenin). The Guarantor hereby grants prior consent to such transfers and agrees to cooperate with the SD Lessors in preparing and delivering the documents requested by the SD Lessors.

Article 6. (Limited Recourse)

     The limitation of liability by the limited recourse provision pursuant to Article 29, Paragraph 1 of the Lease Agreement shall not prevent the exercise of the rights of the SD Lessors against the Guarantor pursuant to this Agreement, nor shall the provisions thereof affect the performance of the guarantee obligations pursuant to this Agreement.

Article 7. (Modification of the Agreement)

     This Agreement may not be modified except with the written consent of the Guarantor, the SD Lessors and the Toshiba Lessors.

Article 8. (Governing Law)

     This Agreement shall be governed by, and construed in accordance with, the laws of Japan in every respect.

Article 9. (Jurisdiction)

     Any and all disputes arising out of or in connection with this Agreement shall be subject to the exclusive jurisdiction of the Tokyo District Court.

     This Guarantee Agreement shall be prepared in four counterparts and the Guarantor and the SD Lessors shall each retain one copy hereof.

June 20, 2006

	[Guarantee Agreement]
Guarantor:	SanDisk Corporation
	/s/ Eli Harari
	By: Eli Harari
	Title: Chief Executive Officer

	[Guarantee Agreement]
SD Lessor:	IBJ Leasing Co., Ltd.
	/s/ IBJ Leasing Co., Ltd.
	By:
	Title:

	[Guarantee Agreement]
SD Lessor:	Sumisho Lease Co., Ltd.
	/s/ Sumisho Lease Co., Ltd.
	By:
	Title:

	[Guarantee Agreement]
SD Lessor:	Toshiba Finance Corporation
	/s/ Toshiba Finance Corporation
	By:
	Title:

EX-10.2

Exhibit 10.2
FOIA Confidential Treatment Requested
[Execution Version]

Basic Lease Contract

Flash memory manufacturing equipment

June 20, 2006

IBJ Leasing Co., Ltd.
Sumisho Lease Co., Ltd.
Toshiba Finance Corporation
SD Lessors

IBJ Leasing Co., Ltd.
Sumisho Lease Co., Ltd.
Toshiba Lessors

Flash Partners Yugen Kaisha
Lessee

Table of Contents

	Page
Article 1 (Definitions)		1
Article 2 (Transaction Structure)		10
Article 3 (Lease)		10
Article 4 (Delivery)		10
Article 5 (Prior conditions regarding delivery)		11
Article 6 (Related documents)		12
Article 7 (Payment of lease payment etc.)		13
Article 8 (Immunity from defect liability)		15
Article 9 (Burden of loss, damage and risk)		16
Article 10 (Representation of Owner)		18
Article 11 (Quiet Enjoyment)		18
Article 12 (Installation and Use)		18
Article 13 (Possession and Sublease)		18
Article 14 (Maintenance Management)		19
Article 15 (Change in Original Condition)		19
Article 16 (Ownership of Parts)		20
Article 17 (Inspection)		20
Article 18 (Obligations)		20
Article 19 (Insurance)		21
Article 20 (Representations and Warranties)		21
Article 21 (Covenants)		23
Article 22 (Indemnity and Expenses Liabilities)		24
Article 23 (Number of individual transactions and change of deliverable period)		26
Article 24 (Purchase Options)		26
Article 25 (Return)		27
Article 26 (Termination of Agreement)		29
Article 27 (Default Interest)		32
Article 28 (Transfer of Rights and Obligations)		32
Article 29 (Limitations on Recourse to the Property)		33
Article 30 (Notices, etc.)		35
Article 31 (Modification of Agreement)		35
Article 32 (Confidentiality)		35
Article 33 (Governing Law)		36
Article 34 (Jurisdiction)		36

Attachment 1 Lease Terms and Conditions

Attachment 2 Loan Certificate

Attachment 3 Permitted Liens

Attachment 4 Certificate of Return

Attachment 5 Certificate of Transfer

Attachment 6 Conditions at the Time of Return

Attachment 7 Notification address

Basic Lease Contract

This Basic Lease Contract (hereinafter, “the Agreement”) was executed on June 20, 2006 by and between IBJ Leasing Co., Ltd., Sumisho Lease Co., Ltd. and Toshiba Finance Corporation as SD Lessors (hereinafter collectively referred to as “SD Lessors”), IBJ Leasing Co., Ltd. and Sumisho Lease Co., Ltd. as Toshiba Lessors (hereinafter collectively referred to as “Toshiba Lessors” and, it is with SD Lessors, collectively referred to as the “Lessors”), and Flash Partners Yugen Kaisha (hereinafter referred to as “Lessee”).

Article 1 (Definitions)

1 Unless the context makes it clear that the term has a different meaning, the terms in the left column below, used in this Agreement, shall have the meanings set forth in the right column below, corresponding to the relevant terms.

SD Group Companies	San Disk Corporation and companies of which San Disk Corporation directly or indirectly owns 50% or more of their voting stocks
SD Lessor RA	Pursuant to the assignment provided in Article 4 of All Parties Agreement, Sumisho Lease Co., Ltd., at the time of return, sale and other forms of disposition of Subject Property (hereinafter, “the Property”), acting on behalf of the SD Lessors with respect to the SD Lessors’ interest, or acting on behalf of the SD Lender with respect to the Property or the SD Lessors’ interest.
Reason for cancellation	Any of all of the reasons stipulated in Article 26, Paragraph 1
Loan certificate	Loan certificate for the Property prepared for each individual transaction in a manner provided in Attachment 2 pursuant to Article 4, Paragraph 5
Stipulated loss payment	Amount calculated for each Tranche on a certain day in accordance with Attachment 1, Paragraph 9

Taxes and public dues	Present or future tax, levy, withholding tax, fees, handling fees, monetary obligations as well as other monies (regardless of their names) and penalties, default assessments, surcharges, late charges and late interest thereon (regardless of their names) imposed by a tax authority or public office (both domestic and foreign)
Bank Business Day	Days on which banks operate in Japan
Payment for exercise of purchase options	Amount calculated pursuant to Attachment 1, Paragraph 6 with respect to each Tranche for each lease payment date
Individual transaction	Each individual transaction to be conducted pursuant to this Agreement and each loan certificate
Original Purchase Agreement	Each purchase agreement executed between Lessee and a property manufacturer in connection with the purchase of the Property
Sublessee	Person who holds a sublease pursuant to the stipulation in Article 13
Repayment standard fee	Amount calculated pursuant to Attachment 1, Paragraph 8 for the return date stipulated in Article 25, Paragraph 1
Performance, etc.	Performance, structure, design, design specification, practical value, exchange value, usability, sales possibility, commercial value, durability, operability, economical efficiency, compatibility with purpose, legality and any other performance, function, characteristics, value and utility of the Property
Reason for total loss	Any of the following incidents that occur to the Property or its unit component or component part: (a) Loss or whereabouts unknown (b) damage or failure, reasonably recognized by Lessee as impossible to repair or reuse from an economic viewpoint, which is confirmed by an appraisal company appointed by Lessor or (c) confiscation, expropriation or theft

- 2 -

Loss, etc.	Losses, damage, costs, fees, handling fees, liabilities, responsibilities, penal charges, penalties, delinquency charges, claims and lawsuits
Unit component part	A set of each property (including subject parts fixed to or furnished with said property) listed separately in each loan certificate of the Property. Provided, however, that when a part or unit component part subject to said individual transaction is excluded from this Agreement, the remaining unit component part/s shall compose unit component parts subject to the said individual transaction thereafter.
Bankruptcy proceedings, etc.	General term referring to bankruptcy, civil rehabilitation or corporate reorganizations and other bankruptcy proceedings
Toshiba Lessor RA	Pursuant to Article 4 of All Parties Agreement, at the time of return, sale and other forms of disposition of the Property, Sumisho Lease Co., Ltd. acting on behalf of Toshiba Lessor with respect to Toshiba Lessor’s interest, or acting on behalf of the SD Lender with respect to the Property or the SD Lessor’s interest.
Toshiba group companies	Toshiba Corporation and companies of which Toshiba Corporation directly or indirectly owns 50% or more of their voting shares
Tranche	Collective term for SD Tranche 1, SD Tranche 2, Toshiba Tranche 1 and Toshiba Tranche 2, which are structured pursuant to Article 7, Paragraph 1 in regard to lease payments or other receivables under this Agreement
Delivery period	Period from the day of the execution of this Agreement to the final deliverable date stipulated in Attachment 1, Paragraph 1

- 3 -

Delivery place	Place, on each scheduled delivery day, where the Property or its unit component part is located, which the Lessee notifies the Lessor on a Banking Business Day immediately prior to the relevant scheduled delivery day
Delivery date	Date on which each unit component part composing the Property is delivered pursuant to Article 4
Scheduled delivery date	Each day stipulated in Attachment 1, Paragraph 1 as a scheduled delivery date for each individual transaction or other bank business day during the delivery period agreed upon by Lessee and Lessor
Person to be compensated	Lessor, the Borrower, or the Lender and all or either of successor, director, employee or agent thereof
Obligation etc.	Ownership, right of possession, lease right, lease, mortgage, right of pledge, lien, security interests, right of mortgage and conditional rights thereto, subscription rights thereto, any other usufructuary right as well as security rights and rights based on attachment or provisional attachment
Property purchase price	Sales price determined by Article 3, Paragraph 1 of the Master Sale and Purchase Agreement with respect to the Property or its each unit component part
Property manufacturer	Person indicated in the column “manufacturer” on an itemized property list attached to a loan certificate
Cause of default	Cause of cancellation or cancellation by notification or cause of cancellation as a result of passing of time or other conditions

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Break funding cost	Damages or expense borne by each Lessor with respect to raising funds for purchasing the Property upon nonperformance or early termination of a lease, pursuant to this Agreement. The cost shall be calculated as damage cost, penalty or other monies (provided, however, that if Lessee has doubts about other monies, Lessor, Lessee and the Lender shall negotiate) imposed by the Lender on the Borrower pursuant to the Loan Agreements with respect to nonperformance of loans or prepayment, etc.
Return Adjustment Fee	Amount to be calculated pursuant to Attachment 1, Paragraph 7 with respect to the return date stipulated in Article 25, Paragraph 1
The Lenders	Collective term for the SD Lenders and Toshiba Lenders.
The SD Lenders	Collective term for persons listed as the SD Lenders in Attachment 1, Paragraph 11
The Toshiba Lenders	Collective term for persons listed as the Toshiba Lenders in Attachment 1, Paragraph 11
The Loan Agreements	Collective term for the SD Loan Agreement and the Toshiba Loan Agreement
The SD Loan Agreement	Collective term for Revolving Loan Agreement (SD Tranche 1) concluded between the SD Borrower and the SD Lender on the same date as the execution of this Agreement and its Acknowledgement of Debts and Repayment Agreement thereunder.
The Toshiba Loan Agreement	Collective term for Revolving Loan Agreement (Toshiba Tranche 1) concluded between the Toshiba Borrower and the Toshiba Lender on the same date as the execution of this Agreement and its Acknowledgment of Debts and Repayment Agreement thereunder.
The Borrowers	Collective term for the SD Borrower and the Toshiba Borrower.

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The SD Borrower	Person/s listed as SD Borrower in Attachment 1, Paragraph 12
The Toshiba Borrower	Person/s listed as Toshiba Borrower in Attachment 1, Paragraph 12
All Parties Agreement	Agreement setting forth priority executed by the Lenders, Lessor and the Borrowers on the same date as this Agreement
Related Agreements	This Agreement, Sale and Purchase Agreement, Sale and Purchase Agreement regarding Receivables, All Parties Agreement, Master Agreement on Security Assignment regarding Claims, Master Agreement on Commitment for Security Assignment regarding Claims, Administrative Services Agreement, Guarantee Agreement, Letter of Agreement, agreements and other documents related thereto
Master Agreements on Security Assignment regarding Claims	Collective term for SD Master Agreement on Security Assignment regarding Claims and Toshiba Master Agreement on Security Assignment regarding Claims
SD Master Agreement on Security Assignment regarding Claims	Collective term for Master Agreement on Security Assignment regarding Claims (SD Tranche 1) executed between the SD Borrower and the SD Lenders on the same date as this Agreement regarding the right to claim performance of guaranteed obligations with respect to (i) claims associated with SD Tranche 1 under this Agreement and (ii) claims associated with SD Tranche 1 under this Agreement based on SD Guarantee Agreement and each individual agreement based thereon.

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Toshiba Master Agreement on Security Assignment regarding Claims	Collective term for Master Agreement on Security Assignment regarding Claims (Toshiba Tranche 1) executed between the Toshiba Borrower and the Toshiba Lender on the same date as this Agreement regarding the right to claim performance of guaranteed obligations with respect to (i) claims associated with Toshiba Tranche 1 under this Agreement and (ii) claims associated with Toshiba Tranche 1 under this Agreement based on Toshiba Guarantee Agreement and each individual agreement based thereon.
Sale and Purchase Agreements regarding Receivables	Collective term for SD Sale and Purchase Agreement regarding Receivables and Toshiba Sale and Purchase Agreement regarding Receivables
SD Sale and Purchase Agreement regarding Receivables	Collective term for Sale and Purchase Agreement regarding Master Lease Receivables (SD Tranche 1) executed between the SD Lessors and the SD Borrower on the same date as this Agreement regarding the right to claim performance of guaranteed obligations with respect to (i) claims associated with SD Tranche 1 under this Agreement and (ii) claims associated with SD Tranche 1 under this Agreement based on the SD Guarantee Agreement and each individual agreement based thereon
Toshiba Sale and Purchase Agreement regarding Receivables	Collective term for Sale and Purchase Agreement regarding Master Lease Receivables (Toshiba Tranche 1) executed between the Toshiba Lessors and the Toshiba Borrower on the same date as this Agreement regarding the right to claim performance of guaranteed obligations (i) claims associated with Toshiba Tranche 1 under this Agreement and (ii) claims associated with Toshiba Tranche 1 under this Agreement based on the Toshiba Guarantee Agreement and each individual agreement based thereon

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The Administrative Services Agreement	Collective term for SD Administrative Services Agreement and Toshiba Administrative Services Agreement
SD Administrative Services Agreement	SD Administrative Services Agreement concluded between the SD Lessors and the Administrative Custodian on the same date as this Agreement Toshiba Administrative Services Agreement
Toshiba Administrative Services Agreement	concluded between the Toshiba Lessors and the Administrative Custodian on the same date as this Agreement
Administrative Custodian	Person/s described in Attachment 1, Paragraph 14
Letter of Agreement	Letter of consent by the Guarantors and Lessees in a specified form with respect to assignment of receivables based on each Agreement on Security Assignment regarding Claims and establishment of the right to complete commitment for security assignment based on the Agreement on Commitment for Security Assignment regarding Claims
Master Sale and Purchase Agreement	Collective term for Master Sale and Purchase Agreement with respect to the Property executed between Lessee and Lessor on the same date as this Agreement and each individual agreement based thereon.
The Property	Each unit component (including subject parts) in each individual transaction reported by Lessee to Lessor pursuant to Article 4, Paragraph 1 of Master Sale and Purchase Agreement, confirmed by a certificate of transfer, receipt and loan certificate delivered on the delivery date for said individual transaction. Provided, however, that if some portion of unit components is excluded from this Agreement due to the occurrence of total loss, or by exercise of purchase options, the remaining unit components shall constitute the Property thereafter.

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Master Agreement on Commitment for Security Assignment regarding Claims	Collective term for Master Agreement on Commitment for Security Assignment regarding Claims concluded between Lessor and the Lenders on the same date as this Agreement and individual agreements pursuant thereto
Parts	Equipment and parts composing a unit component, and/or equipment, accessories, attachments and parts (including collection of parts and parts of similar kinds) fixed to or furnished with the Property
The Guarantee Agreements	Collective term for SD Guarantee Agreement and the Toshiba Guarantee Agreement
SD Guarantee Agreement	Guarantee Agreement concluded between SanDisk and the SD Lessors on the same date as this Agreement
Toshiba Guarantee Agreement	Guarantee Agreement concluded between Toshiba and the Toshiba Lessors on the same date as this Agreement
The Guarantors	Collectively refers to SanDisk and Toshiba
SanDisk	Person/s described as SanDisk in Attachment 1, Paragraph 13.
Toshiba	Person/s described as Toshiba in Attachment 1, Paragraph 13
Waived obligations, etc.	Obligations, etc. excluded pursuant to Article 18, Paragraph 1
Lease period	Period starting on delivery date stipulated in Attachment 1, Paragraph 2. Provided, however, that if this Agreement is cancelled before expiration, the lease period shall terminate on such cancellation day.
Lease period expiration date	The last day of a lease period
Lease payment	Lease payment determined for each unit component of each Tranche pursuant to Attachment 1, Paragraph 3
Lease payment calculation period	Period stipulated in Attachment 1, Paragraph 5
Lease payment date	Date stipulated in Attachment 1, Paragraph 4

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2	With respect to quoting other agreements and documents in this Agreement, if the relevant agreements and documents are revised, added or changed after the Agreement was initially executed, they shall mean the relevant agreements and documents after they were revised, added or changed.
3	With respect to quoting provisions in this Agreement, the provisions shall mean, unless otherwise specially stated, the provisions of this Agreement.
4	With respect to referring to parties to the related agreements to this Agreement, the parties shall also include their successors and accredited assignees.

Article 2 (Transaction Structure)

1	Lessee and Lessor confirm that transactions listed in Attachment 1, Paragraph 15 are planned with respect to the Property and they are inextricably linked with each other.
2	Lessee confirms that Lessor has the ownership of the Property during the lease period under this Agreement.

Article 3 (Lease)

1	Pursuant to Master Sale and Purchase Agreement, Lessor shall receive from Lessee each unit component composing the Property on each delivery date and, in the meantime, shall lease said unit component to Lessee.
2	A lease of the Property and each unit component under this Agreement shall exist for each individual transaction during its lease period and it shall commence from the issuance date of each loan certificate pursuant to Article 4, Paragraph 5. Except where explicitly provided in this Agreement, a lease of the Property shall neither be cancelled nor terminated prior to its lease expiration date.
3	Lessee shall pay the lease payment pursuant to Article 7, Paragraph 2 as compensations for the lease under this Agreement.
4	Lessee shall have the right to quiet enjoyment of the Property pursuant to Article 11 and other provisions of this Agreement.

Article 4 (Delivery)

1	Lessee shall designate a scheduled date to deliver each unit component composing the Property to Lessor pursuant to Attachment 1, Paragraph 1.
2	Subject to the satisfaction of the conditions set forth in Article 5, and to receive from Lessee a unit component on each delivery date at a delivery location in accordance with

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Master Sale and Purchase Agreement, Lessor shall deliver said unit component to Lessee on the same date and at the same location for the purpose of the leasing stipulated in the previous Article, and Lessee shall receive said unit component from Lessor.

3	If it becomes necessary to change any scheduled delivery date, Lessee shall notify Lessor to that effect as soon as possible (at the latest by 5 bank business days prior). Lessee and Lessor shall agree on each amount of lease payment, payment for exercise of purchase options, Return Adjustment Fee, repayment standard fee and stipulated loss payment for each individual transaction, based on the actual property purchase price of and delivery date for said unit component. In such case, the agreed amount of lease payment, payment for exercise of purchase options, Return Adjustment Fee, repayment standard fee and stipulated loss payment, together with the actual property purchase price and the delivery date, shall be documented and attached to each loan certificate in the form specified in Attachment 2.
4	Lessee shall bear the cost and liabilities (including break funding cost; further, if Lessee bears the liability for break funding cost in accordance with this Agreement, Lessee shall pay the amount calculated based on the definition stipulated in Article 1 for both SD Tranche 1 and Toshiba Tranche 1, respectively. Provided, however, that if respective amounts and payment periods for SD Tranche 1 and Toshiba Tranche 1 are different, they shall be appropriately adjusted. Hereinafter, the same in this Agreement.) incurred as a result of a change of delivery date or delayed or failed delivery (excluding cases where the cause is attributable to Lessor).
5	Lessee shall prepare and deliver to Lessor a loan certificate in the form specified in Attachment 2 as the delivery of each unit component takes place pursuant to the above Paragraph 2.
6	Delivery of each unit component as part of leasing in each individual transaction under this Agreement shall be deemed complete by delivery of a loan certificate referenced in the preceding paragraph. Lessee may use each unit component from such delivery date of said loan certificate.
7	Lessee shall bear all the cost of delivering the Property under this Article.
8	In the event where delivery of the Property is not completed during a delivery period in accordance with Article 4 Paragraph 2, Lessee and Lessor shall faithfully negotiate a possibility of extending such delivery period.

Article 5 (Prior conditions regarding delivery)

Lessor’s obligation to deliver each unit component for each individual transaction under Article 4 is conditional upon meeting the following conditions before the scheduled delivery date. Provided, however, that this shall not apply if Lessor notifies Lessee before

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completion of delivery that Lessor waives these conditions.

(1)	That no event has occurred by a scheduled delivery date that triggers Lessor or Lessee to expect changes in laws, orders, notices or other legal, administrative guidance or tax changes that, in light of the purpose [of the transaction], Lessor or Lessee reasonably considers appropriate reasons to suspend or postpone the execution of such transaction planned in accordance with the related agreements, or that such transaction is illegal. (However, if Lessor or Lessee determines that an event applicable under this Item has occurred, Lessor or Lessee shall immediately notify and negotiate with the other party.)
(2)	That Lessee has purchased from a manufacturer of the Property said unit components before such scheduled delivery date from a manufacturer in accordance with the Original Purchase Agreement, and Lessee has acquired the ownership thereof without incurring any obligations etc. (excluding waived obligations).
(3)	That said unit component is insured under Article 19 by an insurance that is effective as of said scheduled delivery date.
(4)	That no events of default have occurred.
(5)	That no events have occurred that cause Lessor to determine that events constituting a total loss or leading to a total loss of said unit component.
(6)	That related agreements to which Lessor or Lessee shall be a party are signed by all the parties, issued and continued to be in effect.
(7)	That representations and warranties by Lessee under Article 20 are entirely correct as of said scheduled delivery date under existing conditions on the same day.
(8)	That no significant change has been added to the FLASH PARTNERS MASTER AGREEMENT executed on September 10, 2004 between the Guarantors and SanDisk International Limited, or that this Agreement has not been cancelled, dissolved or terminated.
(9)	That the long-term loan rating of SanDisk by Standard & Poor’s Rating Services or Moody’s Investors Service is BB- or above Ba3, respectively, as of said scheduled delivery date.

Article 6 (Related documents)

1 Lessee and Lessor shall take steps necessary for execution of this Agreement and other related agreements and for authorization required to carry out obligations under this Agreement by the date of execution of this Agreement or each delivery date and, in the meantime, shall exchange certificates of seal impression for the seals used in these agreements (issued within three months prior to each signing), certified copy of company registration (issued within three months prior to the day of each signing) and Articles of

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	Incorporation (valid as of the date of signing of this Agreement).
2	Lessee shall submit the following documents to Lessor by each scheduled delivery date:

(1)	Insurance certificate for said unit component designated in Article 19
(2)	Original Letter of Agreement, notarized and dated, for said unit component
(3)	Copies of other documents reasonably requested by Lessor

Article 7 (Payment of lease payment etc.)

1	Lessee and each Lessor agree that monetary claims of Lessor against Lessee in the form of lease payment, stipulated loss payment, Return Adjustment Fee, payments for exercise of purchase options and other payments connected to each individual transaction under this Agreement comprise each SD Tranche 1, SD Tranche 2, Toshiba Tranche 1 and Toshiba Tranche 2. Each Tranche regarding each individual transaction shall consist of claims obtained by dividing such monetary claims by a rate provided in the loan certificate for said individual transaction. Further, a specific amount for each Tranche in the form of lease payment, stipulated loss payment, Return Adjustment Fee and payment for exercise of purchase options for each individual transaction shall be determined by Attachment 1, Paragraph 3, Paragraph 6, Paragraph 7 and Paragraph 9 of this Agreement and the loan certificate related to said individual transaction.
	In addition, (i) in regard to SD Tranche 1 and SD Tranche 2, claims related to lease payment, stipulated loss payment, Return Adjustment Fee, and payment for exercise of purchase options shall be attributed to only the SD Lessors (each SD Lessor holds claims divided by the ratio of its share of the Property), and money for such claims shall be paid only to the SD Lessors, and (ii) claims related to lease payment, stipulated loss payment, Return Adjustment Fee, payment for exercise of purchase options regarding Toshiba Tranche 1 and Toshiba Tranche 2 shall be attributed to only the Toshiba Lessors (each Toshiba Lessor holds claims divided by the ratio of its share of the Property), and money for such claims shall be paid only to the Toshiba Lessors.
2	Lessee shall, for each individual transaction, make a lease payment to Lessor for the lease payment calculation period that ends on each payment date by 11 am on such payment date.
3	In the event that the day that Lessee is supposed to make payment in any amount that Lessee has payment obligations for each individual transaction under this Agreement on a day other than a bank business day, with respect to such lease payment, stipulated loss payment, Return Adjustment Fee, and payment for exercise of purchase options, Lessee shall make payment on the following bank business day (if the following bank business day falls in next month, then use the previous bank business day shall apply) and such payment amount shall be adjusted accordingly. With respect to other payments, payments shall be made on the following bank business day and such payments shall not be adjusted.

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4	The amount that Lessee owes under this Agreement shall be paid according to provisions set forth in Attachment 1, Paragraph 10(2), unless as otherwise agreed by the parties concerned. However, lease payment, stipulated loss payment, payment for exercise of purchase options and Return Adjustment Fee due under this Agreement regarding SD Tranche 1 and SD Tranche 2 shall be paid to the SD Borrower, and lease payment, stipulated loss payment, payment for exercise of purchase options and Return Adjustment Fee due under this Agreement regarding Toshiba Tranche 1 and Toshiba Tranche 2 shall be paid to the Toshiba Borrower in accordance with Attachment 1, Paragraph 10(1). Lessee confirms that in connection with depositing said payments into the bank account of the Borrower, the SD Lessors have assigned such amounts to the SD Borrower, and the Toshiba Lessors have assigned such amounts to the Toshiba Borrower, and each Borrower has accepted such assignments. If such assignment is cancelled by a prior written notice by the SD Lessors or Toshiba Lessors to the SD Borrower or the Toshiba Borrower, respectively, Lessor shall notify Lessee to that effect at the latest one bank business day before the first lease payment due date that arrives after such cancellation. (In such case, with respect to lease payment, stipulated loss payment, payment for exercise of purchase options and Return Adjustment Fee due under this Agreement, the amount with respect to SD Tranche 1 shall be paid in the bank account of each SD Lender provided in Attachment 1, Paragraph 10(2); the amount with respect to Toshiba Tranche 1 shall be paid in the bank account of each Toshiba Lender provided in Attachment 1, Paragraph 10(2); the amount with respect to SD Tranche 2 shall be paid in the bank account of each SD Lessor provided in Attachment 1, Paragraph 10(2); and the amount with respect to Toshiba Tranche 2 shall be paid in the bank account of each Toshiba Lessor provided in Attachment 1, Paragraph 10(2))
5	Pursuant to this Agreement, Lessee is obliged to pay Lessor in full amount without any deduction, offsetting or defense regardless of any reasons (except where Lessor is responsible), including defective performance etc. by the Property, obligations against the Property, infringement against use of the Property or bankruptcy proceedings of the parties concerned. If Lessee is required by decree to withhold tax for the applicable payment, Lessee shall make an additional payment that is needed to ensure the amount that the receiving party would have received should such withholding have not been necessary.
6	If a lease pursuant to this Agreement for each individual transaction is terminated on a day other than its lease payment date, regardless of the occurrence of a total loss of the Property or its unit component, cancellation, exercising of purchase options or return options by Lessee or other reasons (except where Lessor is responsible for causing such termination), Lessee shall pay break funding cost to Lessor on said termination day.
7	If the amount that Lessee has paid to Lessor or the amount received by Lessor by

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disposition of the Property under this Agreement is less than the total amount of debts due on said payment date or receipt date under this Agreement for liquidation, such amount shall be appropriated to each debt in the following order. However, debts of the same priority shall be distributed proportionally to the claims each Lessor holds.

(1)	Amount Lessee is required to pay Lessor under the related agreements.
(2)	Default interest related to lease payment, stipulated loss payment, Return Adjustment Fee, payment for exercise of purchase options due under SD Tranche 1 and Toshiba Tranche 1.
(3)	As between lease payments and stipulated loss payments with respect to SD Tranche 1 and Toshiba Tranche 1, the amount equivalent to lease payment interest (each amount due under said Tranche, provided in Attachment 1, Paragraph 3 j (2) and l (2), and Attachment 1, Paragraph 9 (3) and (9) specified in the loan certificate for each individual transaction) .
(4)	As between lease payments and stipulated loss payments with respect to SD Tranche 1 and Toshiba Tranche 1, the amount equivalent to the original principal of the lease payments (each amount due under the relevant Tranche, provided in Attachment 1, Paragraph 3 j (1) and l (1) and Attachment 1, Paragraph 9 (1), (2), (7) and (8) specified in the loan certificate for each individual transaction), or amount equivalent to payments for exercise of purchase options or Return Adjustment Fees.
(5)	Default interest on lease payment, stipulated loss payment, Return Adjustment Fee, and payment for exercise of purchase options related to SD Tranche 2 and Toshiba Tranche 2.
(6)	As between lease payments and stipulated loss payments with respect to SD Tranche 2 and Toshiba Tranche 2, the amount equivalent to lease payment interest (each amount due under the relevant Tranche provided in Attachment 1, Paragraph 3 k (2) and „ (2) and Attachment 1, Paragraph 9 (6) and (12) specified in the loan certificate for each individual transaction).
(7)	As between lease payments and stipulated loss payments with respect to SD Tranche 2 and Toshiba Tranche 2, the amount equivalent to the original principal of lease payments (each amount due under the relevant Tranche provided in Attachment 1, Paragraph 3 k (1) and „ (1) and Attachment 1, Paragraph 9 (4), (5), (10) and (11) specified in the loan certificate for each individual transaction), payments for exercise of purchase options, or amount equivalent to Return Adjustment Fees.
(8)	Other debts.

Article 8 (Immunity from defect liability)

1 Lessor shall lease the Property to Lessee on an as is basis, without warranty of any kind

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	regarding the Property, whether express or implied, and shall not be liable for defects in the Property, whether apparent or hidden. Further, Lessor shall make no guarantee regarding existing obligations etc. regarding the Property or its parts and shall not be liable for defects irrespective of whether the defects are known or not.
2	Lessee, assuming its own responsibility and at its own expense, shall acquire appropriate quality assurance from the manufacturer of the Property or its parts supplier, and at the same time make an arrangement for after-sale service and hereby assigns to Lessor (except where such assignment is prohibited) the rights regarding the Property, such as the right to claim damages and warranties (including the right to claim warranty against defects). However, Lessee may exercise the applicable right to claim damages and warranties in its own name, provided that no event of cancellation has occurred, and may directly receive the benefit of the execution of the right to claim damages and warranties during the lease period from a manufacturer of the Property or its parts suppliers.
3	In the event that Lessee suffers damage or a loss due to lack of performance by the Property, Lessee may, assuming its own responsibility and at its own expense, demand recovery of such damage or loss directly from a manufacturer of the Property or its parts manufacturer under the right set forth in the provision of the previous paragraph, and Lessor shall not be responsible for this. However, Lessee’s obligations under Article 14 shall not be affected.

Article 9 (Burden of loss, damage and risk)

1	If an event of total loss occurs to all or any unit component of the Property (except where Lessor is responsible), Lessee shall immediately notify Lessor of such event and provide Lessor stipulated loss payment and other amounts of debts that are due with respect to the Property and its unit component as of the day of payment on the earlier date of the following dates: (a) 90th day since the occurrence of said event of total loss (except where Lessee is not responsible for the total loss event and Lessor and Lessee have otherwise agreed); or (b) the following bank business day after the day when an amount greater than the stipulated loss payments is paid as insurance coverage prescribed in Article 19.
2	When Lessee has paid the amount prescribed in the previous paragraph, Lessor shall assign Lessee the right to the Property or its unit component that suffered a total loss or the right to a third party acquired as a result of such total loss event (excluding the right to claim compensation for damages for which Lessor should be held liable) on an as is basis with respect to performance without the third party providing funds, credits or other type of guarantee.
3	In the event that Lessor has received compensation from a third party as a result of the occurrence of a total loss event with respect to the Property or its unit component (including, irrespective of characterization, an amount paid to compensate for loss and

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	financial burdens due to the occurrence of such total loss event, but excluding the amount that Lessor should incur to compensate for damage) or received insurance coverage for the total loss, when Lessee has not met the payment date due under Paragraph 1 (irrespective of whether or not Lessee is aware that the payment date due under Paragraph 1 has arrived as a result of the payment of total loss insurance coverage ), the received amount shall be appropriated for payment of stipulated loss payment, and if there is a surplus after the appropriation, the surplus amount shall be immediately returned to Lessee upon subtracting unpaid amounts that Lessee owes Lessor under the related agreements (including late charges), and if there is still deficiency after such appropriation, Lessee shall not avoid payment of said deficient amount. Further, if Lessee has paid said stipulated loss payment at the time referenced above, Lessor shall immediately return the remaining balance of the received amount to Lessee upon subtracting, if any, unpaid amounts due from Lessee due under the related agreements.
4	During the lease period, Lessee shall incur all the risk and relevant expenses related to a loss (including total loss events) or damage (in either case, except when Lessor is responsible) to the Property or its unit component.
5	In the event that a total loss event occurs to a unit component and Lessee has paid stipulated loss payment with respect to said component and paid other unpaid amounts with respect to such component or the total loss, said unit component shall be removed from transactions set forth in the related agreements, and Lessee shall be exempt from obligations to pay future lease payment with respect to said unit component part.
6	With respect to a unit component that Lessee reasonably determines, through Lessee’s consultation with a manufacturer or maintenance company of the Property after delivery of such component, that it does not meet Lessee’s required specification, a total loss event is deemed to have occurred immediately after delivery on the delivery date for reasons for which Lessee is not responsible, and the provisions of this Article shall apply accordingly.
7	In the event that a total loss event has occurred to the Property or its unit component part, or that Lessee judges that the Property or its unit component needs to be replaced for the purpose of doing business, Lessee may request replacement of the Property or its unit component, subject to consent by Lessor, the Borrower and the Lenders (Lessor, the Borrower or the Lenders may not refuse such consent without any rational reasons, which include the case where Lessor judges, at its own discretion, that the value of the Property or its unit component after replacement will decrease compared to the value before replacement (excluding a minor decrease)). Such replacement shall take place at the expense of Lessee if Lessor, the Borrower and the Lenders agree on conditions with respect to a replacement property, its cost and other matters of consideration.

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Article 10 (Representation of Owner)

Lessee shall, on its own responsibility and at its own expense, in a manner clearly recognizable by a third party, place signs indicating Lessor’s ownership of the Property where the Property is located and on main unit components of the Property and certain unit components that Lessor requests.

Article 11 (Quiet Enjoyment)

Lessee shall, unless a cancellation event has occurred, have the quiet enjoyment of the Property, and Lessor shall not disturb such use by Lessee without valid reasons.

Article 12 (Installation and Use)

1	Lessee shall, on its own responsibility and at its own expense, install the Property in Toshiba Yokkaichi Factory in accordance with installation standards or methods provided by the manufacturers of the Property and regulatory authorities, and shall not change the installation location without prior consent of Lessor. If installation of the Property or its unit components takes place outside of Japan, in addition to prior consent of Lessor, the following must be observed: compliance outside of Japan of with the provisions of each Article of this Agreement regarding the Property or its unit components, no compromising of the rights of Lessor, the Borrower and the Lenders with respect to the Property and rights under the related agreements, and compliance with laws of Japan and the United States regarding export and re-export control.
2	Lessee shall comply with all applicable laws with respect to installation, use, operation and handling of the Property (including environmental laws), any request, conditions imposed and instructions provided by the manufacturers of the Property, parts suppliers and the insurers and agreements with such parties and, at the same time, shall use the Property only for legal purposes.
3	Lessee shall, on its own responsibility and at its own expense, keep and maintain records regarding use and operation of the Property.

Article 13 (Possession and Sublease)

1

Lessee shall not, without prior consent of Lessor, transfer the possession of the Property to a third party, or sublease the Property. However, Lessee may, on its own responsibility and at its own expense, without consent of Lessor, transfer the possession of the Property for maintenance or repair to a manufacturer of the Property or approved maintenance or repair provider, and sublease the Property to an SD Group company or a Toshiba Group company.

2

In the event that the transfer of possession or sublease is executed in accordance with the

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previous paragraph, the transfer of possession or sublease shall not affect Lessee’s obligations under this Agreement and shall be subject to the Agreement’s Articles, survival and other provisions, and even if Lessee incurs taxes and public dues as a result of the transfer of possession or subleasing, there shall be no affect on the lease payment or other lease conditions under this Agreement. Further, Lessee shall, on its own responsibility and at its own expense, take all reasonable measures so that Lessor and the Lenders maintain security interests as before (not limited to those expressed in this Agreement).

Article 14 (Maintenance Management)

1	Lessee shall, on its own responsibility and at its own expense, keep the Property in safe condition at all time.
2	Lessee shall, on its own responsibility and at its own expense, perform maintenance and management of the Property in accordance with provisions of law, perform maintenance and repair using a method approved or recommended by a manufacturer of the Property or a parts supplier and a similar method that Lessee has employed with respect to other similar properties and, in the meantime, retain the Property in the same condition at all time as the initial condition of the delivery date (excluding normal wear and tear). Under any circumstances, Lessee shall not perform acts that might cause a significant adverse effect to the manufacturer’s warranty of the Property.
3	Lessee shall, on its own responsibility and at its own expense, keep and maintain records regarding maintenance and repair of the Property, including maintenance log.
4	Lessee may, for the purpose of maintenance and repair provided in Paragraph 2, on its own responsibility and at its own expense, replace parts with substitutes that are similar in performance to the respective parts and owned by Lessee without any obligation to itself (excluding the waived obligations) or may install parts owned by Lessee without any obligation for itself (excluding the waived obligations) in the Property without replacing the parts of the Property. However, in either case, the replacement or installation shall not cause any changes that are reasonably expected to decrease performance etc. of the Property, or have adverse effect on its performance etc.
5	Lessee may, on its own responsibility and at its own expense, after delivery of the Property to Lessee in accordance with Article 4, remove, without installing substitutes, parts that are installed to the Property as an addition, not as a replacement of the parts, or the parts of which removal does not cause reduced performance etc. of the Property.

Article 15 (Change in Original Condition)

Lessee may, on its own responsibility and at its own expense, perform changes, alterations or additions to the Property that are considered necessary or desirable for operations so

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long as such act does not reduce or negatively affect performance of the Property.

Article 16 (Ownership of Parts)

1

Except for circumstances under Paragraph 2, parts that Lessee installed in the Property under Article 14, Paragraph 4, upon installation, shall comprise the Parts that constitute the Property and automatically belong to Lessor and be leased from Lessor to Lessee under this Agreement. With respect to parts that are removed from the Property, the ownership of the removed parts shall be transferred to Lessee while the ownership of the substitutes is transferred to Lessor. However, the parts that are exchanged and removed, though not replaced by similar substitutes, shall still be owned by Lessor regardless of their location and are subject to this Agreement.

2

Lessee may retain the ownership of parts that are installed to the Property, after the Property was delivered to Lessee under Article 4, as an addition, not as replacements, under Article 14, if removal of such parts from the Property is possible without compromising performance of the Property. Lessor may consider said parts in accordance with Article 26, Paragraph 3.

Article 17 (Inspection)

Lessor and its designated parties may, upon prior notice to Lessee no less than 5 bank business days in advance, with respect to the Property or its parts, enter an office, factory or facility of Lessee or its installation location, or on a premise of Lessee and inspect the Property with respect to conditions, installation, use, operation, storage, maintenance and repair. However, when performing the applicable inspection, normal operations of Lessee or its installation location shall not be disturbed and, at the same time, confidentiality, safety, and security restrictions imposed by Lessee or its installation location shall apply.

Article 18 (Obligations)

1

Lessee shall not establish, approve, or cause to create any obligation to the Property and its parts, rights or benefits under this Agreement. Provided, however, such shall not apply to any obligation arising out of (a) rights of Lessor and Lessee provided in this Agreement, (b) retention rights or similar security rights of employees, maintenance providers and repair providers that arise during normal operations of Lessee, for which a payment due date has not arrived and there is no risk of enforcement of obligations with respect to the Property, and (c) rights under the related agreements executed by Lessor, the Lenders and their successor/s and assignee/s (including loan and security agreements ).

2

In the event that an obligation arises that is not excluded by the conditions stipulated in the previous paragraph, Lessee, on its own responsibility and at its own expense, shall remove

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the same in an appropriate method.

Article 19 (Insurance)

1	Lessee shall, on its own responsibility and at its own expense, personally, execute an insurance agreement to cover damage to and loss of the Property at all times during the lease period through the Guarantor, Toshiba Group companies or SD Group companies with an insurance company recognized by Lessor as internationally reliable.
2	Regarding insurance referred to in the previous paragraph, the amount of insurance shall be no less than the amount equivalent to 100% of stipulated loss payment as of the lease payment date immediately before the date of loss event.
3	Lessee shall, in the event that an event insured against, whether total or partial, occurs to the Property, promptly notify Lessor.
4	In the event that damage (partial loss) occurs to the Property, where restoration or repair of the Property is possible, Lessee shall receive the insurance money paid for such event. Upon receiving such insurance money, unless the damage has already been restored or repaired, Lessee shall apply the entire amount of the insurance money to restoration and repair of the Property. Further, in the event that a total loss event occurs, the provisions stipulated in Article 9 shall apply.
5	Prior to the date of transfer of the Property stipulated in Article 4 and at the start of each insurance coverage for the period for which insurance coverage is required pursuant to this Article (at least once a year), Lessee shall obtain documentation that proves the coverage that meets the above conditions from an insurance company prescribed in Paragraph 1 and deliver such document to Lessor.
6	Terms and conditions for insurance set forth in this Article shall, in all respects under any circumstances, not be less than insurance that covers property that is similar to the Property. In the event that terms and conditions of the insurance set forth in this Article become less than the terms and conditions of such other insurance, the terms and conditions of the insurance set forth in this Article shall be improved to the terms and conditions of such other insurance, and Lessee shall promptly conform to the improved terms and conditions.

Article 20 (Representations and Warranties)

1 Lessee represents and warrants the following items as of the day of this Agreement:

(1) That Lessee has concluded the related agreements to which Lessee is a party, has capacity and authority by law and internal corporate rules and regulations of the company to exercise the rights and fulfill the obligations under the related agreements and has processed resolutions of the general meetings of shareholders and other measures necessary by law and internal corporate rules and regulations of

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	the company for the approval of such related agreements and exercise of its own rights and fulfillment of its obligations.
(2)	That preparation, delivery and execution by Lessee of the related agreements to which Lessee is a party does not, in any respects, violate laws, Lessee’s Articles of Association and other documents related to its organizations and provisions of agreements to which Lessee is a party.
(3)	That the related agreements, to which Lessee is a party, are legal, effective and binding agreements of Lessee where implementation in accordance with each provision is possible.
(4)	That preparation and delivery of the related agreements to which Lessee is a party, and performance or fulfillment by Lessee of each intended transaction thereunder do not require in any way approval and license by any government or other public office or court, notification to or registration with government or other public office or court, or other procedure, except for those already completed.
(5)	That there is no pending judicial or administrative procedure in any way that would adversely affect execution of the rights or fulfillment of the obligations by Lessee with respect to the related agreements to which Lessee is a party.
(6)	That Lessee has disclosed to Lessor, the Borrower and the Lenders business plans for the fiscal year during which the execution date of this Agreement falls within the scope determined by Lessee’s directors as reasonably necessary for implementation of this Agreement.

2 Lessor represents and warrants the following items as of the execution date of this Agreement:

(1)	That Lessor has concluded the related agreements to which Lessor is a party has capacity and authority by law and internal corporate rules and regulations of the company to exercise the rights and fulfill the obligations under the related agreements and has processed passed resolutions of internal corporate meetings and other measures necessary by law and internal corporate rules and regulations of the company for the approval of such related agreements and exercise of its own rights and fulfillment of its obligations.
(2)	That preparation, delivery and execution by Lessor of the related agreements to which Lessor is a party does not, in any respects, violate laws, Lessor’s Articles of Association and other documents related to its organizations, and provisions of agreements to which Lessor is a party.
(3)	That the related agreements, to which Lessor is a party, are legal, effective and binding agreements of Lessor where implementation in accordance with each provision is possible.

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(4)	That preparation and delivery of the related agreements to which Lessor is a party, and performance or fulfillment by Lessor of each intended transaction thereunder do not require in any way approval and license by government or other public office or court, notification to or registration with any government or other public office or court, or other procedure, except for those already completed.
(5)	That there is no pending judicial or administrative procedure in any way that would adversely affect execution of rights or fulfillment of obligations by Lessor with respect to the related agreements to which Lessor is a party.

3 Representations and warranties of each item in the previous two paragraphs shall be deemed to be repeated by Lessee and Lessor on the delivery date of each individual transaction and each lease payment date under the circumstances existing on those days.

Article 21 (Covenants)

1 Lessee shall make the following commitments to Lessor:

(1)	Lessee shall manage during the lease period the Property, its unit components and its parts distinctly from other properties.
(2)	Lessee shall fulfill and comply with Lessee’s obligations pursuant to the provisions stipulated in the related agreements (including the Original Purchase Agreements for the purpose of this Agreement).
(3)	In the event that a cause for default or cause that may have a significantly adverse effect on Lessor’s full rights under the related agreements or fulfillment of Lessee’s obligations thereunder arises, Lessee shall notify Lessor to that effect promptly after learning of the occurrence of such events.
(4)	As regards to the related agreements, Lessee shall acquire each consent, permission, approval, license or acceptance from any government or other public office or court that such government or public office or court requires Lessee to acquire in order to continue essentially the same business operations as the present, shall maintain its effect, and also shall abide by all conditions or restrictions imposed thereby.
(5)	Lessee shall provide Lessor and the Lenders, upon their request, with information regarding the financial circumstances and business conditions of Lessor and the Guarantors as Lessor reasonably requests, including financial statements for which Lessee or the Guarantor has no specific confidentiality obligation, and information regarding installation, condition, storage, use, maintenance and repair of the Property after the end of a fiscal year (however, with respect to the Guarantor, at the end of its half year period and fiscal year).
(6)	Lessee shall perform all acts that Lessor reasonably requests as necessary for establishment, transfer or formation of rights or fulfillment of perfection, to the extent

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	that such act is recognized and intended by the related agreements and within the limitations provided thereunder.
(7)	Lessee shall, for each fiscal year, report promptly after the end of each fiscal year to Lessor progress status of business plans of the fiscal years that are reasonably recognized by Lessee’s directors as necessary for implementation of this Agreement.
(8)	If Lessor reasonably demands, Lessee shall cooperate with Lessor and the Lenders to achieve objectives of the related contracts.
(9)	Lessee and the Guarantor shall handle, at their own discretion and responsibility, accounting and financial matters of Lessee and the Guarantor with respect to the transaction under this Agreement and its related agreements.
(10)	Lessee shall ensure that the Guarantor makes no significant changes to the FLASH PARTNERS MASTER AGREEMENT executed between the Guarantor and SanDisk International Limited on September 10, 2004. Provided, however, that this shall not apply in the event that the Lessor and the Lenders agree otherwise.
(11)	Lessee shall cause SanDisk to abide by the following provisions. Provided, however, that this shall not apply in the event that the Lessor and the Lenders agree otherwise as to (1) and (3) below.

(1)	SanDisk shall maintain a long-term debt rating by Standard & Poor’s Rating Services or Moody’s Investors Service at BB-, Ba3 or above respectively.
(2)	SanDisk shall undertake that no lien shall be attached to any SanDisk assets without prior written approval by Lessor. Provided, however, that this shall exclude cases involving normal securitization transactions regarding loan or inventory or any of the permitted liens listed in Attachment 3 below (Permitted Liens).
(3)	SanDisk shall maintain the amount of equity (Total Stockholders’ Equity) indicated in consolidated balance sheet as of the end of each accounting term and mid accounting term of each fiscal year at no less than 1,164 million US dollars until the termination of this Agreement and completion of fulfillment of all of Lessee’s and SanDisk’s obligations to Lessor under this Agreement.

Article 22 (Indemnity and Expenses Liabilities)

1 Lessee shall, except as otherwise provided in this Article, be responsible and indemnify for all obligations and loss etc. related to expenses that arise from ownership, possession, use, application, operation, lease, sublease, installation, storage, maintenance, repair, improvement, modification, insurance, obligations etc., delivery, purchase, transfer, return, performance etc., structure, design, specification, functions, durability, operability, manufacture of the Property, unit component or its parts and/or payments due under the

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	related agreements (except payment of property purchase price under the Sale and Purchase Agreement and payment of principal and interest under the Loan Agreement), taxes and public duties imposed on all or any of persons to be indemnified in direct or indirect relation to any of the subject transactions, and loss etc. to be incurred by all or any of persons to be indemnified and, if there is an instruction from the persons to be indemnified, directly pay to the authorities or a third party. However, Lessee shall have no obligation of indemnity or payment stipulated under this paragraph for either taxes or public duties imposed with respect to net profit of the persons to be indemnified or taxes or public duties imposed based on or in respect of net profit, or taxes and public duties otherwise provided in this paragraph.
2	In respect of the expenses for preparation, drafting and execution of the related agreements, each party shall pay its own attorney’s fee.
3	Expenses arising from fulfillment of obligations and transactions under the related agreements shall be determined by the express provisions thereof and by the following:

(1)	Lessee shall bear the bank fees with respect to payments etc. stipulated in Article 7.
(2)	Lessee shall bear the expenses including attorney’s fees with respect to Lessee exercising purchase options or returning the Property.
(3)	Expenses including attorney’s fees that arise from default by any of parties involved shall be incurred by the defaulting party.

4 Taxes and public duties with respect to the related agreements shall be determined by the express provisions thereof and by the following.

(1)

Except as otherwise agreed by and between parties to this Agreement, with respect to consumption tax imposed on payment of sales and purchase price and lease payments for the Property due under the related agreements, the parties involved that make these payments shall pay the amount of consumption tax to the receiving parties along with these payments. Provided, however, this shall not apply in the case that any of the parties to this Agreement may be exempt from consumption tax under the provisions of consumption tax law.

(2)

Fixed property tax imposed on the Property shall be paid by those subject to such tax by operation of law. However, if Lessor is subject to such payment, Lessee shall pay Lessor the amount equivalent to the fixed property tax.

5	Taxes and public duties that Lessee indemnifies or pays those persons to be indemnified under this Article shall be based upon net amount after tax.
6	If the loan interest rate is increased or each Borrower is charged with additional costs in accordance with each Loan Agreement, Lessor may, upon written notice, based on charges from each Borrower, increase lease payment applicable to SD Tranche 1 or Toshiba Tranche 1 using a reasonable calculation method, or may demand payment of the relevant

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additional costs to Lessee. In such case, each amount of the applicable payment for the exercise of purchase options, Return Adjustment Fee, repayment standard fee and stipulated loss payment shall be recalculated as well.

7

In the event that taxes and public duties and other expenses to be incurred by Lessee pursuant to the related agreements are charged to Lessor or paid in advance by Lessor, Lessee shall immediately pay Lessor, upon request by Lessor, the amount of the relevant payment and interest calculated from the payment date in accordance with provisions of Article 27. Provided, however, Lessor shall immediately notify Lessee if Lessor is charged with such taxes and public duties and other expenses, or has paid such amount.

Article 23 (Number of individual transactions and change of deliverable period)

1

Lessee and Lessor shall perform the first individual transaction in the period starting [*] and ending [*], and may execute up to [*] times in [*] months after the first individual transaction. Provided, however, the number of individual transactions and deliverable period shall be set forth in Attachment 1, Paragraph 1.

2

Lessee and Lessor may, if prior written approval of the Lender and the Borrower are obtained, change the execution period of individual transactions and the number of individual transactions provided in the previous paragraph, and in this case Lessee and Lessor shall, if a change is needed regarding terms and conditions of payment, including lease payment, stipulated loss payment, payment for exercise of purchase option payments and Return Adjustment Fee, discuss such changes.

Article 24 (Purchase Options)

1

Lessee may, for each individual transaction, by notifying Lessor no less than 30 days in advance of each lease payment date, purchase all of the Property or any unit component (provided, however, exercise of purchase options for any unit component shall be in accordance with the provisions in Paragraph 4 below) by paying Lessor the relevant payment for exercise of purchase option and the other amounts that are due with respect to the Property or said unit component as of said lease payment date (provided, however, for each individual transaction on the final lease payment date, whether or not there is notification from Lessee, unless the leased item is returned pursuant to Article 25, the purchase options shall be deemed to have been exercised). Notice of exercise of purchase options under this paragraph shall not be withdrawn.

2

If Lessee exercises purchase options stipulated in the previous paragraph and has paid the

^* Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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	amount as prescribed in the previous paragraph, Lessor’s ownership and any other rights with respect to such Property or its unit component shall be transferred to Lessee on an as is basis without warranty and others at the time of completion of its payment. Provided, however, Lessor shall warrant to Lessee that no obligations etc. with respect to the Property or its unit component that arise from causes created by Lessor or attributable to Lessor exist at the time of such transfer.
3	Lessor shall deliver a certificate of transfer provided in Attachment 5 to Lessee when receiving the amount as prescribed in Paragraph 1 has been paid.
4	Exercise of purchase options with respect to some unit components and not the entire Property may be allowed only if the total amount of property purchase cost of said unit component that Lessee is to purchase on a lease payment date pursuant to this Article exceeds [*] Yen and Lessor’s consent is obtained (Lessor may not reject such consent without any rational reasons, which include the case that Lessor determines, at its own discretion, that the relative value of the remaining Property against payment for exercise of purchase options of the Property after the purchase of said unit component has decreased (excluding slight decrease) compared to that of the Property before such purchase.) Further, of the payment for exercise of purchase options, the maximum amount that is appropriated to the original principal of each of SD Tranche 1 and Toshiba Tranche 1 shall be the amount calculated by multiplying a property purchase cost of said unit component by rates provided in the stipulated loss payments column (A) and (C) of a loan certificate.
5	Lessee shall incur all expenses regarding exercise of purchase options by Lessee.

Article 25 (Return)

1 Lessee may, in accordance with the following provisions, for each individual transaction, return to Lessor all unit components that are subject to said individual transaction at the location designated by Lessor on the anniversary of the delivery date each year during the lease period (hereinafter referred to as “return date”) by notifying Lessor and the Lenders no less than [^*] days in advance. Provided, however, if any of reasons for cancellation or default (including reasons for cancellation and for default with respect to provisions regarding return in this Article) has occurred on such return date, or purchase by exercising purchase options pursuant to Article 24 takes place on the same day as the return date, Lessee may not return the Property under this Article. Notification of exercise of return options pursuant to this Article may be withdrawn until [^*] days before such return date.

(1) When Lessee returns the Property to Lessor pursuant to this Article, the Property shall

^* Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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	be in a good condition as at the time of delivery in Article 4, its normal use is possible, and that Lessor determines that all of the requirements for conditions at the time of return of the Property prescribed in Attachment 6 are met, except for normal wear and tear and changes etc. performed in accordance with provisions of Article 14, Paragraph 4 or 5, or Article 15.
(2)	Lessee shall deliver, with return of the Property to Lessor, in addition to a maintenance and repair log of the Property, all records or copy thereof of installation, storage, use, operation, maintenance and repair of the Property and, if Lessor requests, a certificate by the Property manufacturer, the Property parts supplier or a property maintenance and repair provider approved by the property manufacturer that certifies the items provided in Item (1) of this paragraph.
(3)	Lessee shall approve that Lessor, the Lenders or a party that is to become a buyer of the Property that Lessor has designated (and related parties thereof) enters the office and factory of Lessee or its installation location to inspect the Property prior to return of the Property in accordance with Article 17.
(4)	Lessee shall, on the return date, with return of the Property, pay Lessor the Return Adjustment Fee for retuning the Property as of the return date and other amounts due under the related agreements.
(5)	If Lessor incurs a debt against Lessee under the related agreements on the return date, Lessor shall, on the return date, upon return of the Property, pay Lessee the relevant amount.
(6)	Return of the Property under this Article shall be allowed only with respect to all unit components subject to the relevant individual transaction, and shall not be allowed with respect to only some unit components.
(7)	Lessee shall, in electing return under this Article, upon discussion with Lessor, work to offer a third party who purchases the Property with purchase conditions with which Lessor is objectively satisfied. Provided, however, this shall not apply in the case where the Property or any of its unit components is discarded in accordance with Paragraph 4.

2	Lessor shall, when receiving the returned Property, prepare a certificate of return as provided in Attachment 4 and delivery it to Lessee.
3	Lessee shall, if requested by Lessor, on its own responsibility and at its own expense, hold in trust the Property for Lessor for maximum of [*] after the return date, and shall perform maintenance management, inspection and maintenance in accordance with this Agreement

^* Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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	in order to maintain the same level of performance etc. as on the delivery date by the Property at all times, and if the Property is damaged, regardless of the cause, shall restore it to its original condition.
4	Notwithstanding the provisions of Paragraph 1, Lessor may request Lessee to dispose all or a part of unit components that constitute the Property before the return date. In this case, Lessee shall, upon delivery of acknowledgement to Lessor, on its own responsibility and at its own expense, immediately dispose of the requested unit components within Japan. Lessee shall, for such disposition, comply with the applicable laws (including environmental laws). Provided, however, if Lessor needs to dispose on its own behalf, Lessee shall bear such cost and provide necessary support. In any event, Lessor may request Lessee to provide documentation that confirms disposition or any related documents, or copies thereof.
5	Lessee shall incur maintenance expense, removal expense, transport expense, storage expense, resale expense and all other expenses related to the return of the Property, and all expenses related to disposition of the Property.
6	If Lessor sells the Property to a third party within [*] of return of the Property by Lessee to Lessor under this Article, and if the net amount after deducting taxes and public dues, sales fee, and any other expenses from the received amount of the sales proceeds exceeds the Return Adjustment Fee of the Property as of the return date, Lessor shall pay Lessee the amount equivalent to [*]% of such difference of such sales proceeds and the Return Adjustment Fee. Lessee shall incur taxes and public duties charged on such payment.
7	In disposing Property that is returned pursuant to this Article, conditions and methods etc. of disposition shall be determined by discussion with SD Lessor RA and Toshiba Lessor RA.

Article 26 (Termination of Agreement)

1 Lessor may, upon the occurrence of any one of the following events, with only written notice without formal demand, accelerate all payments owing by Lessee under this Agreement or any or all of the individual transactions and terminate this Agreement or any or all of the individual transactions.

(1)	If Lessee defaults a lease payment and payment for other debts due under the related agreements and does not make the relevant payments within 2 bank business days of receipt of written notice to that effect from Lessor.
(2)	If Lessee neglects to obtain and keep required insurance in accordance with this

^* Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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	Agreement.
(3)	If Lessee neglects to remove obligations etc. in accordance with this Agreement.
(4)	If Lessee violates the provisions of the related agreements, in addition to the previous Item, and does not correct the relevant violations within 10 bank business days of receipt of written notice to that effect from Lessor.
(5)	If Lessee or a Guarantor is subject to compulsory execution, petition for auction or disposition for failure to pay taxes and public duties, or petition for the commencement of bankruptcy proceedings (including petition for similar procedures or dispositions under foreign law). Provided, however, except where the relevant petition or disposition is cancelled or dissolved within 30 days.
(6)	If Lessee or a Guarantor starts private dissolution, passes a resolution to liquidate or dissolve all or the major part of the business operation (provided, however, except in the case of corporate reorganization that does not follow a procedure provided in Item (5) for Lessee or the Guarantor, and Lessor, the Borrower and the Lenders have consented thereto), or receives an order of business suspension of all or major part of business or operation or other discontinuance of all or major part of business or operation from a public office (It shall be considered to fall under this Item (6) if operation of the Property by Lessee has ceased for more than 2 months and without any prospect for resumption).
(7)	If Lessee or a Guarantor transfers all or major part of its business. Provided, however, except in the case of corporate reorganization that does not follow a procedure of Item (5) for Lessee or the Guarantor, and Lessor, the Borrower, the Lenders have consented thereto.
(8)	If Lessee or a Guarantor stops payment or suffers suspension by a bill clearing house.
(9)	If the direct or indirect rate of equity participation by each Guarantor with respect to Lessee changes. Provided, however, except where Lessor, the Borrower and the Lenders otherwise have consented thereto.
(10)	If the FLASH PARTNERS MASTER AGREEMENT executed between Toshiba Corporation, SanDisk Corporation and SanDisk International Limited on September 10, 2004 is cancelled, dissolved, or terminated.
(11)	If Lessee or a Guarantor suffers acceleration with respect to debt greater than 20 million US dollars. Provided, however, that this shall not include cases where it is determined that the creditor has consented or agreed to the delay (including cases where the creditor is silent pursuant to commercial practices).
(12)	If the amount of equity (Total Stockholders’ Equity) in consolidated the balance sheet as of the last of accounting term and mid accounting term of each fiscal year of SanDisk becomes less than 1,164 million US dollars.

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(13)

If a long-term debt rating of SanDisk by Standard & Poor’s Rating Services or Moody’s Investors Service is decreased to below BB- or Ba3, respectively

(14)

In addition to the foregoing items, there exists a significant cause, objectively recognized, whereby voluntary and smooth performance of the obligations due under this Agreement becomes difficult due to a significant change in conditions regarding assets and creditworthiness of Lessee or a Guarantor, and there is no discussion of cure measures arranged within 30 days of receipt of notice to that effect from Lessor by Lessee.

2

If this Agreement is terminated under the previous paragraph, Lessee shall return the Property to Lessor on the date specified by Lessor for termination (hereinafter referred to as “termination date”), and pay all amounts due that have not been paid as of the termination date, including unpaid lease payments due to be paid on a lease payment date before the termination date and late charges thereof and stipulated loss payment as of the termination date as provided in Attachment 1, Paragraph 9.

3

In the event that this Agreement is terminated in accordance with Paragraph 1, Lessor shall, following its selection, liquidate all or a portion of debts of the previous paragraph by method provided in each of the following Items.

(1)	Upon disposing of the Property by sale under sales conditions determined at its own discretion, the amount equivalent to the amount of such net sales proceeds from which expenses have been deducted is less than the amounts owing under the previous paragraph.
(2)	Upon appraising fair market price of the Property, the amount equivalent to such appraisal amount from which expenses are deducted is less than the amounts owning under the previous paragraph.

	In addition, of the amounts owing under the previous paragraph, Lessee shall not avoid liability for any of such amount remaining after such liquidation. Lessor shall immediately return to Lessee the remaining balance after the total amounts owing under the previous paragraph is satisfied by such liquidation.
4	When Lessee returns the Property pursuant to Paragraph 2, conditions of the Property, method of return and others shall be determined by the provisions of Article 25, unless otherwise provided in this Article.
5	Notwithstanding the provisions of each of the previous paragraphs, Lessee may, until Lessor disposes of the Property or its unit components by sale in accordance with Paragraph 3, purchase the Property or its unit component that have not been sold by paying to Lessor stipulated loss payment with respect to the Property or unit component as of the termination date, unpaid lease payments and other amounts that Lessee is required to pay to Lessor under Paragraph 2 (including late charges) (provided, however, except for a case of

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	purchasing the entire Property, this may be approved only when Lessor’s consent is provided ). If Lessee purchases the Property or its unit component by making such payment to Lessor, Lessor shall transfer title to the Property or its unit component to Lessee on an as is basis without warranty. Such transfer shall be pursuant to provisions of certificate of transfer in the form provided in Attachment 5.
6	Lessor may, with respect to every term and condition of the related agreements, seek injunction of defaults or specific performance, claims for compensation regarding losses or liability suffered by Lessor, and any other remedies recognized by law.
7	In the event that any reason for termination set forth in Paragraph 1 (12) or (13) occurs, that termination event shall be deemed not to have occurred if SanDisk, the SD Lessors, and the SD Lenders have agreed on the supplementary security to be supplied by SanDisk, or if they have agreed on the amount of lease and stipulated loss payment pursuant to this Agreement and on revision of the spread used to calculate the interest rate pursuant to the Loan Agreement.
8	Lessee may, in the event that any reason for termination provided in each Item of Paragraph 1 occurs, by obtaining prior written consent of Lessor, transfer the status of Lessee under this Agreement and its related agreements to both or either of the Guarantors. In such case, the relevant reason for termination is cured and shall be deemed to not have occurred.
9	In the event that a reason for termination provided in Paragraph 1 (5) through (8) and (10) through (14) occurs for either Guarantor, the other Guarantor may succeed the status of Guarantor within 30 days of the date of the occurrence of said event if such other Guarantor delivers a guarantee or security acceptable to Lessor and the Lenders, then in such case, such termination event shall be deemed not to have occurred.

Article 27 (Default Interest)

If Lessee defaults in the payment of money to Lessor under this Agreement, Lessee shall pay late charges at the interest rate of [^*]% per annum (on a prorated daily basis with 1 year as 360 days) for that delinquent period.

Article 28 (Transfer of Rights and Obligations)

Lessee and Lessor shall not, without obtaining prior written approval of the other party, transfer to a third party the right of use of the Property and rights and obligations under this Agreement, or give the same as security. Provided, however, except for the following cases:

^* Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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(1)	For each individual transaction, SD Lessor may transfer to the SD Borrower under the SD Sale and Purchase Agreement regarding Receivables any and all obligations related to the lease payments, stipulated loss payments, payments for purchase options, exercise, Return Adjustment Fees, break funding costs, late charges, and any other amounts related to SD Tranche 1.
(2)	For each individual transaction, Toshiba Lessor may transfer to the Toshiba Borrower under the Toshiba Sale and Purchase Agreement regarding Receivables any and all obligations related to the lease payments, stipulated loss payments, payments for purchase options exercise, Return Adjustment Fees, break funding costs, late charges, and any other amounts related to Toshiba Tranche 1.
(3)	For each individual transaction, the SD Borrower may, as security for the SD Loan Agreement for the SD Lenders, transfer the assigned obligations of Paragraph 1 under the SD Agreement on Security Assignment regarding Claims.
(4)	For each individual transaction, the Toshiba Borrower may, as security for the Toshiba Loan Agreement for the Toshiba Lenders, transfer the assigned obligations of Paragraph 1 under the Toshiba Agreement on Security Assignment regarding Claims.
(5)	For each individual transaction, Lessor may, as security for the Loan Agreement for the Lenders, assign the Property under the Master Agreement on Commitment for Security Assignment regarding Claims.

Lessee shall hereby approve such transfers of the obligations and the establishment of security rights/liens and shall cooperate with Lessor in preparation and delivery of documents requested by Lessor. In addition, Lessee and SD Lessor shall approve the exercise of the SD Lessor’s rights provided in this Agreement to the extent necessary for performance of assigned obligations the SD Borrower has acquired pursuant to the SD Sale and Purchase Agreement regarding Receivables, and Lessee and the Toshiba Lessor shall approve the exercise of Toshiba Lessor’s rights provided in this Agreement to the extent necessary for performance of the assigned obligations that the Toshiba Borrower has acquired under the Toshiba Sale and Purchase Agreement regarding Receivables.

Article 29 (Limitations on Recourse to the Property)

1 Except as provided in Paragraph 3 of this Article, performance of monetary obligations that Lessee owes to the SD Lessor under this Agreement shall be recoverable against only the following money and other assets (hereinafter referred to as “SD recourse property”), and Lessee shall not be responsible for default by any parties to the related agreements other than itself or price fluctuations or any inability to dispose of the Property. Except in respect of the SD recourse property, the SD Lessor shall not file petition for attachment,

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provisional attachment or other compulsory procedures, or protective orders against Lessee’s assets, and shall not seek bankruptcy procedures against Lessee.

(1)	Amounts equal to lease payment, stipulated loss payment, Return Adjustment Fee, payment for exercise of purchase options, break funding costs and late charges related to SD Tranche 1 and SD Tranche 2 and other monies related to SD Tranche 1 and SD Tranche 2 under the Master Lease Agreement.
(2)	Monetary amounts that the SD Lessor may claim pursuant to the SD Guarantee Agreement with respect to the rights related to the monies stipulated in the previous Item.
(3)	The SD Lessor’s shared equity of the Property.
(4)	Amounts that the SD Lessor receives as a result of exercise or execution of rights under the related agreements (irrespective of compulsory or voluntary procedures).

2 Except as provided in Paragraph 3 of this Article, performance of monetary obligations that Lessee owes to the Toshiba Lessor under this Agreement shall be recoverable against only the following money and other assets (hereinafter referred to as “Toshiba recourse property”) and Lessee shall not be responsible for default by any parties to the related agreements other than itself, price fluctuations or any inability to dispose of the Property. Except in respect of the Toshiba recourse property, the Toshiba Lessor shall not file petition for attachment, provisional attachment or other compulsory procedures, or protective orders against Lessee’s assets, and shall not seek bankruptcy procedures against Lessee.

(1)	Amounts equal to lease payment, stipulated loss payment, Return Adjustment Fee, payments for exercise of purchase options, break funding costs and late charges related to Toshiba Tranche 1 and Toshiba Tranche 2 and other monies related to Toshiba Tranche 1 and Toshiba Tranche 2 under the Master Lease Agreement.
(2)	Monetary amounts that the Toshiba Lessor may claim pursuant to the Toshiba Guarantee Agreement with respect to the rights related to the monies stipulated in the previous Item.
(3)	The Toshiba Lessor’s shared equity of the Property.
(4)	Amounts that the Toshiba Lessor receives as a result of exercise or execution of rights under the related agreements (irrespective of compulsory or voluntary procedures).

3 Notwithstanding the provisions of the previous two paragraphs, Lessee shall not be exempt from liability and shall owe absolute obligations and responsibility to Lessor under the Master Lease Agreement or its related agreements with respect to loss, damage, expenses and cost Lessor incurs or suffers for reasons attributable to Lessee’s responsibility and in that case the provisions of the previous two paragraphs shall not apply. Further, this paragraph shall not extend to the other Tranche the several obligations for each Tranche of

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	the respective Guarantor under the Guarantee Agreements.
4	The provisions of Paragraph 1 and Paragraph 2 shall only restrict sources of payment with respect to payment of monetary obligations provided in the same paragraphs, and shall not affect the existence of such debts or reduce such debts, nor restrict exercise of Lessor’s rights under the related agreements or security rights/liens held by Lessor.

Article 30 (Notices, etc.)

All written notices necessary under this Agreement shall be sent by postal mail, personal delivery or facsimile transmission to the notified parties provided on Attachment 7. In addition, external administrative services of Lessor such as notification and other transmissions shall be performed by IBJ Leasing Co., Ltd. on behalf of Lessor, expect as otherwise provided in this Agreement.

Article 31 (Modification of Agreement)

This Agreement shall not be modified without written consent of all parties concerned.

Article 32 (Confidentiality)

1	Each party to this Agreement shall pledge to keep strictly confidential contents of this Agreement and its related agreements and information or documents received through negotiations thereon in accordance with the provisions thereof for [*] years from the day of execution of this Agreement. Provided, however, except as in the case of disclosure of information or documents that are already publicly known, disclosure that accompanies marketing of the Property, disclosure that is necessary for exercise of rights or fulfillment of obligations under the related agreements, and disclosure at the request of tax authorities and other related authorities or disclosure due to prior consent of all parties to this Agreement.
2	Period of confidentiality provided in the previous paragraph shall be automatically renewed for [*] year, unless there is notice of cancellation of confidentiality from Lessee, and the same shall apply thereafter. Provided, however, Lessor may request confirmation from Lessee with respect to the extension of period of confidentiality at the [*] year or at the end of an extended period.
3	In the event that a party to this Agreement infringes the obligations of Paragraph 1, said party shall compensate economic damages incurred by other parties.

^* Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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Article 33 (Governing Law)

This Agreement shall be in every respect governed by, and construed in accordance with, the laws of Japan.

Article 34 (Jurisdiction)

The Tokyo District Court shall have the exclusive jurisdiction for any and all disputes arising out of or in connection with this Agreement.

In order to verify this Agreement described above, on the date first above written, Lessor and Lessee shall prepare 4 originals of this Agreement and each shall maintain one set.

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(Basic Lease Contract)

SD Lessor	:	IBJ Leasing Co., Ltd.
as well as
Toshiba Lessor

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(Basic Lease Contract)

SD Lessor	:	Sumisho Lease Co., Ltd.
as well as
Toshiba Lessor

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(Basic Lease Contract)

SD Lessor : Toshiba Finance Corporation

- 39 -

(Basic Lease Contract)

Lessee : Flash Partners Yugen Kaisha

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Lease Agreement, Attachment 1

Lease Terms and Conditions

1 Designation of scheduled delivery day, the last possible date for delivery and of Property

Lessee shall designate the unit components with serial numbers, etc. for the purpose of objective identification and a delivery date that falls on a business day [^*] on [^*], which Lessee notifies to Lessor 20 days to the delivery date (provided, however, that for the first transaction, Lessee and Lessor have agreed otherwise) as a delivery date for each individual transaction and the last delivery date during this period as the last delivery date under this Agreement. Lessee and Lessor shall conduct the first individual transaction during the period from [^*] through [^*], and they may execute up to [^*] transactions in the following [^*] months. Provided, however, that Lessee and Lessor may change the period mentioned above and the number of transactions to be implemented pursuant to Article 23.

2 Lease period

For each individual transaction four or five years from the delivery date described in the related loan certificates (including delivery date but excluding lease expiration date).

3 Calculation of lease payments

The total amount of the following SD Tranche 1, SD Tranche 2, Toshiba Tranche 1, and Toshiba Tranche 2.

j	(SD Tranche 1)
	For each lease payment calculation period, the total sum of (1) property purchase price for the Property in each individual transaction multiplied by the ratio in the following (A); and (2) the interest amount calculated pursuant to the following Paragraph 9 (1) as of the lease payment date with respect to the lease payment calculation period immediately prior to the relevant lease payment calculation period (in the event that the prior lease payment calculation period does not exist, delivery date is used) multiplied by the interest rate of Euro Yen TIBOR with respect to the first date through the last date of the lease payment calculation period plus the following SD Tranche 1 spread (calculated on a pro-rate basis with 360 days a year).
	(SD Tranche 1 spread)

^* Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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In the event that a long-term debt rating of SanDisk by Standard & Poor’s Rating Services or Moody’s Investors Service (hereinafter collectively referred to as the “designated rating agency”) as of the date of this Agreement is “BB-“ or “Ba3” or below respectively;	[*] % p.a.
In the event that a long-term debt rating of SanDisk by the designated rating agency is “BB” or “Ba2” respectively;	[*] % p.a.
In the event that a long-term debt rating of SanDisk by the designated rating agency is “BB+” or “Ba1” or above respectively.	[*] % p.a.

	Further, changes in SD Tranche 1 spread in the above-referenced formula shall apply from the lease payment calculation period that arrives after a formal public announcement by a designated rating agency (provided, however, that if said public announcement is made after 10 business days prior to the start of the lease payment calculation period, they shall apply from the lease payment calculation period following the next lease payment calculation period).
k	(SD Tranche 2)
	For each lease payment calculation period, the total sum of (1) the amount obtained by multiplying the purchase price of the Property in each individual transaction by the ratio in the following (B); and (2) the interest amount calculated pursuant to the following Paragraph 9 (4) as of the lease payment date with respect to the lease payment calculation period immediately prior to the lease payment calculation period (delivery date in the event that the immediately prior lease payment calculation period does not exist) multiplied by the interest rate of Euro Yen TIBOR with respect to the first date through the last date of the lease payment calculation period plus the following SD Tranche 2 spread (calculated on a pro-rate basis with 360 days a year).
	(SD Tranche 2 spread)

In the event that a long-term loan rating of SanDisk as of the day of this Agreement by the designated rating agency is “BB-“ or “Ba3” or below respectively;	[*]% p.a.
In the event that a long-term loan rating of SanDisk by the designated rating agency is “BB” or “Ba2” respectively;	[*]% p.a.
In the event that long-term loan rating of SanDisk by the designated rating agency is “BB+” or “Ba1” or above respectively;	[*]% p.a.

Further, changes in the SD Tranche 2 spread based on the above-referenced formula shall apply from the lease payment calculation period after a formal public announcement by a

^* Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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	designated rating agency (provided, however, that if said formal announcement is made after 10 business days prior to the first date of lease payment calculation period, the change shall apply from the lease payment calculation period following the next lease payment calculation period).
l	(Toshiba Tranche 1)
	For each lease payment calculation period, the total sum of (1) the amount obtained by multiplying the purchase price of the Property in each individual transaction by the rate in the following (C); and (2) the interest amount calculated pursuant to the following Paragraph 9 (7) as of the lease payment date with respect to the lease payment calculation period immediately prior to the relevant lease payment calculation period (delivery date in the event that the immediately prior lease payment calculation period does not exist) multiplied by the interest rate of Euro Yen TIBOR with respect to the first date through the last date of the lease payment calculation period plus [*] %p.a. (calculated on a pro-rate basis with 360 days a year).
m	(Toshiba Tranche 2)
	For each lease payment calculation period, total sum of (1) amount obtained by multiplying a purchase price of the Property in each individual transaction by the ratio in the following (D); and (2) interest amount calculated pursuant to the following Paragraph 9 (10) as of the lease payment date with respect to the lease payment calculation period immediately prior to the relevant lease payment calculation period (delivery date in the event that the immediately prior lease payment calculation period does not exist) multiplied by the interest rate of Euro Yen TIBOR with respect to the first date through the last date of the lease payment calculation period plus [*]% p.a. (calculated on a pro-rate basis with 360 days a year).

(A) Provided in loan certificate regarding the relevant individual transaction

(B) Provided in loan certificate regarding the relevant individual transaction

(C) Provided in loan certificate regarding the relevant individual transaction

(D) Provided in loan certificate regarding the relevant individual transaction

In this paragraph, “Euro Yen TIBOR” shall be the rate of Yen offered trade for a three-month term (per annum) (for the final payment due date), indicated on Telerate Screen 23070 pursuant to the Japanese Bankers Association Euro-Yen Public Announcement Rules designated by the Japanese Bankers Assoc., as of 11:00 a.m. Japan time on the date of loan (in the event of the first

^* Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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	payment due date) or the date two bank business days prior to the previous interest calculation date (as defined in Article 1). Provided, however, that in the event that the lease payment calculation period is less than three months, the rate shall be separately defined in the loan certificate.
4	Lease payment date
	In each individual transaction, a corresponding date three months after each delivery date shall be the first lease payment date, followed by a corresponding delivery date for each subsequent three-month period (in the event that a delivery date falls on the last bank business day of a month, the last bank business day of each three-month period shall be the lease payment date). However, in the event that the relevant corresponding date is not a bank business day, the payment date shall be determined pursuant to the provisions of Article 7, Paragraph 3 of this Agreement.
5	Lease payment calculation period
	In each individual transaction, a period that starts on the delivery date and ends on the date a day before the first lease payment date shall be the first lease payment calculation period, followed by a period that starts on the following day of the last date of the prior lease payment calculation period and ends on a day before the following lease payment date. Provided, however, that in the event that this Agreement is cancelled before termination, the last lease payment calculation period is until the relevant cancellation date.
6	Payment for exercise of purchase option amounts
	As described in the relevant loan certificate for each individual transaction.
7	Return Adjustment Fee
	As described in the relevant loan certificate for each individual transaction.
8	Repayment standard fee
	As described in the relevant loan certificate for each individual transaction.
9	Stipulated loss payment
	The total sum of the following (1), (4), (7) and (10) with respect to the delivery date or each lease payment date. Provided, however, that the lease payment as of the relevant lease payment date shall be paid separately. In the event that a date on which a stipulated loss payment shall be paid is neither a delivery date nor lease payment date, it shall be the total sum of the following (2), (3), (5), (6), (8), (9), (11) and (12).

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(SD Tranche 1)

(1)	The amount obtained by multiplying the purchase price for the Property or unit component purchase price with respect to the delivery date or lease payment date by the rate referenced in the following (A)
(2)	The amount obtained by multiplying by the rate in the following (A) with respect to the delivery date immediately before the date on which payment should be made for the purchase price of the Property or its unit component part or lease payment date.
(3)	The amount of interest calculated by multiplying the amount mentioned above in (2) by the interest rate of Euro Yen TIBOR stipulated in the list attached to the Loan Agreement, Paragraph 6 (3) with respect to a period from the first date of the lease payment calculation period through the date on which a stipulated loss payment should be paid plus the SD Tranche 1 spread mentioned below (calculated on a pro-rate basis with 360 days a year).
	(SD Tranche 1 spread)

In the event that a long-term debt rating of SanDisk by the designated rating agency as of the day of this Agreement is “BB-“ or “Ba3” or below respectively;	[*]% p.a.
Long-term debt rating of SanDisk by the designated rating agency is ”BB” or “Ba2” respectively;	[*]% p.a.
Long-term debt rating of SanDisk by the designated rating agency is “BB+” or “Ba1” or above respectively.	[*]% p.a.

Further, the above changes shall apply only when a formal public announcement by a designated rating agency has been made at least 10 bank business days before the immediately preceding delivery date or the lease payment date.

(SD Tranche 2)

(4)	The amount obtained by multiplying the purchase price for the Property or its unit component purchase price with respect to the delivery date or lease payment date by the rate referenced in the following(B)
(5)	The amount obtained by multiplying by the rate in the following (B) with respect to the delivery date immediately before the date on which payment should be made for the purchase price of the Property or its unit component part or lease payment date.
(6)	The amount of interest calculated by multiplying the amount mentioned above in (5) by the interest rate of Euro Yen TIBOR stipulated in the list attached to the Loan Agreement, Paragraph 6 (3) with respect to a period from the first date of the lease payment calculation

^* Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

- 45 -

period through the date on which a stipulated loss payment should be paid plus the SD Tranche 2 spread mentioned below (calculated on a pro-rate basis with 360 days a year).

(SD Tranche 2 spread)

Long-term loan rating of SanDisk as of the day of this Agreement by the designated rating agency is “BB-“ or “Ba3” or below respectively;	[*]% p.a.
Long-term loan rating of SanDisk is “BB” or ”Ba2” respectively;	[*]% p.a.
Long-term loan rating of SanDisk by the designated rating agency is “BB+” or “Ba1” or above respectively;	[*]% p.a.

Further, the above changes shall apply only when a formal public announcement by a designated rating agency has been made at least 10 bank business days before the immediately preceding delivery date or the lease payment date.

(Toshiba Tranche 1)

(7)	The amount obtained by multiplying the purchase price for the Property or its unit component purchase price with respect to the delivery date or lease payment date by the rate referenced in the following(C).
(8)	The amount obtained by multiplying by the rate in the following (C) with respect to the delivery date immediately before the date on which payment should be made for the purchase price of the Property or its unit component part or lease payment date.
(9)	The amount of interest calculated by multiplying the amount mentioned above in (8) by the interest rate of Euro Yen TIBOR stipulated in the list attached to the Loan Agreement, Paragraph 6 (3) with respect to a period from the first date of the lease payment calculation period through the date on which a stipulated loss payment should be paid plus [*]% p.a. (calculated on a pro-rate basis with 360 days a year).

(Toshiba Tranche 2)

(10)	The amount obtained by multiplying the purchase price for the Property or its unit component purchase price with respect to the delivery date or lease payment date by the rate referenced in the following (D).
(11)	The amount obtained by multiplying by the rate in the following (D) with respect to the delivery date immediately before the date on which payment should be made for the purchase price of the Property or its unit component part or lease payment date.
(12)	The amount of interest calculated by multiplying the amount mentioned above in (8) by the interest rate of Euro Yen TIBOR stipulated in the list attached to the Loan Agreement,

^* Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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Paragraph 6 (3) with respect to a period from the first date of the lease payment calculation period through the date on which a stipulated loss payment should be paid plus [^*]% p.a. (calculated on a pro-rate basis with 360 days a year).

(A) Provided in loan certificate regarding the relevant individual transaction

(B) Provided in loan certificate regarding the relevant individual transaction

(C) Provided in loan certificate regarding the relevant individual transaction

(D) Provided in loan certificate regarding the relevant individual transaction

10 Payment method

(1) j Lease payments, stipulated loss payments, payments for exercise of purchase options and Return Adjustment Fees related to SD Tranche 1 and SD Tranche 2 shall be remitted to the following account of the SD Borrower in cash or by credit pursuant to assignment of payment receipt stipulated in Article 7, Paragraph 4 (Lessee shall bear the bank remittance fee).

[^*]
[^*]
[^*]
[^*]

k	Lease payments, stipulated loss payments, payments for exercise of purchase options and Return Adjustment Fees related to Toshiba Tranche 1 and Toshiba Tranche 2 shall be remitted to the following account of the Toshiba Borrower in cash or by credit pursuant to assignment of payment receipt stipulated in Article 7, Paragraph 4 (Lessee shall bear the bank remittance fee).
	[*] [*] [*] [*]

^* Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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(2)	Other monies, or in the event that proxy receipt for each Borrower stipulated in Article 7, Paragraph 4 is cancelled, shall be remitted into the account of each Lessor or each Lender in cash or by credit (Lessee shall bear the bank remittance fee).
	[*] [*] [*] [*]
	[*] [*] [*] [*]
	[*] [*] [*] [*]
	[*] [*] [*] [*]

^* Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

- 48 -

[^*]
[^*]
[^*]
[^*]

[^*]
[^*]
[^*]
[^*]

[^*]
[^*]
[^*]
[^*]

[^*]
[^*]
[^*]
[^*]

[^*]
[^*]
[^*]
[^*]

[^*]
[^*]
[^*]

^* Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

- 49 -

[^*]
[^*]
[^*]
[^*]

[^*]
[^*]
[^*]
[^*]

[^*]
[^*]
[^*]
[^*]

[^*]
[^*]
[^*]
[^*]

11 The Lenders

(The SD Lenders)

IBJ Leasing Co., Ltd.

Sumisho Lease Co., Ltd.

Toshiba Finance Corporation

The Norinchukin

The Bank of Yokohama, Ltd.

NTT Leasing Co., Ltd.

Century Leasing System Co., Ltd.

Tokyo Leasing Co., Ltd.

Fuyo General Lease Co., Ltd.

(Toshiba Lenders)

Mizuho Corporate Bank Co., Ltd.

The Bank of Yokohama, Ltd.

^* Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

- 50 -

Resona Bank, Limited

The Sumitomo Trust & Banking Co., Ltd.

The Chuo Mitsui Trust and Banking Company, Limited

Development Bank of Japan

12 The Borrowers

(SD Borrower)

Lancelot Leasing Yugen Kaisha

(Toshiba Borrower)

Facile Princeps Yugen Kaisha

13 The Guarantors

(SanDisk)

SanDisk Corporation as a guarantor of debts related to SD Tranche 1 and SD Tranche 2 under this Agreement

(Toshiba)

Toshiba Corporation a guarantor of debts related to Toshiba Tranche 1 and Toshiba Tranche 2 under this Agreement

14 The Administrative Custodian

IBJ Leasing Co., Ltd.

15 Transaction structure

(1)	Lessor shall purchase from Lessee each unit component in each individual transaction on the delivery date pursuant to the Sales and Purchase Agreement and obtain the ownership thereof. The SD Lessor and the Toshiba Lessor share the ownership of the Property in a ratio of 1:1.
(2)	Pursuant to the SD Sale and Purchase Agreement regarding Master Receivables, the SD Lessor shall sell to the SD Borrower, at its own election and discretion, the obligations related to SD Tranche 1 due under this Agreement on each delivery date in order to raise an amount equivalent to about [*]% of the property purchase price.
(3)	Pursuant to the Toshiba Sale and Purchase Agreement regarding Master Receivables, the Toshiba Lessor shall sell to the Toshiba Borrower, at its own election and discretion, the obligations related to Toshiba Tranche 1 due under this Agreement on

^* Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

- 51 -

	each delivery date in order to raise an amount equivalent to about [*]% of the property purchase price.
(4)	To raise funds to purchase receivables/obligations, pursuant to the SD Loan Agreement, the SD Borrower shall, at its own election and discretion, receive financing from the SD Lenders on each delivery date.
(5)	To raise funds to purchase receivables/obligations, pursuant to the Toshiba Loan Agreement, the Toshiba Borrower shall, at its own option and discretion, receive financing from the Toshiba Lenders on each delivery date.
(6)	The SD Lessor and the Toshiba Lessor shall each raise an amount equivalent to about [*]% of the property price from their own funds.
(7)	Lessor shall lease to Lessee the relevant unit component part on each delivery date pursuant to this Agreement. The ratio of obligations with respect to SD Tranche 1 and Toshiba Tranche 1 and with respect to SD Tranche 2 and Toshiba Tranche 2 shall be 1 to 1, respectively.

^* Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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Lease Agreement Attachment 2

Loan Certificate
([Serial number]th Individual transaction)

(Month) (Day), 200

To: IBJ Leasing Co., Ltd.
To: Sumisho Lease Co., Ltd.
To. Toshiba Finance Corporation

Flash Partners Yugen Kaisha

1	Our company hereby prepares and delivers to your company this Loan Certificate to certify the receipt of the property indicated below pursuant to the Basic Lease Contract of June 20, 2006 executed between our company and your companies.
2	Our company confirms that, with respect to each individual transaction subject to this Loan Certificate, its delivery date, lease period, the share of each Tranche, each amount of lease payments, payment for exercise of purchase options, Return Adjustment Fee, repayment standard fee and stipulated loss payment stipulated in Items 1, 2, 3, 6, 7, 8 and 9 of Attachment 1 of Basic Lease Contract after being agreed upon pursuant to Article 4, Item 3 of Basic Lease Contract, are as follows and provided in Attachment 2 to this Loan Certificate.
3	Our company approves that all of the provisions of Basic Lease Contract, provided in Item 1, apply to each individual transaction subject to this Loan Certificate.
1	Property loaned
	Property specifications           : see Attachment 1
2	Delivery date       : (Month) (Day), 200
	Lease period : [years ][months]from the date of delivery
3	Place of delivery           : [800 Yamano-Issiki-cho, Yokkaichi City, Mie Prefecture]

- 53 -

(Loan Certificate, Attachment 1)

[Property specifications]

- 54 -

(Loan Certificate, Attachment 2)

Ratio of each Tranche based on Basic Lease Contract, Article 7, Item 1

SD Tranche 1	[*]
SD Tranche 2	[*]
Toshiba Tranche 1	[*]
Toshiba Tranche 2	[*]

Basic Lease Contract, Attachment 1, Item 3 lease payment calculation

[^*]

^* Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

- 55 -

Basic Lease Contract, Attachment 1, Item 6 Purchase option exercise cost

Amount obtained by multiplying the property purchase price of the Property by the following ratios. Provided, however, that the lease payment as of the relevant lease payment date shall be paid separately.

[^*]

Basic Lease Contract, Attachment 1, Item 7 Return adjustment charges

Amount obtained by multiplying the property purchase cost the Property or its relevant unit component by the following ratios. Provided, however, that the lease payment as of the relevant lease payment day shall be paid separately.

[^*]

^* Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

- 56 -

Basic Lease Contract, Attachment 1, Item 8 Repayment standard fee

Amount obtained by multiplying the property purchase cost of the Property or its relevant unit component part by the following ratios.

[*]

Basic Lease Contract, Attachment 1, Item 9 Stipulated loss payment

[*]

^* Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

- 57 -

[^*]

^* Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

- 58 -

Lease Agreement, Attachment 3

Permitted Liens

(a)	Liens existing on the date hereof and Liens securing refinancing indebtedness in respect of secured indebtedness;
(b)	Indebtedness represented by F, F&E Financing Agreements and/or Capitalized Lease Obligations by secured by the assets acquired pursuant to the respective capital lease (in the case of Capitalized Lease Obligations) or with the proceeds of the respective F, F&E Financing Agreements, so long as such Liens do not extend to any other assets;
(c)	Working Capital Indebtedness up to 50% of SanDisk’s and its Subsidiaries accounts receivable and inventory balances (and refinancings thereof) may be secured by the assets of SanDisk and its Subsidiaries;
(d)	any Lien arising by reason of (i) any judgment, decree or order of any court, so long as such Lien is adequately bonded and any appropriate legal proceedings which may have been duly initiated for the review of such judgment, decree or order shall not have been finally terminated or the period within which such proceedings may be initiated shall not have expired; (ii) security for payment of workmen’s compensation or other insurance; (iii) good faith deposits in connection with tenders, leases and contracts (other than contracts for the payment of money); and (iv) deposits to secure, or guarantees of, public, governmental or statutory obligations, or in lieu of surety or appeal bonds;
(e)	Liens for taxes, assessments of other governmental charges not yet due or which are being contested in good faith and by appropriate proceedings by SanDisk or any of its Subsidiaries if adequate reserves with respect thereto are maintained on the books of SanDisk or any of its Subsidiaries, as the case may be, in accordance with GAAP;
(f)	purchase money security interests arising in the ordinary course of business securing only the assets so acquired;
(g)	statutory Liens of carriers, warehousemen, mechanics, landlords, laborers, materialmen, repairmen or other like Liens arising by operation of law in the ordinary course of business and consistent with industry practices and Liens on deposits made to obtain the release of such Liens if (i) the underlying obligations are not overdue for a period of more than 60 days or (ii) such Liens are being contested in good faith and by appropriate proceedings by

- 59 -

	SanDisk or any of its Subsidiaries and adequate reserves with respect thereto are maintained on the books of SanDisk or any of its Subsidiaries, as the case may be, in accordance with GAAP;
(h)	Easements, rights-of-way, zoning and similar restrictions and other similar encumbrances or title defects, which, if they are incurred by SanDisk or any of its Subsidiaries after it acquires the property subject thereto, are incurred in the ordinary course of business and consistent with industry practices which, individually or in the aggregate, do not materially detract from the value of the property subject thereto (as such property is used or proposed to be used by SanDisk or any of its Subsidiaries) or interfere with the ordinary conduct of the business of SanDisk or any of its Subsidiaries, provided, that any such Liens are not incurred in connection with any borrowing of money or any commitment to loan any money or to extend any credit;
(i)	Liens that secure Acquired Indebtedness (and refinancings thereof), provided, in each case, that such Liens do not secure any property or assets other than the property or asset so acquired;
(j)	leases or subleases granted to other persons not materially interfering with the conduct of the business of SanDisk or any of its Subsidiaries or materially detracting from the value of the relative assets of SanDisk or such Subsidiary;
(k)	Liens arising from precautionary Uniform Commercial Code financing statement filings regarding operating leases entered into by SanDisk or any of its Subsidiaries;
(l)	A notice of intention filed by a mechanic, materialman, or laborer under applicable mechanic’s lien law, or a building contract filed by a contractor or subcontractor thereunder; and
(m)	Other Liens as SanDisk and the Lessors may agree upon from time to time.

Related Definitions

“Acquired Indebtedness” means indebtedness of any Person (a) existing at the time such Person becomes a Subsidiary of SanDisk, including by designation, or is merged or consolidated into or with SanDisk or one of its Subsidiaries or (b) assumed in connection with the Acquisition of assets from such Person.

“Capital Lease Obligations” means any amount capitalized under any lease which is required under GAAP to be capitalized by SanDisk or one of its consolidated Subsidiaries.

“F, F&E Financing Agreement” means an agreement which creates a Lien upon any after-acquired tangible personal property and/or other items constituting operating assets, which are financed, purchased or leased for the purpose of engaging in or developing SanDisk’s and its Subsidiaries’ respective businesses.

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“GAAP” means generally accepted accounting principals as in effect from time to time in the applicable jurisdiction.

“Lien” means any mortgage, charge, pledge, lien (statutory or otherwise), privilege, security interest, hypothecation or other encumbrance upon or with respect to any property of any kind, real or personal, movable or immovable, now owned or hereafter acquired by SanDisk.

“Person” means any individual, corporation, company, partnership, or governmental agency.

“Subsidiary” of any Person means (i) a corporation a majority of whose Voting Stock is at the time, directly or indirectly, owned by such Person, by such Person and one or more Subsidiaries of such Person or by one or more Subsidiaries of such Person, (ii) any other Person (other than a corporation) in which such Person, one or more Subsidiaries of such Person, or such Person and one or more Subsidiaries of such Person, directly or indirectly, at the date of determination thereof has a majority ownership interest, or (iii) a partnership in which such Person of a Subsidiary of such Person is, at the time, a general partner and has a majority ownership interest.

“Voting Stock” means all classes of equity interests then outstanding and normally entitled to vote in the election of directors (or similar body) of the issuer of such Voting Securities.

“Working Capital Indebtedness” means indebtedness incurred under a credit facility available to SanDisk or any of its Subsidiaries the proceeds of which are used for working capital or similar purposes.

[Reference Translation]

(a)

Security interests/liens existing at the execution of this Agreement and security interests/liens to guarantee refinancing debt related to the secured debt.

(b)

Security interests/liens established by an agreement to establish security interest and obtain operating assets (an agreement to obtain (including purchases and/or leases) operating assets after the execution of this Agreement in order to implement or develop each enterprise of SanDisk or affiliated companies ((i) any company owned directly or indirectly at that time by SanDisk through ownership of a majority of the voting shares (shares which have been issued by that time and which grant in the ordinary course of business the right to select directors and similar positions of the issuer) by SanDisk alone, or by SanDisk and an affiliated company, or by a SanDisk affiliated company alone, (ii) any entity (excluding a corporation) in which SanDisk independently, or SanDisk and its affiliated company, or a SanDisk affiliated company alone owns a majority interest directly or indirectly on the date of decision, or (iii) any partnership in which SanDisk or a SanDisk affiliated company is a general partner and owns a majority interest; similarly throughout this Article) executed to establish a security interest in those operating assets for the purpose of securing payment of the price of those

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	assets), as well as security interests established in assets obtained pursuant to a capital lease (a lease or other financing required by SanDisk or an affiliated company under U.S. accounting standards (GAAP) for capitalization; similarly below) to secure the payment of the price of those assets.
(c)	Security interests/liens established in the assets of SanDisk or its affiliated companies to secure accounts receivables or inventory balances and financings thereof up to 50 percent of working capital debt (debt borrowed under a credit facility available for use by SanDisk or its affiliated companies, which is used for working capital or some similar purpose) .
(d)	(i) Security interests/liens arising by reason of court judgment, decision, or order (provided, however, that this shall only apply if a bond sufficient for purposes of appealing such judgment, decision, or order has been paid, and all legal procedures properly instituted for the review of such judgment, decision, or order have not been terminated, or the period within which such procedures may be initiated has not expired); (ii) security interests to guarantee payment of worker’s compensation insurance and other insurance; (iii) good-faith deposit monies for deposits related to tenders, leases, and contracts (excluding contracts for payment of money); and (4) deposits to secure a public, government, or legal obligations, or appeal bonds.
(e)	Security interests to secure payable taxes, public charges, and other governmental levies that are not yet due, and security interests to secure taxes, public charges, and other governmental levies that SanDisk or its affiliated companies are contested in court in good faith and by appropriate procedures. Provided, however, that this shall be limited to cases in which SanDisk or its affiliated companies have set aside sufficient reserves on its books for these charges as appropriate pursuant to GAAP.
(f)	Purchase money security interests arising in the ordinary course of business. Provided, however, that this shall be limited to assets acquired therein.
(g)	Judicial liens for carriers, warehousemen, workmen, landlords, laborers, material suppliers, and mechanics and other similar liens arising by operation of law in the ordinary course of business and consistent with standard industry practices, and any security interests on deposits to release any of these liens. Provided, however, that this shall be limited to situations (i) within 60 days since the payment of the underlying indebtedness has become due, or (ii) such lien is contested in good faith and according to the appropriate procedures by SanDisk or its affiliated companies and SanDisk

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	or its affiliated companies have set aside sufficient reserves on their books for these charges as appropriate pursuant to GAAP.
(h)	Easements, limitations on use, or other limitations or similar encumbrances or title defects that are incurred by SanDisk or its affiliated companies after it acquired the property subject thereto in the ordinary course of business in a manner consistent with industry practices and do not, whether in whole or in part, reduce the actual value of the property and do not interfere with the ordinary operations of SanDisk or its affiliated companies. Provided, however, that these security interests are not incurred in connection with any borrowing of money, any commitment to loan money or extending credit.
(i)	Security interests to secure acquired debt or financings thereof ((i) debt existing at a time of any person who has become a SanDisk affiliated company, or is merged with SanDisk or its affiliated company, or (ii) debt assumed in connection with the acquisition of assets from some person). Provided, however, that these security interests shall be limited to those established in the assets acquired.
(j)	A lease or sublease of assets of SanDisk or its affiliated companies not materially interfering with the ordinary operations of SanDisk or its affiliated company. Provided, however, that such lease or sublease does not reduce the actual value of such assets.
(k)	Security interests arising from precautionary Uniform Commercial Code financing statement filings related to operating leases entered into by SanDisk or its affiliated company
(l)	Security interests arising from filing a notice of intention by a mechanic, material supplier, or laborer under applicable mechanic’s lien law or a building contract filed by a contractor or subcontractor thereunder

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Lease Agreement Attachment 4

Certificate of Return

(Month) (Day), 200_

To: Flash Partners Yugen Kaisha

IBJ Leasing Co., Ltd.

Sumisho Lease Co., Ltd.

Toshiba Finance Corporation

     Our company hereby prepares and delivers this Certificate of Return to your company to certify the receipt of the property referenced below pursuant to the Basic Lease Contract executed between our company and your company on June 20, 2006.

1	Property returned
	Property specifications	: as listed in the attachment

2	Day of return	: (Month) (Day), 200_
3	Place of return	:

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Lease Agreement Attachment 5

Certificate of Transfer

To: Flash Partners Yugen Kaisha

Our company hereby certifies that the following property was transferred by sale on (Month) (Day), 200 pursuant to Basic Lease Contract between our company and your company dated June 20, 2006.

1 Transferee : Flash Partners Yugen Kaisha

2 Property specifications : as listed in the attachment

(Month) (Day), 200

IBJ Leasing Co., Ltd.

Sumisho Lease Co., Ltd.

Toshiba Finance Corporation

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Lease Agreement Attachment 6

Conditions at the Time of Return

     When Flash Partners Yugen Kaisha (hereinafter referred to as “Lessee”) returns the Property to Lessors (hereinafter referred to as “Lessors”) pursuant to the provision of Article 25 of the Lease Agreement, in addition to the provision of Article 25 of the Lease Agreement, the following requirements shall be satisfied.

     When Lessee returns the Equipment pursuant to Clause 25 of the Lease, Lessee shall satisfy the following conditions, in addition to the conditions specified in Clause 25 of the Lease.

     (A) Lessee shall no later than [^*] days prior to the expiration or other termination of the lease (with regard to all but not less than all Equipment) provide, at its expense:

          1. a detailed inventory of the Equipment (including the model and serial number of each major component thereof), including, without limitation, all internal circuit boards, module boards, and software features

          2. a complete and current set of al manuals, blue prints, process flow diagrams, equipment configuration diagrams, operation, maintenance and repair records and other data (in Japanese and English) reasonably requested by Lessors concerning the configuration and operation of the Equipment, and

          3. a certification of the manufacturer or of a maintenance provider acceptable to Lessors that the Equipment (a) has been tested and is operating in accordance with manufacturer’s specifications together with a report detailing the condition of the Equipment, the results of such test (s) and inspection (s) and all repairs that were performed as a result of such test (s) and inspection (s), and (b) that the Equipment qualifies for the manufacturer’s used equipment maintenance program.

     (B) Upon the request of Lessors and at the expense of Lessee, Lessee shall, not later than [^*] days prior to the expiration or other termination of the Lease make the Equipment available for on-site operational inspection by persons designated by Lessors who shall be qualified to inspect the Equipment in its operational environment.

     (C) At the expense of Lessee, all Equipment shall be cleaned and treated with respect to rust, corrosion and appearance in accordance with manufacturer’s recommendations and consistent with the best practices of dealers in used equipment similar to the Equipment. At Lessors’ option and at the expense of Lessee, Lessee shall (a) properly remove all Lessees installed markings which are not necessary for the operation, maintenance or repair of the Equipment; or (b) translate said markings to a language as specified by Lessors and reattach those markings.

     (D) Lessee shall, at its expense, ensure all Equipment and Equipment operations conform to

^* Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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all applicable local, state, and federal laws, health and safety guidelines which may be in effect at the time of return, or as specified by Lessors.

     (E) Lessee shall, at its expense, provide for the deinstallation, packing, transporting, and certifying of the Equipment to include, but not limited to, the following: (1) the manufacturer’s representative or such other person acceptable to Lessors shall de-install all Equipment (including all wire, cable and mounting hardware) in accordance with the specifications of Lessors; (2) each item of Equipment will be returned with a certificate supplied by the manufacturer’s representative qualifying the Equipment to be in good condition and (where applicable) to be eligible for the manufacturer’s maintenance plan; the certificate of eligibility shall be transferable to another operator of the Equipment; this assignment shall extend to any software licensing or relicensing or other requirements of the manufacturer to enable an alternate user/purchaser of the Equipment to enjoy all rights and privileges as would the original purchaser of the Equipment directly from the manufacturer; (3) the Equipment shall be packed properly and in accordance to Lessors’ specifications; (4) upon sale of the Equipment to a third party, provide transportation in a manner and to locations specified by Lessors; (5) without limitation, as applicable, all Equipment shall be professionally de-contaminated and certified for removal and transport by appropriate authorities, in accordance with industry standards, and consistent with the mode of transport specified by Lessors; all internal fluids and/or gases shall be purged and properly disposed of, any applicable reservoirs etc. shall be secured in accordance with manufacturers recommendations and in accordance with all applicable laws, rules, and regulations.

     (F) At the expense of Lessee all Equipment shall conform to or be modified to conform to established standards in Japan, the United States or Taiwan; including, but not limited to wiring codes, software, keyboards, control consoles, all fittings and lines for gas, water, exhaust; Equipment labeling i.e. (operational, warning, safety labels) all current operational and service manuals. At the expense of Lessee accommodation of power requirements different from where originally shall be provided including but not limited to step-up/step-down transformers shall be fitted by original manufacturer or by certified party in compliance with manufacturer’s specifications.

     (G) All tariffs, duties, taxes, import/export fees, bonding fees, bonded warehousing fees, licenses, permits, approvals, permissions, and/or freight forwarder fees without limitation shall be the responsibility of the Lessee.

     (H) Lessee shall, at its expense, obtain and pay for a policy of transit insurance for the redelivery period in an amount equal to the replacement value of the Equipment and Lessors shall be named as the loss payee on all such policies of insurance;

     (I) Lessee shall, at its expense, provide insurance and safe, secure storage for the Equipment for a period specified by Lessors after expiration of the Lease at locations acceptable to Lessors which shall not exceed three (3) years from the return of the Equipment;

     (J) With regard to any Equipment that has been modified or reconfigured by the Lessee, at Lessors’ options, Lessee shall, at its expense: (a) return or restore the Equipment to its original configuration, as specified by the manufacturer, or (b) make available for a period of [^*] days following successful re-installation and test runs, as required, any engineering and technical personnel necessary for the training of personnel with respect to the operation, maintenance and repair of the Equipment (said engineering and technical personnel will be made available by

^* Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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Lessee for an additional [^*] day period for consultation regarding the operation of the Equipment);

     (K) Lessee shall, at its expense, allow Lessors the right to attempt resale of the Equipment from the Toshiba’s Yokkaichi facility with the Lessee’s full cooperation and assistance, for a period of [^*] days from the Lease expiration. Lessee will allow Lessors to show prospective buyers the Equipment while it is operational during the [^*] days from the Lessee’s notification of its intent to return the Equipment and the Lease expiration date. Lessee shall, at its expense, provide safe, secure storage for Equipment if requested by Lessors for a [^*] period. If an equipment auction is necessary, Lessors should be permitted to auction the Equipment on-site.

^* Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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Lease Agreement Attachment 7

Notification Address:

To:
IBJ Leasing Co., Ltd.

          [*]

Sumisho Lease Co., Ltd.

          [*]

Toshiba Finance Corporation

          [*]

Flash Partners Yugen Kaisha

          [*]

^* Indicates that certain information contained herein has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

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EX-10.3

Exhibit 10.3

SUBLEASE
(BUILDING 3)

     THIS SUBLEASE (“Sublease”), dated as of December 21, 2005, is made by and between MAXTOR CORPORATION, a Delaware corporation (“Sublessor”), and SANDISK CORPORATION, a Delaware corporation (“Sublessee”).

R E C I T A L S

     A. John Arrillaga, Trustee or his Successor Trustee u/t/a dated 7/20/77 (John Arrillaga Separate Property Trust), as amended, and Richard T. Peery, Trustee or his Successor Trustee u/t/a dated 7/20/77 (Richard T. Peery Separate Property Trust), as amended (collectively, “Master Lessor”), and Quantum Corporation, a Delaware corporation (“Quantum”), have entered into: (i) that certain Lease Agreement dated April 10, 1992 pursuant to which Quantum leased from Master Lessor the real property commonly called 900 Sumac Drive, Milpitas, California and the building constructed thereon (“Building 3” or the “Building”), as amended by that certain Amendment No. 1 to Lease dated April 16, 1997 and that certain Amendment No. 2 to Lease dated March 22, 2001 (collectively, the “Building 3 Master Lease” or the “Master Lease”); (ii) that certain Lease Agreement dated September 17, 1990 pursuant to which Quantum leased from Master Lessor the real property commonly called 1000 Sumac Drive, Milpitas, California and the building constructed thereon (“Building 4”), as amended by that certain Amendment No. 1 to Lease dated April 16, 1997 and that certain Amendment No. 2 to Lease dated March 26, 2001 (collectively, the “Building 4 Master Lease”); (iii) that certain Lease Agreement dated April 16, 1997 pursuant to which Quantum leased from Master Lessor the real property commonly called 601 McCarthy Boulevard, Milpitas, California and the building constructed thereon (“Building 6”), as amended by that certain Amendment No. 1 to Lease dated April 15, 1998 and that certain Amendment No. 2 to Lease dated March 22, 2001 (collectively, the “Building 6 Master Lease”); and (iv) that certain Lease Agreement dated March 23, 1994 pursuant to which Quantum leased from Master Lessor the real property commonly called 1100 Sumac Drive, Milpitas, California and the building constructed thereon (“Building 5”), as amended by that certain Amendment No. 1 to Lease dated April 16, 1997 and that certain Amendment No. 2 to Lease dated March 22, 2001 (collectively, the “Building 5 Master Lease”). Pursuant to Amendment No. 2 to each of the foregoing leases, Sublessor has succeeded to the interest of Quantum as tenant thereunder. A copy of the Building 3 Master Lease is attached hereto as Exhibit D.

     B. Sublessee desires to sublease from Sublessor, and Sublessor desires to sublease to Sublessee, (i) the entire premises covered by the Building 3 Master Lease upon the terms and conditions hereinafter set forth in this Sublease, (ii) the entire premises covered by the Building 4 Master Lease upon the terms and conditions set forth in that certain Sublease (Building 4) of even date herewith between Sublessor and Sublessee (the “Building 4 Sublease”), and (iii) the entire premises covered by the Building 6 Master Lease upon the terms and conditions set forth in that certain Sublease (Building 6) of even date herewith between Sublessor and Sublessee (the “Building 6 Sublease”). This Sublease, the Building 4 Sublease and the Building 6 Sublease are collectively called the “Subleases”.

     NOW, THEREFORE, in consideration of the mutual promises contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Sublessor and Sublessee agree as follows:

     1. Definitions. All capitalized terms not otherwise defined herein shall have the respective meanings ascribed to them under the Master Lease.

     2. Subleased Premises. Subject to the terms and conditions contained in this Sublease, Sublessor hereby subleases to Sublessee, and Sublessee hereby subleases from Sublessor, the entire premises covered by the Master Lease as depicted on Exhibit A hereto (the “Subleased Premises”); provided, however, subject to Section 29 below, Sublessor shall retain for itself and its employees, agents, contractors, invitees, licensees, successors and assigns (and Sublessee does hereby grant to each of the foregoing) the right to non-exclusive use of all common areas, landscaped areas, sidewalks and driveways related to each of Building 3, Building 4 and Building 6 (collectively, the “Buildings”). Moreover, subject to the terms and conditions of this Sublease, Sublessee shall have non-exclusive use of all common areas, landscaped areas, sidewalks and driveways related to the Building. For the avoidance of doubt, Sublessee acknowledges that it has no right to access any building (other than the Buildings and Building 5 if Sublessee exercises the ROFO, as defined in Section 27.1 below pursuant to the Subleases) in the project that the Buildings are a part. Sublessee hereby acknowledges and agrees that Building 3 consists of approximately 60,128 rentable square feet. Nevertheless, the parties agree that the foregoing approximation shall be final and binding for all purposes hereunder; and notwithstanding anything to the contrary contained herein, no adjustment shall be made to the Base Rent (as defined in Section 5.1(a) below) if the actual square footage of Building 3 differs from any reference to square footage contained herein.

     3. Term; Sublease Consent; Early Entry.

          3.1 Term. Provided that Master Lessor has consented to this Sublease (the “Sublease Consent”) and unless sooner terminated in accordance with the provisions contained herein, the term (“Term”) of this Sublease shall commence on March 13, 2006 (the “Commencement Date”) and shall expire on July 31, 2011 (the “Expiration Date”) [sixty (60) days prior to the expiration date of the Master Lease].

          3.2 Sublease Consent. If Master Lessor has not consented to this Sublease on or prior to January 15, 2006, then either party hereto shall have the right to terminate this Sublease and the other Subleases at any time on or prior to March 31, 2006, effective upon written notice to the other party. Sublessor agrees to use commercially reasonable efforts to obtain a non-disturbance agreement for the benefit of Sublessee as part of the Sublease Consent.

          3.3 Early Entry (Post-Consent). Upon full execution and delivery of the Sublease Consent, Sublessee and Sublessee’s employees, agents and contractors shall be permitted to enter the Subleased Premises during Building business hours (as determined by Sublessor in its sole discretion) for the purposes of (i) installing and re-configuring furnishings, fixtures and equipment, (ii) construction and testing of subtenant improvements, and (iii) conducting business operations. Such entry shall be subject to all of the terms and conditions of the Master Lease and this Sublease, including without limitation, (a) the indemnity and hold harmless provisions of Section 9 of this Sublease and (b) the obligation to pay utilities and

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janitorial services; provided, however, other than as provided in Section 5.2 below, Sublessee shall not be required to pay any Base Rent nor Operating Expense Payments (as defined below) for Real Property Taxes, insurance premiums and common area expenses with regard to such early entry. Sublessee shall furnish to Sublessor evidence of the insurance required under Section 7 of this Sublease prior to any entry into any portion of the Subleased Premises.

          3.4 Early Entry (Pre-Consent). In addition to Sublessee’s rights under Section 3.3 above, Sublessee and Sublessee’s employees, agents and contractors shall be permitted to enter the Building during Building business hours (as determined by Sublessor in its sole discretion) for the sole purposes of (i) testing the Warranted Systems (as defined in Section 4.5 below) therein, and (ii) preparing construction drawing, plans and specifications, and for no other purposes. Such entry shall be subject to all of the terms and conditions of the Master Lease and this Sublease, including without limitation, (a) the indemnity and hold harmless provisions of Section 9 of this Sublease and (b) the obligation to pay utilities and janitorial services; provided, however, other than as provided in Section 5.2 below, Sublessee shall not be required to pay any Base Rent nor Operating Expense Payments for Real Property Taxes, insurance premiums and common area expenses with regard to such early entry. Sublessee shall furnish to Sublessor evidence of the insurance required under Section 7 of this Sublease prior to any entry into any portion of the Subleased Premises. Moreover, and without limiting the foregoing, Sublessee shall indemnify, protect, defend with counsel reasonably acceptable to Sublessor and hold harmless Sublessor and Sublessor’s shareholders, directors, officers, employees, agents, affiliates, successors and assigns from and against any and all claims, demands, liabilities, judgments, losses, causes of action, fines, penalties, damages, costs and expenses, including reasonable attorneys’ and experts’ fees (collectively, “Claims”), caused by or arising in connection with the early entry described in this Section 3.4, including without limitation, any Claims by Master Lessor that Sublessor has committed (or allegedly committed) a default and/or breach under the Master Lease by permitting the early entry described in this Section 3.4. Sublessee’s indemnification and other covenants provided in this Section 3.4 shall survive the expiration or termination of this Sublease.

     4. Use; “As Is” Condition; Furniture.

          4.1 Use. Sublessee shall use the Subleased Premises for any legal use permitted under the Master Lease. Sublessee acknowledges that it is thoroughly familiar with the condition of the Subleased Premises, and Sublessee agrees that it is subleasing the Subleased Premises on an “AS IS”, “WHERE IS” basis, subject to all latent or patent defects, without any representation or warranty by Sublessor or Master Lessor or their respective employees or agents as to the condition of the Subleased Premises or their fitness for Sublessee’s use, except as otherwise set forth in this Sublease, and subject to all applicable zoning, municipal, county and state laws, ordinances and regulations governing and regulating the use of the Subleased Premises, and any easements, covenants or restrictions of record. Sublessee acknowledges that Sublessor and Master Lessor and their respective employees or agents have not made any representations or warranties that the Subleased Premises comply with applicable law, ordinance, rule, regulation or covenant or restriction of record (collectively, “Applicable Requirements”), including, but not limited to, the Americans With Disabilities Act, as amended (“ADA”), or any laws relating to earthquake or other life/safety matters or Hazardous Substances (as defined below), except as set forth in this Sublease. The parties hereto agree that the plans attached

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hereto as Exhibit B accurately reflect all Alterations (as defined below) in the Subleased Premises existing as of the date hereof (collectively, the “Existing Alterations”). Sublessor hereby assigns all of its right, title and interest under any warranties with respect to the Building and/or such Building’s systems and which are then in effect and which by their terms may be assigned without the consent of the counterparty thereto (collectively, “Building Warranties”). The assignment of the Building Warranties is conditioned on this Sublease being in full force and effect and that upon expiration or termination of this Sublease, the conditional assignment shall terminate automatically and Sublessee shall not have any further right, title or interest in the Building Warranties.

          4.2 Alterations. Sublessee shall obtain both Sublessor’s and Master Lessor’s prior written consent to the architect and contractor engaged by Sublessee to perform work in or about the Subleased Premises, which consent Sublessor shall not unreasonably withhold. Sublessor agrees that it shall not charge Sublessee any supervisory fee with respect to any alterations, additions or improvements (collectively, “Alterations”) that Sublessee makes to the Subleased Premises, other than any supervisory fee that Master Lessor charges Sublessor with respect thereto (which charge Sublessee shall pay Sublessor as Additional Rent (as defined below) hereunder). Except as modified by this Section, Sublessee shall strictly comply with all obligations of Section 6 of the Master Lease, as incorporated by reference herein. Notwithstanding anything to the contrary contained in this Sublease, (a) if so required in writing by Master Lessor, Sublessee shall remove all Alterations made by or on behalf of Sublessee in or to the Subleased Premises (whether or not Sublessor’s consent was required hereunder) at expiration or termination of this Sublease and restore the Subleased Premises to the condition shown on Exhibit B hereto, ordinary wear and tear and damage caused by Sublessor excepted, all at Sublessee’s sole cost and expense, and (b) Sublessee shall not be required to obtain Sublessor’s consent (but shall still be required to obtain Master Lessor’s consent, if applicable) to any Alteration to the Subleased Premises if (i) (A) the total cost (including soft costs) for such Alteration does not exceed Twenty Thousand Dollars ($20,000), (B) such Alteration does not affect the foundation, roof or any structural component of the Building, (C) such Alteration does not materially affect the Building’s mechanical, electrical, plumbing or life safety systems, and (D) Sublessee provides Sublessor with not fewer than ten (10) days’ prior written notice of Sublessee’s construction or installation of such Alteration, or (ii) if Master Lessor consents in writing to the Alterations in question and agrees that it need not be removed at the end of the term of the Master Lease. Sublessee shall furnish to Sublessor copies of all permits and plans and specifications for all Alterations made by or for Sublessee to the Subleased Premises, whether or not Sublessor’s consent thereto is required hereunder. Sublessee shall pay, when due, all Claims for labor or materials furnished or alleged to have been furnished to or for Sublessee at or for use on the Subleased Premises. If any mechanic’s lien is recorded for work claimed to have been done for, or on behalf of, or for materials claimed to be furnished to or for Sublessee, then Sublessee shall, at its expense, immediately discharge such lien, by bond or otherwise, on demand of Sublessor.

          4.3 Repair and Maintenance. Subject to the provisions of Sections 6.3(c) and 8 below, the parties hereto agree that Sublessor shall have no obligation to Sublessee, in any manner whatsoever, to repair and/or maintain the Subleased Premises or the Building, or any portion thereof or the contents therein (including, without limitation, the Personal Property, as

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defined below). Sublessee shall strictly comply with all other obligations of Section 7 of the Master Lease, as incorporated by reference herein.

          4.4 License for Personal Property and Infrastructure Systems. Sublessor hereby grants Sublessee a license to use in the Subleased Premises during the Term, (i) all cubicle systems, work stations, furniture, trade fixtures, equipment, art work, cabling, cafeteria and gym equipment, security systems (including card access, camera and intrusion systems, the “Security Systems”), and other personal property owned by Sublessor and located in the Subleased Premises as of the date hereof, including without limitation, those items described in Exhibit C attached hereto (collectively, the “Personal Property”), and (ii) all generators, uninterruptible power systems (UPS), heating, ventilation and air conditioning systems (HVAC), and data center systems and controls, located in the Subleased Premises (collectively, the “Infrastructure Systems”), and subject to the terms and conditions set forth below:

          (a) The parties shall jointly conduct a walk-through inspection of the Personal Property (and photograph such Personal Property, if needed), and note on Exhibit C any pre-existing damage or defective conditions in the Personal Property.

          (b) SUBLESSEE ACCEPTS THE PERSONAL PROPERTY AND THE INFRASTRUCTURE SYSTEMS IN THEIR “AS IS”, “WHERE IS” CONDITION WITH ALL FAULTS AND WITHOUT WARRANTIES, EXPRESS OR IMPLIED. SUBLESSOR DISCLAIMS ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. SUBLESSEE EXPRESSLY ASSUMES ALL RISK AND RESPONSIBILITY FOR ANY DEFECTS (INCLUDING LATENT DEFECTS) IN THE PERSONAL PROPERTY AND THE INFRASTRUCTURE SYSTEMS.

          (c) Except for pre-existing damage or defective conditions to the Personal Property (as mutually agreed by Sublessor and Sublessee), Sublessee shall maintain the Personal Property and the Infrastructure Systems, and all portions thereof, in good condition and repair throughout the Term. Upon the expiration or earlier termination of this Sublease but subject to Section 4.2(f) below, Sublessee shall surrender the Personal Property and the Infrastructure Systems in the same condition as received, ordinary wear and tear excepted. Except for pre-existing damage or defective conditions to the Personal Property (as mutually agreed by Sublessor and Sublessee) but subject to Section 4.2(f) below, Sublessee shall reimburse Sublessor, as Additional Rent, for the reasonable cost of repairing any damage to the Personal Property and the Infrastructure Systems, ordinary wear and tear excepted.

          (d) Sublessee shall keep the Personal Property and the Infrastructure Systems free from any liens arising out of work performed, materials furnished or obligations incurred by Sublessee.

          (e) Sublessee shall be permitted to remove the Personal Property from the Subleased Premises; provided, however, Sublessee shall not transfer its right to use the Personal Property or dispose of any of the same, without obtaining the prior written consent of Sublessor, and shall comply with Sublessor’s reasonable instructions regarding such transfer or disposition. Sublessee shall not be permitted to remove the Infrastructure Systems or any portion thereof

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from its location in the Building, without obtaining the prior written consent of Sublessor, which consent shall not be unreasonably withheld.

          (f) Provided that this Sublease has not been terminated in accordance with the terms and conditions contained herein and Sublessee has not surrendered the Personal Property in accordance with Section 32 below, on the Expiration Date, Sublessee shall purchase the Personal Property on an “AS IS”, “WHERE IS” basis with all faults and without warranties, express or implied, for the sum of One Dollar ($1.00), pursuant to a bill of sale in a form mutually agreeable to the parties.

          4.5 Warranted Systems. Sublessor hereby represents and warrants to Sublessee that (i) the Infrastructure Systems, (ii) the kitchen equipment, and (iii) the central processors and transponders of the Security Systems in the Building (collectively, the “Warranted Systems”) are in good working condition as of the Commencement Date. The foregoing representation and warranty of Sublessor (collectively, the “IS Warranty”) shall expire sixty (60) days after the Commencement Date (the “IS Warranty Period”). In the event of a breach of the IS Warranty (i.e., Sublessee determines during the IS Warranty Period that any of the Warranted Systems is not in good working condition as of the Commencement Date), then Sublessee’s sole remedy shall be to provide Sublessor with written notice (the “Repair Notice”) describing (in reasonable detail) the Warranted System(s) that is (are) not in good working condition. Provided that (a) Sublessor receives the Repair Notice prior to expiration of the IS Warranty Period, and (b) Sublessee has not modified or otherwise altered the Warranted System this is the subject of the Repair Notice (without having first obtained Sublessor’s prior written consent to such modification or alteration pursuant to Section 4.2 above), Sublessor shall promptly cause, at Sublessor’s expense, the Warranted System(s) identified in the Repair Notice to be put into good working condition. In no event shall Sublessee be permitted to offset or withhold rent due to Sublessor hereunder in the event of a breach by Sublessor of the IS Warranty or any other obligation of Sublessor under this Sublease, including without limitation, this Section 4.5.

     5. Rent; Security Deposit.

          5.1 Base Rent.

          (a) The base rent (“Base Rent”) to be paid by Sublessee to Sublessor under this Sublease is intended to be absolutely triple net. Subject to Section 5.1(b) below, beginning on July 1, 2006 (the “Rent Commencement Date”) and continuing during the Term, Sublessee shall pay to Sublessor monthly Base Rent for the Subleased Premises, payable in advance on the first (1^st) day of each month in accordance with the following schedule (“Base Rent Schedule”):

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Time Period from		Monthly Installment
Rent		of
Commencement	Monthly Base Rent	Base Rent
Date	Rate Per RSF	(Bldg 3)
Months 1-12	$ 0.65	$ 39,083.20
Months 13-24	$ 0.69	$ 41,488.32
Months 25-36	$ 0.73	$ 43,893.44
Months 37-48	$ 0.77	$ 46,298.56
Months 49-61	$ 0.81	$ 48,703.68

          (b) Notwithstanding the foregoing, Sublessee shall pay to Sublessor, upon execution of this Sublease, the sum of Thirty-Nine Thousand Eighty-Three Dollars and Twenty Cents ($39,083.20), as prepaid Base Rent for the first (1^st) full month of the Term that Base Rent is due hereunder (i.e., the month of July 2006).

          (c) If the Term commences on a day other than the first (1^st) day of a calendar month or ends on a day other than the last day of a calendar month, Base Rent for the first and/or last fractional month of the Term shall be prorated on the actual number of days elapsed in such month.

          5.2 Additional Rent. Sublessee shall pay as additional rent (“Additional Rent”), within twenty (20) days after demand therefor, all sums or other charges required to be paid by Sublessee under this Sublease. During the Term, Sublessee shall pay to Sublessor all sums or other charges required to be paid by Sublessor, as tenant, to Master Lessor under the Master Lease, including without limitation, (a) all Real Property Taxes, insurance premiums and common area expenses required to be paid to Master Lessor thereunder (collectively, “Operating Expense Payments”, and which shall include expenses relating to the Parking Areas and Outdoor Areas, as such terms are defined below), (b) all “Additional Rent” (as defined in the Master Lease) due from Sublessor, as tenant, to Master Lessor under Paragraphs 4.D.(a) and (b) of the Master Lease, and (c) the management fee charged by Master Lessor to Sublessor under the Master Lease, but expressly excluding (i) any “Basic Rent” due from Sublessor, as tenant, to Master Lessor under the Master Lease, and (ii) any late charges, default interest and other penalties due from Sublessor, as tenant, to Master Lessor under the Master Lease provided the same are not caused by the default or breach of any of Sublessee’s obligations contained in this Sublease. Sublessor shall not charge Subtenant a management fee with regard to the Building, other than the management fees charged by Master Lessor under the Master Lease. Notwithstanding the foregoing, Sublessee’s obligation to pay Operating Expense Payments for the Subleased Premises shall be tolled until the earlier of (x) such time as twenty-five (25) or more employees of Sublessee occupy any portion of the Building, or (y) the Commencement Date. Moreover, Sublessee agrees to pay its proportionate share of any costs and expenses incurred by Sublessor for (A) any insurance obtained by Sublessor pursuant to Section 55 of the Master Lease, (B) repair or maintenance of the central courtyard, and (C) repair, maintenance, replacement or new construction of improvements in such central courtyard, within twenty (20) days after written demand therefor (which written demand shall contain documentation in reasonable detail evidencing the costs and expenses incurred by Sublessor); provided, however,

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that Sublessee shall have no obligation to reimburse Sublesssor for any (aa) replacement of an existing improvement in the central courtyard, or (bb) construction or installation of any new improvement in the central courtyard, if Sublessor had not first obtained Sublessee’s written approval thereof, which approval shall not be unreasonably withheld, conditioned or delayed by Sublessee. Sublessor shall have the same remedies for a default in the payment of Additional Rent as for a default in the payment of Base Rent. Base Rent and Additional Rent are hereinafter sometimes referred to collectively as “Rent.”

          5.3 Payment of Rent. Rent shall be paid to Sublessor, without deduction, demand, recoupment, offset or counterclaim, in lawful money of the United States of America, at Maxtor Corporation, 333 South Street, Shrewsbury, MA 01545, Attn: Gary Leblanc, or to such other person or at such other place as Sublessor may from time to time designate in writing.

          5.4 Security Deposit; Letter of Credit.

          (a) Upon execution of this Sublease, Sublessee shall deliver to Sublessor a clean, unconditional, irrevocable, transferable letter of credit in the amount of Six Hundred Ninety-Four Thousand Thirty-Four Dollars and Ninety-Seven Cents ($694,034.97). (the “Letter of Credit”), in form and issued by a financial institution (“Issuer”) satisfactory to Sublessor in its sole discretion, which Letter of Credit (and all sums drawn by Sublessor thereunder) shall constitute a security deposit to secure Sublessse’s obligations under this Sublease and the other Subleases (the “Security Deposit”). Sublessee hereby grants to Sublessor a security interest in the Letter of Credit and all proceeds, replacements and modifications thereof to secure Sublessee’s obligations herein, including without limitation, the obligation to pay Rent, perform its insurance and indemnity obligation and to maintain and restore the Subleased Premises. The Letter of Credit shall permit partial draws, and provide that draws thereunder will be honored upon receipt by Issuer (at its offices in San Francisco, California or such other location that Sublessor shall approve in its sole discretion) of the original or a certified copy of the Letter of Credit accompanied by a written statement signed by Sublessor or its authorized agent stating that Sublessor is entitled to draw on the Letter of Credit pursuant to the terms of this Sublease. The Letter of Credit shall have an expiration period of one (1) year from the date of issuance but shall provide that it will automatically renew by its terms to a date which is sixty (60) days following the Expiration Date of the Building 6 Sublease unless affirmatively cancelled by Issuer following not fewer than sixty (60) days prior written notice of such expiration or cancellation from Issuer to Sublessor. Sublessor shall be entitled to draw the Letter of Credit in part or in full. All costs and expenses related to the Letter of Credit, including any transfer fees, shall be paid by Sublessee.

     (b) Sublessor shall hold the Security Deposit as security for the full and faithful performance by Sublessee of its covenants and obligations under this Sublease and the other Subleases. If Sublessee defaults in the full and timely performance of any or all of Sublessee’s covenants and obligations under this Sublease or any of the other Subleases, then Sublessor may, from time to time, without waiving any other remedy available to Sublessor, use the Security Deposit, or any portion thereof, to the extent necessary to cure or remedy the default or to compensate Sublessor for all or any part of the damages sustained by Sublessor resulting from Sublessee’s default. Sublessee shall pay to Sublessor within ten (10) business days after receipt of demand, the amount so applied in order to restore the Security Deposit to its original amount.

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Sublessor shall not be required to keep the Security Deposit separate from its general accounts and no trust relationship is created between Sublessor and Sublessee with respect to the Security Deposit. If Sublessee performs all of its obligations hereunder and under all of the other Subleases, the Security Deposit, or so much thereof as has not theretofore been applied by Sublessor, shall be returned to Sublessee, without interest or other increment for its use, at the Expiration Date and after Sublessee has vacated the entire Subleased Premises. Sublessee’s failure to provide and keep the Letter of Credit in full force and effect and otherwise in accordance with the terms of this Section 5.4 shall constitute a default of this Sublease and the other Subleases.

     6. Master Lease.

          6.1 Subject to Master Lease. This Sublease is and shall at all times be subject and subordinate to the Master Lease attached hereto as Exhibit D, and every provision thereof. Sublessee acknowledges that (a) Sublessee’s use and enjoyment of the Subleased Premises are subject to the rights of Master Lessor pursuant to the Master Lease, and (b) Sublessee has reviewed a copy of each Master Lease and is fully familiar with the provisions thereof. Sublessor represents and warrants that (i) the copy of the Master Lease attached hereto as Exhibit D is a true and complete copy of the Master Lease and all amendments, modifications, written side letter agreements and recorded memoranda of leases with respect thereto, (ii) Sublessor has not already assigned its interest in the Master Lease or sublet any of the Subleased Premises, and (iii) as of the date hereof, the Master Lease is in full force and effect and no defaults exist on the part of Sublessor or, to the best of Sublessor’s knowledge, Master Lessor under the terms of the Master Lease. Sublessor shall not assign, terminate or amend the Master Lease (or the Building 5 Master Lease provided that Sublesssee’s ROFO is in full force and effect) without the prior written consent of Sublessee, which consent may be withheld in Sublessee’s sole discretion.

          6.2 No Violation of Master Lease. Neither Sublessor nor Sublessee shall commit or permit to be committed any act or omission which would violate any term or condition of the Master Lease. If a Master Lease terminates, this Sublease shall terminate as to the portion of the Subleased Premises covered thereby and the parties shall be relieved of any further liability or obligation under this Sublease with respect thereto; provided, however, that if the Master Lease terminates as a result of a default or breach by either Sublessor or Sublessee under this Sublease and subject to Section 13 of this Sublease, then the defaulting party shall be liable to the other party for the damage suffered as a result of such termination. Furthermore, Sublessor agrees not to voluntarily terminate the Master Lease without the written consent of Sublessee, which consent shall not be unreasonably withheld, conditioned or delayed.

          6.3 Incorporation of Master Lease.

          (a) Subject to and in accordance with the exceptions, qualifications and modifications set forth below and elsewhere in this Sublease, all the provisions of the Master Lease, as set forth in Exhibit D hereto, are hereby incorporated by reference and made a part of this Sublease, and to the extent that such provisions impose obligations or duties on Sublessor as tenant under the Master Lease and are incorporated by reference into the terms of this Sublease, Sublessee does hereby expressly assume and agree with Sublessor to perform and to comply with such obligations and duties of Sublessor as tenant thereunder, as the same accrue on and after the Commencement Date, subject to the provisions of Sections 3.3 and 3.4 above. In the event of

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any conflict between any provision of the Master Lease incorporated herein and a provision contained in this Sublease, the provision contained in this Sublease shall prevail.

          (b) Except as otherwise expressly provided herein and except for those provisions that are not incorporated into this Sublease, the term “Landlord” (and similar terms) as used in the Master Lease shall mean “Sublessor” hereunder; the term “Tenant” (and similar terms) as used in the Master Lease shall mean “Sublessee” hereunder; the term “Premises” (and similar terms) as used in the Master Lease shall mean “Subleased Premises” hereunder; and the term “Lease” as used in the Master Lease shall mean this “Sublease”.

          (c) Sublessor shall have no obligation to operate or maintain (i) the Building or any other premises covered by the Master Lease, (ii) any common areas in the Building or any other premises covered by the Master Lease, or (iii) provide any Building services or utilities. With respect to all services to be performed or provided by Master Lessor under the Master Lease, Sublessor’s sole obligation shall be to exercise commercially reasonable efforts (without litigation or the threat thereof) to require Master Lessor to comply with its obligations to perform or provide such services under the Master Lease, including promptly notifying Master Lessor of its nonperformance if so requested by Sublessee in writing.

          (d) Notwithstanding anything to the contrary contained herein, in no event shall Sublessor be deemed to be in default under this Sublease or liable to Sublessee for any failure of Master Lessor to perform its obligations under the Master Lease. Wherever the Master Lease requires the consent of the landlord be obtained, both Master Lessor’s consent and Sublessor’s consent shall be required and the standard for such consent by Sublessor shall be a consent not unreasonably withheld or delayed. For the avoidance of doubt, Sublessee shall be required to obtain both Sublessor’s and Master Lessor’s consent for (i) any assignment or sub-subletting of the Subleased Premises (provided that Sublessor’s consent shall not be required for assignments to entities controlled by or under common control with Sublessee if Sublessee is not released from its obligations under this Sublease), or (ii) any Alterations to the Subleased Premises or any portion thereof, in accordance with the provisions of the Master Lease, as incorporated be referenced herein, but subject to the terms and conditions contained in Section 4.2 above.

          6.4 Exclusions from Master Lease. Sublessor and Sublessee expressly agree that the following provisions of the Master Lease are not incorporated in this Sublease: the first full paragraph of the Master Lease; Sections 2, 4.A and 4.B; Sections 4.E and 4.F; the first two sentences of Section 5; the seventh sentence of Section 6; the first sentence of Section 9; the first sentence of Section 12; Sections 13 and 23; the term “Landlord” in the first and second sentences of Section 21, the second paragraph of Section 22 and in Section 27 shall be replaced with “Master Lessor”; Sections 29, 31, 34, 36, 38.G, 39 through 44 (inclusive), 45 through 51 (inclusive), 52.A through D (inclusive); the term “Landlord” in Section 53 shall be replaced with “Master Lessor” and all references to extension rights or periods in such Section 53 shall be deleted (i.e., not incorporated by reference into this Sublease); Sections 55, 62, 63, 64 and 65; the term “for lease” in Section 59(ii) shall be replaced with “for sublease”; Sections 1 through 5 (inclusive), Sections 8, 9, 11, 12, 14, 17, 18 and 19 of Amendment No. 1 to Lease; and all of Amendment No. 2 to Lease.

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          6.5 Time for Notices and Demands. Whenever in the Master Lease a time is specified for the giving of any notice or the making of any demand by the tenant thereunder, such time is hereby changed (for the purpose of this Sublease only) by subtracting five (5) days thereto (unless the time specified is less than five (5) days in which event two (2) business days shall be subtracted thereto instead); and whenever in the Master Lease a time is specified for the giving of any notice or the making of any demand by the landlord thereunder, such time is hereby changed (for the purpose of this Sublease only) by adding five (5) days if such notice, request or demand of the landlord thereunder relates to any subject other than the payment of fixed annual rent or additional rent under the Master Lease (unless the time specified is less than five (5) days in which event two (2) business days shall be added thereto instead). Whenever in the Master Lease a time is specified within which the tenant thereunder must give notice or make a demand following an event, or within which the tenant thereunder must respond to any notice, request or demand previously given or made by the landlord thereunder, or to comply with any obligation on the tenant’s part thereunder, such time is hereby changed (for the purpose of this Sublease only) by subtracting five (5) days if the same shall relate to any obligation other than the payment of fixed annual rent or additional rent under the Master Lease or under this Sublease (unless the time specified is less than five (5) days in which event two (2) business days shall be subtracted thereto instead). Wherever in the Master Lease a time is specified within which the landlord thereunder must give notice or make a demand following an event, or within which the landlord thereunder must respond to any notice, request or demand previously given or made by the tenant thereunder, such time is hereby changed (for the purpose of this Sublease only) by adding five (5) days thereto (unless the time specified is less than five (5) days in which event two (2) business days shall be added thereto instead). It is the purpose and intent of the foregoing provisions, among other things, to provide Sublessor with time within which to transmit to the Master Lessor any notices or demands received from Sublessee and to transmit to Sublessee any notices or demands received from the Master Lessor.

          6.6 Options to Extend Under Master Lease; Amendment to Sublease. In the event that (a) Sublessee notifies Sublessor in writing that Sublessee is actively negotiating a direct lease with Master Lessor (“Direct Lease”) with regard to the Subleased Premises for a term commencing immediately after the Expiration Date, and (b) provided that Sublessee is not then in default under this Sublease, then Sublessor agrees that it will not exercise its Option to Extend with regard to the Subleased Premises until such time as Sublessee notifies Sublessor in writing that it is no longer negotiating a Direct Lease with Master Lessor for the Subleased Premises. Sublessee hereby agrees to respond (in the affirmative or negative), from time to time, within ten (10) business days of its receipt of a written inquiry from Sublessor requesting that Sublessee confirm that Sublessee is or is not actively negotiating a Direct Lease with Master Lessor. In the event that Sublessee and Master Lessor execute and deliver a Direct Lease for the Subleased Premises, with a term commencing immediately after the Expiration Date, then (1) Sublessor shall agree to amend the Master Lease to delete its Options to Extend thereunder, and (2) Sublessor and Sublessee shall execute and deliver an amendment to this Sublease providing: (I) the Expiration Date for the Building shall be extended to be co-terminus with the expiration date of the Master Lease; (II) Sublessee shall assume the obligations of Sublessor under the Master Lease to remove any Alterations to the applicable Building that Master Lessor requires be removed and to restore the same in accordance with the terms of the Master Lease (collectively, the “Restoration Obligations”); and (III) Sublessee shall indemnify, defend and hold harmless Sublessor and the Sublessor Indemnitees from and against all Claims related to the Restoration

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Obligations assumed by Sublessee. In the event that Sublessee executes a Direct Lease with Master Lessor for the Subleased Premises, then Sublessor agrees to execute a quitclaim deed with respect thereto for delivery and recordation at expiration or termination of the Master Lease.

     7. Sublessee’s Insurance. Notwithstanding anything to the contrary contained in the Master Lease, Sublessee, at its sole cost and expense, shall keep in force at all times during the Term a policy of commercial general liability insurance with combined single limit coverage of not less than Three Million Dollars ($3,000,000) per occurrence and Five Million Dollars ($5,000,000) in the aggregate for bodily injury and property damage occurring in, on or about the Subleased Premises, including parking and landscaped areas. All insured policies required to be maintained by Sublessee hereunder shall name Sublessor and Master Lessor as additional insureds. Except as modified by this Section, Sublessee shall strictly comply with all other obligations under Section 10 of the Master Lease, as incorporated by reference herein.

     8. Casualty; Condemnation.

          (a) In the event that Sublessor’s interest as tenant under the Master Lease is terminated by reason of damage or destruction, condemnation, or any other reason, then this Sublease shall terminate as to Sublessor’s interest therein only (and not as to all Sublessor interests under the Master Lease) on the same date as the termination of such interest, without liability of Sublessor to Sublessee, and Sublessee shall not be entitled to any insurance proceeds or other remuneration from Sublessor except for insurance proceeds from insurance policies purchased by Sublessee for its own personal property. Sublessor agrees to give written notice to Sublessee promptly should Sublessor’s interest in any portion of the Subleased Premises be terminated, or be threatened to be terminated, under the Master Lease. Sublessor shall not terminate the Master Lease due to a casualty or condemnation without the prior written consent of Sublessee, which consent may be withheld in Sublessee’s sole and absolute discretion.

          (b) If the Subleased Premises or any portion thereof is damaged by fire or other casualty, and if the Master Lease is not terminated, then:

               (i) This Sublease shall continue in full force and effect;

               (ii) Sublessor shall have no obligation to repair or restore the damaged space;

               (iii) Sublessor shall use commercially reasonable efforts (without litigation or the threat thereof), as set forth in Section 6.3(c) above, to cause Master Lessor to perform the repairs which Master Lessor is required to perform under the Master Lease; provided that Sublessor shall not be liable for any damages, nor shall Rent due hereunder be abated, nor shall Sublessee be relieved from the performance of any term or covenant hereunder, nor shall Sublessee be deemed to have been evicted, due to any aspect of the repair and restoration of the damaged space (including without limitation any delay of such repair and restoration), except to the extent so abated, relieved or evicted under the Master Lease; and

               (iv) There shall be no reduction or abatement of Rent for any period during which Sublessee is unable to use the affected portion of the Subleased Premises, in whole

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or part, due to damage or destruction of the same or the Building, unless Sublessor actually receives a reduction or abatement of rent under the Master Lease.

          (c) In the event eminent domain or condemnation is instituted against the Subleased Premises or any portion thereof, and the Master Lease is terminated with respect to all or a portion of the Subleased Premises as a result thereof pursuant to the Master Lease, (i) this Sublease shall terminate as of the date the Master Lease terminates with respect to such portion of the Subleased Premises without any liability on the part of Sublessor to Sublessee, and Sublessee shall not be entitled to any award of damages for Sublessee’s interest in the Subleased Premises, except that Sublessee may make a claim against the condemning authority for loss of or damage to Sublessee’s trade fixtures and personal property, relocation expenses, and unamortized subtenant improvements costs that have been paid by Sublessee, and (ii) Sublessor shall have no obligation to rebuild or restore the Subleased Premises. If this Sublease is terminated as to less than all of the Subleased Premises, this Sublease shall continue in full force and effect as to the remaining portion of the Subleased Premises, except that the Base Rent payable hereunder shall be equitably reduced but only to the extent (if any) that rent applicable to the affected portion of the Subleased Premises is reduced under the Master Lease.

          (d) Sublessee expressly waives the provisions of California Civil Code Section 1932(2) and Section 1933(4). Sublessor and Sublessee expressly waive the provisions of California Code of Civil Procedure Sections 1265.120 and 1265.130.

          9. Indemnity; Hold Harmless.

          (a) Sublessor shall not be liable to Sublessee or Sublessee’s employees, agents, invitees, licensees or visitors, or to any other person, for any injury to person, or damage to or loss of property on or about the Subleased Premises or the Building arising from any cause whatsoever, except to the extent caused solely by the gross negligence or willful misconduct of Sublessor. Except to the extent caused solely by the gross negligence or willful misconduct of Sublessor, Sublessee shall indemnify, protect, defend with counsel reasonably acceptable to Sublessor and hold harmless Sublessor and Sublessor’s shareholders, directors, officers, employees, agents, affiliates, successors and assigns (collectively, “Sublessor Indemnitees”) from and against any and all Claims caused by or arising in connection with: (i) the use or occupancy of the Subleased Premises, the Building, the Infrastructure Systems and the Personal Property by Sublessee or its employees, contractors, agents, invitees, licensees, permitted sub-sublessees or assignees or permitted sublessees pursuant to Section 32 below; or (ii) the negligence or willful misconduct of Sublessee or its employees, contractors, agents, invitees, licensees or permitted sub-sublessees or assignees; or (iii) a default or breach of Sublessee’s obligations under this Sublease; or (iv) a default or breach of Sublessor’s obligations under the Master Lease to the extent caused by Sublessee’s default or breach of any of its obligations contained in this Sublease; or (v) any negligence, gross negligence or willful misconduct of Sublessee or its agents, employees, contractors, invitees, licensees, permitted sub-sublessees or assignees or permitted sublessees pursuant to Section 32 below in, on or about the Subleased Premises or the Building; or (vi) any failure of Sublessee to surrender the Subleased Premises (or any portion thereof) to Sublessor at the end of the Term hereof (or such sooner date as provided in this Sublease) or otherwise in the condition required hereunder to the extent required pursuant to the terms of this Sublease, or (vii) all Claims for labor or materials furnished or alleged to

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have been furnished to or for Sublessee at or for use on the Subleased Premises. Sublessee’s indemnification and other covenants provided in this Section 9 shall survive the expiration or termination of this Sublease.

          (b) Except to the extent caused solely by the gross negligence or willful misconduct of Sublessee but subject to Sections 3.3 and 3.4 above, Sublessor shall indemnify, protect, defend with counsel reasonably acceptable to Sublessee and hold harmless Sublessee and Sublessee’s shareholders, directors, officers, employees, agents, affiliates, successors and assigns (collectively, “Sublessee Indemnitees”) from and against any and all Claims caused by or arising in connection with: (i) a default or breach of Sublessor’s obligations under the Master Lease that is not caused by Sublessee’s default or breach of any of its obligations contained in this Sublease; or (ii) any negligence, gross negligence or willful misconduct of Sublessor or its agents, employees, contractors, invitees, licensees or permitted sub-sublessees or assignees in, on or about the Subleased Premises or the Building; or (iii) all Claims for labor or materials furnished or alleged to have been furnished to or for Sublessor at or for use on the Subleased Premises. Sublessor’s indemnification and other covenants provided in this Section 9 shall survive the expiration or termination of this Sublease.

     10. Utilities; System Connections; Vendors. Pursuant to Section 8 of the Master Lease, as incorporated by reference herein, Sublessee shall be responsible and shall pay directly all utilities and services furnished to the Subleased Premises, including security and janitorial services. Sublessor shall cause, at Sublessor’s expense, Infrastructure Systems and Security Systems within the Building to be separated from Infrastructure Systems and Security Systems for other buildings; and thereafter, Sublessee shall cause, at Sublessee’s expense, Infrastructure Systems and Security Systems within the Building to be reconnected (if necessary). Subject to the terms of the Master Lease and provided that Sublessee obtains both Sublessor’s and Master Lessor’s prior written consent (which consent Sublessor shall not unreasonably withhold), Sublessee shall be permitted to select its own vendors for its repair and maintenance of the Subleased Premises and for janitorial, security and other services to the Subleased Premises.

     11. Notices.

          11.1 Notices Under Sublease. All notices, consents, demands, requests and other communications from one party to the other given pursuant to the terms of this Sublease shall be in writing and shall be delivered by hand, air courier or by United States mail, certified or registered, postage prepaid, and addressed to Sublessee or Sublessor at the addresses respectively specified below or to such other place as Sublessee or Sublessor may from time to time designate in a written notice to the other. Notices shall be deemed given on the earliest of (i) receipt, (ii) one (1) business day after deposit with an courier for overnight delivery, or (iii) three (3) business days after deposit in the United States mail.

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The address for
Sublessor is:	Maxtor Corporation
	333 South Street
	Shrewsbury, MA 01545
	Attn: Gary Leblanc
with a copy to:	Maxtor Corporation
	2452 Clover Basin Drive Longmont, CO 80503
	Attention: General Counsel
The address for
Sublessee is:	[Prior to the Commencement Date]
	SanDisk Corporation
	140 Caspian Court
	Sunnyvale, CA 94089
	Attn: General Counsel
with a copy to:	SanDisk Corporation
	140 Caspian Court
	Sunnyvale, CA 94089
	Attn: Edward Palma
	[On and after the Commencement Date]
	SanDisk Corporation
	601 McCarthy Boulevard
	Milpitas, CA 95035
	Attn: General Counsel
with a copy to:	SanDisk Corporation
	601 McCarthy Boulevard
	Milpitas, CA 95035
	Attn: Edward Palma

          11.2 Notices Under Master Lease. Sublessor shall promptly provide Sublessee with a copy of any notice it receives from Master Lessor relating to the Subleased Premises or the Master Lease. Sublessee shall promptly provide Sublessor with a copy of any notice it receives from Master Lessor relating to the Subleased Premises or the Master Lease.

     12. Confidentiality. Sublessee acknowledges and agrees that the terms and conditions set forth in this Sublease constitute Sublessor’s “Confidential Information” (as defined in the NDA, as defined below) and that such terms and conditions shall be subject to the Mutual Nondisclosure Agreement executed by Sublessor and Sublessee and made effective as of May 4, 2004 (the “NDA”).

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     13. Limitation of Liability. Notwithstanding anything to the contrary contained in this Sublease, (a) no director, officer, shareholder, employee, adviser or agent of Sublessor or Sublessee shall be personally liable in any manner or to any extent under or in connection with this Sublease, and (b) neither Sublessor nor any of the Sublessor Indemnitees shall be responsible or liable for any consequential or punitive damages in connection with this Sublease, including, without limitation, on account of lost profits or the interruption of Sublessee’s business.

     14. Signage. Subject to the terms and conditions of the Master Lease, Sublessee, at its sole cost and expense, shall have the same signage rights as Sublessor has under the Master Lease with regard to the Building subleased to Sublessee hereunder, provided that at Sublessee’s sole cost (a) Sublessee shall obtain the prior written consent of Master Lessor thereto, (b) other than with respect to signage for Building 6, Sublessee shall obtain the prior written consent of Sublessor thereto (which consent of Sublessor shall not be unreasonably withheld), (c) Sublessee shall obtain all necessary permits and approvals from all applicable government agencies with respect thereto, (d) Sublessee shall install, maintain, repair and, to the extent required by Master Lessor, remove all signage at expiration or earlier termination of this Sublease, and (e) Sublessee shall repair all damage to the Subleased Premises caused by the removal of all signage at expiration or earlier termination of this Sublease.

     15. Brokers. Sublessor shall pay The Staubach Company any brokerage commission earned in connection with this Sublease pursuant to a separate agreement. Sublessee represents and warrants to Sublessor that no real estate broker, agent or finder negotiated or was instrumental in negotiating or representing Sublessee in the negotiation of this Sublease, other than CPS/Cushman & Wakefield. Sublessor represents and warrants to Sublessee that no real estate broker, agent or finder negotiated or was instrumental in negotiating or representing Sublessor in the negotiation of this Sublease, other than The Staubach Company. Sublessee and Sublessor shall each indemnify and hold the other harmless from and against any Claims resulting from breach of such party’s representation and warranty contained above.

     16. Counterparts. This Sublease may be executed in separate counterparts, each of which shall be an original, and all of which taken together shall constitute one and the same agreement.

     17. No Recording. Neither party hereto shall record this Sublease nor any memorandum hereof without the written consent of the other party.

     18. Curing Defaults.

     (a) If Sublessee shall be in default in the performance of any of its obligations hereunder beyond any applicable notice and cure period, Sublessor, without any obligation to do so, in addition to any other rights it may have in law or equity, may elect (but shall not be obligated) to cure such default after the applicable cure period at any time after delivery of five (5) business days’ notice to Sublessee. Sublessee shall reimburse Sublessor, upon demand for one hundred percent (100%) of all costs and expenses paid or incurred by Sublessor in curing such default, and interest thereon from the respective dates of Sublessor’s making the payments and incurring such costs, at the lesser of (i) the prime rate announced by Bank of America

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NT&SA from time to time (the “Prime Rate”) plus two percent (2%), or (ii) the maximum amount allowed by law, which sums and costs together with interest thereon shall be deemed Additional Rent payable promptly upon being billed therefor.

     (b) If Sublessor shall be in default in the performance of any of its obligations under the Master Lease beyond any applicable notice and cure period, Sublessee, without any obligation to do so, in addition to any other rights it may have in law or equity, may elect (but shall not be obligated) to cure such default after the applicable cure period at any time after delivery of five (5) business days’ notice to Sublessor. Sublessor shall reimburse Sublessee, upon demand for one hundred percent (100%) of all costs and expenses paid or incurred by Sublessee in curing such default, and interest thereon from the respective dates of Sublessee’s making the payments and incurring such costs, at the lesser of (i) the Prime Rate plus two percent (2%), or (ii) the maximum amount allowed by law, which sums and costs together with interest thereon shall be payable promptly upon being billed therefor.

     19. Time. In all instances where Sublessee is required by the provisions of this Sublease to pay any sum of money or to do any act at a particular indicated time or within any indicated period, it is understood and agreed that TIME IS OF THE ESSENCE.

     20. Authority. The individual or individuals signing this Sublease on behalf of Sublessee or Sublessor, represent and warrant that: (i) Sublessee or Sublessor, respectively, is a corporation duly incorporated and organized and validly existing and in good standing under the laws of the State of Delaware; (ii) Sublessee or Sublessor, respectively has full power and authority to enter into this Sublease and to perform its obligations under this Sublease; (iii) the execution, delivery and performance of this Sublease by Sublessee or Sublessor have been duly and validly authorized by all necessary corporate action on the part of Sublessee or Sublessor and all required consents and approvals have been duly obtained; and (iv) this Sublease is a legal, valid and binding obligation of Sublessee or Sublessor, respectively, enforceable against Sublessee or Sublessor, respectively in accordance with its terms, subject to the effect of applicable bankruptcy, insolvency, reorganization, arrangement, moratorium or other similar laws affecting the rights of creditors generally.

     21. Attorneys’ Fees. If as a result of any breach or default on the part of Sublessee under this Sublease, Sublessor uses the services of an attorney in order to secure compliance with this Sublease, Sublessee shall reimburse Sublessor upon demand as Additional Rent for any and all reasonable attorneys’ fees and expenses incurred by Sublessor, whether or not formal legal proceedings are instituted. Should either party bring an action against the other party, by reason of or alleging the failure of the other party to comply with any or all of its obligations hereunder, whether for declaratory or other relief, then the party which prevails in such action shall be entitled to its reasonable attorneys’ fees and expenses related to such action, in addition to all other recovery or relief. A party shall be deemed to have prevailed in any such action (without limiting the generality of the foregoing) if such action is dismissed upon the payment by the other party of the sums allegedly due or the performance of obligations allegedly not complied with, or if such party obtains substantially the relief sought by it in the action, irrespective of whether such action is prosecuted to judgment. Attorneys’ fees shall include, without limitation, fees incurred in discovery, contempt proceedings, and bankruptcy litigation. The non-prevailing party shall also pay the reasonable attorneys’ fees and costs incurred by the prevailing party in

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any post-judgment proceedings to collect and enforce the judgment. The covenant in the preceding sentence is separate and several and shall survive the merger of this provision into any judgment on this Sublease.

     22. Successors. The terms, covenants and conditions of this Sublease shall be binding upon and inure to the benefit of Sublessor and Sublessee and their respective successors, and except as otherwise provided, their assigns.

     23. Remedies; Cross-Defaults. Sublessor shall have the right, upon Sublessee’s default hereunder, in addition to the remedies set forth in this Sublease, to exercise against Sublessee any and all of the rights and remedies described in the Master Lease as available to Master Lessor in the event of a default by the tenant under the Master Lease. Moreover, any default by Sublessee of any of its obligations or duties under any Sublease shall constitute a default by Sublessee under all of the Subleases.

     24. Not Offer. The submission of this Sublease for review or signature by Sublessee shall not constitute an offer or option to sublease the Subleased Premises, nor shall this Sublease be effective as a sublease or otherwise until both parties execute and deliver execution counterparts of this Sublease and Master Lessor approves this Sublease in writing.

     25. Construction. This Sublease is the result of negotiations between the parties and their respective attorneys and shall be construed in an even and fair manner, regardless of the party who drafted this Sublease or any provision hereof. The headings or captions of sections in this Sublease are for convenience and reference only, and in no way define, limit, or describe the scope or intent of this Sublease or the provisions of such sections. The term “including” shall mean “including, but not limited to.”

     26. Entire Agreement; Amendment; Severability. Sublessor and Sublessee hereby agree to mutually terminate that certain Sublease dated as of November 30, 2005 with respect to the Buildings (as amended, the “Prior Sublease”). Sublessor and Sublessee hereby also agree that, notwithstanding the terms of the Prior Sublease, all covenants, duties, obligations and indemnities contained in the Prior Sublease shall not survive the termination thereof. There are no oral agreements between Sublessor and Sublessee affecting this Sublease, and this Sublease (along with the NDA) supersedes and cancels any and all prior negotiations, arrangements, correspondence, communications, agreements and understandings, if any, whether oral or written, between Sublessor and Sublessee with respect to the subject matter of this Sublease (including the Prior Sublease), and none of the foregoing shall be used to construe this Sublease. No amendment or modification of this Sublease shall be binding or valid unless expressed in writing and executed and delivered by Sublessor and Sublessee. If any one or more of the provisions contained in this Sublease shall be invalid, illegal or unenforceable in any respect, the validity, legality or enforceability of the remaining provisions contained herein shall not in any way be affected or impaired.

     27. Right of First Offer.

          27.1 Right of First Offer. During the Term, Sublessee shall have a right of first offer (“ROFO”) to sublease all of Building 5, containing approximately 94,484 rentable square

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feet, if and when Building 5 becomes Available (as defined below) and subject to Sublessor’s obtaining Master Lessor’s consent thereto in the Sublease Consent or another writing. As used in this Sublease, “Available” shall mean that the entire Building 5 is then offered in the marketplace to the public at large for rent, free and clear of all claims and rights of other parties, and Building 5 shall be deemed not to be or not to have become “Available” if as to Building 5 there is a lease, lease option or option or other right of extension, renewal, expansion, refusal, negotiation or similar or other right, pursuant to any lease, sublease or written agreement in existence, with respect to any portion of Building 5, on or before July 1, 2006, including any option or right of extension or renewal thereof in existence on or before July 1, 2006 (and any subsequent exercise thereof). Sublessor will notify Sublessee in writing (“Sublessor’s Notice”) if the entire Building 5 (and not less than all of Building 5) becomes Available, which Sublessor’s Notice shall include, but not be limited to, (a) the date that Sublessor anticipates that Building 5 will become Available, and (b) Sublessor’s proposed terms and conditions for subleasing Building 5, including any subtenant improvement allowance that Sublessor shall provide. Sublessee shall have fifteen (15) days following Sublessor’s delivery of Sublessor’s Notice (“Election Notice Period”) to provide Sublessor irrevocable written notice (“Election Notice”) of Sublessee’s election to exercise its ROFO on the exact same terms and conditions as contained in Sublessor’s Notice. If Sublessee fails to deliver the Election Notice to Sublessor within the Election Notice Period or if Sublessee declines to exercise its ROFO, then Sublessee’s ROFO shall be null and void and at any time thereafter Sublessor shall be free to sublease Building 5 to any third party on the terms and conditions contained in Sublessor’s Notice or such other term and conditions that are not less than five percent (5%) lower (on an overall economic basis) than the terms and conditions described in Sublessor’s Notice.

          27.2 Terms and Conditions. If Sublessee duly and timely delivers its Election Notice to Sublessor, then Sublessor shall prepare and Sublessee shall execute a direct sublease with respect to Building 5, subject to Sublessor’s termination right pursuant to Section 27.3 below, on the same terms and conditions as contained in the Building 6 Sublease except as follows: (a) Sublessee shall accept Building 5 in its then “As-built” and “AS IS” condition without any obligation of Sublessor to repaint, remodel, improve or alter Building 5 or any portion thereof for Sublessee’s occupancy or to provide Sublessee any allowance therefor (unless Sublessor’s Notice provides otherwise); (b) Sublessor shall deliver Building 5 to Sublessee on the date (“Delivery Date”) that is the later of (i) thirty (30) days after Sublessor regains possession of all of Building 5, and (ii) the date that Master Lessor consents to Sublessee’s subleasing of Building 5; (c) the term of Sublessee’s sublease of Building 5, and obligation to pay Rent therefor, shall commence on the Delivery Date and shall expire sixty (60) days prior to the expiration date of the Building 5 Master Lease; and (d) the Letter of Credit shall be increased by an amount to three (3) months’ Base Rent for Building 5; and (f) as otherwise expressly provided in this Section 27.

          27.3 Termination of ROFO. Upon the occurrence of any of the following events, Sublessor shall have the option, exercisable at any time prior to the commencement of the term as to Building 5, to terminate all of the provisions of this Section 27, whereupon all rights of Sublessee pursuant to the ROFO shall terminate and shall be of no further force and effect:

          (a) Sublessee’s failure to timely exercise the ROFO in strict accordance with this Section 27.

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          (b) The existence at the time of exercise of the ROFO (or anytime thereafter) of a default or breach by Sublessee under this Sublease.

     28. No Solicitation. During the Term, Sublessee shall not solicit nor hire any employee of Sublessor with first obtaining the prior written consent of Sublessor, which consent may be withheld in Sublessor’s sole discretion. Sublessee hereby agrees that money damages will not be a sufficient remedy for any breach of this Section 28, such that Sublessor shall be entitled to injunctive relief, specific performance, or both as a remedy for any such breach. Such remedy shall not be deemed to be the exclusive remedy for any such breach but shall be in addition to all other remedies available at law or equity.

     29. Parking. Sublessee shall have the right to use, on an unassigned, non-exclusive basis, all parking spaces in the parking areas designated for the Building, as shown on Exhibit A hereto (the “Parking Areas”). Notwithstanding the foregoing but subject to Applicable Requirements (including those relating to handicap parking), Sublessor agrees to use commercially reasonable efforts to ensure that its employees, agents, contractors and invitees do not park in a reasonable number of “visitors” parking spaces that shall be designated by Sublessee in front of Building 3. The use of the Parking Areas shall be subject to, and is conditioned upon, compliance by Sublessee with all rules and regulations governing the Parking Areas promulgated by Master Lessor or Sublessor from time to time (and Sublessee shall cause all of its employees, agents, contractors and invitees to comply with the same).

     30. Outdoor Areas. Sublessee shall have the right to use, on a non-exclusive basis, the outdoor sunken amphitheatre, basketball and volleyball courts, seating and lawn areas and other outdoor areas associated with the Buildings (collectively, the “Outdoor Areas”). The use of the Outdoor Areas shall be subject to, and is conditioned upon, compliance by Sublessee with all rules and regulations governing the Outdoor Areas promulgated by Master Lessor or Sublessor from time to time (and Sublessee shall cause all of its employees, agents, contractors and invitees to comply with the same). In the event that Sublessee desires to reserve an Outdoor Area for its exclusive use (a “Reservation”), it may do so subject to the following requirements: (a) Sublessee shall deliver to Sublessor written notice specifying which Outdoor Area it proposes to reserve and the date and time of the proposed Reservation at least fifteen (15) days’ prior to the proposed Reservation date; (b) Sublessee shall not be permitted to reserve an Outdoor Area if Sublessor or Master Lessor intends to use such Outdoor Area (or any portion thereof) during the proposed Reservation period; (c) Sublessee shall not be permitted to reserve an Outdoor Area for longer than a twenty-four (24) hour period (unless otherwise approved in writing by Sublessor which approval shall not be unreasonably withheld, conditioned or delayed); (d) Sublessee shall set up and clean up the Outdoor Area at Sublessee’s sole cost; and (e) Sublessee shall comply with all rules and regulations governing the Outdoor Areas promulgated by Master Lessor or Sublessor from time to time, including without limitation, any requirement by Sublessor that Sublessee obtain additional insurance or provide Sublessor with additional indemnities in connection with any alcoholic beverages served by or for Sublessee in or around the Outdoor Area.

     31. Hazardous Substances.

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          31.1 Definitions. As used in this Sublease, the term “Hazardous Substance” shall mean any product, substance, or waste whose presence, use, manufacture, disposal, transportation, or release, either by itself or in combination with other materials expected to be on the Subleased Premises, is: (i) potentially injurious to the public health, safety or welfare, the environment or the Subleased Premises, (ii) regulated or monitored by any governmental authority, or (iii) a basis for potential liability of Sublessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substances shall include, but not be limited to, PCB’s, hydrocarbons, petroleum, gasoline, asbestos and/or crude oil or any products, by-products or fractions thereof. As used in this Sublease, the term “Reportable Use” shall mean (i) the installation or use of any above ground storage tank, (ii) the generation, possession, storage, use, transportation, release or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority, and/or (iii) the presence at the Subleased Premises of a Hazardous Substance with respect to which any Applicable Requirement requires that a notice be given to persons entering or occupying the Subleased Premises or neighboring properties.

          31.2 Reportable Uses and Hazardous Substances Require Consent. Except as expressly provided below and subject to the Master Lease, Sublessee shall not engage in any activity in or on the Subleased Premises which constitutes a Reportable Use of Hazardous Substances, nor shall Sublessee generate, possess, store, use, release or dispose of any Hazardous Substances in, on, under or about the Subleased Premises or the Building, without the express prior written consent of both Sublessor and Master Lessor (which consent Sublessor shall not unreasonably withhold), and Sublessee’s timely compliance (at Sublessee’s expense) with all Applicable Requirements.

          31.3 Duty to Inform Sublessor. If Sublessee knows that a Hazardous Substance has come or may have come to be located in, on, under or about the Subleased Premises, Sublessee shall immediately give written notice of such fact to Sublessor, and provide Sublessor with a copy of any report, notice, claim or other documentation which it has concerning the presence of such Hazardous Substance.

          31.4 Sublessee Remediation. Sublessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under, or about the Subleased Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Sublessee’s sole cost and expense, take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of the Subleased Premises or neighboring properties, that was caused or materially contributed to by Sublessee, or pertaining to or involving any Hazardous Substance brought onto or released in, on or under the Subleased Premises the Subleased Premises by or for Sublessee or Sublessee’s employees, contractors, agents, invitees, licensees or permitted sub-sublessees or assignees. Sublessee shall be solely responsible for the remediation of any condition concerning any Hazardous Substance brought onto or released in, on or under the Subleased Premises by or for Sublessee or Sublessee’s employees, contractors, agents, invitees, licensees or permitted sub-sublessees or assignees.

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          31.5 Investigations and Remediations. Sublessee shall have responsibility and shall pay for any investigations or remediation measures required by governmental entities having jurisdiction with respect to the existence of Hazardous Substances brought onto or released in, on or under the Subleased Premises by or for Sublessee or Sublessee’s employees, contractors, agents, invitees, licensees or permitted sub-sublessees or assignees. Sublessee shall cooperate fully in any such activities at the request of Sublessor or Master Lessor, including allowing Sublessor and Master Lessor and their respective employees and agents to have reasonable access to the Subleased Premises at reasonable times in order to carry out any investigative and remedial actions which Sublessor or Master Lessor may elect to do.

          31.6 Sublessee’s Compliance with Applicable Requirements. Sublessee shall obtain, maintain and strictly comply with, at Sublessee’s sole cost and expense, any and all Applicable Requirements with the generation, possession, storage, use, release or disposal of any Hazardous Substance brought onto or released in, on or under the Subleased Premises by or for Sublessee or Sublessee’s employees, contractors, agents, invitees, licensees or permitted sub-sublessees or assignees. Sublessee shall, within ten (10) days after receipt of Sublessor’s or Master Lessor’s written request, provide Sublessor and Master Lessor with copies of all permits and other documents, and other information evidencing Sublessee’s compliance with any Applicable Requirements specified by Sublessor or Master Lessor, and shall immediately upon receipt by Sublessee, notify Sublessor and Master Lessor in writing (and immediately provide to Sublessor and Master Lessor copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving the failure of Sublessee or the Subleased Premises to comply with any Applicable Requirements or the provisions of this Section 31.

          31.7 Inspection; Compliance. Sublessor and Master Lessor and their respective employees and agents shall have the right to enter the Subleased Premises at any time, in the case of an emergency, and otherwise at reasonable times upon reasonable prior notice, which may be verbal, for the purpose of inspecting the condition of the Subleased Premises and for verifying compliance by Sublessee with this Section 31. The reasonable cost of any such inspections shall be paid by Sublessor, unless such inspection reveals that Sublessee has violated the provisions of this Section 31 in which case Sublessee shall reimburse Sublessor for the reasonable out of pocket costs of such inspections. Moreover, Master Lessor shall be permitted at any time (a) to cause testing wells to be installed in or around the Subleased Premises, and (b) to cause ground water to be tested to detect the presence of Hazardous Substances.

          31.8 Sublessee Indemnification. Sublessee shall indemnify, defend and hold harmless each of Sublessor, the Sublessor Indemnitees and the Master Lessor from and against any and all Claims arising out of or involving any Hazardous Substance brought onto or released in, on or under the Subleased Premises by or for Sublessee or Sublessee’s employees, contractors, agents, invitees, licensees or permitted sub-sublessees or assignees. Sublessee’s obligations shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Sublessee, and the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Sublease. No termination, cancellation or release agreement entered into by Sublessor and Sublessee shall release Sublessee from its obligations under this Sublease with respect to Hazardous Substances, unless Sublessor specifically agrees thereto in

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writing at the time of such agreement and such agreement specifically identifies this Section 31 of this Sublease.

          31.9 Sublessor Indemnification. Sublessor shall indemnify, defend and hold harmless each of Sublessee and the Sublessee Indemnitees from and against any and all Claims arising out of or involving (a) any Hazardous Substance existing in, on or under the Subleased Premises prior to the Commencement Date other than any Hazardous Substance brought onto or released in, on or under the Subleased Premises by or for Sublessee or Sublessee’s employees, contractors, agents, invitees or licensees prior to the Commencement Date, or (b) any Hazardous Substance brought onto or released in, on or under the Subleased Premises by or for Sublessor on and after the Commencement Date. Sublessor’s obligations shall include, but not be limited to, the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Sublease. No termination, cancellation or release agreement entered into by Sublessor and Sublessee shall release Sublessor from its obligations under this Section 31, unless Sublessee specifically agrees thereto in writing at the time of such agreement and such agreement specifically identifies this Section 31 of this Sublease.

     32. Proposed Sub-Subletting; Recapture. In the event that Sublessee desires to sub-sublet all or a portion of the Subleased Premises, Sublessee shall submit to Sublessor for its review the terms and conditions of such proposed sub-sublease transaction. Sublessor shall have the option for a period of thirty (30) days, commencing upon the delivery to Sublessor of all of the information described in the succeeding sentence, to elect in Sublessor’s sole discretion to terminate this Sublease (as to the portion of the Subleased Premises that Sublessee proposes to sub-sublet) and enter into a direct sublease (the “Direct Sublease”) with the prospective sub-sublessee (the “Recapture”). In connection with Sublessor’s review process, Sublessee shall submit to Sublessor in writing (i) the name of the proposed sub-sublessee, (ii) such information as to such sub-sublessee’s financial condition and general standing in the community as may be available to Sublessee, (iii) all of the terms and conditions upon which the proposed transaction is to be made, and (iv) such other information as Sublessor shall reasonably request. The parties hereto acknowledge and agree that, if Sublessor elects to Recapture: (a) the consent of Master Lessor is required for the Direct Sublease (the “Direct Sublease Consent”); (b) the parties hereto shall use commercially reasonable efforts to negotiate in good faith to obtain, execute and deliver the Direct Sublease Consent as soon as reasonably practicable; (c) Sublessee shall execute and deliver a guaranty, in form and substance reasonably acceptable to Sublessor and Sublessee, wherein Sublessee shall guaranty for the benefit of Sublessor the prompt payment and performance of each and every obligation of the sublessee under the Direct Sublease; (d) upon the effective date of the Recapture (provided that Master Lessor has executed the Direct Sublease Consent), Sublessee shall surrender possession of the portion of the Subleased Premises covered by the Direct Sublease and any applicable Personal Property and Infrastructure Systems in accordance with the terms and conditions contained in this Sublease for the surrender of the same; and (e) Sublessee shall execute and deliver an amendment to this Sublease modifying the description of the Subleased Premises, the Base Rent and any other relevant provisions contained herein. The provisions contained in this Section 32 are in addition to (and not in lieu of) the provisions contained in Sections 16, 56 and 57 of the Master Lease, as the same have been incorporated by reference into this Sublease.

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     IN WITNESS WHEREOF, the parties have executed this Sublease as of the date first hereinabove written.

Sublessor:
MAXTOR CORPORATION
By:	/s/ Duston Williams
Name:	Duston Williams
Title:	Chief Financial Officer
Sublessee:
SANDISK CORPORATION
By:	/s/ Judy Bruner
Name:	Judy Bruner
Title:	Executive Vice President and Chief Financial Officer

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EX-10.4

Exhibit 10.4

SUBLEASE
(BUILDING 4)

     THIS SUBLEASE (“Sublease”), dated as of December 21, 2005, is made by and between MAXTOR CORPORATION, a Delaware corporation (“Sublessor”), and SANDISK CORPORATION, a Delaware corporation (“Sublessee”).

RECITALS

     A. John Arrillaga, Trustee or his Successor Trustee u/t/a dated 7/20/77 (John Arrillaga Separate Property Trust), as amended, and Richard T. Peery, Trustee or his Successor Trustee u/t/a dated 7/20/77 (Richard T. Peery Separate Property Trust), as amended (collectively, “Master Lessor”), and Quantum Corporation, a Delaware corporation (“Quantum”), have entered into: (i) that certain Lease Agreement dated April 10, 1992 pursuant to which Quantum leased from Master Lessor the real property commonly called 900 Sumac Drive, Milpitas, California and the building constructed thereon (“Building 3”), as amended by that certain Amendment No. 1 to Lease dated April 16, 1997 and that certain Amendment No. 2 to Lease dated March 22, 2001 (collectively, the “Building 3 Master Lease”); (ii) that certain Lease Agreement dated September 17, 1990 pursuant to which Quantum leased from Master Lessor the real property commonly called 1000 Sumac Drive, Milpitas, California and the building constructed thereon (“Building 4” or the “Building”), as amended by that certain Amendment No. 1 to Lease dated April 16, 1997 and that certain Amendment No. 2 to Lease dated March 26, 2001 (collectively, the “Building 4 Master Lease” or the “Master Lease”); (iii) that certain Lease Agreement dated April 16, 1997 pursuant to which Quantum leased from Master Lessor the real property commonly called 601 McCarthy Boulevard, Milpitas, California and the building constructed thereon (“Building 6”), as amended by that certain Amendment No. 1 to Lease dated April 15, 1998 and that certain Amendment No. 2 to Lease dated March 22, 2001 (collectively, the “Building 6 Master Lease”); and (iv) that certain Lease Agreement dated March 23, 1994 pursuant to which Quantum leased from Master Lessor the real property commonly called 1100 Sumac Drive, Milpitas, California and the building constructed thereon (“Building 5”), as amended by that certain Amendment No. 1 to Lease dated April 16, 1997 and that certain Amendment No. 2 to Lease dated March 22, 2001 (collectively, the “Building 5 Master Lease”). Pursuant to Amendment No. 2 to each of the foregoing leases, Sublessor has succeeded to the interest of Quantum as tenant thereunder. A copy of the Building 4 Master Lease is attached hereto as Exhibit D.

     B. Sublessee desires to sublease from Sublessor, and Sublessor desires to sublease to Sublessee, (i) the entire premises covered by the Building 4 Master Lease upon the terms and conditions hereinafter set forth in this Sublease, (ii) the entire premises covered by the Building 3 Master Lease upon the terms and conditions set forth in that certain Sublease (Building 3) of even date herewith between Sublessor and Sublessee (the “Building 3 Sublease”), and (iii) the entire premises covered by the Building 6 Master Lease upon the terms and conditions set forth in that certain Sublease (Building 6) of even date herewith between Sublessor and Sublessee (the “Building 6 Sublease”). This Sublease, the Building 3 Sublease and the Building 6 Sublease are collectively called the “Subleases”.

     NOW, THEREFORE, in consideration of the mutual promises contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Sublessor and Sublessee agree as follows:

     1. Definitions. All capitalized terms not otherwise defined herein shall have the respective meanings ascribed to them under the Master Lease.

     2. Subleased Premises. Subject to the terms and conditions contained in this Sublease, Sublessor hereby subleases to Sublessee, and Sublessee hereby subleases from Sublessor, the entire premises covered by the Master Lease as depicted on Exhibit A hereto (the “Subleased Premises”); provided, however, subject to Section 29 below, Sublessor shall retain for itself and its employees, agents, contractors, invitees, licensees, successors and assigns (and Sublessee does hereby grant to each of the foregoing) the right to non-exclusive use of all common areas, landscaped areas, sidewalks and driveways related to each of Building 3, Building 4 and Building 6 (collectively, the “Buildings”). Moreover, subject to the terms and conditions of this Sublease, Sublessee shall have non-exclusive use of all common areas, landscaped areas, sidewalks and driveways related to the Building. For the avoidance of doubt, Sublessee acknowledges that it has no right to access any building (other than the Buildings and Building 5 if Sublessee exercises the ROFO, as defined in Section 27.1 below pursuant to the Subleases) in the project that the Buildings are a part. Sublessee hereby acknowledges and agrees that Building 4 consists of approximately 101,253 rentable square feet. Nevertheless, the parties agree that the foregoing approximation shall be final and binding for all purposes hereunder; and notwithstanding anything to the contrary contained herein, no adjustment shall be made to the Base Rent (as defined in Section 5.1(a) below) if the actual square footage of Building 4 differs from any reference to square footage contained herein.

     3. Term; Sublease Consent; Early Entry.

          3.1 Term. Provided that Master Lessor has consented to this Sublease (the “Sublease Consent”) and unless sooner terminated in accordance with the provisions contained herein, the term (“Term”) of this Sublease shall commence on July 1, 2006 (the “Commencement Date”) and shall expire on July 31, 2011 (the “Expiration Date”) [sixty (60) days prior to the expiration date of the Master Lease].

          3.2 Sublease Consent. If Master Lessor has not consented to this Sublease on or prior to January 15, 2006, then either party hereto shall have the right to terminate this Sublease and the other Subleases at any time on or prior to March 31, 2006, effective upon written notice to the other party. Sublessor agrees to use commercially reasonable efforts to obtain a non-disturbance agreement for the benefit of Sublessee as part of the Sublease Consent.

          3.3 Early Entry (Post-Consent). Upon full execution and delivery of the Sublease Consent, Sublessee and Sublessee’s employees, agents and contractors shall be permitted to enter the Subleased Premises during Building business hours (as determined by Sublessor in its sole discretion) for the purposes of (i) installing and re-configuring furnishings, fixtures and equipment, (ii) construction and testing of subtenant improvements, and (iii) conducting business operations. Such entry shall be subject to all of the terms and conditions of the Master Lease and this Sublease, including without limitation, (a) the indemnity and hold harmless provisions of Section 9 of this Sublease and (b) the obligation to pay utilities and

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janitorial services; provided, however, other than as provided in Section 5.2 below, Sublessee shall not be required to pay any Base Rent nor Operating Expense Payments (as defined below) for Real Property Taxes, insurance premiums and common area expenses with regard to such early entry. Sublessee shall furnish to Sublessor evidence of the insurance required under Section 7 of this Sublease prior to any entry into any portion of the Subleased Premises.

          3.4 Early Entry (Pre-Consent). In addition to Sublessee’s rights under Section 3.3 above, Sublessee and Sublessee’s employees, agents and contractors shall be permitted to enter the Building during Building business hours (as determined by Sublessor in its sole discretion) for the sole purposes of (i) testing the Warranted Systems (as defined in Section 4.5 below) therein, and (ii) preparing construction drawing, plans and specifications, and for no other purposes. Such entry shall be subject to all of the terms and conditions of the Master Lease and this Sublease, including without limitation, (a) the indemnity and hold harmless provisions of Section 9 of this Sublease and (b) the obligation to pay utilities and janitorial services; provided, however, other than as provided in Section 5.2 below, Sublessee shall not be required to pay any Base Rent nor Operating Expense Payments for Real Property Taxes, insurance premiums and common area expenses with regard to such early entry. Sublessee shall furnish to Sublessor evidence of the insurance required under Section 7 of this Sublease prior to any entry into any portion of the Subleased Premises. Moreover, and without limiting the foregoing, Sublessee shall indemnify, protect, defend with counsel reasonably acceptable to Sublessor and hold harmless Sublessor and Sublessor’s shareholders, directors, officers, employees, agents, affiliates, successors and assigns from and against any and all claims, demands, liabilities, judgments, losses, causes of action, fines, penalties, damages, costs and expenses, including reasonable attorneys’ and experts’ fees (collectively, “Claims”), caused by or arising in connection with the early entry described in this Section 3.4, including without limitation, any Claims by Master Lessor that Sublessor has committed (or allegedly committed) a default and/or breach under the Master Lease by permitting the early entry described in this Section 3.4. Sublessee’s indemnification and other covenants provided in this Section 3.4 shall survive the expiration or termination of this Sublease.

     4. Use; “As Is” Condition; Furniture.

          4.1 Use. Sublessee shall use the Subleased Premises for any legal use permitted under the Master Lease. Sublessee acknowledges that it is thoroughly familiar with the condition of the Subleased Premises, and Sublessee agrees that it is subleasing the Subleased Premises on an “AS IS”, “WHERE IS” basis, subject to all latent or patent defects, without any representation or warranty by Sublessor or Master Lessor or their respective employees or agents as to the condition of the Subleased Premises or their fitness for Sublessee’s use, except as otherwise set forth in this Sublease, and subject to all applicable zoning, municipal, county and state laws, ordinances and regulations governing and regulating the use of the Subleased Premises, and any easements, covenants or restrictions of record. Sublessee acknowledges that Sublessor and Master Lessor and their respective employees or agents have not made any representations or warranties that the Subleased Premises comply with applicable law, ordinance, rule, regulation or covenant or restriction of record (collectively, “Applicable Requirements”), including, but not limited to, the Americans With Disabilities Act, as amended (“ADA”), or any laws relating to earthquake or other life/safety matters or Hazardous Substances (as defined below), except as set forth in this Sublease. The parties hereto agree that the plans attached

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hereto as Exhibit B accurately reflect all Alterations (as defined below) in the Subleased Premises existing as of the date hereof (collectively, the “Existing Alterations”). Sublessor hereby assigns all of its right, title and interest under any warranties with respect to the Building and/or such Building’s systems and which are then in effect and which by their terms may be assigned without the consent of the counterparty thereto (collectively, “Building Warranties”). The assignment of the Building Warranties is conditioned on this Sublease being in full force and effect and that upon expiration or termination of this Sublease, the conditional assignment shall terminate automatically and Sublessee shall not have any further right, title or interest in the Building Warranties.

          4.2 Alterations. Sublessee shall obtain both Sublessor’s and Master Lessor’s prior written consent to the architect and contractor engaged by Sublessee to perform work in or about the Subleased Premises, which consent Sublessor shall not unreasonably withhold. Sublessor agrees that it shall not charge Sublessee any supervisory fee with respect to any alterations, additions or improvements (collectively, “Alterations”) that Sublessee makes to the Subleased Premises, other than any supervisory fee that Master Lessor charges Sublessor with respect thereto (which charge Sublessee shall pay Sublessor as Additional Rent (as defined below) hereunder). Except as modified by this Section, Sublessee shall strictly comply with all obligations of Section 6 of the Master Lease, as incorporated by reference herein. Notwithstanding anything to the contrary contained in this Sublease, (a) if so required in writing by Master Lessor, Sublessee shall remove all Alterations made by or on behalf of Sublessee in or to the Subleased Premises (whether or not Sublessor’s consent was required hereunder) at expiration or termination of this Sublease and restore the Subleased Premises to the condition shown on Exhibit B hereto, ordinary wear and tear and damage caused by Sublessor excepted, all at Sublessee’s sole cost and expense, and (b) Sublessee shall not be required to obtain Sublessor’s consent (but shall still be required to obtain Master Lessor’s consent, if applicable) to any Alteration to the Subleased Premises if (i) (A) the total cost (including soft costs) for such Alteration does not exceed Twenty Thousand Dollars ($20,000), (B) such Alteration does not affect the foundation, roof or any structural component of the Building, (C) such Alteration does not materially affect the Building’s mechanical, electrical, plumbing or life safety systems, and (D) Sublessee provides Sublessor with not fewer than ten (10) days’ prior written notice of Sublessee’s construction or installation of such Alteration, or (ii) if Master Lessor consents in writing to the Alterations in question and agrees that it need not be removed at the end of the term of the Master Lease. Sublessee shall furnish to Sublessor copies of all permits and plans and specifications for all Alterations made by or for Sublessee to the Subleased Premises, whether or not Sublessor’s consent thereto is required hereunder. Sublessee shall pay, when due, all Claims for labor or materials furnished or alleged to have been furnished to or for Sublessee at or for use on the Subleased Premises. If any mechanic’s lien is recorded for work claimed to have been done for, or on behalf of, or for materials claimed to be furnished to or for Sublessee, then Sublessee shall, at its expense, immediately discharge such lien, by bond or otherwise, on demand of Sublessor.

          4.3 Repair and Maintenance. Subject to the provisions of Sections 6.3(c) and 8 below, the parties hereto agree that Sublessor shall have no obligation to Sublessee, in any manner whatsoever, to repair and/or maintain the Subleased Premises or the Building, or any portion thereof or the contents therein (including, without limitation, the Personal Property, as

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defined below). Sublessee shall strictly comply with all other obligations of Section 7 of the Master Lease, as incorporated by reference herein.

          4.4 License for Personal Property and Infrastructure Systems. Sublessor hereby grants Sublessee a license to use in the Subleased Premises during the Term, (i) all cubicle systems, work stations, furniture, trade fixtures, equipment, art work, cabling, cafeteria and gym equipment, security systems (including card access, camera and intrusion systems, the “Security Systems”), and other personal property owned by Sublessor and located in the Subleased Premises as of the date hereof, including without limitation, those items described in Exhibit C attached hereto (collectively, the “Personal Property”), and (ii) all generators, uninterruptible power systems (UPS), heating, ventilation and air conditioning systems (HVAC), and data center systems and controls, located in the Subleased Premises (collectively, the “Infrastructure Systems”), and subject to the terms and conditions set forth below:

          (a) The parties shall jointly conduct a walk-through inspection of the Personal Property (and photograph such Personal Property, if needed), and note on Exhibit C any pre-existing damage or defective conditions in the Personal Property.

          (b) SUBLESSEE ACCEPTS THE PERSONAL PROPERTY AND THE INFRASTRUCTURE SYSTEMS IN THEIR “AS IS”, “WHERE IS” CONDITION WITH ALL FAULTS AND WITHOUT WARRANTIES, EXPRESS OR IMPLIED. SUBLESSOR DISCLAIMS ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. SUBLESSEE EXPRESSLY ASSUMES ALL RISK AND RESPONSIBILITY FOR ANY DEFECTS (INCLUDING LATENT DEFECTS) IN THE PERSONAL PROPERTY AND THE INFRASTRUCTURE SYSTEMS.

          (c) Except for pre-existing damage or defective conditions to the Personal Property (as mutually agreed by Sublessor and Sublessee), Sublessee shall maintain the Personal Property and the Infrastructure Systems, and all portions thereof, in good condition and repair throughout the Term. Upon the expiration or earlier termination of this Sublease but subject to Section 4.2(f) below, Sublessee shall surrender the Personal Property and the Infrastructure Systems in the same condition as received, ordinary wear and tear excepted. Except for pre-existing damage or defective conditions to the Personal Property (as mutually agreed by Sublessor and Sublessee) but subject to Section 4.2(f) below, Sublessee shall reimburse Sublessor, as Additional Rent, for the reasonable cost of repairing any damage to the Personal Property and the Infrastructure Systems, ordinary wear and tear excepted.

          (d) Sublessee shall keep the Personal Property and the Infrastructure Systems free from any liens arising out of work performed, materials furnished or obligations incurred by Sublessee.

          (e) Sublessee shall be permitted to remove the Personal Property from the Subleased Premises; provided, however, Sublessee shall not transfer its right to use the Personal Property or dispose of any of the same, without obtaining the prior written consent of Sublessor, and shall comply with Sublessor’s reasonable instructions regarding such transfer or disposition. Sublessee shall not be permitted to remove the Infrastructure Systems or any portion thereof

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from its location in the Building, without obtaining the prior written consent of Sublessor, which consent shall not be unreasonably withheld.

          (f) Provided that this Sublease has not been terminated in accordance with the terms and conditions contained herein and Sublessee has not surrendered the Personal Property in accordance with Section 32 below, on the Expiration Date, Sublessee shall purchase the Personal Property on an “AS IS”, “WHERE IS” basis with all faults and without warranties, express or implied, for the sum of One Dollar ($1.00), pursuant to a bill of sale in a form mutually agreeable to the parties.

          4.5 Warranted Systems. Sublessor hereby represents and warrants to Sublessee that (i) the Infrastructure Systems, (ii) the kitchen equipment, and (iii) the central processors and transponders of the Security Systems in the Building (collectively, the “Warranted Systems”) are in good working condition as of the Commencement Date. The foregoing representation and warranty of Sublessor (collectively, the “IS Warranty”) shall expire sixty (60) days after the Commencement Date (the “IS Warranty Period”). In the event of a breach of the IS Warranty (i.e., Sublessee determines during the IS Warranty Period that any of the Warranted Systems is not in good working condition as of the Commencement Date), then Sublessee’s sole remedy shall be to provide Sublessor with written notice (the “Repair Notice”) describing (in reasonable detail) the Warranted System(s) that is (are) not in good working condition. Provided that (a) Sublessor receives the Repair Notice prior to expiration of the IS Warranty Period, and (b) Sublessee has not modified or otherwise altered the Warranted System this is the subject of the Repair Notice (without having first obtained Sublessor’s prior written consent to such modification or alteration pursuant to Section 4.2 above), Sublessor shall promptly cause, at Sublessor’s expense, the Warranted System(s) identified in the Repair Notice to be put into good working condition. In no event shall Sublessee be permitted to offset or withhold rent due to Sublessor hereunder in the event of a breach by Sublessor of the IS Warranty or any other obligation of Sublessor under this Sublease, including without limitation, this Section 4.5.

     5. Rent; Security Deposit.

          5.1 Base Rent.

          (a) The base rent (“Base Rent”) to be paid by Sublessee to Sublessor under this Sublease is intended to be absolutely triple net. Subject to Section 5.1(b) below, during the Term, Sublessee shall pay to Sublessor monthly Base Rent for the Subleased Premises, payable in advance on the first (1^st) day of each month in accordance with the following schedule (“Base Rent Schedule”):

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		Monthly Installment
Time Period from		of
Commencement	Monthly Base Rent	Base Rent
Date	Rate Per RSF	(Bldg 4)
Months 1-2	$0.00	$0.00
Months 3-12	$0.65	$65,814.45
Months 13-24	$0.69	$69,864.57
Months 25-36	$0.73	$73,914.69
Months 37-48	$0.77	$77,964.81
Months 49-61	$0.81	$82,014.93

          (b) Notwithstanding the foregoing, Sublessee shall pay to Sublessor, upon execution of this Sublease, the sum of Sixty-Five Thousand Eight Hundred Fourteen Dollars and Forty-Five Cents ($65,814.45), as prepaid Base Rent for the first (1^st) full month of the Term that Base Rent is due hereunder.

          (c) If the Term commences on a day other than the first (1^st) day of a calendar month or ends on a day other than the last day of a calendar month, Base Rent for the first and/or last fractional month of the Term shall be prorated on the actual number of days elapsed in such month.

          5.2 Additional Rent. Sublessee shall pay as additional rent (“Additional Rent”), within twenty (20) days after demand therefor, all sums or other charges required to be paid by Sublessee under this Sublease. During the Term, Sublessee shall pay to Sublessor all sums or other charges required to be paid by Sublessor, as tenant, to Master Lessor under the Master Lease, including without limitation, (a) all Real Property Taxes, insurance premiums and common area expenses required to be paid to Master Lessor thereunder (collectively, “Operating Expense Payments”, and which shall include expenses relating to the Parking Areas and Outdoor Areas, as such terms are defined below), (b) all “Additional Rent” (as defined in the Master Lease) due from Sublessor, as tenant, to Master Lessor under Paragraphs 4.D.(a) and (b) of the Master Lease, and (c) the management fee charged by Master Lessor to Sublessor under the Master Lease, but expressly excluding (i) any “Basic Rent” due from Sublessor, as tenant, to Master Lessor under the Master Lease, and (ii) any late charges, default interest and other penalties due from Sublessor, as tenant, to Master Lessor under the Master Lease provided the same are not caused by the default or breach of any of Sublessee’s obligations contained in this Sublease. Sublessor shall not charge Subtenant a management fee with regard to the Building, other than the management fees charged by Master Lessor under the Master Lease. Notwithstanding the foregoing, Sublessee’s obligation to pay Operating Expense Payments for the Subleased Premises shall be tolled until the earlier of (x) such time as twenty-five (25) or more employees of Sublessee occupy any portion of the Building, or (y) the Commencement Date. Moreover, Sublessee agrees to pay its proportionate share of any costs and expenses incurred by Sublessor for (A) any insurance obtained by Sublessor pursuant to Section 54 of the Master Lease, (B) repair or maintenance of the central courtyard, and (C) repair, maintenance, replacement or new construction of improvements in such central courtyard, within twenty (20) days after written demand therefor (which written demand shall contain documentation in reasonable detail evidencing the costs and expenses incurred by Sublessor); provided, however,

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that Sublessee shall have no obligation to reimburse Sublesssor for any (aa) replacement of an existing improvement in the central courtyard, or (bb) construction or installation of any new improvement in the central courtyard, if Sublessor had not first obtained Sublessee’s written approval thereof, which approval shall not be unreasonably withheld, conditioned or delayed by Sublessee. Sublessor shall have the same remedies for a default in the payment of Additional Rent as for a default in the payment of Base Rent. Base Rent and Additional Rent are hereinafter sometimes referred to collectively as “Rent.”

          5.3 Payment of Rent. Rent shall be paid to Sublessor, without deduction, demand, recoupment, offset or counterclaim, in lawful money of the United States of America, at Maxtor Corporation, 333 South Street, Shrewsbury, MA 01545, Attn: Gary Leblanc, or to such other person or at such other place as Sublessor may from time to time designate in writing.

          5.4 Security Deposit; Letter of Credit.

          (a) Upon execution of this Sublease, Sublessee shall deliver to Sublessor a clean, unconditional, irrevocable, transferable letter of credit in the amount of Six Hundred Ninety-Four Thousand Thirty-Four Dollars and Ninety-Seven Cents ($694,034.97). (the “Letter of Credit”), in form and issued by a financial institution (“Issuer”) satisfactory to Sublessor in its sole discretion, which Letter of Credit (and all sums drawn by Sublessor thereunder) shall constitute a security deposit to secure Sublessse’s obligations under this Sublease and the other Subleases (the “Security Deposit”). Sublessee hereby grants to Sublessor a security interest in the Letter of Credit and all proceeds, replacements and modifications thereof to secure Sublessee’s obligations herein, including without limitation, the obligation to pay Rent, perform its insurance and indemnity obligation and to maintain and restore the Subleased Premises. The Letter of Credit shall permit partial draws, and provide that draws thereunder will be honored upon receipt by Issuer (at its offices in San Francisco, California or such other location that Sublessor shall approve in its sole discretion) of the original or a certified copy of the Letter of Credit accompanied by a written statement signed by Sublessor or its authorized agent stating that Sublessor is entitled to draw on the Letter of Credit pursuant to the terms of this Sublease. The Letter of Credit shall have an expiration period of one (1) year from the date of issuance but shall provide that it will automatically renew by its terms to a date which is sixty (60) days following the Expiration Date of the Building 6 Sublease unless affirmatively cancelled by Issuer following not fewer than sixty (60) days prior written notice of such expiration or cancellation from Issuer to Sublessor. Sublessor shall be entitled to draw the Letter of Credit in part or in full. All costs and expenses related to the Letter of Credit, including any transfer fees, shall be paid by Sublessee.

     (b) Sublessor shall hold the Security Deposit as security for the full and faithful performance by Sublessee of its covenants and obligations under this Sublease and the other Subleases. If Sublessee defaults in the full and timely performance of any or all of Sublessee’s covenants and obligations under this Sublease or any of the other Subleases, then Sublessor may, from time to time, without waiving any other remedy available to Sublessor, use the Security Deposit, or any portion thereof, to the extent necessary to cure or remedy the default or to compensate Sublessor for all or any part of the damages sustained by Sublessor resulting from Sublessee’s default. Sublessee shall pay to Sublessor within ten (10) business days after receipt of demand, the amount so applied in order to restore the Security Deposit to its original amount.

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Sublessor shall not be required to keep the Security Deposit separate from its general accounts and no trust relationship is created between Sublessor and Sublessee with respect to the Security Deposit. If Sublessee performs all of its obligations hereunder and under all of the other Subleases, the Security Deposit, or so much thereof as has not theretofore been applied by Sublessor, shall be returned to Sublessee, without interest or other increment for its use, at the Expiration Date and after Sublessee has vacated the entire Subleased Premises. Sublessee’s failure to provide and keep the Letter of Credit in full force and effect and otherwise in accordance with the terms of this Section 5.4 shall constitute a default of this Sublease and the other Subleases.

     6. Master Lease.

          6.1 Subject to Master Lease. This Sublease is and shall at all times be subject and subordinate to the Master Lease attached hereto as Exhibit D, and every provision thereof. Sublessee acknowledges that (a) Sublessee’s use and enjoyment of the Subleased Premises are subject to the rights of Master Lessor pursuant to the Master Lease, and (b) Sublessee has reviewed a copy of each Master Lease and is fully familiar with the provisions thereof. Sublessor represents and warrants that (i) the copy of the Master Lease attached hereto as Exhibit D is a true and complete copy of the Master Lease and all amendments, modifications, written side letter agreements and recorded memoranda of leases with respect thereto, (ii) Sublessor has not already assigned its interest in the Master Lease or sublet any of the Subleased Premises, and (iii) as of the date hereof, the Master Lease is in full force and effect and no defaults exist on the part of Sublessor or, to the best of Sublessor’s knowledge, Master Lessor under the terms of the Master Lease. Sublessor shall not assign, terminate or amend the Master Lease (or the Building 5 Master Lease provided that Sublesssee’s ROFO is in full force and effect) without the prior written consent of Sublessee, which consent may be withheld in Sublessee’s sole discretion.

          6.2 No Violation of Master Lease. Neither Sublessor nor Sublessee shall commit or permit to be committed any act or omission which would violate any term or condition of the Master Lease. If a Master Lease terminates, this Sublease shall terminate as to the portion of the Subleased Premises covered thereby and the parties shall be relieved of any further liability or obligation under this Sublease with respect thereto; provided, however, that if the Master Lease terminates as a result of a default or breach by either Sublessor or Sublessee under this Sublease and subject to Section 13 of this Sublease, then the defaulting party shall be liable to the other party for the damage suffered as a result of such termination. Furthermore, Sublessor agrees not to voluntarily terminate the Master Lease without the written consent of Sublessee, which consent shall not be unreasonably withheld, conditioned or delayed.

          6.3 Incorporation of Master Lease.

          (a) Subject to and in accordance with the exceptions, qualifications and modifications set forth below and elsewhere in this Sublease, all the provisions of the Master Lease, as set forth in Exhibit D hereto, are hereby incorporated by reference and made a part of this Sublease, and to the extent that such provisions impose obligations or duties on Sublessor as tenant under the Master Lease and are incorporated by reference into the terms of this Sublease, Sublessee does hereby expressly assume and agree with Sublessor to perform and to comply with such obligations and duties of Sublessor as tenant thereunder, as the same accrue on and after the Commencement Date, subject to the provisions of Sections 3.3 and 3.4 above. In the event of

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any conflict between any provision of the Master Lease incorporated herein and a provision contained in this Sublease, the provision contained in this Sublease shall prevail.

          (b) Except as otherwise expressly provided herein and except for those provisions that are not incorporated into this Sublease, the term “Landlord” (and similar terms) as used in the Master Lease shall mean “Sublessor” hereunder; the term “Tenant” (and similar terms) as used in the Master Lease shall mean “Sublessee” hereunder; the term “Premises” (and similar terms) as used in the Master Lease shall mean “Subleased Premises” hereunder; and the term “Lease” as used in the Master Lease shall mean this “Sublease”.

          (c) Sublessor shall have no obligation to operate or maintain (i) the Building or any other premises covered by the Master Lease, (ii) any common areas in the Building or any other premises covered by the Master Lease, or (iii) provide any Building services or utilities. With respect to all services to be performed or provided by Master Lessor under the Master Lease, Sublessor’s sole obligation shall be to exercise commercially reasonable efforts (without litigation or the threat thereof) to require Master Lessor to comply with its obligations to perform or provide such services under the Master Lease, including promptly notifying Master Lessor of its nonperformance if so requested by Sublessee in writing.

          (d) Notwithstanding anything to the contrary contained herein, in no event shall Sublessor be deemed to be in default under this Sublease or liable to Sublessee for any failure of Master Lessor to perform its obligations under the Master Lease. Wherever the Master Lease requires the consent of the landlord be obtained, both Master Lessor’s consent and Sublessor’s consent shall be required and the standard for such consent by Sublessor shall be a consent not unreasonably withheld or delayed. For the avoidance of doubt, Sublessee shall be required to obtain both Sublessor’s and Master Lessor’s consent for (i) any assignment or sub-subletting of the Subleased Premises (provided that Sublessor’s consent shall not be required for assignments to entities controlled by or under common control with Sublessee if Sublessee is not released from its obligations under this Sublease), or (ii) any Alterations to the Subleased Premises or any portion thereof, in accordance with the provisions of the Master Lease, as incorporated be referenced herein, but subject to the terms and conditions contained in Section 4.2 above.

          6.4 Exclusions from Master Lease. Sublessor and Sublessee expressly agree that the following provisions of the Master Lease are not incorporated in this Sublease: the first full paragraph of the Master Lease; Sections 2, 4.A and 4.B; Sections 4.E and 4.F; the first two sentences of Section 5; the seventh sentence of Section 6; the first sentence of Section 9; the first sentence of Section 12; Sections 13 and 23; the term “Landlord” in the first and second sentences of Section 21, the second paragraph of Section 22 and in Section 27 shall be replaced with “Master Lessor”; Sections 29, 31, 34, 36, 38.G, 39 through 42 (inclusive), 44, 46 through 50 (inclusive), 51.A through D (inclusive); the term “Landlord” in Section 52 shall be replaced with “Master Lessor” and all references to extension rights or periods in such Section 52 shall be deleted (i.e., not incorporated by reference into this Sublease); Sections 54, 61, 62, 63 and 64; the term “for lease” in Section 58(ii) shall be replaced with “for sublease”; Sections 1 through 5 (inclusive), Sections 8, 9, 11, 12, 14, 17, 18 and 19 of Amendment No. 1 to Lease; and all of Amendment No. 2 to Lease.

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          6.5 Time for Notices and Demands. Whenever in the Master Lease a time is specified for the giving of any notice or the making of any demand by the tenant thereunder, such time is hereby changed (for the purpose of this Sublease only) by subtracting five (5) days thereto (unless the time specified is less than five (5) days in which event two (2) business days shall be subtracted thereto instead); and whenever in the Master Lease a time is specified for the giving of any notice or the making of any demand by the landlord thereunder, such time is hereby changed (for the purpose of this Sublease only) by adding five (5) days if such notice, request or demand of the landlord thereunder relates to any subject other than the payment of fixed annual rent or additional rent under the Master Lease (unless the time specified is less than five (5) days in which event two (2) business days shall be added thereto instead). Whenever in the Master Lease a time is specified within which the tenant thereunder must give notice or make a demand following an event, or within which the tenant thereunder must respond to any notice, request or demand previously given or made by the landlord thereunder, or to comply with any obligation on the tenant’s part thereunder, such time is hereby changed (for the purpose of this Sublease only) by subtracting five (5) days if the same shall relate to any obligation other than the payment of fixed annual rent or additional rent under the Master Lease or under this Sublease (unless the time specified is less than five (5) days in which event two (2) business days shall be subtracted thereto instead). Wherever in the Master Lease a time is specified within which the landlord thereunder must give notice or make a demand following an event, or within which the landlord thereunder must respond to any notice, request or demand previously given or made by the tenant thereunder, such time is hereby changed (for the purpose of this Sublease only) by adding five (5) days thereto (unless the time specified is less than five (5) days in which event two (2) business days shall be added thereto instead). It is the purpose and intent of the foregoing provisions, among other things, to provide Sublessor with time within which to transmit to the Master Lessor any notices or demands received from Sublessee and to transmit to Sublessee any notices or demands received from the Master Lessor.

          6.6 Options to Extend Under Master Lease; Amendment to Sublease. In the event that (a) Sublessee notifies Sublessor in writing that Sublessee is actively negotiating a direct lease with Master Lessor (“Direct Lease”) with regard to the Subleased Premises for a term commencing immediately after the Expiration Date, and (b) provided that Sublessee is not then in default under this Sublease, then Sublessor agrees that it will not exercise its Option to Extend with regard to the Subleased Premises until such time as Sublessee notifies Sublessor in writing that it is no longer negotiating a Direct Lease with Master Lessor for the Subleased Premises. Sublessee hereby agrees to respond (in the affirmative or negative), from time to time, within ten (10) business days of its receipt of a written inquiry from Sublessor requesting that Sublessee confirm that Sublessee is or is not actively negotiating a Direct Lease with Master Lessor. In the event that Sublessee and Master Lessor execute and deliver a Direct Lease for the Subleased Premises, with a term commencing immediately after the Expiration Date, then (1) Sublessor shall agree to amend the Master Lease to delete its Options to Extend thereunder, and (2) Sublessor and Sublessee shall execute and deliver an amendment to this Sublease providing: (I) the Expiration Date for the Building shall be extended to be co-terminus with the expiration date of the Master Lease; (II) Sublessee shall assume the obligations of Sublessor under the Master Lease to remove any Alterations to the applicable Building that Master Lessor requires be removed and to restore the same in accordance with the terms of the Master Lease (collectively, the “Restoration Obligations”); and (III) Sublessee shall indemnify, defend and hold harmless Sublessor and the Sublessor Indemnitees from and against all Claims related to the Restoration

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Obligations assumed by Sublessee. In the event that Sublessee executes a Direct Lease with Master Lessor for the Subleased Premises, then Sublessor agrees to execute a quitclaim deed with respect thereto for delivery and recordation at expiration or termination of the Master Lease.

     7. Sublessee’s Insurance. Notwithstanding anything to the contrary contained in the Master Lease, Sublessee, at its sole cost and expense, shall keep in force at all times during the Term a policy of commercial general liability insurance with combined single limit coverage of not less than Three Million Dollars ($3,000,000) per occurrence and Five Million Dollars ($5,000,000) in the aggregate for bodily injury and property damage occurring in, on or about the Subleased Premises, including parking and landscaped areas. All insured policies required to be maintained by Sublessee hereunder shall name Sublessor and Master Lessor as additional insureds. Except as modified by this Section, Sublessee shall strictly comply with all other obligations under Section 10 of the Master Lease, as incorporated by reference herein.

     8. Casualty; Condemnation.

          (a) In the event that Sublessor’s interest as tenant under the Master Lease is terminated by reason of damage or destruction, condemnation, or any other reason, then this Sublease shall terminate as to Sublessor’s interest therein only (and not as to all Sublessor interests under the Master Lease) on the same date as the termination of such interest, without liability of Sublessor to Sublessee, and Sublessee shall not be entitled to any insurance proceeds or other remuneration from Sublessor except for insurance proceeds from insurance policies purchased by Sublessee for its own personal property. Sublessor agrees to give written notice to Sublessee promptly should Sublessor’s interest in any portion of the Subleased Premises be terminated, or be threatened to be terminated, under the Master Lease. Sublessor shall not terminate the Master Lease due to a casualty or condemnation without the prior written consent of Sublessee, which consent may be withheld in Sublessee’s sole and absolute discretion.

          (b) If the Subleased Premises or any portion thereof is damaged by fire or other casualty, and if the Master Lease is not terminated, then:

               (i) This Sublease shall continue in full force and effect;

               (ii) Sublessor shall have no obligation to repair or restore the damaged space;

               (iii) Sublessor shall use commercially reasonable efforts (without litigation or the threat thereof), as set forth in Section 6.3(c) above, to cause Master Lessor to perform the repairs which Master Lessor is required to perform under the Master Lease; provided that Sublessor shall not be liable for any damages, nor shall Rent due hereunder be abated, nor shall Sublessee be relieved from the performance of any term or covenant hereunder, nor shall Sublessee be deemed to have been evicted, due to any aspect of the repair and restoration of the damaged space (including without limitation any delay of such repair and restoration), except to the extent so abated, relieved or evicted under the Master Lease; and

               (iv) There shall be no reduction or abatement of Rent for any period during which Sublessee is unable to use the affected portion of the Subleased Premises, in whole

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or part, due to damage or destruction of the same or the Building, unless Sublessor actually receives a reduction or abatement of rent under the Master Lease.

          (c) In the event eminent domain or condemnation is instituted against the Subleased Premises or any portion thereof, and the Master Lease is terminated with respect to all or a portion of the Subleased Premises as a result thereof pursuant to the Master Lease, (i) this Sublease shall terminate as of the date the Master Lease terminates with respect to such portion of the Subleased Premises without any liability on the part of Sublessor to Sublessee, and Sublessee shall not be entitled to any award of damages for Sublessee’s interest in the Subleased Premises, except that Sublessee may make a claim against the condemning authority for loss of or damage to Sublessee’s trade fixtures and personal property, relocation expenses, and unamortized subtenant improvements costs that have been paid by Sublessee, and (ii) Sublessor shall have no obligation to rebuild or restore the Subleased Premises. If this Sublease is terminated as to less than all of the Subleased Premises, this Sublease shall continue in full force and effect as to the remaining portion of the Subleased Premises, except that the Base Rent payable hereunder shall be equitably reduced but only to the extent (if any) that rent applicable to the affected portion of the Subleased Premises is reduced under the Master Lease.

          (d) Sublessee expressly waives the provisions of California Civil Code Section 1932(2) and Section 1933(4). Sublessor and Sublessee expressly waive the provisions of California Code of Civil Procedure Sections 1265.120 and 1265.130.

          9. Indemnity; Hold Harmless.

          (a) Sublessor shall not be liable to Sublessee or Sublessee’s employees, agents, invitees, licensees or visitors, or to any other person, for any injury to person, or damage to or loss of property on or about the Subleased Premises or the Building arising from any cause whatsoever, except to the extent caused solely by the gross negligence or willful misconduct of Sublessor. Except to the extent caused solely by the gross negligence or willful misconduct of Sublessor, Sublessee shall indemnify, protect, defend with counsel reasonably acceptable to Sublessor and hold harmless Sublessor and Sublessor’s shareholders, directors, officers, employees, agents, affiliates, successors and assigns (collectively, “Sublessor Indemnitees”) from and against any and all Claims caused by or arising in connection with: (i) the use or occupancy of the Subleased Premises, the Building, the Infrastructure Systems and the Personal Property by Sublessee or its employees, contractors, agents, invitees, licensees, permitted sub-sublessees or assignees or permitted sublessees pursuant to Section 32 below; or (ii) the negligence or willful misconduct of Sublessee or its employees, contractors, agents, invitees, licensees or permitted sub-sublessees or assignees; or (iii) a default or breach of Sublessee’s obligations under this Sublease; or (iv) a default or breach of Sublessor’s obligations under the Master Lease to the extent caused by Sublessee’s default or breach of any of its obligations contained in this Sublease; or (v) any negligence, gross negligence or willful misconduct of Sublessee or its agents, employees, contractors, invitees, licensees, permitted sub-sublessees or assignees or permitted sublessees pursuant to Section 32 below in, on or about the Subleased Premises or the Building; or (vi) any failure of Sublessee to surrender the Subleased Premises (or any portion thereof) to Sublessor at the end of the Term hereof (or such sooner date as provided in this Sublease) or otherwise in the condition required hereunder to the extent required pursuant to the terms of this Sublease, or (vii) all Claims for labor or materials furnished or alleged to

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have been furnished to or for Sublessee at or for use on the Subleased Premises. Sublessee’s indemnification and other covenants provided in this Section 9 shall survive the expiration or termination of this Sublease.

          (b) Except to the extent caused solely by the gross negligence or willful misconduct of Sublessee but subject to Sections 3.3 and 3.4 above, Sublessor shall indemnify, protect, defend with counsel reasonably acceptable to Sublessee and hold harmless Sublessee and Sublessee’s shareholders, directors, officers, employees, agents, affiliates, successors and assigns (collectively, “Sublessee Indemnitees”) from and against any and all Claims caused by or arising in connection with: (i) a default or breach of Sublessor’s obligations under the Master Lease that is not caused by Sublessee’s default or breach of any of its obligations contained in this Sublease; or (ii) any negligence, gross negligence or willful misconduct of Sublessor or its agents, employees, contractors, invitees, licensees or permitted sub-sublessees or assignees in, on or about the Subleased Premises or the Building; or (iii) all Claims for labor or materials furnished or alleged to have been furnished to or for Sublessor at or for use on the Subleased Premises. Sublessor’s indemnification and other covenants provided in this Section 9 shall survive the expiration or termination of this Sublease.

     10. Utilities; System Connections; Vendors. Pursuant to Section 8 of the Master Lease, as incorporated by reference herein, Sublessee shall be responsible and shall pay directly all utilities and services furnished to the Subleased Premises, including security and janitorial services. Sublessor shall cause, at Sublessor’s expense, Infrastructure Systems and Security Systems within the Building to be separated from Infrastructure Systems and Security Systems for other buildings; and thereafter, Sublessee shall cause, at Sublessee’s expense, Infrastructure Systems and Security Systems within the Building to be reconnected (if necessary). Subject to the terms of the Master Lease and provided that Sublessee obtains both Sublessor’s and Master Lessor’s prior written consent (which consent Sublessor shall not unreasonably withhold), Sublessee shall be permitted to select its own vendors for its repair and maintenance of the Subleased Premises and for janitorial, security and other services to the Subleased Premises.

     11. Notices.

          11.1 Notices Under Sublease. All notices, consents, demands, requests and other communications from one party to the other given pursuant to the terms of this Sublease shall be in writing and shall be delivered by hand, air courier or by United States mail, certified or registered, postage prepaid, and addressed to Sublessee or Sublessor at the addresses respectively specified below or to such other place as Sublessee or Sublessor may from time to time designate in a written notice to the other. Notices shall be deemed given on the earliest of (i) receipt, (ii) one (1) business day after deposit with an courier for overnight delivery, or (iii) three (3) business days after deposit in the United States mail.

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The address for
Sublessor is:	Maxtor Corporation
	333 South Street
	Shrewsbury, MA 01545
	Attn: Gary Leblanc
with a copy to:	Maxtor Corporation
	2452 Clover Basin Drive
	Longmont, CO 80503
	Attention: General Counsel
The address for
Sublessee is:	[Prior to the Commencement Date]
	SanDisk Corporation
	140 Caspian Court
	Sunnyvale, CA 94089
	Attn: General Counsel
with a copy to:	SanDisk Corporation
	140 Caspian Court
	Sunnyvale, CA 94089
	Attn: Edward Palma
	[On and after the Commencement Date]
	SanDisk Corporation
	601 McCarthy Boulevard
	Milpitas, CA 95035
	Attn: General Counsel
with a copy to:	SanDisk Corporation
	601 McCarthy Boulevard
	Milpitas, CA 95035
	Attn: Edward Palma

          11.2 Notices Under Master Lease. Sublessor shall promptly provide Sublessee with a copy of any notice it receives from Master Lessor relating to the Subleased Premises or the Master Lease. Sublessee shall promptly provide Sublessor with a copy of any notice it receives from Master Lessor relating to the Subleased Premises or the Master Lease.

     12. Confidentiality. Sublessee acknowledges and agrees that the terms and conditions set forth in this Sublease constitute Sublessor’s “Confidential Information” (as defined in the NDA, as defined below) and that such terms and conditions shall be subject to the Mutual Nondisclosure Agreement executed by Sublessor and Sublessee and made effective as of May 4, 2004 (the “NDA”).

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     13. Limitation of Liability. Notwithstanding anything to the contrary contained in this Sublease, (a) no director, officer, shareholder, employee, adviser or agent of Sublessor or Sublessee shall be personally liable in any manner or to any extent under or in connection with this Sublease, and (b) neither Sublessor nor any of the Sublessor Indemnitees shall be responsible or liable for any consequential or punitive damages in connection with this Sublease, including, without limitation, on account of lost profits or the interruption of Sublessee’s business.

     14. Signage. Subject to the terms and conditions of the Master Lease, Sublessee, at its sole cost and expense, shall have the same signage rights as Sublessor has under the Master Lease with regard to the Building subleased to Sublessee hereunder, provided that at Sublessee’s sole cost (a) Sublessee shall obtain the prior written consent of Master Lessor thereto, (b) other than with respect to signage for Building 6, Sublessee shall obtain the prior written consent of Sublessor thereto (which consent of Sublessor shall not be unreasonably withheld), (c) Sublessee shall obtain all necessary permits and approvals from all applicable government agencies with respect thereto, (d) Sublessee shall install, maintain, repair and, to the extent required by Master Lessor, remove all signage at expiration or earlier termination of this Sublease, and (e) Sublessee shall repair all damage to the Subleased Premises caused by the removal of all signage at expiration or earlier termination of this Sublease.

     15. Brokers. Sublessor shall pay The Staubach Company any brokerage commission earned in connection with this Sublease pursuant to a separate agreement. Sublessee represents and warrants to Sublessor that no real estate broker, agent or finder negotiated or was instrumental in negotiating or representing Sublessee in the negotiation of this Sublease, other than CPS/Cushman & Wakefield. Sublessor represents and warrants to Sublessee that no real estate broker, agent or finder negotiated or was instrumental in negotiating or representing Sublessor in the negotiation of this Sublease, other than The Staubach Company. Sublessee and Sublessor shall each indemnify and hold the other harmless from and against any Claims resulting from breach of such party’s representation and warranty contained above.

     16. Counterparts. This Sublease may be executed in separate counterparts, each of which shall be an original, and all of which taken together shall constitute one and the same agreement.

     17. No Recording. Neither party hereto shall record this Sublease nor any memorandum hereof without the written consent of the other party.

     18. Curing Defaults.

     (a) If Sublessee shall be in default in the performance of any of its obligations hereunder beyond any applicable notice and cure period, Sublessor, without any obligation to do so, in addition to any other rights it may have in law or equity, may elect (but shall not be obligated) to cure such default after the applicable cure period at any time after delivery of five (5) business days’ notice to Sublessee. Sublessee shall reimburse Sublessor, upon demand for one hundred percent (100%) of all costs and expenses paid or incurred by Sublessor in curing such default, and interest thereon from the respective dates of Sublessor’s making the payments and incurring such costs, at the lesser of (i) the prime rate announced by Bank of America

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NT&SA from time to time (the “Prime Rate”) plus two percent (2%), or (ii) the maximum amount allowed by law, which sums and costs together with interest thereon shall be deemed Additional Rent payable promptly upon being billed therefor.

     (b) If Sublessor shall be in default in the performance of any of its obligations under the Master Lease beyond any applicable notice and cure period, Sublessee, without any obligation to do so, in addition to any other rights it may have in law or equity, may elect (but shall not be obligated) to cure such default after the applicable cure period at any time after delivery of five (5) business days’ notice to Sublessor. Sublessor shall reimburse Sublessee, upon demand for one hundred percent (100%) of all costs and expenses paid or incurred by Sublessee in curing such default, and interest thereon from the respective dates of Sublessee’s making the payments and incurring such costs, at the lesser of (i) the Prime Rate plus two percent (2%), or (ii) the maximum amount allowed by law, which sums and costs together with interest thereon shall be payable promptly upon being billed therefor.

     19. Time. In all instances where Sublessee is required by the provisions of this Sublease to pay any sum of money or to do any act at a particular indicated time or within any indicated period, it is understood and agreed that TIME IS OF THE ESSENCE.

     20. Authority. The individual or individuals signing this Sublease on behalf of Sublessee or Sublessor, represent and warrant that: (i) Sublessee or Sublessor, respectively, is a corporation duly incorporated and organized and validly existing and in good standing under the laws of the State of Delaware; (ii) Sublessee or Sublessor, respectively has full power and authority to enter into this Sublease and to perform its obligations under this Sublease; (iii) the execution, delivery and performance of this Sublease by Sublessee or Sublessor have been duly and validly authorized by all necessary corporate action on the part of Sublessee or Sublessor and all required consents and approvals have been duly obtained; and (iv) this Sublease is a legal, valid and binding obligation of Sublessee or Sublessor, respectively, enforceable against Sublessee or Sublessor, respectively in accordance with its terms, subject to the effect of applicable bankruptcy, insolvency, reorganization, arrangement, moratorium or other similar laws affecting the rights of creditors generally.

     21. Attorneys’ Fees. If as a result of any breach or default on the part of Sublessee under this Sublease, Sublessor uses the services of an attorney in order to secure compliance with this Sublease, Sublessee shall reimburse Sublessor upon demand as Additional Rent for any and all reasonable attorneys’ fees and expenses incurred by Sublessor, whether or not formal legal proceedings are instituted. Should either party bring an action against the other party, by reason of or alleging the failure of the other party to comply with any or all of its obligations hereunder, whether for declaratory or other relief, then the party which prevails in such action shall be entitled to its reasonable attorneys’ fees and expenses related to such action, in addition to all other recovery or relief. A party shall be deemed to have prevailed in any such action (without limiting the generality of the foregoing) if such action is dismissed upon the payment by the other party of the sums allegedly due or the performance of obligations allegedly not complied with, or if such party obtains substantially the relief sought by it in the action, irrespective of whether such action is prosecuted to judgment. Attorneys’ fees shall include, without limitation, fees incurred in discovery, contempt proceedings, and bankruptcy litigation. The non-prevailing party shall also pay the reasonable attorneys’ fees and costs incurred by the prevailing party in

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any post-judgment proceedings to collect and enforce the judgment. The covenant in the preceding sentence is separate and several and shall survive the merger of this provision into any judgment on this Sublease.

     22. Successors. The terms, covenants and conditions of this Sublease shall be binding upon and inure to the benefit of Sublessor and Sublessee and their respective successors, and except as otherwise provided, their assigns.

     23. Remedies; Cross-Defaults. Sublessor shall have the right, upon Sublessee’s default hereunder, in addition to the remedies set forth in this Sublease, to exercise against Sublessee any and all of the rights and remedies described in the Master Lease as available to Master Lessor in the event of a default by the tenant under the Master Lease. Moreover, any default by Sublessee of any of its obligations or duties under any Sublease shall constitute a default by Sublessee under all of the Subleases.

     24. Not Offer. The submission of this Sublease for review or signature by Sublessee shall not constitute an offer or option to sublease the Subleased Premises, nor shall this Sublease be effective as a sublease or otherwise until both parties execute and deliver execution counterparts of this Sublease and Master Lessor approves this Sublease in writing.

     25. Construction. This Sublease is the result of negotiations between the parties and their respective attorneys and shall be construed in an even and fair manner, regardless of the party who drafted this Sublease or any provision hereof. The headings or captions of sections in this Sublease are for convenience and reference only, and in no way define, limit, or describe the scope or intent of this Sublease or the provisions of such sections. The term “including” shall mean “including, but not limited to.”

     26. Entire Agreement; Amendment; Severability. Sublessor and Sublessee hereby agree to mutually terminate that certain Sublease dated as of November 30, 2005 with respect to the Buildings (as amended, the “Prior Sublease”). Sublessor and Sublessee hereby also agree that, notwithstanding the terms of the Prior Sublease, all covenants, duties, obligations and indemnities contained in the Prior Sublease shall not survive the termination thereof. There are no oral agreements between Sublessor and Sublessee affecting this Sublease, and this Sublease (along with the NDA) supersedes and cancels any and all prior negotiations, arrangements, correspondence, communications, agreements and understandings, if any, whether oral or written, between Sublessor and Sublessee with respect to the subject matter of this Sublease (including the Prior Sublease), and none of the foregoing shall be used to construe this Sublease. No amendment or modification of this Sublease shall be binding or valid unless expressed in writing and executed and delivered by Sublessor and Sublessee. If any one or more of the provisions contained in this Sublease shall be invalid, illegal or unenforceable in any respect, the validity, legality or enforceability of the remaining provisions contained herein shall not in any way be affected or impaired.

     27. Right of First Offer.

          27.1 Right of First Offer. During the Term, Sublessee shall have a right of first offer (“ROFO”) to sublease all of Building 5, containing approximately 94,484 rentable square

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feet, if and when Building 5 becomes Available (as defined below) and subject to Sublessor’s obtaining Master Lessor’s consent thereto in the Sublease Consent or another writing. As used in this Sublease, “Available” shall mean that the entire Building 5 is then offered in the marketplace to the public at large for rent, free and clear of all claims and rights of other parties, and Building 5 shall be deemed not to be or not to have become “Available” if as to Building 5 there is a lease, lease option or option or other right of extension, renewal, expansion, refusal, negotiation or similar or other right, pursuant to any lease, sublease or written agreement in existence, with respect to any portion of Building 5, on or before the Commencement Date, including any option or right of extension or renewal thereof in existence on or before the Commencement Date (and any subsequent exercise thereof). Sublessor will notify Sublessee in writing (“Sublessor’s Notice”) if the entire Building 5 (and not less than all of Building 5) becomes Available, which Sublessor’s Notice shall include, but not be limited to, (a) the date that Sublessor anticipates that Building 5 will become Available, and (b) Sublessor’s proposed terms and conditions for subleasing Building 5, including any subtenant improvement allowance that Sublessor shall provide. Sublessee shall have fifteen (15) days following Sublessor’s delivery of Sublessor’s Notice (“Election Notice Period”) to provide Sublessor irrevocable written notice (“Election Notice”) of Sublessee’s election to exercise its ROFO on the exact same terms and conditions as contained in Sublessor’s Notice. If Sublessee fails to deliver the Election Notice to Sublessor within the Election Notice Period or if Sublessee declines to exercise its ROFO, then Sublessee’s ROFO shall be null and void and at any time thereafter Sublessor shall be free to sublease Building 5 to any third party on the terms and conditions contained in Sublessor’s Notice or such other term and conditions that are not less than five percent (5%) lower (on an overall economic basis) than the terms and conditions described in Sublessor’s Notice.

          27.2 Terms and Conditions. If Sublessee duly and timely delivers its Election Notice to Sublessor, then Sublessor shall prepare and Sublessee shall execute a direct sublease with respect to Building 5, subject to Sublessor’s termination right pursuant to Section 27.3 below, on the same terms and conditions as contained in the Building 6 Sublease except as follows: (a) Sublessee shall accept Building 5 in its then “As-built” and “AS IS” condition without any obligation of Sublessor to repaint, remodel, improve or alter Building 5 or any portion thereof for Sublessee’s occupancy or to provide Sublessee any allowance therefor (unless Sublessor’s Notice provides otherwise); (b) Sublessor shall deliver Building 5 to Sublessee on the date (“Delivery Date”) that is the later of (i) thirty (30) days after Sublessor regains possession of all of Building 5, and (ii) the date that Master Lessor consents to Sublessee’s subleasing of Building 5; (c) the term of Sublessee’s sublease of Building 5, and obligation to pay Rent therefor, shall commence on the Delivery Date and shall expire sixty (60) days prior to the expiration date of the Building 5 Master Lease; and (d) the Letter of Credit shall be increased by an amount to three (3) months’ Base Rent for Building 5; and (f) as otherwise expressly provided in this Section 27.

          27.3 Termination of ROFO. Upon the occurrence of any of the following events, Sublessor shall have the option, exercisable at any time prior to the commencement of the term as to Building 5, to terminate all of the provisions of this Section 27, whereupon all rights of Sublessee pursuant to the ROFO shall terminate and shall be of no further force and effect:

          (a) Sublessee’s failure to timely exercise the ROFO in strict accordance with this Section 27.

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     (b) The existence at the time of exercise of the ROFO (or anytime thereafter) of a default or breach by Sublessee under this Sublease.

     28. No Solicitation. During the Term, Sublessee shall not solicit nor hire any employee of Sublessor with first obtaining the prior written consent of Sublessor, which consent may be withheld in Sublessor’s sole discretion. Sublessee hereby agrees that money damages will not be a sufficient remedy for any breach of this Section 28, such that Sublessor shall be entitled to injunctive relief, specific performance, or both as a remedy for any such breach. Such remedy shall not be deemed to be the exclusive remedy for any such breach but shall be in addition to all other remedies available at law or equity.

     29. Parking. Sublessee shall have the right to use, on an unassigned, non-exclusive basis, all parking spaces in the parking areas designated for the Building, as shown on Exhibit A hereto (the “Parking Areas”). Notwithstanding the foregoing but subject to Applicable Requirements (including those relating to handicap parking), Sublessor agrees to use commercially reasonable efforts to ensure that its employees, agents, contractors and invitees do not park in a reasonable number of “visitors” parking spaces that shall be designated by Sublessee in front of Building 4. The use of the Parking Areas shall be subject to, and is conditioned upon, compliance by Sublessee with all rules and regulations governing the Parking Areas promulgated by Master Lessor or Sublessor from time to time (and Sublessee shall cause all of its employees, agents, contractors and invitees to comply with the same).

     30. Outdoor Areas. Sublessee shall have the right to use, on a non-exclusive basis, the outdoor sunken amphitheatre, basketball and volleyball courts, seating and lawn areas and other outdoor areas associated with the Buildings (collectively, the “Outdoor Areas”). The use of the Outdoor Areas shall be subject to, and is conditioned upon, compliance by Sublessee with all rules and regulations governing the Outdoor Areas promulgated by Master Lessor or Sublessor from time to time (and Sublessee shall cause all of its employees, agents, contractors and invitees to comply with the same). In the event that Sublessee desires to reserve an Outdoor Area for its exclusive use (a “Reservation”), it may do so subject to the following requirements: (a) Sublessee shall deliver to Sublessor written notice specifying which Outdoor Area it proposes to reserve and the date and time of the proposed Reservation at least fifteen (15) days’ prior to the proposed Reservation date; (b) Sublessee shall not be permitted to reserve an Outdoor Area if Sublessor or Master Lessor intends to use such Outdoor Area (or any portion thereof) during the proposed Reservation period; (c) Sublessee shall not be permitted to reserve an Outdoor Area for longer than a twenty-four (24) hour period (unless otherwise approved in writing by Sublessor which approval shall not be unreasonably withheld, conditioned or delayed); (d) Sublessee shall set up and clean up the Outdoor Area at Sublessee’s sole cost; and (e) Sublessee shall comply with all rules and regulations governing the Outdoor Areas promulgated by Master Lessor or Sublessor from time to time, including without limitation, any requirement by Sublessor that Sublessee obtain additional insurance or provide Sublessor with additional indemnities in connection with any alcoholic beverages served by or for Sublessee in or around the Outdoor Area.

     31. Hazardous Substances.

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          31.1 Definitions. As used in this Sublease, the term “Hazardous Substance” shall mean any product, substance, or waste whose presence, use, manufacture, disposal, transportation, or release, either by itself or in combination with other materials expected to be on the Subleased Premises, is: (i) potentially injurious to the public health, safety or welfare, the environment or the Subleased Premises, (ii) regulated or monitored by any governmental authority, or (iii) a basis for potential liability of Sublessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substances shall include, but not be limited to, PCB’s, hydrocarbons, petroleum, gasoline, asbestos and/or crude oil or any products, by-products or fractions thereof. As used in this Sublease, the term “Reportable Use” shall mean (i) the installation or use of any above ground storage tank, (ii) the generation, possession, storage, use, transportation, release or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority, and/or (iii) the presence at the Subleased Premises of a Hazardous Substance with respect to which any Applicable Requirement requires that a notice be given to persons entering or occupying the Subleased Premises or neighboring properties.

          31.2 Reportable Uses and Hazardous Substances Require Consent. Except as expressly provided below and subject to the Master Lease, Sublessee shall not engage in any activity in or on the Subleased Premises which constitutes a Reportable Use of Hazardous Substances, nor shall Sublessee generate, possess, store, use, release or dispose of any Hazardous Substances in, on, under or about the Subleased Premises or the Building, without the express prior written consent of both Sublessor and Master Lessor (which consent Sublessor shall not unreasonably withhold), and Sublessee’s timely compliance (at Sublessee’s expense) with all Applicable Requirements.

          31.3 Duty to Inform Sublessor. If Sublessee knows that a Hazardous Substance has come or may have come to be located in, on, under or about the Subleased Premises, Sublessee shall immediately give written notice of such fact to Sublessor, and provide Sublessor with a copy of any report, notice, claim or other documentation which it has concerning the presence of such Hazardous Substance.

          31.4 Sublessee Remediation. Sublessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under, or about the Subleased Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Sublessee’s sole cost and expense, take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of the Subleased Premises or neighboring properties, that was caused or materially contributed to by Sublessee, or pertaining to or involving any Hazardous Substance brought onto or released in, on or under the Subleased Premises the Subleased Premises by or for Sublessee or Sublessee’s employees, contractors, agents, invitees, licensees or permitted sub-sublessees or assignees. Sublessee shall be solely responsible for the remediation of any condition concerning any Hazardous Substance brought onto or released in, on or under the Subleased Premises by or for Sublessee or Sublessee’s employees, contractors, agents, invitees, licensees or permitted sub-sublessees or assignees.

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          31.5 Investigations and Remediations. Sublessee shall have responsibility and shall pay for any investigations or remediation measures required by governmental entities having jurisdiction with respect to the existence of Hazardous Substances brought onto or released in, on or under the Subleased Premises by or for Sublessee or Sublessee’s employees, contractors, agents, invitees, licensees or permitted sub-sublessees or assignees. Sublessee shall cooperate fully in any such activities at the request of Sublessor or Master Lessor, including allowing Sublessor and Master Lessor and their respective employees and agents to have reasonable access to the Subleased Premises at reasonable times in order to carry out any investigative and remedial actions which Sublessor or Master Lessor may elect to do.

          31.6 Sublessee’s Compliance with Applicable Requirements. Sublessee shall obtain, maintain and strictly comply with, at Sublessee’s sole cost and expense, any and all Applicable Requirements with the generation, possession, storage, use, release or disposal of any Hazardous Substance brought onto or released in, on or under the Subleased Premises by or for Sublessee or Sublessee’s employees, contractors, agents, invitees, licensees or permitted sub-sublessees or assignees. Sublessee shall, within ten (10) days after receipt of Sublessor’s or Master Lessor’s written request, provide Sublessor and Master Lessor with copies of all permits and other documents, and other information evidencing Sublessee’s compliance with any Applicable Requirements specified by Sublessor or Master Lessor, and shall immediately upon receipt by Sublessee, notify Sublessor and Master Lessor in writing (and immediately provide to Sublessor and Master Lessor copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving the failure of Sublessee or the Subleased Premises to comply with any Applicable Requirements or the provisions of this Section 31.

          31.7 Inspection; Compliance. Sublessor and Master Lessor and their respective employees and agents shall have the right to enter the Subleased Premises at any time, in the case of an emergency, and otherwise at reasonable times upon reasonable prior notice, which may be verbal, for the purpose of inspecting the condition of the Subleased Premises and for verifying compliance by Sublessee with this Section 31. The reasonable cost of any such inspections shall be paid by Sublessor, unless such inspection reveals that Sublessee has violated the provisions of this Section 31 in which case Sublessee shall reimburse Sublessor for the reasonable out of pocket costs of such inspections. Moreover, Master Lessor shall be permitted at any time (a) to cause testing wells to be installed in or around the Subleased Premises, and (b) to cause ground water to be tested to detect the presence of Hazardous Substances.

          31.8 Sublessee Indemnification as. Sublessee shall indemnify, defend and hold harmless each of Sublessor, the Sublessor Indemnitees and the Master Lessor from and against any and all Claims arising out of or involving any Hazardous Substance brought onto or released in, on or under the Subleased Premises by or for Sublessee or Sublessee’s employees, contractors, agents, invitees, licensees or permitted sub-sublessees or assignees. Sublessee’s obligations shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Sublessee, and the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Sublease. No termination, cancellation or release agreement entered into by Sublessor and Sublessee shall release Sublessee from its obligations under this Sublease with respect to Hazardous Substances, unless Sublessor specifically agrees thereto in

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writing at the time of such agreement and such agreement specifically identifies this Section 31 of this Sublease.

          31.9 Sublessor Indemnification. Sublessor shall indemnify, defend and hold harmless each of Sublessee and the Sublessee Indemnitees from and against any and all Claims arising out of or involving (a) any Hazardous Substance existing in, on or under the Subleased Premises prior to the Commencement Date other than any Hazardous Substance brought onto or released in, on or under the Subleased Premises by or for Sublessee or Sublessee’s employees, contractors, agents, invitees or licensees prior to the Commencement Date, or (b) any Hazardous Substance brought onto or released in, on or under the Subleased Premises by or for Sublessor on and after the Commencement Date. Sublessor’s obligations shall include, but not be limited to, the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Sublease. No termination, cancellation or release agreement entered into by Sublessor and Sublessee shall release Sublessor from its obligations under this Section 31, unless Sublessee specifically agrees thereto in writing at the time of such agreement and such agreement specifically identifies this Section 31 of this Sublease.

     32. Proposed Sub-Subletting; Recapture. In the event that Sublessee desires to sub-sublet all or a portion of the Subleased Premises, Sublessee shall submit to Sublessor for its review the terms and conditions of such proposed sub-sublease transaction. Sublessor shall have the option for a period of thirty (30) days, commencing upon the delivery to Sublessor of all of the information described in the succeeding sentence, to elect in Sublessor’s sole discretion to terminate this Sublease (as to the portion of the Subleased Premises that Sublessee proposes to sub-sublet) and enter into a direct sublease (the “Direct Sublease”) with the prospective sub-sublessee (the “Recapture”). In connection with Sublessor’s review process, Sublessee shall submit to Sublessor in writing (i) the name of the proposed sub-sublessee, (ii) such information as to such sub-sublessee’s financial condition and general standing in the community as may be available to Sublessee, (iii) all of the terms and conditions upon which the proposed transaction is to be made, and (iv) such other information as Sublessor shall reasonably request. The parties hereto acknowledge and agree that, if Sublessor elects to Recapture: (a) the consent of Master Lessor is required for the Direct Sublease (the “Direct Sublease Consent”); (b) the parties hereto shall use commercially reasonable efforts to negotiate in good faith to obtain, execute and deliver the Direct Sublease Consent as soon as reasonably practicable; (c) Sublessee shall execute and deliver a guaranty, in form and substance reasonably acceptable to Sublessor and Sublessee, wherein Sublessee shall guaranty for the benefit of Sublessor the prompt payment and performance of each and every obligation of the sublessee under the Direct Sublease; (d) upon the effective date of the Recapture (provided that Master Lessor has executed the Direct Sublease Consent), Sublessee shall surrender possession of the portion of the Subleased Premises covered by the Direct Sublease and any applicable Personal Property and Infrastructure Systems in accordance with the terms and conditions contained in this Sublease for the surrender of the same; and (e) Sublessee shall execute and deliver an amendment to this Sublease modifying the description of the Subleased Premises, the Base Rent and any other relevant provisions contained herein. The provisions contained in this Section 32 are in addition to (and not in lieu of) the provisions contained in Sections 16, 55 and 56 of the Master Lease, as the same have been incorporated by reference into this Sublease.

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     IN WITNESS WHEREOF, the parties have executed this Sublease as of the date first hereinabove written.

Sublessor:
MAXTOR CORPORATION
By:	/s/ Duston Williams
Name:	Duston Williams
Title:	Chief Financial Officer
Sublessee:
SANDISK CORPORATION
By:	/s/ Judy Bruner
Name:	Judy Bruner
Title:	Executive Vice President and Chief Financial Officer

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EX-10.5

Exhibit 10.5

SUBLEASE
(BUILDING 6)

     THIS SUBLEASE (“Sublease”), dated as of December 21, 2005, is made by and between MAXTOR CORPORATION, a Delaware corporation (“Sublessor”), and SANDISK CORPORATION, a Delaware corporation (“Sublessee”).

R E C I T A L S

     A. John Arrillaga, Trustee or his Successor Trustee u/t/a dated 7/20/77 (John Arrillaga Separate Property Trust), as amended, and Richard T. Peery, Trustee or his Successor Trustee u/t/a dated 7/20/77 (Richard T. Peery Separate Property Trust), as amended (collectively, “Master Lessor”), and Quantum Corporation, a Delaware corporation (“Quantum”), have entered into: (i) that certain Lease Agreement dated April 10, 1992 pursuant to which Quantum leased from Master Lessor the real property commonly called 900 Sumac Drive, Milpitas, California and the building constructed thereon (“Building 3”), as amended by that certain Amendment No. 1 to Lease dated April 16, 1997 and that certain Amendment No. 2 to Lease dated March 22, 2001 (collectively, the “Building 3 Master Lease”); (ii) that certain Lease Agreement dated September 17, 1990 pursuant to which Quantum leased from Master Lessor the real property commonly called 1000 Sumac Drive, Milpitas, California and the building constructed thereon (“Building 4”), as amended by that certain Amendment No. 1 to Lease dated April 16, 1997 and that certain Amendment No. 2 to Lease dated March 26, 2001 (collectively, the “Building 4 Master Lease”); (iii) that certain Lease Agreement dated April 16, 1997 pursuant to which Quantum leased from Master Lessor the real property commonly called 601 McCarthy Boulevard, Milpitas, California and the building constructed thereon (“Building 6” or the “Building”), as amended by that certain Amendment No. 1 to Lease dated April 15, 1998 and that certain Amendment No. 2 to Lease dated March 22, 2001 (collectively, the “Building 6 Master Lease” or the “Master Lease”); and (iv) that certain Lease Agreement dated March 23, 1994 pursuant to which Quantum leased from Master Lessor the real property commonly called 1100 Sumac Drive, Milpitas, California and the building constructed thereon (“Building 5”), as amended by that certain Amendment No. 1 to Lease dated April 16, 1997 and that certain Amendment No. 2 to Lease dated March 22, 2001 (collectively, the “Building 5 Master Lease”). Pursuant to Amendment No. 2 to each of the foregoing leases, Sublessor has succeeded to the interest of Quantum as tenant thereunder. A copy of the Building 6 Master Lease is attached hereto as Exhibit D.

     B. Sublessee desires to sublease from Sublessor, and Sublessor desires to sublease to Sublessee, (i) the entire premises covered by the Building 6 Master Lease upon the terms and conditions hereinafter set forth in this Sublease, (ii) the entire premises covered by the Building 3 Master Lease upon the terms and conditions set forth in that certain Sublease (Building 3) of even date herewith between Sublessor and Sublessee (the “Building 3 Sublease”), and (iii) the entire premises covered by the Building 4 Master Lease upon the terms and conditions set forth in that certain Sublease (Building 4) of even date herewith between Sublessor and Sublessee (the “Building 4 Sublease”). This Sublease, the Building 3 Sublease and the Building 4 Sublease are collectively called the “Subleases”.

     NOW, THEREFORE, in consideration of the mutual promises contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Sublessor and Sublessee agree as follows:

     1. Definitions. All capitalized terms not otherwise defined herein shall have the respective meanings ascribed to them under the Master Lease.

     2. Subleased Premises. Subject to the terms and conditions contained in this Sublease, Sublessor hereby subleases to Sublessee, and Sublessee hereby subleases from Sublessor, the entire premises covered by the Master Lease as depicted on Exhibit A hereto (the “Subleased Premises”); provided, however, subject to Section 29 below, Sublessor shall retain for itself and its employees, agents, contractors, invitees, licensees, successors and assigns (and Sublessee does hereby grant to each of the foregoing) the right to non-exclusive use of all common areas, landscaped areas, sidewalks and driveways related to each of Building 3, Building 4 and Building 6 (collectively, the “Buildings”). Moreover, subject to the terms and conditions of this Sublease, Sublessee shall have non-exclusive use of all common areas, landscaped areas, sidewalks and driveways related to the Building, including the “Hetch-Hetchy Land” described in Paragraph 49 of the Master Lease (the “Hetch-Hetchy Land”). For the avoidance of doubt, Sublessee acknowledges that it has no right to access any building (other than the Buildings and Building 5 if Sublessee exercises the ROFO, as defined in Section 27.1 below pursuant to the Subleases) in the project that the Buildings are a part. Sublessee hereby acknowledges and agrees that Building 6 consists of approximately 187,134 rentable square feet. Nevertheless, the parties agree that the foregoing approximation shall be final and binding for all purposes hereunder; and notwithstanding anything to the contrary contained herein, no adjustment shall be made to the Base Rent (as defined in Section 5.1(a) below) if the actual square footage of Building 6 differs from any reference to square footage contained herein.

     3. Term; Sublease Consent; Early Entry.

          3.1 Term. Provided that Master Lessor has consented to this Sublease (the “Sublease Consent”) and unless sooner terminated in accordance with the provisions contained herein, the term (“Term”) of this Sublease shall commence on July 1, 2006 (the “Commencement Date”) and shall expire on March 31, 2013 (the “Expiration Date”) [sixty (60) days prior to the expiration date of the Master Lease].

          3.2 Sublease Consent. If Master Lessor has not consented to this Sublease on or prior to January 15, 2006, then either party hereto shall have the right to terminate this Sublease and the other Subleases at any time on or prior to March 31, 2006, effective upon written notice to the other party. Sublessor agrees to use commercially reasonable efforts to obtain a non-disturbance agreement for the benefit of Sublessee as part of the Sublease Consent.

          3.3 Early Entry (Post-Consent). Upon full execution and delivery of the Sublease Consent, Sublessee and Sublessee’s employees, agents and contractors shall be permitted to enter the Subleased Premises during Building business hours (as determined by Sublessor in its sole discretion) for the purposes of (i) installing and re-configuring furnishings, fixtures and equipment, (ii) construction and testing of subtenant improvements, and (iii) conducting business operations. Such entry shall be subject to all of the terms and conditions of the Master Lease and this Sublease, including without limitation, (a) the indemnity and hold

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harmless provisions of Section 9 of this Sublease and (b) the obligation to pay utilities and janitorial services; provided, however, other than as provided in Section 5.2 below, Sublessee shall not be required to pay any Base Rent nor Operating Expense Payments (as defined below) for Real Property Taxes, insurance premiums and common area expenses with regard to such early entry. Sublessee shall furnish to Sublessor evidence of the insurance required under Section 7 of this Sublease prior to any entry into any portion of the Subleased Premises.

          3.4 Early Entry (Pre-Consent). In addition to Sublessee’s rights under Section 3.3 above, Sublessee and Sublessee’s employees, agents and contractors shall be permitted to enter the Building during Building business hours (as determined by Sublessor in its sole discretion) for the sole purposes of (i) testing the Warranted Systems (as defined in Section 4.5 below) therein, and (ii) preparing construction drawing, plans and specifications, and for no other purposes. Such entry shall be subject to all of the terms and conditions of the Master Lease and this Sublease, including without limitation, (a) the indemnity and hold harmless provisions of Section 9 of this Sublease and (b) the obligation to pay utilities and janitorial services; provided, however, other than as provided in Section 5.2 below, Sublessee shall not be required to pay any Base Rent nor Operating Expense Payments for Real Property Taxes, insurance premiums and common area expenses with regard to such early entry. Sublessee shall furnish to Sublessor evidence of the insurance required under Section 7 of this Sublease prior to any entry into any portion of the Subleased Premises. Moreover, and without limiting the foregoing, Sublessee shall indemnify, protect, defend with counsel reasonably acceptable to Sublessor and hold harmless Sublessor and Sublessor’s shareholders, directors, officers, employees, agents, affiliates, successors and assigns from and against any and all claims, demands, liabilities, judgments, losses, causes of action, fines, penalties, damages, costs and expenses, including reasonable attorneys’ and experts’ fees (collectively, “Claims”), caused by or arising in connection with the early entry described in this Section 3.4, including without limitation, any Claims by Master Lessor that Sublessor has committed (or allegedly committed) a default and/or breach under the Master Lease by permitting the early entry described in this Section 3.4. Sublessee’s indemnification and other covenants provided in this Section 3.4 shall survive the expiration or termination of this Sublease.

     4. Use; “As Is” Condition; Furniture.

          4.1Use. Sublessee shall use the Subleased Premises for any legal use permitted under the Master Lease. Sublessee acknowledges that it is thoroughly familiar with the condition of the Subleased Premises, and Sublessee agrees that it is subleasing the Subleased Premises on an “AS IS”, “WHERE IS” basis, subject to all latent or patent defects, without any representation or warranty by Sublessor or Master Lessor or their respective employees or agents as to the condition of the Subleased Premises or their fitness for Sublessee’s use, except as otherwise set forth in this Sublease, and subject to all applicable zoning, municipal, county and state laws, ordinances and regulations governing and regulating the use of the Subleased Premises, and any easements, covenants or restrictions of record. Sublessee acknowledges that Sublessor and Master Lessor and their respective employees or agents have not made any representations or warranties that the Subleased Premises comply with applicable law, ordinance, rule, regulation or covenant or restriction of record (collectively, “Applicable Requirements”), including, but not limited to, the Americans With Disabilities Act, as amended (“ADA”), or any laws relating to earthquake or other life/safety matters or Hazardous Substances (as defined

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below), except as set forth in this Sublease. The parties hereto agree that the plans attached hereto as Exhibit B accurately reflect all Alterations (as defined below) in the Subleased Premises existing as of the date hereof (collectively, the “Existing Alterations”). Sublessor hereby assigns all of its right, title and interest under any warranties with respect to the Building and/or such Building’s systems and which are then in effect and which by their terms may be assigned without the consent of the counterparty thereto (collectively, “Building Warranties”). The assignment of the Building Warranties is conditioned on this Sublease being in full force and effect and that upon expiration or termination of this Sublease, the conditional assignment shall terminate automatically and Sublessee shall not have any further right, title or interest in the Building Warranties.

     4.2 Alterations. Sublessee shall obtain both Sublessor’s and Master Lessor’s prior written consent to the architect and contractor engaged by Sublessee to perform work in or about the Subleased Premises, which consent Sublessor shall not unreasonably withhold. Sublessor agrees that it shall not charge Sublessee any supervisory fee with respect to any alterations, additions or improvements (collectively, “Alterations”) that Sublessee makes to the Subleased Premises, other than any supervisory fee that Master Lessor charges Sublessor with respect thereto (which charge Sublessee shall pay Sublessor as Additional Rent (as defined below) hereunder). Except as modified by this Section, Sublessee shall strictly comply with all obligations of Section 6 of the Master Lease, as incorporated by reference herein. Notwithstanding anything to the contrary contained in this Sublease, (a) if so required in writing by Master Lessor, Sublessee shall remove all Alterations made by or on behalf of Sublessee in or to the Subleased Premises (whether or not Sublessor’s consent was required hereunder) at expiration or termination of this Sublease and restore the Subleased Premises to the condition shown on Exhibit B hereto, ordinary wear and tear and damage caused by Sublessor excepted, all at Sublessee’s sole cost and expense, and (b) Sublessee shall not be required to obtain Sublessor’s consent (but shall still be required to obtain Master Lessor’s consent, if applicable) to any Alteration to the Subleased Premises if (i) (A) the total cost (including soft costs) for such Alteration does not exceed Twenty Thousand Dollars ($20,000), (B) such Alteration does not affect the foundation, roof or any structural component of the Building, (C) such Alteration does not materially affect the Building’s mechanical, electrical, plumbing or life safety systems, and (D) Sublessee provides Sublessor with not fewer than ten (10) days’ prior written notice of Sublessee’s construction or installation of such Alteration, or (ii) if Master Lessor consents in writing to the Alterations in question and agrees that it need not be removed at the end of the term of the Master Lease. Sublessee shall furnish to Sublessor copies of all permits and plans and specifications for all Alterations made by or for Sublessee to the Subleased Premises, whether or not Sublessor’s consent thereto is required hereunder. Sublessee shall pay, when due, all Claims for labor or materials furnished or alleged to have been furnished to or for Sublessee at or for use on the Subleased Premises. If any mechanic’s lien is recorded for work claimed to have been done for, or on behalf of, or for materials claimed to be furnished to or for Sublessee, then Sublessee shall, at its expense, immediately discharge such lien, by bond or otherwise, on demand of Sublessor.

          4.3 Repair and Maintenance. Subject to the provisions of Sections 6.3(c) and 8 below, the parties hereto agree that Sublessor shall have no obligation to Sublessee, in any manner whatsoever, to repair and/or maintain the Subleased Premises or the Building, or any portion thereof or the contents therein (including, without limitation, the Personal Property, as

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defined below). Sublessee shall strictly comply with all other obligations of Section 7 of the Master Lease, as incorporated by reference herein.

          4.4 License for Personal Property and Infrastructure Systems. Sublessor hereby grants Sublessee a license to use in the Subleased Premises during the Term, (i) all cubicle systems, work stations, furniture, trade fixtures, equipment, art work, cabling, cafeteria and gym equipment, security systems (including card access, camera and intrusion systems, the “Security Systems”), and other personal property owned by Sublessor and located in the Subleased Premises as of the date hereof, including without limitation, those items described in Exhibit C attached hereto (collectively, the “Personal Property”), and (ii) all generators, uninterruptible power systems (UPS), heating, ventilation and air conditioning systems (HVAC), and data center systems and controls, located in the Subleased Premises (collectively, the “Infrastructure Systems”), and subject to the terms and conditions set forth below:

          (a) The parties shall jointly conduct a walk-through inspection of the Personal Property (and photograph such Personal Property, if needed), and note on Exhibit C any pre-existing damage or defective conditions in the Personal Property.

          (b) SUBLESSEE ACCEPTS THE PERSONAL PROPERTY AND THE INFRASTRUCTURE SYSTEMS IN THEIR “AS IS”, “WHERE IS” CONDITION WITH ALL FAULTS AND WITHOUT WARRANTIES, EXPRESS OR IMPLIED. SUBLESSOR DISCLAIMS ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. SUBLESSEE EXPRESSLY ASSUMES ALL RISK AND RESPONSIBILITY FOR ANY DEFECTS (INCLUDING LATENT DEFECTS) IN THE PERSONAL PROPERTY AND THE INFRASTRUCTURE SYSTEMS.

          (c) Except for pre-existing damage or defective conditions to the Personal Property (as mutually agreed by Sublessor and Sublessee), Sublessee shall maintain the Personal Property and the Infrastructure Systems, and all portions thereof, in good condition and repair throughout the Term. Upon the expiration or earlier termination of this Sublease but subject to Section 4.2(f) below, Sublessee shall surrender the Personal Property and the Infrastructure Systems in the same condition as received, ordinary wear and tear excepted. Except for pre-existing damage or defective conditions to the Personal Property (as mutually agreed by Sublessor and Sublessee) but subject to Section 4.2(f) below, Sublessee shall reimburse Sublessor, as Additional Rent, for the reasonable cost of repairing any damage to the Personal Property and the Infrastructure Systems, ordinary wear and tear excepted.

          (d) Sublessee shall keep the Personal Property and the Infrastructure Systems free from any liens arising out of work performed, materials furnished or obligations incurred by Sublessee.

          (e) Sublessee shall be permitted to remove the Personal Property from the Subleased Premises; provided, however, Sublessee shall not transfer its right to use the Personal Property or dispose of any of the same, without obtaining the prior written consent of Sublessor, and shall comply with Sublessor’s reasonable instructions regarding such transfer or disposition. Sublessee shall not be permitted to remove the Infrastructure Systems or any portion thereof

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from its location in the Building, without obtaining the prior written consent of Sublessor, which consent shall not be unreasonably withheld.

          (f) Provided that this Sublease has not been terminated in accordance with the terms and conditions contained herein and Sublessee has not surrendered the Personal Property in accordance with Section 32 below, on the Expiration Date, Sublessee shall purchase the Personal Property on an “AS IS”, “WHERE IS” basis with all faults and without warranties, express or implied, for the sum of One Dollar ($1.00), pursuant to a bill of sale in a form mutually agreeable to the parties.

          4.5 Warranted Systems. Sublessor hereby represents and warrants to Sublessee that (i) the Infrastructure Systems, (ii) the kitchen equipment, and (iii) the central processors and transponders of the Security Systems in the Building (collectively, the “Warranted Systems”) are in good working condition as of the Commencement Date. The foregoing representation and warranty of Sublessor (collectively, the “IS Warranty”) shall expire sixty (60) days after the Commencement Date (the “IS Warranty Period”). In the event of a breach of the IS Warranty (i.e., Sublessee determines during the IS Warranty Period that any of the Warranted Systems is not in good working condition as of the Commencement Date), then Sublessee’s sole remedy shall be to provide Sublessor with written notice (the “Repair Notice”) describing (in reasonable detail) the Warranted System(s) that is (are) not in good working condition. Provided that (a) Sublessor receives the Repair Notice prior to expiration of the IS Warranty Period, and (b) Sublessee has not modified or otherwise altered the Warranted System this is the subject of the Repair Notice (without having first obtained Sublessor’s prior written consent to such modification or alteration pursuant to Section 4.2 above), Sublessor shall promptly cause, at Sublessor’s expense, the Warranted System(s) identified in the Repair Notice to be put into good working condition. In no event shall Sublessee be permitted to offset or withhold rent due to Sublessor hereunder in the event of a breach by Sublessor of the IS Warranty or any other obligation of Sublessor under this Sublease, including without limitation, this Section 4.5.

          4.6 ADA Compliance re Building 6. Sublessor hereby represents and warrants to Sublessee that Building 6 complies with ADA as of the date Master Lessor executes the Sublease Consent. The foregoing representation and warranty of Sublessor (collectively, the “ADA Warranty”) shall expire sixty (60) days after the date Master Lessor executes the Sublease Consent (the “ADA Warranty Period”). In the event of a breach of the ADA Warranty (i.e., Sublessee determines during the ADA Warranty Period that Building 6 does not comply with ADA as of the date Master Lessor executes the Sublease Consent), then Sublessee’s sole remedy shall be to provide Sublessor with written notice (the “Compliance Notice”) describing (in reasonable detail) the portion(s) of Building 6 that fail to comply with ADA as of such date. Provided that (a) Sublessor receives the Compliance Notice prior to expiration of the ADA Warranty Period, and (b) compliance with ADA is not triggered by Sublessee’s Alterations to or use of Building 6, Sublessor shall promptly cause, at Sublessor’s expense, the portion(s) of Building 6 that is (are) identified in the Compliance Notice to comply with ADA, unless Sublessor determines, in its reasonable discretion, that it is not economically practicable for Sublessor to do so. In no event shall Sublessee be permitted to offset or withhold rent due to Sublessor hereunder in the event of a breach by Sublessor of the ADA Warranty or any other obligation of Sublessor under this Sublease, including without limitation, this Section 4.6.

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     5. Rent; Security Deposit.

          5.1 Base Rent.

          (a) The base rent (“Base Rent”) to be paid by Sublessee to Sublessor under this Sublease is intended to be absolutely triple net. Subject to Section 5.1(b) below, during the Term, Sublessee shall pay to Sublessor monthly Base Rent for the Subleased Premises, payable in advance on the first (1^st) day of each month in accordance with the following schedule (“Base Rent Schedule”):

		Monthly Installment
Time Period from		of
Commencement	Monthly Base Rent	Base Rent
Date	Rate Per RSF	(Bldg 6)
Months 1-2	$0.00	$0.00
Months 3-12	$0.65	$121,637.10
Months 13-24	$0.69	$129,122.46
Months 25-36	$0.73	$136,607.82
Months 37-48	$0.77	$144,093.18
Months 49-61	$0.81	$151,578.54
Months 62-81	$0.90	$168,420.60

          (b) Notwithstanding the foregoing, Sublessee shall pay to Sublessor, upon execution of this Sublease, the sum of One Hundred Twenty-One Thousand Six Hundred Thirty-Seven Dollars and Ten Cents ($121,637.10), as prepaid Base Rent for the first (1^st) full month of the Term that Base Rent is due hereunder.

          (c) If the Term commences on a day other than the first (1^st) day of a calendar month or ends on a day other than the last day of a calendar month, Base Rent for the first and/or last fractional month of the Term shall be prorated on the actual number of days elapsed in such month.

          5.2 Additional Rent. Sublessee shall pay as additional rent (“Additional Rent”), within twenty (20) days after demand therefor, all sums or other charges required to be paid by Sublessee under this Sublease. During the Term, Sublessee shall pay to Sublessor all sums or other charges required to be paid by Sublessor, as tenant, to Master Lessor under the Master Lease, including without limitation, (a) all Real Property Taxes, insurance premiums and common area expenses required to be paid to Master Lessor thereunder (collectively, “Operating Expense Payments”, and which shall include expenses relating to the Parking Areas and Outdoor Areas, as such terms are defined below), (b) all “Additional Rent” (as defined in the Master Lease) due from Sublessor, as tenant, to Master Lessor under Paragraphs 4.D.(a) and (b) of the Master Lease, and (c) the management fee charged by Master Lessor to Sublessor under the Master Lease, but expressly excluding (i) any “Basic Rent” due from Sublessor, as tenant, to Master Lessor under the Master Lease, and (ii) any late charges, default interest and other

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penalties due from Sublessor, as tenant, to Master Lessor under the Master Lease provided the same are not caused by the default or breach of any of Sublessee’s obligations contained in this Sublease. Sublessor shall not charge Subtenant a management fee with regard to the Building, other than the management fees charged by Master Lessor under the Master Lease. Notwithstanding the foregoing, Sublessee’s obligation to pay Operating Expense Payments for the Subleased Premises shall be tolled until the earlier of (x) such time as twenty-five (25) or more employees of Sublessee occupy any portion of the Building, or (y) the Commencement Date. Moreover, Sublessee agrees to pay its proportionate share of any costs and expenses incurred by Sublessor for (A) any insurance obtained by Sublessor pursuant to Section 54 of the Master Lease, (B) repair or maintenance of the central courtyard, and (C) repair, maintenance, replacement or new construction of improvements in such central courtyard, within twenty (20) days after written demand therefor (which written demand shall contain documentation in reasonable detail evidencing the costs and expenses incurred by Sublessor); provided, however, that Sublessee shall have no obligation to reimburse Sublesssor for any (aa) replacement of an existing improvement in the central courtyard, or (bb) construction or installation of any new improvement in the central courtyard, if Sublessor had not first obtained Sublessee’s written approval thereof, which approval shall not be unreasonably withheld, conditioned or delayed by Sublessee. Sublessor shall have the same remedies for a default in the payment of Additional Rent as for a default in the payment of Base Rent. Base Rent and Additional Rent are hereinafter sometimes referred to collectively as “Rent.”

          5.3 Payment of Rent. Rent shall be paid to Sublessor, without deduction, demand, recoupment, offset or counterclaim, in lawful money of the United States of America, at Maxtor Corporation, 333 South Street, Shrewsbury, MA 01545, Attn: Gary Leblanc, or to such other person or at such other place as Sublessor may from time to time designate in writing.

          5.4 Security Deposit; Letter of Credit.

          (a) Upon execution of this Sublease, Sublessee shall deliver to Sublessor a clean, unconditional, irrevocable, transferable letter of credit in the amount of Six Hundred Ninety-Four Thousand Thirty-Four Dollars and Ninety-Seven Cents ($694,034.97). (the “Letter of Credit”), in form and issued by a financial institution (“Issuer”) satisfactory to Sublessor in its sole discretion, which Letter of Credit (and all sums drawn by Sublessor thereunder) shall constitute a security deposit to secure Sublessse’s obligations under this Sublease and the other Subleases (the “Security Deposit”). Sublessee hereby grants to Sublessor a security interest in the Letter of Credit and all proceeds, replacements and modifications thereof to secure Sublessee’s obligations herein, including without limitation, the obligation to pay Rent, perform its insurance and indemnity obligation and to maintain and restore the Subleased Premises. The Letter of Credit shall permit partial draws, and provide that draws thereunder will be honored upon receipt by Issuer (at its offices in San Francisco, California or such other location that Sublessor shall approve in its sole discretion) of the original or a certified copy of the Letter of Credit accompanied by a written statement signed by Sublessor or its authorized agent stating that Sublessor is entitled to draw on the Letter of Credit pursuant to the terms of this Sublease. The Letter of Credit shall have an expiration period of one (1) year from the date of issuance but shall provide that it will automatically renew by its terms to a date which is sixty (60) days following the Expiration Date unless affirmatively cancelled by Issuer following not fewer than sixty (60) days prior written notice of such expiration or cancellation from Issuer to Sublessor.

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Sublessor shall be entitled to draw the Letter of Credit in part or in full. All costs and expenses related to the Letter of Credit, including any transfer fees, shall be paid by Sublessee.

     (b) Sublessor shall hold the Security Deposit as security for the full and faithful performance by Sublessee of its covenants and obligations under this Sublease and the other Subleases. If Sublessee defaults in the full and timely performance of any or all of Sublessee’s covenants and obligations under this Sublease or any of the other Subleases, then Sublessor may, from time to time, without waiving any other remedy available to Sublessor, use the Security Deposit, or any portion thereof, to the extent necessary to cure or remedy the default or to compensate Sublessor for all or any part of the damages sustained by Sublessor resulting from Sublessee’s default. Sublessee shall pay to Sublessor within ten (10) business days after receipt of demand, the amount so applied in order to restore the Security Deposit to its original amount. Sublessor shall not be required to keep the Security Deposit separate from its general accounts and no trust relationship is created between Sublessor and Sublessee with respect to the Security Deposit. If Sublessee performs all of its obligations hereunder and under all of the other Subleases, the Security Deposit, or so much thereof as has not theretofore been applied by Sublessor, shall be returned to Sublessee, without interest or other increment for its use, at the Expiration Date and after Sublessee has vacated the entire Subleased Premises. Sublessee’s failure to provide and keep the Letter of Credit in full force and effect and otherwise in accordance with the terms of this Section 5.4 shall constitute a default of this Sublease and the other Subleases.

     6. Master Lease.

          6.1 Subject to Master Lease. This Sublease is and shall at all times be subject and subordinate to the Master Lease attached hereto as Exhibit D, and every provision thereof. Sublessee acknowledges that (a) Sublessee’s use and enjoyment of the Subleased Premises are subject to the rights of Master Lessor pursuant to the Master Lease, and (b) Sublessee has reviewed a copy of each Master Lease and is fully familiar with the provisions thereof. Sublessor represents and warrants that (i) the copy of the Master Lease attached hereto as Exhibit D is a true and complete copy of the Master Lease and all amendments, modifications, written side letter agreements and recorded memoranda of leases with respect thereto, (ii) Sublessor has not already assigned its interest in the Master Lease or sublet any of the Subleased Premises, and (iii) as of the date hereof, the Master Lease is in full force and effect and no defaults exist on the part of Sublessor or, to the best of Sublessor’s knowledge, Master Lessor under the terms of the Master Lease. Sublessor shall not assign, terminate or amend the Master Lease (or the Building 5 Master Lease provided that Sublesssee’s ROFO is in full force and effect) without the prior written consent of Sublessee, which consent may be withheld in Sublessee’s sole discretion.

          6.2 No Violation of Master Lease. Neither Sublessor nor Sublessee shall commit or permit to be committed any act or omission which would violate any term or condition of the Master Lease. If a Master Lease terminates, this Sublease shall terminate as to the portion of the Subleased Premises covered thereby and the parties shall be relieved of any further liability or obligation under this Sublease with respect thereto; provided, however, that if the Master Lease terminates as a result of a default or breach by either Sublessor or Sublessee under this Sublease and subject to Section 13 of this Sublease, then the defaulting party shall be liable to the other party for the damage suffered as a result of such termination. Furthermore,

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Sublessor agrees not to voluntarily terminate the Master Lease without the written consent of Sublessee, which consent shall not be unreasonably withheld, conditioned or delayed.

          6.3 Incorporation of Master Lease.

          (a) Subject to and in accordance with the exceptions, qualifications and modifications set forth below and elsewhere in this Sublease, all the provisions of the Master Lease, as set forth in Exhibit D hereto, are hereby incorporated by reference and made a part of this Sublease, and to the extent that such provisions impose obligations or duties on Sublessor as tenant under the Master Lease and are incorporated by reference into the terms of this Sublease, Sublessee does hereby expressly assume and agree with Sublessor to perform and to comply with such obligations and duties of Sublessor as tenant thereunder, as the same accrue on and after the Commencement Date, subject to the provisions of Sections 3.3 and 3.4 above. In the event of any conflict between any provision of the Master Lease incorporated herein and a provision contained in this Sublease, the provision contained in this Sublease shall prevail.

          (b) Except as otherwise expressly provided herein and except for those provisions that are not incorporated into this Sublease, the term “Landlord” (and similar terms) as used in the Master Lease shall mean “Sublessor” hereunder; the term “Tenant” (and similar terms) as used in the Master Lease shall mean “Sublessee” hereunder; the term “Premises” (and similar terms) as used in the Master Lease shall mean “Subleased Premises” hereunder; and the term “Lease” as used in the Master Lease shall mean this “Sublease”.

          (c) Sublessor shall have no obligation to operate or maintain (i) the Building or any other premises covered by the Master Lease, (ii) any common areas in the Building or any other premises covered by the Master Lease, or (iii) provide any Building services or utilities. With respect to all services to be performed or provided by Master Lessor under the Master Lease, Sublessor’s sole obligation shall be to exercise commercially reasonable efforts (without litigation or the threat thereof) to require Master Lessor to comply with its obligations to perform or provide such services under the Master Lease, including promptly notifying Master Lessor of its nonperformance if so requested by Sublessee in writing.

          (d) Notwithstanding anything to the contrary contained herein, in no event shall Sublessor be deemed to be in default under this Sublease or liable to Sublessee for any failure of Master Lessor to perform its obligations under the Master Lease. Wherever the Master Lease requires the consent of the landlord be obtained, both Master Lessor’s consent and Sublessor’s consent shall be required and the standard for such consent by Sublessor shall be a consent not unreasonably withheld or delayed. For the avoidance of doubt, Sublessee shall be required to obtain both Sublessor’s and Master Lessor’s consent for (i) any assignment or sub-subletting of the Subleased Premises (provided that Sublessor’s consent shall not be required for assignments to entities controlled by or under common control with Sublessee if Sublessee is not released from its obligations under this Sublease), or (ii) any Alterations to the Subleased Premises or any portion thereof, in accordance with the provisions of the Master Lease, as incorporated be referenced herein, but subject to the terms and conditions contained in Section 4.2 above.

          6.4 Exclusions from Master Lease. Sublessor and Sublessee expressly agree that the following provisions of the Master Lease are not incorporated in this Sublease: the first

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full paragraph of the Master Lease; Sections 2, 4.A and 4.B; the reference in 4.C. to “ten percent (10%)” shall be replaced by a reference to “five percent (5%)”; Sections 4.F and 4.G; the first two sentences of Section 5; the seventh sentence of Section 6; the first sentence of Section 9; the first sentence of Section 12; Sections 13 and 23; the term “Landlord” in the first and second sentences of Section 21, the second paragraph of Section 22 and in Section 27 shall be replaced with “Master Lessor”; Sections 29, 31, 34, 36, 38.G, 39 through 42 (inclusive), 44, 46 through 50 (inclusive), 51.A through D (inclusive); the term “Landlord” in Section 52 shall be replaced with “Master Lessor” and all references to extension rights or periods in such Section 52 shall be deleted (i.e., not incorporated by reference into this Sublease); Sections 54, 61, 62, 63 and 64; the term “for lease” in Section 58(ii) shall be replaced with “for sublease”; and all of Amendment No. 1 to Lease and Amendment No. 2 to Lease.

          6.5 Time for Notices and Demands. Whenever in the Master Lease a time is specified for the giving of any notice or the making of any demand by the tenant thereunder, such time is hereby changed (for the purpose of this Sublease only) by subtracting five (5) days thereto (unless the time specified is less than five (5) days in which event two (2) business days shall be subtracted thereto instead); and whenever in the Master Lease a time is specified for the giving of any notice or the making of any demand by the landlord thereunder, such time is hereby changed (for the purpose of this Sublease only) by adding five (5) days if such notice, request or demand of the landlord thereunder relates to any subject other than the payment of fixed annual rent or additional rent under the Master Lease (unless the time specified is less than five (5) days in which event two (2) business days shall be added thereto instead). Whenever in the Master Lease a time is specified within which the tenant thereunder must give notice or make a demand following an event, or within which the tenant thereunder must respond to any notice, request or demand previously given or made by the landlord thereunder, or to comply with any obligation on the tenant’s part thereunder, such time is hereby changed (for the purpose of this Sublease only) by subtracting five (5) days if the same shall relate to any obligation other than the payment of fixed annual rent or additional rent under the Master Lease or under this Sublease (unless the time specified is less than five (5) days in which event two (2) business days shall be subtracted thereto instead). Wherever in the Master Lease a time is specified within which the landlord thereunder must give notice or make a demand following an event, or within which the landlord thereunder must respond to any notice, request or demand previously given or made by the tenant thereunder, such time is hereby changed (for the purpose of this Sublease only) by adding five (5) days thereto (unless the time specified is less than five (5) days in which event two (2) business days shall be added thereto instead). It is the purpose and intent of the foregoing provisions, among other things, to provide Sublessor with time within which to transmit to the Master Lessor any notices or demands received from Sublessee and to transmit to Sublessee any notices or demands received from the Master Lessor.

          6.6 Options to Extend Under Master Lease; Amendment to Sublease. In the event that (a) Sublessee notifies Sublessor in writing that Sublessee is actively negotiating a direct lease with Master Lessor (“Direct Lease”) with regard to the Subleased Premises for a term commencing immediately after the Expiration Date, and (b) provided that Sublessee is not then in default under this Sublease, then Sublessor agrees that it will not exercise its Option to Extend with regard to the Subleased Premises until such time as Sublessee notifies Sublessor in writing that it is no longer negotiating a Direct Lease with Master Lessor for the Subleased Premises. Sublessee hereby agrees to respond (in the affirmative or negative), from time to time,

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within ten (10) business days of its receipt of a written inquiry from Sublessor requesting that Sublessee confirm that Sublessee is or is not actively negotiating a Direct Lease with Master Lessor. In the event that Sublessee and Master Lessor execute and deliver a Direct Lease for the Subleased Premises, with a term commencing immediately after the Expiration Date, then (1) Sublessor shall agree to amend the Master Lease to delete its Options to Extend thereunder, and (2) Sublessor and Sublessee shall execute and deliver an amendment to this Sublease providing: (I) the Expiration Date for the Building shall be extended to be co-terminus with the expiration date of the Master Lease; (II) Sublessee shall assume the obligations of Sublessor under the Master Lease to remove any Alterations to the applicable Building that Master Lessor requires be removed and to restore the same in accordance with the terms of the Master Lease (collectively, the “Restoration Obligations”); and (III) Sublessee shall indemnify, defend and hold harmless Sublessor and the Sublessor Indemnitees from and against all Claims related to the Restoration Obligations assumed by Sublessee. In the event that Sublessee executes a Direct Lease with Master Lessor for the Subleased Premises, then Sublessor agrees to execute a quitclaim deed with respect thereto for delivery and recordation at expiration or termination of the Master Lease.

     7. Sublessee’s Insurance. Notwithstanding anything to the contrary contained in the Master Lease, Sublessee, at its sole cost and expense, shall keep in force at all times during the Term a policy of commercial general liability insurance with combined single limit coverage of not less than Three Million Dollars ($3,000,000) per occurrence and Five Million Dollars ($5,000,000) in the aggregate for bodily injury and property damage occurring in, on or about the Subleased Premises, including parking and landscaped areas and the Hetch-Hetchy Land. All insured policies required to be maintained by Sublessee hereunder shall name Sublessor and Master Lessor as additional insureds. Except as modified by this Section, Sublessee shall strictly comply with all other obligations under Section 10 of the Master Lease, as incorporated by reference herein.

     8. Casualty; Condemnation.

          (a) In the event that Sublessor’s interest as tenant under the Master Lease is terminated by reason of damage or destruction, condemnation, or any other reason, then this Sublease shall terminate as to Sublessor’s interest therein only (and not as to all Sublessor interests under the Master Lease) on the same date as the termination of such interest, without liability of Sublessor to Sublessee, and Sublessee shall not be entitled to any insurance proceeds or other remuneration from Sublessor except for insurance proceeds from insurance policies purchased by Sublessee for its own personal property. Sublessor agrees to give written notice to Sublessee promptly should Sublessor’s interest in any portion of the Subleased Premises be terminated, or be threatened to be terminated, under the Master Lease. Sublessor shall not terminate the Master Lease due to a casualty or condemnation without the prior written consent of Sublessee, which consent may be withheld in Sublessee’s sole and absolute discretion.

          (b) If the Subleased Premises or any portion thereof is damaged by fire or other casualty, and if the Master Lease is not terminated, then:

               (i) This Sublease shall continue in full force and effect;

               (ii) Sublessor shall have no obligation to repair or restore the damaged space;

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               (iii) Sublessor shall use commercially reasonable efforts (without litigation or the threat thereof), as set forth in Section 6.3(c) above, to cause Master Lessor to perform the repairs which Master Lessor is required to perform under the Master Lease; provided that Sublessor shall not be liable for any damages, nor shall Rent due hereunder be abated, nor shall Sublessee be relieved from the performance of any term or covenant hereunder, nor shall Sublessee be deemed to have been evicted, due to any aspect of the repair and restoration of the damaged space (including without limitation any delay of such repair and restoration), except to the extent so abated, relieved or evicted under the Master Lease; and

               (iv) There shall be no reduction or abatement of Rent for any period during which Sublessee is unable to use the affected portion of the Subleased Premises, in whole or part, due to damage or destruction of the same or the Building, unless Sublessor actually receives a reduction or abatement of rent under the Master Lease.

          (c) In the event eminent domain or condemnation is instituted against the Subleased Premises or any portion thereof, and the Master Lease is terminated with respect to all or a portion of the Subleased Premises as a result thereof pursuant to the Master Lease, (i) this Sublease shall terminate as of the date the Master Lease terminates with respect to such portion of the Subleased Premises without any liability on the part of Sublessor to Sublessee, and Sublessee shall not be entitled to any award of damages for Sublessee’s interest in the Subleased Premises, except that Sublessee may make a claim against the condemning authority for loss of or damage to Sublessee’s trade fixtures and personal property, relocation expenses, and unamortized subtenant improvements costs that have been paid by Sublessee, and (ii) Sublessor shall have no obligation to rebuild or restore the Subleased Premises. If this Sublease is terminated as to less than all of the Subleased Premises, this Sublease shall continue in full force and effect as to the remaining portion of the Subleased Premises, except that the Base Rent payable hereunder shall be equitably reduced but only to the extent (if any) that rent applicable to the affected portion of the Subleased Premises is reduced under the Master Lease.

          (d) Sublessee expressly waives the provisions of California Civil Code Section 1932(2) and Section 1933(4). Sublessor and Sublessee expressly waive the provisions of California Code of Civil Procedure Sections 1265.120 and 1265.130.

          9. Indemnity; Hold Harmless.

          (a) Sublessor shall not be liable to Sublessee or Sublessee’s employees, agents, invitees, licensees or visitors, or to any other person, for any injury to person, or damage to or loss of property on or about the Subleased Premises or the Building arising from any cause whatsoever, except to the extent caused solely by the gross negligence or willful misconduct of Sublessor. Except to the extent caused solely by the gross negligence or willful misconduct of Sublessor, Sublessee shall indemnify, protect, defend with counsel reasonably acceptable to Sublessor and hold harmless Sublessor and Sublessor’s shareholders, directors, officers, employees, agents, affiliates, successors and assigns (collectively, “Sublessor Indemnitees”) from and against any and all Claims caused by or arising in connection with: (i) the use or occupancy of the Subleased Premises, the Building, the Hetch-Hetchy Land, the Infrastructure Systems and the Personal Property by Sublessee or its employees, contractors, agents, invitees, licensees, permitted sub-sublessees or assignees or permitted sublessees pursuant to Section 32

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below; or (ii) the negligence or willful misconduct of Sublessee or its employees, contractors, agents, invitees, licensees or permitted sub-sublessees or assignees; or (iii) a default or breach of Sublessee’s obligations under this Sublease; or (iv) a default or breach of Sublessor’s obligations under the Master Lease to the extent caused by Sublessee’s default or breach of any of its obligations contained in this Sublease; or (v) any negligence, gross negligence or willful misconduct of Sublessee or its agents, employees, contractors, invitees, licensees, permitted sub-sublessees or assignees or permitted sublessees pursuant to Section 32 below in, on or about the Subleased Premises, the Building or the Hetch-Hetchy Land; or (vi) any failure of Sublessee to surrender the Subleased Premises (or any portion thereof) to Sublessor at the end of the Term hereof (or such sooner date as provided in this Sublease) or otherwise in the condition required hereunder to the extent required pursuant to the terms of this Sublease, or (vii) all Claims for labor or materials furnished or alleged to have been furnished to or for Sublessee at or for use on the Subleased Premises. Sublessee’s indemnification and other covenants provided in this Section 9 shall survive the expiration or termination of this Sublease.

          (b) Except to the extent caused solely by the gross negligence or willful misconduct of Sublessee but subject to Sections 3.3 and 3.4 above. Sublessor shall indemnify, protect, defend with counsel reasonably acceptable to Sublessee and hold harmless Sublessee and Sublessee’s shareholders, directors, officers, employees, agents, affiliates, successors and assigns (collectively, “Sublessee Indemnitees”) from and against any and all Claims caused by or arising in connection with: (i) a default or breach of Sublessor’s obligations under the Master Lease that is not caused by Sublessee’s default or breach of any of its obligations contained in this Sublease; or (ii) any negligence, gross negligence or willful misconduct of Sublessor or its agents, employees, contractors, invitees, licensees or permitted sub-sublessees or assignees in, on or about the Subleased Premises, the Building or the Hetch-Hetchy Land; or (iii) all Claims for labor or materials furnished or alleged to have been furnished to or for Sublessor at or for use on the Subleased Premises. Sublessor’s indemnification and other covenants provided in this Section 9 shall survive the expiration or termination of this Sublease.

     10. Utilities; System Connections; Vendors. Pursuant to Section 8 of the Master Lease, as incorporated by reference herein, Sublessee shall be responsible and shall pay directly all utilities and services furnished to the Subleased Premises, including security and janitorial services. Sublessor shall cause, at Sublessor’s expense, Infrastructure Systems and Security Systems within the Building to be separated from Infrastructure Systems and Security Systems for other buildings; and thereafter, Sublessee shall cause, at Sublessee’s expense, Infrastructure Systems and Security Systems within the Building to be reconnected (if necessary). Subject to the terms of the Master Lease and provided that Sublessee obtains both Sublessor’s and Master Lessor’s prior written consent (which consent Sublessor shall not unreasonably withhold). Sublessee shall be permitted to select its own vendors for its repair and maintenance of the Subleased Premises and for janitorial, security and other services to the Subleased Premises.

     11. Notices.

          11.1 Notices Under Sublease. All notices, consents, demands, requests and other communications from one party to the other given pursuant to the terms of this Sublease shall be in writing and shall be delivered by hand, air courier or by United States mail, certified or registered, postage prepaid, and addressed to Sublessee or Sublessor at the addresses respectively specified below or to such other place as Sublessee or Sublessor may from time to

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time designate in a written notice to the other. Notices shall be deemed given on the earliest of (i) receipt, (ii) one (1) business day after deposit with an courier for overnight delivery, or (iii) three (3) business days after deposit in the United States mail.

The address for
Sublessor is:	Maxtor Corporation
	333 South Street
	Shrewsbury, MA 01545
	Attn: Gary Leblanc
with a copy to:	Maxtor Corporation
	2452 Clover Basin Drive
	Longmont, CO 80503
	Attention: General Counsel
The address for
Sublessee is:	[Prior to the Commencement Date]
	SanDisk Corporation
	140 Caspian Court
	Sunnyvale, CA 94089
	Attn: General Counsel
with a copy to:	SanDisk Corporation
	140 Caspian Court
	Sunnyvale, CA 94089
	Attn: Edward Palma
	[On and after the Commencement Date]
	SanDisk Corporation
	601 McCarthy Boulevard
	Milpitas, CA 95035
	Attn: General Counsel
with a copy to:	SanDisk Corporation
	601 McCarthy Boulevard
	Milpitas, CA 95035
	Attn: Edward Palma

          11.2 Notices Under Master Lease. Sublessor shall promptly provide Sublessee with a copy of any notice it receives from Master Lessor relating to the Subleased Premises or the Master Lease. Sublessee shall promptly provide Sublessor with a copy of any notice it receives from Master Lessor relating to the Subleased Premises or the Master Lease.

     12. Confidentiality. Sublessee acknowledges and agrees that the terms and conditions set forth in this Sublease constitute Sublessor’s “Confidential Information” (as defined in the

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NDA, as defined below) and that such terms and conditions shall be subject to the Mutual Nondisclosure Agreement executed by Sublessor and Sublessee and made effective as of May 4, 2004 (the “NDA”).

     13. Limitation of Liability. Notwithstanding anything to the contrary contained in this Sublease, (a) no director, officer, shareholder, employee, adviser or agent of Sublessor or Sublessee shall be personally liable in any manner or to any extent under or in connection with this Sublease, and (b) neither Sublessor nor any of the Sublessor Indemnitees shall be responsible or liable for any consequential or punitive damages in connection with this Sublease, including, without limitation, on account of lost profits or the interruption of Sublessee’s business.

     14. Signage. Subject to the terms and conditions of the Master Lease, Sublessee, at its sole cost and expense, shall have the same signage rights as Sublessor has under the Master Lease with regard to the Building subleased to Sublessee hereunder, provided that at Sublessee’s sole cost (a) Sublessee shall obtain the prior written consent of Master Lessor thereto, (b) other than with respect to signage for Building 6, Sublessee shall obtain the prior written consent of Sublessor thereto (which consent of Sublessor shall not be unreasonably withheld), (c) Sublessee shall obtain all necessary permits and approvals from all applicable government agencies with respect thereto, (d) Sublessee shall install, maintain, repair and, to the extent required by Master Lessor, remove all signage at expiration or earlier termination of this Sublease, and (e) Sublessee shall repair all damage to the Subleased Premises caused by the removal of all signage at expiration or earlier termination of this Sublease.

     15. Brokers. Sublessor shall pay The Staubach Company any brokerage commission earned in connection with this Sublease pursuant to a separate agreement. Sublessee represents and warrants to Sublessor that no real estate broker, agent or finder negotiated or was instrumental in negotiating or representing Sublessee in the negotiation of this Sublease, other than CPS/Cushman & Wakefield. Sublessor represents and warrants to Sublessee that no real estate broker, agent or finder negotiated or was instrumental in negotiating or representing Sublessor in the negotiation of this Sublease, other than The Staubach Company. Sublessee and Sublessor shall each indemnify and hold the other harmless from and against any Claims resulting from breach of such party’s representation and warranty contained above.

     16. Counterparts. This Sublease may be executed in separate counterparts, each of which shall be an original, and all of which taken together shall constitute one and the same agreement.

     17. No Recording. Neither party hereto shall record this Sublease nor any memorandum hereof without the written consent of the other party.

     18. Curing Defaults.

     (a) If Sublessee shall be in default in the performance of any of its obligations hereunder beyond any applicable notice and cure period, Sublessor, without any obligation to do so, in addition to any other rights it may have in law or equity, may elect (but shall not be obligated) to cure such default after the applicable cure period at any time after delivery of five (5) business days’ notice to Sublessee. Sublessee shall reimburse Sublessor, upon demand for

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one hundred percent (100%) of all costs and expenses paid or incurred by Sublessor in curing such default, and interest thereon from the respective dates of Sublessor’s making the payments and incurring such costs, at the lesser of (i) the prime rate announced by Bank of America NT&SA from time to time (the “Prime Rate”) plus two percent (2%), or (ii) the maximum amount allowed by law, which sums and costs together with interest thereon shall be deemed Additional Rent payable promptly upon being billed therefor.

     (b) If Sublessor shall be in default in the performance of any of its obligations under the Master Lease beyond any applicable notice and cure period, Sublessee, without any obligation to do so, in addition to any other rights it may have in law or equity, may elect (but shall not be obligated) to cure such default after the applicable cure period at any time after delivery of five (5) business days’ notice to Sublessor. Sublessor shall reimburse Sublessee, upon demand for one hundred percent (100%) of all costs and expenses paid or incurred by Sublessee in curing such default, and interest thereon from the respective dates of Sublessee’s making the payments and incurring such costs, at the lesser of (i) the Prime Rate plus two percent (2%), or (ii) the maximum amount allowed by law, which sums and costs together with interest thereon shall be payable promptly upon being billed therefor.

     19. Time. In all instances where Sublessee is required by the provisions of this Sublease to pay any sum of money or to do any act at a particular indicated time or within any indicated period, it is understood and agreed that TIME IS OF THE ESSENCE.

     20. Authority. The individual or individuals signing this Sublease on behalf of Sublessee or Sublessor, represent and warrant that: (i) Sublessee or Sublessor, respectively, is a corporation duly incorporated and organized and validly existing and in good standing under the laws of the State of Delaware; (ii) Sublessee or Sublessor, respectively has full power and authority to enter into this Sublease and to perform its obligations under this Sublease; (iii) the execution, delivery and performance of this Sublease by Sublessee or Sublessor have been duly and validly authorized by all necessary corporate action on the part of Sublessee or Sublessor and all required consents and approvals have been duly obtained; and (iv) this Sublease is a legal, valid and binding obligation of Sublessee or Sublessor, respectively, enforceable against Sublessee or Sublessor, respectively in accordance with its terms, subject to the effect of applicable bankruptcy, insolvency, reorganization, arrangement, moratorium or other similar laws affecting the rights of creditors generally.

     21. Attorneys’ Fees. If as a result of any breach or default on the part of Sublessee under this Sublease, Sublessor uses the services of an attorney in order to secure compliance with this Sublease, Sublessee shall reimburse Sublessor upon demand as Additional Rent for any and all reasonable attorneys’ fees and expenses incurred by Sublessor, whether or not formal legal proceedings are instituted. Should either party bring an action against the other party, by reason of or alleging the failure of the other party to comply with any or all of its obligations hereunder, whether for declaratory or other relief, then the party which prevails in such action shall be entitled to its reasonable attorneys’ fees and expenses related to such action, in addition to all other recovery or relief. A party shall be deemed to have prevailed in any such action (without limiting the generality of the foregoing) if such action is dismissed upon the payment by the other party of the sums allegedly due or the performance of obligations allegedly not complied with, or if such party obtains substantially the relief sought by it in the action, irrespective of

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whether such action is prosecuted to judgment. Attorneys’ fees shall include, without limitation, fees incurred in discovery, contempt proceedings, and bankruptcy litigation. The non-prevailing party shall also pay the reasonable attorneys’ fees and costs incurred by the prevailing party in any post-judgment proceedings to collect and enforce the judgment. The covenant in the preceding sentence is separate and several and shall survive the merger of this provision into any judgment on this Sublease.

     22. Successors. The terms, covenants and conditions of this Sublease shall be binding upon and inure to the benefit of Sublessor and Sublessee and their respective successors, and except as otherwise provided, their assigns.

     23. Remedies; Cross-Defaults. Sublessor shall have the right, upon Sublessee’s default hereunder, in addition to the remedies set forth in this Sublease, to exercise against Sublessee any and all of the rights and remedies described in the Master Lease as available to Master Lessor in the event of a default by the tenant under the Master Lease. Moreover, any default by Sublessee of any of its obligations or duties under any Sublease shall constitute a default by Sublessee under all of the Subleases.

     24. Not Offer. The submission of this Sublease for review or signature by Sublessee shall not constitute an offer or option to sublease the Subleased Premises, nor shall this Sublease be effective as a sublease or otherwise until both parties execute and deliver execution counterparts of this Sublease and Master Lessor approves this Sublease in writing.

     25. Construction. This Sublease is the result of negotiations between the parties and their respective attorneys and shall be construed in an even and fair manner, regardless of the party who drafted this Sublease or any provision hereof. The headings or captions of sections in this Sublease are for convenience and reference only, and in no way define, limit, or describe the scope or intent of this Sublease or the provisions of such sections. The term “including” shall mean “including, but not limited to.”

     26. Entire Agreement; Amendment; Severability. Sublessor and Sublessee hereby agree to mutually terminate that certain Sublease dated as of November 30, 2005 with respect to the Buildings (as amended, the “Prior Sublease”). Sublessor and Sublessee hereby also agree that, notwithstanding the terms of the Prior Sublease, all covenants, duties, obligations and indemnities contained in the Prior Sublease shall not survive the termination thereof. There are no oral agreements between Sublessor and Sublessee affecting this Sublease, and this Sublease (along with the NDA) supersedes and cancels any and all prior negotiations, arrangements, correspondence, communications, agreements and understandings, if any, whether oral or written, between Sublessor and Sublessee with respect to the subject matter of this Sublease (including the Prior Sublease), and none of the foregoing shall be used to construe this Sublease. No amendment or modification of this Sublease shall be binding or valid unless expressed in writing and executed and delivered by Sublessor and Sublessee. If any one or more of the provisions contained in this Sublease shall be invalid, illegal or unenforceable in any respect, the validity, legality or enforceability of the remaining provisions contained herein shall not in any way be affected or impaired.

     27. Right of First Offer.

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          27.1 Right of First Offer. During the Term, Sublessee shall have a right of first offer (“ROFO”) to sublease all of Building 5, containing approximately 94,484 rentable square feet, if and when Building 5 becomes Available (as defined below) and subject to Sublessor’s obtaining Master Lessor’s consent thereto in the Sublease Consent or another writing. As used in this Sublease, “Available” shall mean that the entire Building 5 is then offered in the marketplace to the public at large for rent, free and clear of all claims and rights of other parties, and Building 5 shall be deemed not to be or not to have become “Available” if as to Building 5 there is a lease, lease option or option or other right of extension, renewal, expansion, refusal, negotiation or similar or other right, pursuant to any lease, sublease or written agreement in existence, with respect to any portion of Building 5, on or before the Commencement Date, including any option or right of extension or renewal thereof in existence on or before the Commencement Date (and any subsequent exercise thereof). Sublessor will notify Sublessee in writing (“Sublessor’s Notice”) if the entire Building 5 (and not less than all of Building 5) becomes Available, which Sublessor’s Notice shall include, but not be limited to, (a) the date that Sublessor anticipates that Building 5 will become Available, and (b) Sublessor’s proposed terms and conditions for subleasing Building 5, including any subtenant improvement allowance that Sublessor shall provide. Sublessee shall have fifteen (15) days following Sublessor’s delivery of Sublessor’s Notice (“Election Notice Period”) to provide Sublessor irrevocable written notice (“Election Notice”) of Sublessee’s election to exercise its ROFO on the exact same terms and conditions as contained in Sublessor’s Notice. If Sublessee fails to deliver the Election Notice to Sublessor within the Election Notice Period or if Sublessee declines to exercise its ROFO, then Sublessee’s ROFO shall be null and void and at any time thereafter Sublessor shall be free to sublease Building 5 to any third party on the terms and conditions contained in Sublessor’s Notice or such other term and conditions that are not less than five percent (5%) lower (on an overall economic basis) than the terms and conditions described in Sublessor’s Notice.

          27.2 Terms and Conditions. If Sublessee duly and timely delivers its Election Notice to Sublessor, then Sublessor shall prepare and Sublessee shall execute a direct sublease with respect to Building 5, subject to Sublessor’s termination right pursuant to Section 27.3 below, on the same terms and conditions as contained in this Sublease except as follows: (a) Sublessee shall accept Building 5 in its then “As-built” and “AS IS” condition without any obligation of Sublessor to repaint, remodel, improve or alter Building 5 or any portion thereof for Sublessee’s occupancy or to provide Sublessee any allowance therefor (unless Sublessor’s Notice provides otherwise); (b) Sublessor shall deliver Building 5 to Sublessee on the date (“Delivery Date”) that is the later of (i) thirty (30) days after Sublessor regains possession of all of Building 5, and (ii) the date that Master Lessor consents to Sublessee’s subleasing of Building 5; (c) the term of Sublessee’s sublease of Building 5, and obligation to pay Rent therefor, shall commence on the Delivery Date and shall expire sixty (60) days prior to the expiration date of the Building 5 Master Lease; and (d) the Letter of Credit shall be increased by an amount to three (3) months’ Base Rent for Building 5; and (f) as otherwise expressly provided in this Section 27.

          27.3 Termination of ROFO. Upon the occurrence of any of the following events, Sublessor shall have the option, exercisable at any time prior to the commencement of the term as to Building 5, to terminate all of the provisions of this Section 27, whereupon all rights of Sublessee pursuant to the ROFO shall terminate and shall be of no further force and effect:

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          (a) Sublessee’s failure to timely exercise the ROFO in strict accordance with this Section 27.

          (b) The existence at the time of exercise of the ROFO (or anytime thereafter) of a default or breach by Sublessee under this Sublease.

     28. No Solicitation. During the Term, Sublessee shall not solicit nor hire any employee of Sublessor with first obtaining the prior written consent of Sublessor, which consent may be withheld in Sublessor’s sole discretion. Sublessee hereby agrees that money damages will not be a sufficient remedy for any breach of this Section 28, such that Sublessor shall be entitled to injunctive relief, specific performance, or both as a remedy for any such breach. Such remedy shall not be deemed to be the exclusive remedy for any such breach but shall be in addition to all other remedies available at law or equity.

     29. Parking. Sublessee shall have the right to use, on an unassigned, non-exclusive basis, all parking spaces in the parking areas designated for the Building, as shown on Exhibit A hereto (the “Parking Areas”). Notwithstanding the foregoing but subject to Applicable Requirements (including those relating to handicap parking), Sublessor agrees to use commercially reasonable efforts to ensure that its employees, agents, contractors and invitees do not park in the Parking Area for Building 6 as depicted on Exhibit A hereto. The use of the Parking Areas shall be subject to, and is conditioned upon, compliance by Sublessee with all rules and regulations governing the Parking Areas promulgated by Master Lessor or Sublessor from time to time (and Sublessee shall cause all of its employees, agents, contractors and invitees to comply with the same).

     30. Outdoor Areas. Sublessee shall have the right to use, on a non-exclusive basis, the outdoor sunken amphitheatre, basketball and volleyball courts, seating and lawn areas and other outdoor areas associated with the Buildings (collectively, the “Outdoor Areas”). The use of the Outdoor Areas shall be subject to, and is conditioned upon, compliance by Sublessee with all rules and regulations governing the Outdoor Areas promulgated by Master Lessor or Sublessor from time to time (and Sublessee shall cause all of its employees, agents, contractors and invitees to comply with the same). In the event that Sublessee desires to reserve an Outdoor Area for its exclusive use (a “Reservation”), it may do so subject to the following requirements: (a) Sublessee shall deliver to Sublessor written notice specifying which Outdoor Area it proposes to reserve and the date and time of the proposed Reservation at least fifteen (15) days’ prior to the proposed Reservation date; (b) Sublessee shall not be permitted to reserve an Outdoor Area if Sublessor or Master Lessor intends to use such Outdoor Area (or any portion thereof) during the proposed Reservation period; (c) Sublessee shall not be permitted to reserve an Outdoor Area for longer than a twenty-four (24) hour period (unless otherwise approved in writing by Sublessor which approval shall not be unreasonably withheld, conditioned or delayed); (d) Sublessee shall set up and clean up the Outdoor Area at Sublessee’s sole cost; and (e) Sublessee shall comply with all rules and regulations governing the Outdoor Areas promulgated by Master Lessor or Sublessor from time to time, including without limitation, any requirement by Sublessor that Sublessee obtain additional insurance or provide Sublessor with additional indemnities in connection with any alcoholic beverages served by or for Sublessee in or around the Outdoor Area. Notwithstanding the foregoing, Sublessor shall use commercially reasonable efforts (but

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at no cost to Sublessor) to ensure that Sublessee shall have exclusive use of the outdoor seating and lawn areas adjacent to Building 6 (which are part of the Outdoor Areas), as such outdoor seating and lawn areas are shown on Exhibit A hereto.

     31. Hazardous Substances.

          31.1 Definitions. As used in this Sublease, the term “Hazardous Substance” shall mean any product, substance, or waste whose presence, use, manufacture, disposal, transportation, or release, either by itself or in combination with other materials expected to be on the Subleased Premises, is: (i) potentially injurious to the public health, safety or welfare, the environment or the Subleased Premises, (ii) regulated or monitored by any governmental authority, or (iii) a basis for potential liability of Sublessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substances shall include, but not be limited to, PCB’s, hydrocarbons, petroleum, gasoline, asbestos and/or crude oil or any products, by-products or fractions thereof. As used in this Sublease, the term “Reportable Use” shall mean (i) the installation or use of any above ground storage tank, (ii) the generation, possession, storage, use, transportation, release or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority, and/or (iii) the presence at the Subleased Premises of a Hazardous Substance with respect to which any Applicable Requirement requires that a notice be given to persons entering or occupying the Subleased Premises or neighboring properties.

          31.2 Reportable Uses and Hazardous Substances Require Consent. Except as expressly provided below and subject to the Master Lease, Sublessee shall not engage in any activity in or on the Subleased Premises which constitutes a Reportable Use of Hazardous Substances, nor shall Sublessee generate, possess, store, use, release or dispose of any Hazardous Substances in, on, under or about the Subleased Premises or the Building, without the express prior written consent of both Sublessor and Master Lessor (which consent Sublessor shall not unreasonably withhold), and Sublessee’s timely compliance (at Sublessee’s expense) with all Applicable Requirements.

          31.3 Duty to Inform Sublessor. If Sublessee knows that a Hazardous Substance has come or may have come to be located in, on, under or about the Subleased Premises, Sublessee shall immediately give written notice of such fact to Sublessor, and provide Sublessor with a copy of any report, notice, claim or other documentation which it has concerning the presence of such Hazardous Substance.

          31.4 Sublessee Remediation. Sublessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under, or about the Subleased Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Sublessee’s sole cost and expense, take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of the Subleased Premises or neighboring properties, that was caused or materially contributed to by Sublessee, or pertaining to or involving any Hazardous Substance brought onto or released in, on or under the Subleased Premises the Subleased Premises by or for Sublessee or Sublessee’s employees, contractors, agents, invitees,

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licensees or permitted sub-sublessees or assignees. Sublessee shall be solely responsible for the remediation of any condition concerning any Hazardous Substance brought onto or released in, on or under the Subleased Premises by or for Sublessee or Sublessee’s employees, contractors, agents, invitees, licensees or permitted sub-sublessees or assignees.

          31.5 Investigations and Remediations. Sublessee shall have responsibility and shall pay for any investigations or remediation measures required by governmental entities having jurisdiction with respect to the existence of Hazardous Substances brought onto or released in, on or under the Subleased Premises by or for Sublessee or Sublessee’s employees, contractors, agents, invitees, licensees or permitted sub-sublessees or assignees. Sublessee shall cooperate fully in any such activities at the request of Sublessor or Master Lessor, including allowing Sublessor and Master Lessor and their respective employees and agents to have reasonable access to the Subleased Premises at reasonable times in order to carry out any investigative and remedial actions which Sublessor or Master Lessor may elect to do.

          31.6 Sublessee’s Compliance with Applicable Requirements. Sublessee shall obtain, maintain and strictly comply with, at Sublessee’s sole cost and expense, any and all Applicable Requirements with the generation, possession, storage, use, release or disposal of any Hazardous Substance brought onto or released in, on or under the Subleased Premises by or for Sublessee or Sublessee’s employees, contractors, agents, invitees, licensees or permitted sub-sublessees or assignees. Sublessee shall, within ten (10) days after receipt of Sublessor’s or Master Lessor’s written request, provide Sublessor and Master Lessor with copies of all permits and other documents, and other information evidencing Sublessee’s compliance with any Applicable Requirements specified by Sublessor or Master Lessor, and shall immediately upon receipt by Sublessee, notify Sublessor and Master Lessor in writing (and immediately provide to Sublessor and Master Lessor copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving the failure of Sublessee or the Subleased Premises to comply with any Applicable Requirements or the provisions of this Section 31.

          31.7 Inspection; Compliance. Sublessor and Master Lessor and their respective employees and agents shall have the right to enter the Subleased Premises at any time, in the case of an emergency, and otherwise at reasonable times upon reasonable prior notice, which may be verbal, for the purpose of inspecting the condition of the Subleased Premises and for verifying compliance by Sublessee with this Section 31. The reasonable cost of any such inspections shall be paid by Sublessor, unless such inspection reveals that Sublessee has violated the provisions of this Section 31 in which case Sublessee shall reimburse Sublessor for the reasonable out of pocket costs of such inspections. Moreover, Master Lessor shall be permitted at any time (a) to cause testing wells to be installed in or around the Subleased Premises, and (b) to cause ground water to be tested to detect the presence of Hazardous Substances.

          31.8 Sublessee Indemnification. Sublessee shall indemnify, defend and hold harmless each of Sublessor, the Sublessor Indemnitees and the Master Lessor from and against any and all Claims arising out of or involving any Hazardous Substance brought onto or released in, on or under the Subleased Premises by or for Sublessee or Sublessee’s employees, contractors, agents, invitees, licensees or permitted sub-sublessees or assignees. Sublessee’s obligations shall include, but not be limited to, the effects of any contamination or injury to

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person, property or the environment created or suffered by Sublessee, and the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Sublease. No termination, cancellation or release agreement entered into by Sublessor and Sublessee shall release Sublessee from its obligations under this Sublease with respect to Hazardous Substances, unless Sublessor specifically agrees thereto in writing at the time of such agreement and such agreement specifically identifies this Section 31 of this Sublease.

          31.9 Sublessor Indemnification. Sublessor shall indemnify, defend and hold harmless each of Sublessee and the Sublessee Indemnitees from and against any and all Claims arising out of or involving (a) any Hazardous Substance existing in, on or under the Subleased Premises prior to the Commencement Date other than any Hazardous Substance brought onto or released in, on or under the Subleased Premises by or for Sublessee or Sublessee’s employees, contractors, agents, invitees or licensees prior to the Commencement Date, or (b) any Hazardous Substance brought onto or released in, on or under the Subleased Premises by or for Sublessor on and after the Commencement Date. Sublessor’s obligations shall include, but not be limited to, the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Sublease. No termination, cancellation or release agreement entered into by Sublessor and Sublessee shall release Sublessor from its obligations under this Section 31, unless Sublessee specifically agrees thereto in writing at the time of such agreement and such agreement specifically identifies this Section 31 of this Sublease.

     32. Proposed Sub-Subletting; Recapture. In the event that Sublessee desires to sub-sublet all or a portion of the Subleased Premises, Sublessee shall submit to Sublessor for its review the terms and conditions of such proposed sub-sublease transaction. Sublessor shall have the option for a period of thirty (30) days, commencing upon the delivery to Sublessor of all of the information described in the succeeding sentence, to elect in Sublessor’s sole discretion to terminate this Sublease (as to the portion of the Subleased Premises that Sublessee proposes to sub-sublet) and enter into a direct sublease (the “Direct Sublease”) with the prospective sub-sublessee (the “Recapture”). In connection with Sublessor’s review process, Sublessee shall submit to Sublessor in writing (i) the name of the proposed sub-sublessee, (ii) such information as to such sub-sublessee’s financial condition and general standing in the community as may be available to Sublessee, (iii) all of the terms and conditions upon which the proposed transaction is to be made, and (iv) such other information as Sublessor shall reasonably request. The parties hereto acknowledge and agree that, if Sublessor elects to Recapture: (a) the consent of Master Lessor is required for the Direct Sublease (the “Direct Sublease Consent”); (b) the parties hereto shall use commercially reasonable efforts to negotiate in good faith to obtain, execute and deliver the Direct Sublease Consent as soon as reasonably practicable; (c) Sublessee shall execute and deliver a guaranty, in form and substance reasonably acceptable to Sublessor and Sublessee, wherein Sublessee shall guaranty for the benefit of Sublessor the prompt payment and performance of each and every obligation of the sublessee under the Direct Sublease; (d) upon the effective date of the Recapture (provided that Master Lessor has executed the Direct Sublease Consent), Sublessee shall surrender possession of the portion of the Subleased Premises covered by the Direct Sublease and any applicable Personal Property and Infrastructure Systems in accordance with the terms and conditions contained in this Sublease for the surrender of the same; and (e) Sublessee shall execute and deliver an amendment to this Sublease modifying the description of the Subleased Premises, the Base Rent and any other relevant provisions contained

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herein. The provisions contained in this Section 32 are in addition to (and not in lieu of) the provisions contained in Sections 16, 55 and 56 of the Master Lease, as the same have been incorporated by reference into this Sublease.

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     IN WITNESS WHEREOF, the parties have executed this Sublease as of the date first hereinabove written.

Sublessor:
MAXTOR CORPORATION
By:	/s/ Duston Williams
Name:	Duston Williams
Title:	Chief Financial Officer
Sublessee:
SANDISK CORPORATION
By:	/s/ Judy Bruner
Name:	Judy Bruner
Title:	Executive Vice President and Chief Financial Officer

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EX-10.6

Exhibit 10.6

AMENDMENT NO. 2 TO
INDEMNIFICATION AND REIMBURSEMENT AGREEMENT

     THIS AMENDMENT NO. 2 to Indemnification and Reimbursement Agreement (“Amendment”), dated as of May 29, 2006, is made by and between SanDisk Corporation, a Delaware corporation (“SanDisk”), and Toshiba Corporation, a Japanese Corporation (“Toshiba”).

WITNESSETH:

          WHEREAS, SanDisk and Toshiba are parties to that certain Indemnification and Reimbursement Agreement dated as of April 10, 2002, as amended by the Amendment to Indemnification and Reimbursement Agreement dated as of May 29, 2002 (“Indemnification Agreement”); and

          WHEREAS, SanDisk and Toshiba desire to further amend the Indemnification Agreement to make certain amendments as set forth below.

          NOW THEREFORE, in consideration of the premises and of the mutual promises herein contained, the parties hereto agree as follows:

     1. Amendment to Section 1. The definitions of “Guarantor-Triggered Refinancing Document Default” and “Refinancing Lease Agreement” as set forth in Section 1 of the Indemnification Agreement are hereby deleted in their entirety and the following definitions are substituted in lieu thereof.

          “Guarantor-Triggered Refinancing Document Default” means any event, occurrence or circumstance affecting or effected by Toshiba or any act or omission by Toshiba (including, without limitation, difficulty in performing any obligation under the Toshiba Guaranty) in any case the occurrence or existence of which constitutes an event described under Article 25, Paragraph 1(5), 1(6), 1(7), 1(8), or 1(10) of the Refinancing Lease Agreement.

          “Refinancing Lease Agreement” means that certain Lease Agreement dated May 29, 2006 made and entered into by and among IBJ Leasing Co., Ltd., Sumisho Lease Co., Ltd. and FVC-Japan (as from time to time amended, restated, supplemented or otherwise modified).

     2. Governing Law. This Amendment shall be deemed to be a contract under the laws of the State of California and for all purposes shall be governed by and construed in accordance with such laws.

     3. Effect of this Amendment. Except as specifically amended hereby, the Indemnification Agreement shall remain in full force and effect as in existence on the date hereof and is hereby ratified and confirmed in all respects.

     4. Counterparts. This Amendment may be executed in any number of counterparts which together shall constitute one and the same instrument.

[Remainder of Page Intentionally Left Blank]

     IN WITNESS WHEREOF, the parties have executed this Amendment effective as of the date and year written above.

SANDISK CORPORATION
/s/ Judy Bruner
Name:	Judy Bruner
Title:	Chief Financial Officer
TOSHIBA CORPORATION
/s/ Shozo Saito
Name:	Shozo Saito
Title:	Executive Vice President
	Memory Division, Semiconductor Company

EX-10.7

Exhibit 10.7

SANDISK CORPORATION

AMENDED AND RESTATED 2005 INCENTIVE PLAN

ARTICLE ONE

GENERAL PROVISIONS

I. PURPOSE OF THE PLAN

      This 2005 Incentive Plan is intended to promote the interests of SanDisk Corporation, a Delaware corporation, by providing eligible persons in the Corporation’s service with the opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Corporation as an incentive for them to remain in such service. The Amended and Restated Plan reflects amendments adopted in 2006.

      Capitalized terms shall have the meanings assigned to such terms in the attached Appendix.

II. STRUCTURE OF THE PLAN

      A. The Plan shall be divided into three separate equity incentive programs:

•  the Discretionary Grant Program under which eligible persons may, at the discretion of the Plan Administrator, be granted options to purchase shares of Common Stock or stock appreciation rights tied to the value of such Common Stock,

•  the Stock Issuance and Cash Bonus Program under which eligible persons may, at the discretion of the Plan Administrator, be issued shares of Common Stock pursuant to restricted stock awards, restricted stock units or other stock-based awards which vest upon the completion of a designated service period or the attainment of pre-established performance milestones, be awarded cash bonus opportunities which are earned through the attainment of pre-established performance milestones, or be issued shares of Common Stock through direct purchase or as a bonus for services rendered the Corporation (or any Parent or Subsidiary), and

•  the Automatic Grant Program under which eligible non-employee Board members will automatically receive grants at designated intervals over their period of continued Board service.

      B. The provisions of Articles One and Five shall apply to all equity programs under the Plan and shall govern the interests of all persons under the Plan.

III. ADMINISTRATION OF THE PLAN

      A. The Compensation Committee shall have sole and exclusive authority to administer the Discretionary Grant Program and Stock Issuance and Cash Bonus Program with respect to Section 16 Insiders. Administration of the Discretionary Grant Program and Stock and Cash Bonus Issuance Program with respect to all other persons eligible to participate in those programs may, at the Board’s discretion, be vested in the Compensation Committee or a Secondary Board Committee, or the Board may retain the power to administer those programs with respect to all such persons. However, any discretionary option grants, stock appreciation rights, stock issuances or other stock-based awards for members of the Compensation Committee must be authorized by a disinterested majority of the Board.

      B. Members of the Compensation Committee or any Secondary Board Committee shall serve for such period of time as the Board may determine and may be removed by the Board at any time. The Board may also at any time terminate the functions of any Secondary Board Committee and reassume all powers and authority previously delegated to such committee.

      C. Each Plan Administrator shall, within the scope of its administrative functions under the Plan, have full power and authority (subject to the provisions of the Plan) to establish such rules and regulations as it may deem appropriate for proper administration of the Discretionary Grant Program and Stock Issuance and Cash Bonus Program and to make such determinations under, and issue such interpretations of, the provisions

1

of those programs and any outstanding options, stock appreciation rights, stock issuances, other stock-based awards or cash bonus opportunities thereunder as it may deem necessary or advisable. Decisions of the Plan Administrator within the scope of its administrative functions under the Plan shall be final and binding on all parties who have an interest in the Discretionary Grant Program and Stock Issuance and Cash Bonus Program under its jurisdiction or any stock option, stock appreciation right, stock issuance or other award thereunder.

      D. Service as a Plan Administrator by the members of the Compensation Committee or the Secondary Board Committee shall constitute service as Board members, and the members of each such committee shall accordingly be entitled to full indemnification and reimbursement as Board members for their service on such committee. No member of the Compensation Committee or the Secondary Board Committee shall be liable for any act or omission made in good faith with respect to the Plan or any option grant, stock appreciation right, stock issuance or other award under the Plan.

      E. Administration of the Automatic Grant Program shall be self-executing in accordance with the terms of that program, and no Plan Administrator shall exercise any discretionary functions with respect to any option grants or stock issuances made under that program, except that the Compensation Committee shall have the express authority to establish from time to time the specific number of shares to be subject to the initial and annual grants made to the non-employee Board members under such program.

      F. Awards to Employees who are “covered employees” under Section 162(m) of the Code of (i) options or stock appreciation rights, or (ii) shares or cash subject to the achievement of pre-established criteria as described in Section I.B.2 of Article Three of the Stock Issuance and Cash Bonus Program, shall be deemed to be intended as performance-based compensation within the meaning of Section 162(m) of the Code unless the Compensation Committee provides otherwise at the time such an award is granted.

IV. ELIGIBILITY

      A. The persons eligible to participate in the Discretionary Grant Program and Stock Issuance and Cash Bonus Program are as follows:

      (i) Employees,

      (ii) non-employee members of the Board or the board of directors of any Parent or Subsidiary, and

      (iii) consultants and other independent advisors who provide services to the Corporation (or any Parent or Subsidiary).

Notwithstanding the foregoing, only Employees are eligible to receive awards intended to constitute performance-based compensation under Code Section 162(m).

      B. The Plan Administrator shall have full authority to determine, (i) with respect to the grant of options or stock appreciation rights under the Discretionary Grant Program, which eligible persons are to receive such grants, the time or times when those grants are to be made, the number of shares to be covered by each such grant, the time or times when the grant is to become exercisable, the vesting schedule (if any) applicable to the granted option or stock appreciation right, the maximum term for which such option or stock appreciation right is to remain outstanding and the status of a granted option as either an Incentive Option or a Non-Statutory Option and (ii) with respect to stock issuances, other stock-based awards or cash bonus opportunities under the Stock Issuance and Cash Bonus Program, which eligible persons are to receive such issuances, awards or opportunities, the time or times when the issuances, awards or opportunities are to be made, the number of shares subject to each such issuance, award or opportunity, the vesting and issuance schedules applicable to the shares which are the subject of such issuance or award, the consideration for those shares and the performance criteria and other terms with respect to such cash bonus opportunities.

      C. The Plan Administrator shall have the absolute discretion either to grant options or stock appreciation rights in accordance with the Discretionary Grant Program or to effect stock issuances, other stock-based awards and bonus opportunities in accordance with the Stock Issuance and Cash Bonus Program.

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      D. The individuals who shall be eligible to participate in the Automatic Grant Program shall be limited to (i) those individuals who first become non-employee Board members on or after the Plan Effective Date, whether through appointment by the Board or election by the Corporation’s stockholders, and (ii) those individuals who continue to serve as non-employee Board members on or after the Plan Effective Date. A non-employee Board member who has previously been in the employ of the Corporation (or any Parent or Subsidiary) shall not be eligible to receive a grant under the Automatic Grant Program at the time he or she first becomes a non-employee Board member, but shall be eligible to receive periodic grants under the Automatic Grant Program while he or she continues to serve as a non-employee Board member.

V. STOCK SUBJECT TO THE PLAN; ANNUAL CASH LIMITATION

      A. The stock issuable under the Plan shall be shares of authorized but unissued or reacquired Common Stock, including shares repurchased by the Corporation on the open market. The number of shares of Common Stock reserved for issuance over the term of the Plan shall be limited to twenty million seven hundred thousand (20,700,000) shares. The Plan shall serve as the successor to the two Predecessor Plans, and no further stock option grants shall be made under those Predecessor Plans on or after the Plan Effective Date. However, all options outstanding under the Predecessor Plans on the Plan Effective Date shall continue in full force and effect in accordance with their terms, and no provision of this Plan shall be deemed to affect or otherwise modify the rights or obligations of the holders of those options with respect to their acquisition of shares of Common Stock thereunder. To the extent any options outstanding under the Predecessor Plans on the Plan Effective Date expire or terminate unexercised, the number of shares of Common Stock subject to those expired or terminated options at the time of expiration or termination shall be added to the share reserve under this Plan and shall accordingly be available for issuance hereunder, up to a maximum of an additional ten million (10,000,000) shares.

      B. Notwithstanding the foregoing, the maximum number of shares of Common Stock which may be issued without cash consideration pursuant to the Stock Issuance and Cash Bonus Program shall not exceed ten percent (10%) of the total number of shares of Common Stock from time to time authorized for issuance under the Plan, including (without limitation): (i) any shares added to the Plan reserve by reason of the expiration or termination of outstanding options under the Predecessor Plans prior to exercise, (ii) any increases to the Plan reserve from time to time approved by the Corporation’s stockholders and (iii) any adjustments to the authorized share reserve effected in accordance with Section V.E. of this Article One.

      C. No one person participating in the Plan may receive stock options, stand-alone stock appreciation rights, direct stock issuances (whether vested or unvested) or other stock-based awards (whether in the form of restricted stock units or other share-right awards) for more than one million (1,000,000) shares of Common Stock in the aggregate per calendar year. In addition, the aggregate amount of compensation to be paid to any one participant in respect of all performance-based awards under the Stock Issuance and Cash Bonus Program payable only in cash and not related to shares of Common Stock and granted to that participant in any one calendar year shall not exceed five million dollars ($5,000,000).

      D. Shares of Common Stock subject to outstanding options or other awards made under the Plan shall be available for subsequent issuance under the Plan to the extent those options or awards expire or terminate for any reason prior to the issuance of the shares of Common Stock subject to those options or awards. Unvested shares issued under the Plan and subsequently forfeited or repurchased by the Corporation, at a price per share not greater than the original issue price paid per share, pursuant to the Corporation’s repurchase rights under the Plan shall be added back to the number of shares of Common Stock reserved for issuance under the Plan and shall accordingly be available for subsequent reissuance. Should the exercise price of an option under the Plan be paid with shares of Common Stock, then the authorized reserve of Common Stock under the Plan shall be reduced by the gross number of shares for which that option is exercised, and not by the net number of shares issued under the exercised stock option.

      If shares of Common Stock otherwise issuable under the Plan are withheld by the Corporation in satisfaction of the withholding taxes incurred in connection with the exercise of an option or stock appreciation right or the issuance of fully-vested shares under the Stock Issuance and Cash Bonus Program, then the

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number of shares of Common Stock available for issuance under the Plan shall be reduced by the gross number of shares issuable under the exercised stock option or stock appreciation right or the gross number of fully-vested shares issuable under the Stock Issuance and Cash Bonus Program, calculated in each instance prior to any such share withholding.

      E. If any change is made to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation’s receipt of consideration, appropriate adjustments shall be made by the Plan Administrator to (i) the maximum number and/or class of securities issuable under the Plan, (ii) the maximum number and/or class of securities by which the share under the Plan may increase by reason of the expiration or termination of unexercised options under the Predecessor Plans, (iii) the maximum number and/or class of securities which may be issued without cash consideration under the Stock Issuance and Cash Bonus Program, (iv) the maximum number and/or class of securities for which any one person may be granted stock options, stand-alone stock appreciation rights, direct stock issuances and other stock-based awards under the Plan per calendar year, (v) the maximum number and/or class of securities for which grants may subsequently be made under the Automatic Grant Program to new and continuing non-employee Board members, (vi) the number and/or class of securities and the exercise or base price per share in effect under each outstanding option or stock appreciation right under the Plan and (vii) the number and/or class of securities subject to each outstanding restricted stock unit or other stock-based award under the Plan and the issue price (if any) payable per share. Such adjustments to the outstanding options, stock appreciation rights or other stock-based awards are to be effected in a manner which shall preclude the enlargement or dilution of rights and benefits under those options, stock appreciation rights or other stock-based awards. The adjustments determined by the Plan Administrator shall be final, binding and conclusive.

      F. Outstanding awards granted pursuant to the Plan shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets.

ARTICLE TWO

DISCRETIONARY GRANT PROGRAM

I. OPTION TERMS

      Each option shall be evidenced by one or more documents in the form approved by the Plan Administrator; provided, however, that each such document shall comply with the terms specified below. Each document evidencing an Incentive Option shall, in addition, be subject to the provisions of the Plan applicable to such options.

      A. Exercise Price.

      1. The exercise price per share shall be fixed by the Plan Administrator; provided, however, that such exercise price shall not be less than one hundred percent (100%) of the Fair Market Value per share of Common Stock on the grant date.

      2. The exercise price shall become immediately due upon exercise of the option and shall, subject to the provisions of the documents evidencing the option, be payable in one or more of the forms specified below:

      (i) cash or check made payable to the Corporation,

      (ii) shares of Common Stock held for the requisite period (if any) necessary to avoid any resulting charge to the Corporation’s earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date, or

      (iii) to the extent the option is exercised for vested shares, through a special sale and remittance procedure pursuant to which the Optionee shall concurrently provide instructions to (a) a brokerage firm (reasonably satisfactory to the Corporation for purposes of administering such procedure in compliance

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with the Corporation’s pre-clearance/pre-notification policies) to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased shares plus all applicable income and employment taxes required to be withheld by the Corporation by reason of such exercise and (b) the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm on such settlement date in order to complete the sale.

      Except to the extent such sale and remittance procedure is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date.

      B. Exercise and Term of Options. Each option shall be exercisable at such time or times, during such period and for such number of shares as shall be determined by the Plan Administrator and set forth in the documents evidencing the option. However, no option shall have a term in excess of seven (7) years measured from the option grant date.

      C. Effect of Termination of Service.

      1. The following provisions shall govern the exercise of any options granted pursuant to the Discretionary Grant Program that are outstanding at the time of the Optionee’s cessation of Service or death:

      (i) Any option outstanding at the time of the Optionee’s cessation of Service for any reason shall remain exercisable for such period of time thereafter as shall be determined by the Plan Administrator and set forth in the documents evidencing the option, but no such option shall be exercisable after the expiration of the option term.

      (ii) Any option held by the Optionee at the time of the Optionee’s death and exercisable in whole or in part at that time may be subsequently exercised by the personal representative of the Optionee’s estate or by the person or persons to whom the option is transferred pursuant to the Optionee’s will or the laws of inheritance or by the Optionee’s designated beneficiary or beneficiaries of that option.

      (iii) Should the Optionee’s Service be terminated for Misconduct or should the Optionee otherwise engage in Misconduct while holding one or more outstanding options granted under this Article Two, then all of those options shall terminate immediately and cease to be outstanding.

      (iv) During the applicable post-Service exercise period, the option may not be exercised for more than the number of vested shares for which the option is at the time exercisable. No additional shares shall vest under the option following the Optionee’s cessation of Service, except to the extent (if any) specifically authorized by the Plan Administrator in its sole discretion pursuant to an express written agreement with the Optionee. Upon the expiration of the applicable exercise period or (if earlier) upon the expiration of the option term, the option shall terminate and cease to be outstanding for any shares for which the option has not been exercised.

      2. The Plan Administrator shall have complete discretion, exercisable either at the time an option is granted or at any time while the option remains outstanding, to:

      (i) extend the period of time for which the option is to remain exercisable following the Optionee’s cessation of Service from the limited exercise period otherwise in effect for that option to such greater period of time as the Plan Administrator shall deem appropriate, but in no event beyond the expiration of the option term,

      (ii) include an automatic extension provision whereby the specified post-Service exercise period in effect for any option granted under this Article Two shall automatically be extended by an additional period of time equal in duration to any interval within the specified post-Service exercise period during which the exercise of that option or the immediate sale of the shares acquired under such option could not be effected in compliance with applicable federal and state securities laws, but in no event shall such an extension result in the continuation of such option beyond the expiration date of the term of that option, and/or

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      (iii) permit the option to be exercised, during the applicable post-Service exercise period, not only with respect to the number of vested shares of Common Stock for which such option is exercisable at the time of the Optionee’s cessation of Service but also with respect to one or more additional installments in which the Optionee would have vested had the Optionee continued in Service.

      D. Stockholder Rights. The holder of an option shall have no stockholder rights with respect to the shares subject to the option until such person shall have exercised the option, paid the exercise price and become a holder of record of the purchased shares.

      E. Repurchase Rights. The Plan Administrator shall have the discretion to grant options which are exercisable for unvested shares of Common Stock. Should the Optionee cease Service while such shares are unvested, the Corporation shall have the right to repurchase any or all of those unvested shares at a price per share equal to the lower of (i) the exercise price paid per share or (ii) the Fair Market Value per share of Common Stock at the time of repurchase. The terms upon which such repurchase right shall be exercisable (including the period and procedure for exercise and the appropriate vesting schedule for the purchased shares) shall be established by the Plan Administrator and set forth in the document evidencing such repurchase right.

      F. Transferability of Options. The transferability of options granted under the Plan shall be governed by the following provisions:

      (i) Incentive Options: During the lifetime of the Optionee, Incentive Options shall be exercisable only by the Optionee and shall not be assignable or transferable other than by will or the laws of inheritance following the Optionee’s death.

      (ii) Non-Statutory Options. Non-Statutory Options shall be subject to the same limitation on transfer as Incentive Options, except that the Plan Administrator may structure one or more Non-Statutory Options so that the option may be assigned in whole or in part during the Optionee’s lifetime to one or more Family Members of the Optionee or to a trust established exclusively for one or more such Family Members, to the extent such assignment is in connection with the Optionee’s estate plan or pursuant to a domestic relations order. The assigned portion may only be exercised by the person or persons who acquire a proprietary interest in the option pursuant to the assignment. The terms applicable to the assigned portion shall be the same as those in effect for the option immediately prior to such assignment and shall be set forth in such documents issued to the assignee as the Plan Administrator may deem appropriate.

      (iii) Beneficiary Designations. Notwithstanding the foregoing, the Optionee may designate one or more persons as the beneficiary or beneficiaries of his or her outstanding options under this Article Two (whether Incentive Options or Non-Statutory Options), and those options shall, in accordance with such designation, automatically be transferred to such beneficiary or beneficiaries upon the Optionee’s death while holding those options. Such beneficiary or beneficiaries shall take the transferred options subject to all the terms and conditions of the applicable agreement evidencing each such transferred option, including (without limitation) the limited time period during which the option may be exercised following the Optionee’s death.

II. INCENTIVE OPTIONS

      The terms specified below shall be applicable to all Incentive Options. Except as modified by the provisions of this Section II, all the provisions of Articles One, Two and Five shall be applicable to Incentive Options. Options which are specifically designated as Non-Statutory Options when issued under the Plan shall not be subject to the terms of this Section II.

      A. Eligibility. Incentive Options may only be granted to Employees.

      B. Dollar Limitation. The aggregate Fair Market Value of the shares of Common Stock (determined as of the respective date or dates of grant) for which one or more options granted to any Employee under the Plan (or any other option plan of the Corporation or any Parent or Subsidiary) may for the first time become

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exercisable as Incentive Options during any one calendar year shall not exceed the sum of One Hundred Thousand Dollars ($100,000).

      To the extent the Employee holds two (2) or more such options which become exercisable for the first time in the same calendar year, then for purposes of the foregoing limitations on the exercisability of those options as Incentive Options, such options shall be deemed to become first exercisable in that calendar year on the basis of the chronological order in which they were granted, except to the extent otherwise provided under applicable law or regulation.

      C. 10% Stockholder. If any Employee to whom an Incentive Option is granted is a 10% Stockholder, then the exercise price per share shall not be less than one hundred ten percent (110%) of the Fair Market Value per share of Common Stock on the option grant date, and the option term shall not exceed five (5) years measured from the option grant date.

III. STOCK APPRECIATION RIGHTS

      A. Authority. The Plan Administrator shall have full power and authority, exercisable in its sole discretion, to grant stock appreciation rights in accordance with this Section III to selected Optionees or other individuals eligible to receive option grants under the Discretionary Grant Program.

      B. Types. Two types of stock appreciation rights shall be authorized for issuance under this Section III: (i) tandem stock appreciation rights (“Tandem Rights”) and (ii) stand-alone stock appreciation rights (“Stand-alone Rights”).

      C. Tandem Rights. The following terms and conditions shall govern the grant and exercise of Tandem Rights.

      1. One or more Optionees may be granted a Tandem Right, exercisable upon such terms and conditions as the Plan Administrator may establish, to elect between the exercise of the underlying option for shares of Common Stock or the surrender of that option in exchange for a distribution from the Corporation in an amount equal to the excess of (i) the Fair Market Value (on the option surrender date) of the number of shares in which the Optionee is at the time vested under the surrendered option (or surrendered portion thereof) over (ii) the aggregate exercise price payable for such vested shares.

      2. No such option surrender shall be effective unless it is approved by the Plan Administrator, either at the time of the actual option surrender or at any earlier time. If the surrender is so approved, then the distribution to which the Optionee shall accordingly become entitled under this Section III shall be made in shares of Common Stock valued at Fair Market Value on the option surrender date.

      3. If the surrender of an option is not approved by the Plan Administrator, then the Optionee shall retain whatever rights the Optionee had under the surrendered option (or surrendered portion thereof) on the option surrender date and may exercise such rights at any time prior to the later of (i) five (5) business days after the receipt of the rejection notice or (ii) the last day on which the option is otherwise exercisable in accordance with the terms of the instrument evidencing such option, but in no event may such rights be exercised more than seven (7) years after the date of the option grant.

      D. Stand-Alone Rights. The following terms and conditions shall govern the grant and exercise of Stand-alone Rights:

      1. One or more individuals eligible to participate in the Discretionary Grant Program may be granted a Stand-alone Right not tied to any underlying option under this Discretionary Grant Program. The Stand-alone Right shall relate to a specified number of shares of Common Stock and shall be exercisable upon such terms and conditions as the Plan Administrator may establish. In no event, however, may the Stand-alone Right have a maximum term in excess of seven (7) years measured from the grant date. Upon exercise of the Stand-alone Right, the holder shall be entitled to receive a distribution from the Corporation in an amount equal to the excess of (i) the aggregate Fair Market Value (on the exercise date) of the shares of Common Stock underlying the exercised right over (ii) the aggregate base price in effect for those shares.

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      2. The number of shares of Common Stock underlying each Stand-alone Right and the base price in effect for those shares shall be determined by the Plan Administrator in its sole discretion at the time the Stand-alone Right is granted. In no event, however, may the base price per share be less than the Fair Market Value per underlying share of Common Stock on the grant date. In the event outstanding Stand-alone Rights are to be assumed in connection with a Change in Control transaction or otherwise continued in effect, the shares of Common Stock underlying each such Stand-alone Right shall be adjusted immediately after such Change in Control so as to apply to the number and class of securities into which those shares of Common Stock would have been converted in consummation of such Change in Control had those shares actually been outstanding at that time. Appropriate adjustments to reflect such Change in Control shall also be made to the base price per share in effect under each outstanding Stand-alone Right, provided the aggregate base price shall remain the same. To the extent the actual holders of the Corporation’s outstanding Common Stock receive cash consideration for their Common Stock in consummation of the Change in Control, the successor corporation may, in connection with the assumption or continuation of the outstanding Stand-alone Rights under the Discretionary Grant Program, substitute, for the securities underlying those assumed rights, one or more shares of its own common stock with a fair market value equivalent to the cash consideration paid per share of Common Stock in the Change in Control transaction.

      3. Stand-alone Rights shall be subject to the same transferability restrictions applicable to Non-Statutory Options and may not be transferred during the holder’s lifetime, except if such assignment is in connection with the holder’s estate plan and is to one or more Family Members of the holder or to a trust established for the holder and/or one or more such Family Members or pursuant to a domestic relations order covering the Stand-alone Right as marital property. In addition, one or more beneficiaries may be designated for an outstanding Stand-alone Right in accordance with substantially the same terms and provisions as set forth in Section I.F of this Article Two.

      4. The distribution with respect to an exercised Stand-alone Right shall be made in shares of Common Stock valued at Fair Market Value on the exercise date.

      5. The holder of a Stand-alone Right shall have no stockholder rights with respect to the shares subject to the Stand-alone Right unless and until such person shall have exercised the Stand-alone Right and become a holder of record of the shares of Common Stock issued upon the exercise of such Stand-alone Right.

      E. Post-Service Exercise. The provisions governing the exercise of Tandem and Stand-alone Rights following the cessation of the recipient’s Service shall be substantially the same as those set forth in Section I.C of this Article Two for the options granted under the Discretionary Grant Program, and the Plan Administrator’s discretionary authority under Section I.C.2 of this Article Two shall also extend to any outstanding Tandem or Stand-alone Appreciation Rights.

      F. Gross Counting. Upon the exercise of any Tandem or Stand-alone Right under this Section III, the share reserve under Section V of Article One shall be reduced by the gross number of shares as to which such right is exercised, and not by the net number of shares actually issued by the Corporation upon such exercise.

IV. CHANGE IN CONTROL/ HOSTILE TAKE-OVER

      A. In the event of a Change in Control, each outstanding option or stock appreciation right under the Discretionary Grant Program shall automatically accelerate so that each such option or stock appreciation right shall, immediately prior to the effective date of that Change in Control, become exercisable as to all the shares of Common Stock at the time subject to such option or stock appreciation right and may be exercised as to any or all of those shares as fully vested shares of Common Stock. However, an outstanding option or stock appreciation right shall not become exercisable on such an accelerated basis if and to the extent: (i) such option or stock appreciation right is to be assumed by the successor corporation (or parent thereof) or is otherwise to continue in full force and effect pursuant to the terms of the Change in Control transaction or (ii) such option or stock appreciation right is to be replaced with a cash incentive program of the successor corporation which preserves the spread existing at the time of the Change in Control on any shares as to which

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the option or stock appreciation right is not otherwise at that time exercisable and provides for subsequent payout of that spread in accordance with the same exercise/vesting schedule applicable to those shares or (iii) the acceleration of such option or stock appreciation right is subject to other limitations imposed by the Plan Administrator.

      B. All outstanding repurchase rights under the Discretionary Grant Program shall automatically terminate, and the shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event of a Change in Control, except to the extent: (i) those repurchase rights are to be assigned to the successor corporation (or parent thereof) or are otherwise to continue in full force and effect pursuant to the terms of the Change in Control transaction or (ii) such accelerated vesting is precluded by other limitations imposed by the Plan Administrator.

      C. Immediately following the consummation of the Change in Control, all outstanding options or stock appreciation rights under the Discretionary Grant Program shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof) or otherwise continued in full force and effect pursuant to the terms of the Change in Control transaction.

      D. Each option which is assumed in connection with a Change in Control or otherwise continued in effect shall be appropriately adjusted, immediately after such Change in Control, to apply to the number and class of securities which would have been issuable to the Optionee in consummation of such Change in Control had the option been exercised immediately prior to such Change in Control. Appropriate adjustments to reflect such Change in Control shall also be made to (i) the exercise price payable per share under each outstanding option, provided the aggregate exercise price payable for such securities shall remain the same, (ii) the maximum number and/or class of securities available for issuance over the remaining term of the Plan (iii) the maximum number and/or class of securities by which the share reserve under this Plan may be increased by reason of the expiration or termination of unexercised options under the Predecessor Plans, (iv) the maximum number and/or class of securities which may be issued without cash consideration under the Stock Issuance and Cash Bonus Program and (v) the maximum number and/or class of securities for which any one person may be granted stock options, stand-alone stock appreciation rights, direct stock issuances and other stock-based awards under the Plan per calendar year. To the extent the actual holders of the Corporation’s outstanding Common Stock receive cash consideration for their Common Stock in consummation of the Change in Control, the successor corporation may, in connection with the assumption or continuation of the outstanding options under the Discretionary Grant Program, substitute one or more shares of its own common stock with a fair market value equivalent to the cash consideration paid per share of Common Stock in such Change in Control transaction.

      E. The Plan Administrator shall have the discretionary authority to structure one or more outstanding options or stock appreciation rights under the Discretionary Grant Program so that those options or stock appreciation rights shall, immediately prior to the effective date of a Change in Control, become exercisable as to all the shares of Common Stock at the time subject to those options or stock appreciation rights and may be exercised as to any or all of those shares as fully vested shares of Common Stock, whether or not those options or stock appreciation rights are to be assumed in the Change in Control transaction or otherwise continued in effect. In addition, the Plan Administrator shall have the discretionary authority to structure one or more of the Corporation’s repurchase rights under the Discretionary Grant Program so that those rights shall immediately terminate upon the consummation of the Change in Control transaction, and the shares subject to those terminated rights shall thereupon vest in full.

      F. The Plan Administrator shall have full power and authority to structure one or more outstanding options or stock appreciation rights under the Discretionary Grant Program so that those options or stock appreciation rights shall become exercisable as to all the shares of Common Stock at the time subject to those options or stock appreciation rights in the event the Optionee’s Service is subsequently terminated by reason of an Involuntary Termination within a designated period following the effective date of any Change in Control transaction in which those options or stock appreciation rights do not otherwise fully accelerate. In addition, the Plan Administrator may structure one or more of the Corporation’s repurchase rights so that those rights shall immediately terminate with respect to any shares held by the Optionee at the time of such Involuntary

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Termination, and the shares subject to those terminated repurchase rights shall accordingly vest in full at that time.

      G. The Plan Administrator shall have the discretionary authority to structure one or more outstanding options or stock appreciation rights under the Discretionary Grant Program so that those options or stock appreciation rights shall, immediately prior to the effective date of a Hostile Take-Over, become exercisable as to all the shares of Common Stock at the time subject to those options or stock appreciation rights and may be exercised as to any or all of those shares as fully vested shares of Common Stock. In addition, the Plan Administrator shall have the discretionary authority to structure one or more of the Corporation’s repurchase rights under the Discretionary Grant Program so that those rights shall terminate automatically upon the consummation of such Hostile Take-Over, and the shares subject to those terminated rights shall thereupon vest in full. Alternatively, the Plan Administrator may condition the automatic acceleration of one or more outstanding options or stock appreciation rights under the Discretionary Grant Program and the termination of one or more of the Corporation’s outstanding repurchase rights under such program upon the subsequent termination of the Optionee’s Service by reason of an Involuntary Termination within a designated period following the effective date of such Hostile Take-Over.

      H. The portion of any Incentive Option accelerated in connection with a Change in Control or Hostile Take-Over shall remain exercisable as an Incentive Option only to the extent the applicable One Hundred Thousand Dollar ($100,000) limitation is not exceeded. To the extent such dollar limitation is exceeded, the accelerated portion of such option shall be exercisable as a Non-statutory Option under the Federal tax laws.

V. PROHIBITION ON REPRICING PROGRAMS

      The Plan Administrator shall not (i) implement any cancellation/regrant program pursuant to which outstanding options or stock appreciation rights under the Plan are cancelled and new options or stock appreciation rights are granted in replacement with a lower exercise price per share, (ii) cancel outstanding options or stock appreciation rights under the Plan with exercise prices per share in excess of the then current Fair Market Value per share of Common Stock for consideration payable in equity securities of the Corporation or (iii) otherwise directly reduce the exercise price in effect for outstanding options or stock appreciation rights under the Plan, without in each such instance obtaining stockholder approval.

ARTICLE THREE

STOCK ISSUANCE AND CASH BONUS PROGRAM

I. STOCK ISSUANCE AND CASH BONUS TERMS

      Shares of Common Stock may be issued under the Stock Issuance and Cash Bonus Program, either as vested or unvested shares, through direct and immediate issuances without any intervening option grants. Each such stock issuance shall be evidenced by a Stock Issuance Agreement which complies with the terms specified below. Shares of Common Stock may also be issued under the Stock Issuance and Cash Bonus Program pursuant to share right awards or restricted stock units which entitle the recipients to receive the shares underlying those awards or units upon the attainment of designated performance goals or the satisfaction of specified Service requirements or upon the expiration of a designated time period following the vesting of those awards or units.

      The grant, vesting or payment of cash awards under the Stock Issuance and Cash Bonus Program may depend on the degree of achievement of one or more performance goals relative to a pre-established targeted level or levels using one or more of the criteria set forth in Section I.B.2. of this Article Three.

      The maximum number of shares of Common Stock which may be issued without cash consideration under the Stock Issuance and Cash Bonus Program (whether as direct stock issuances or pursuant to restricted stock units or other share-right awards) may not exceed ten percent (10%) of the total number of shares of Common Stock from time to time authorized for issuance under the Plan, including (without limitation): (i) any shares added to the Plan reserve by reason of the expiration or termination of outstanding

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options under the Predecessor Plans prior to exercise, (ii) any increases to the Plan reserve from time to time approved by the Corporation’s stockholders and (iii) any adjustments to the authorized share reserve effected in accordance with Section V.E. of Article One.

A.  Issue Price.

      1. The issue price per share shall be fixed by the Plan Administrator, but shall not be less than one hundred percent (100%) of the Fair Market Value per share of Common Stock on the issuance date.

      2. Shares of Common Stock may be issued under the Stock Issuance and Cash Bonus Program for any of the following items of consideration which the Plan Administrator may deem appropriate in each individual instance:

      (i) cash or check made payable to the Corporation,

      (ii) past services rendered to the Corporation (or any Parent or Subsidiary); or

      (iii) any other valid consideration under the Delaware General Corporation Law.

      B. Vesting Provisions.

      1. Shares of Common Stock issued under the Stock Issuance and Cash Bonus Program may, in the discretion of the Plan Administrator, be fully and immediately vested upon issuance or may vest in one or more installments over the Participant’s period of Service or upon the attainment of specified performance objectives. The elements of the vesting schedule applicable to any unvested shares of Common Stock issued under the Stock Issuance and Cash Bonus Program shall be determined by the Plan Administrator and incorporated into the Stock Issuance Agreement. Shares of Common Stock may also be issued under the Stock Issuance and Cash Bonus Program pursuant to share right awards or restricted stock units which entitle the recipients to receive the shares underlying those awards or units upon the attainment of designated performance goals or the satisfaction of specified Service requirements or upon the expiration of a designated time period following the vesting of those awards or units, including (without limitation) a deferred distribution date following the termination of the Participant’s Service.

      2. The Plan Administrator shall also have the discretionary authority, consistent with Code Section 162(m), to structure one or more stock issuances, or restricted stock unit or share right awards or cash bonus awards so that the shares of Common Stock or cash subject to those issuances or awards shall vest (or vest and become issuable or payable) upon the achievement of certain pre-established corporate performance goals based on one or more of the following criteria: (1) return on total stockholder equity; (2) earnings per share of Common Stock; (3) net income or operating income (before or after taxes); (4) earnings before interest, taxes, depreciation and amortization; (5) earnings before interest, taxes, depreciation, amortization and charges for stock-based compensation, (6) sales or revenue targets; (7) return on assets, capital or investment; (8) cash flow; (9) market share; (10) cost reduction goals; (11) budget comparisons; (12) measures of customer satisfaction; (13) any combination of, or a specified increase in, any of the foregoing; (14) new product development or successful completion of research and development projects; and (15) the formation of joint ventures, research or development collaborations, or the completion of other corporate transactions intended to enhance the Corporation’s revenue or profitability or enhance its customer base. In addition, such performance goals may be based upon the attainment of specified levels of the Corporation’s performance under one or more of the measures described above relative to the performance of other entities and may also be based on the performance of any of the Corporation’s business units or divisions or any Parent or Subsidiary. Performance goals may include a minimum threshold level of performance below which no award will be earned, levels of performance at which specified portions of an award will be earned and a maximum level of performance at which an award will be fully earned. To qualify awards as performance-based under Section 162(m), the applicable criterion (or criteria, as the case may be) and specific performance goal or goals (“targets”) must be established and approved by the Plan Administrator during the first 90 days of the performance period (and, in the case of performance periods of less than one year, in no event after 25% or more of the performance period has elapsed) and while performance relating to such target(s) remains substantially uncertain within the meaning of Section 162(m) of the Code.

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Performance targets shall be adjusted to mitigate the unbudgeted impact of material, unusual or nonrecurring gains and losses, accounting changes or other extraordinary events not foreseen at the time the targets were set unless the Plan Administrator provides otherwise at the time of establishing the targets. The applicable performance measurement period may not be less than three months nor more than 10 years.

      3. Any new, substituted or additional securities or other property (including money paid other than as a regular cash dividend) which the Participant may have the right to receive with respect to the Participant’s unvested shares of Common Stock by reason of any stock dividend, stock split, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation’s receipt of consideration shall be issued subject to (i) the same vesting requirements applicable to the Participant’s unvested shares of Common Stock and (ii) such escrow arrangements as the Plan Administrator shall deem appropriate.

      4. The Participant shall have full stockholder rights with respect to any shares of Common Stock issued to the Participant under the Stock Issuance and Cash Bonus Program, whether or not the Participant’s interest in those shares is vested. Accordingly, the Participant shall have the right to vote such shares and to receive any dividends paid on such shares, subject to any applicable vesting requirements. The Participant shall not have any stockholder rights with respect to the shares of Common Stock subject to a restricted stock unit or share right award until that award vests and the shares of Common Stock are actually issued thereunder. However, dividend-equivalent units may be paid or credited, either in cash or in actual or phantom shares of Common Stock, on outstanding restricted stock unit or share right awards, subject to such terms and conditions as the Plan Administrator may deem appropriate.

      5. Should the Participant cease to remain in Service while holding one or more unvested shares of Common Stock issued under the Stock Issuance and Cash Bonus Program or should the performance objectives not be attained with respect to one or more such unvested shares of Common Stock, then those shares shall be immediately surrendered to the Corporation for cancellation, and the Participant shall have no further stockholder rights with respect to those shares. To the extent the surrendered shares were previously issued to the Participant for consideration paid in cash or cash equivalent, the Corporation shall repay to the Participant the lower of (i) the cash consideration paid for the surrendered shares or (ii) the Fair Market Value of those shares at the time of cancellation.

      6. The Plan Administrator may in its discretion waive the surrender and cancellation of one or more unvested shares of Common Stock which would otherwise occur upon the cessation of the Participant’s Service or the non-attainment of the performance objectives applicable to those shares. Any such waiver shall result in the immediate vesting of the Participant’s interest in the shares of Common Stock as to which the waiver applies. Such waiver may be effected at any time, whether before or after the Participant’s cessation of Service or the attainment or non-attainment of the applicable performance objectives. However, no vesting requirements tied to the attainment of performance objectives may be waived with respect to shares which were intended at the time of issuance to qualify as performance-based compensation under Code Section 162(m), except in the event of the Participant’s Involuntary Termination or as otherwise provided in Section II of this Article Three.

      7. Outstanding share right awards, restricted stock units or cash bonus awards under the Stock Issuance and Cash Bonus Program shall automatically terminate, and no shares of Common Stock or cash shall actually be issued or paid in satisfaction of those awards or units, if the performance goals or Service requirements established for such awards or units are not attained or satisfied. The Plan Administrator, however, shall have the discretionary authority to (i) issue vested shares of Common Stock under one or more outstanding share right awards or restricted stock units as to which the designated performance goals or Service requirements have not been attained or satisfied, and (ii) award cash bonus payments that are not intended to qualify as performance-based compensation under Section 162(m) of the Code.

      However, no vesting or payment requirements tied to the attainment of performance goals may be waived with respect to awards or units which were intended, at the time those awards or units were granted, to qualify as performance-based compensation under Code Section 162(m), except in the event of the Participant’s Involuntary Termination or as otherwise provided in Section II of this Article Three.

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      8. Before any performance-based award under the Stock Issuance and Cash Bonus Program is paid and to the extent required to qualify the award as performance-based compensation within the meaning of Section 162(m) of the Code, the Plan Administrator must certify in writing that the performance target(s) and any other material terms of the performance-based award were in fact timely satisfied.

      9. The Plan Administrator will have the discretion to determine the restrictions or other limitations of the individual awards granted under the Stock Issuance and Cash Bonus Program including the authority to reduce awards, payouts or vesting or to pay no awards, in its sole discretion, if the Plan Administrator preserves such authority at the time of grant by language to this effect in its authorizing resolutions or otherwise.

II. CHANGE IN CONTROL/ HOSTILE TAKE-OVER

      A. All of the Corporation’s outstanding repurchase rights under the Stock Issuance and Cash Bonus Program shall terminate automatically, and all the shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event of any Change in Control, except to the extent (i) those repurchase rights are to be assigned to the successor corporation (or parent thereof) or are otherwise to continue in full force and effect pursuant to the terms of the Change in Control transaction or (ii) such accelerated vesting is precluded by other limitations imposed in the Stock Issuance Agreement.

      B. Each outstanding restricted stock unit or share right award assumed in connection with a Change in Control or otherwise continued in effect shall be adjusted immediately after the consummation of that Change in Control so as to apply to the number and class of securities into which the shares of Common Stock subject to the award immediately prior to the Change in Control would have been converted in consummation of such Change in Control had those shares actually been outstanding at that time, and appropriate adjustments shall also be made to the consideration (if any) payable per share thereunder, provided the aggregate amount of such consideration shall remain the same. To the extent the actual holders of the Corporation’s outstanding Common Stock receive cash consideration for their Common Stock in consummation of the Change in Control, the successor corporation may, in connection with the assumption or continuation of the outstanding restricted stock units or share right awards, substitute one or more shares of its own common stock with a fair market value equivalent to the cash consideration paid per share of Common Stock in such Change in Control transaction.

      C. If any such restricted stock unit or share right award is not assumed or otherwise continued in effect or replaced with a cash incentive program of the successor corporation which preserves the Fair Market Value of the underlying shares of Common Stock at the time of the Change in Control and provides for the subsequent payout of that value in accordance with the same vesting schedule applicable to those shares, then such unit or award shall vest, and the shares of Common Stock subject to that unit or award shall be issued as fully-vested shares, immediately prior to the consummation of the Change in Control.

      D. The Plan Administrator shall have the discretionary authority to structure one or more unvested stock issuances, one or more restricted stock unit or other share right awards or one or more cash bonus awards under the Stock Issuance and Cash Bonus Program so that the shares of Common Stock or cash subject to those issuances or awards shall automatically vest (or vest and become issuable or payable) in whole or in part immediately upon the occurrence of a Change in Control or upon the subsequent termination of the Participant’s Service by reason of an Involuntary Termination within a designated period following the effective date of that Change in Control transaction.

      E. The Plan Administrator shall also have the discretionary authority to structure one or more unvested stock issuances, one or more restricted stock unit or other share right awards or one or more cash bonus awards under the Stock Issuance and Cash Bonus Program so that the shares of Common Stock or cash subject to those issuances or awards shall automatically vest (or vest and become issuable or payable) in whole or in part immediately upon the occurrence of a Hostile Take-Over or upon the subsequent termination of the Participant’s Service by reason of an Involuntary Termination within a designated period following the effective date of that Hostile Take-Over.

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      F. The Plan Administrator’s authority under Paragraphs D and E of this Section II shall also extend to any stock issuances, restricted stock units, other share right awards or cash awards intended to qualify as performance-based compensation under Code Section 162(m), even though the automatic vesting of those issuances, units or awards pursuant to Paragraph D or E of this Section II may result in their loss of performance-based status under Code Section 162(m).

ARTICLE FOUR

AUTOMATIC GRANT PROGRAM

I. OPTION TERMS

      A. Automatic Grants. The Automatic Grant Program under this Article Four shall supersede and replace the Corporation’s 1995 Non-Employee Director Stock Option Plan, and no further stock option grants shall be made under that plan on or after the Plan Effective Date. However, all options outstanding under that plan on the Plan Effective Date shall continue in full force and effect in accordance with their terms, and no provision of this Plan shall be deemed to affect or otherwise modify the rights or obligations of the holders of those options with respect to their acquisition of shares of Common Stock thereunder.

      Option grants shall be made pursuant to the Automatic Grant Program in effect under this Article Four as follows:

      1. Initial Grant: Each individual who is first elected or appointed as a non-employee Board member at any time on or after the Plan Effective Date shall automatically be granted, on the date of such initial election or appointment, a Non-Statutory Option to purchase not more than one hundred fifty thousand (150,000) shares of Common Stock, provided that individual has not been in the employ of the Corporation or any Parent or Subsidiary during the immediately preceding twelve (12) months. The actual number of shares for which such initial option grant shall be made shall (subject to the 150,000-share limit) be determined by the Plan Administrator at the time of each such grant.

      2. Annual Grants: On the date of each annual stockholders meeting, beginning with the 2005 Annual Meeting, each individual who is to continue to serve as a non-employee Board member, whether or not that individual is standing for re-election to the Board at that particular annual meeting, shall automatically be granted a Non-Statutory Option to purchase not more than forty thousand (40,000) shares of Common Stock, provided that such individual has served as a non-employee Board member for a period of at least six (6) months. There shall be no limit on the number of such annual share option grants any one continuing non-employee Board member may receive over his or her period of Board service, and non-employee Board members who have previously been in the employ of the Corporation (or any Parent or Subsidiary) shall be eligible to receive one or more such annual option grants over their period of continued Board service. The actual number of shares for which such annual option grants are made to each continuing non-employee Board member shall (subject to the 40,000-share limit) be determined by the Plan Administrator on or before the date of the annual stockholders meeting on which those grants are to be made.

      B. Exercise Price.

      1. The exercise price per share shall be equal to one hundred percent (100%) of the Fair Market Value per share of Common Stock on the option grant date.

      2. The exercise price shall be payable in one or more of the alternative forms authorized under the Discretionary Grant Program. Except to the extent the sale and remittance procedure specified thereunder is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date.

      C. Option Term. Each option shall have a maximum term of seven (7) years measured from the option grant date, subject to earlier termination following the Optionee’s cessation of Service.

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      D. Exercise and Vesting of Options. Each option shall be immediately exercisable for any or all of the option shares. However, any unvested shares purchased under the option shall be subject to repurchase by the Corporation, at the lower of (i) the exercise price paid per share or (ii) the Fair Market Value per share of Common Stock at the time of repurchase, upon the Optionee’s cessation of Service prior to vesting in those shares. The shares subject to each initial 150,000-share-or-less grant shall vest, and the Corporation’s repurchase right shall lapse, in four (4) successive equal annual installments upon the Optionee’s completion of each year of Service (whether as a non-employee Board member, Employee or consultant) over the four (4)-year period measured from the option grant date. The shares subject to each annual 40,000-share-or-less grant made to a non-employee Board member for his or her continued Board service shall vest, and the Corporation’s repurchase right shall lapse, in one installment upon the earlier of (i) the Optionee’s completion of the one (1)-year period of Service (whether as a non-employee Board member, Employee or consultant) measured from the grant date or (ii) the Optionee’s continuation in such Service capacity through the day immediately preceding the next annual stockholders meeting following such grant date.

      E. Limited Transferability of Options. Each option under this Article Four may be assigned in whole or in part during the Optionee’s lifetime to one or more of his or her Family Members or to a trust established exclusively for the Optionee and/or one or more such Family Members, to the extent such assignment is in connection with the Optionee’s estate plan or pursuant to a domestic relations order. The assigned portion may only be exercised by the person or persons who acquire a proprietary interest in the option pursuant to the assignment. The terms applicable to the assigned portion shall be the same as those in effect for the option immediately prior to such assignment and shall be set forth in such documents issued to the assignee as the Plan Administrator may deem appropriate. The Optionee may also designate one or more persons as the beneficiary or beneficiaries of his or her outstanding options under this Article Four, and the options shall, in accordance with such designation, automatically be transferred to such beneficiary or beneficiaries upon the Optionee’s death while holding those options. Such beneficiary or beneficiaries shall take the transferred options subject to all the terms and conditions of the applicable agreement evidencing each such transferred option, including (without limitation) the limited time period during which the option may be exercised following the Optionee’s death.

      F. Termination of Board Service. The following provisions shall govern the exercise of any options held by the Optionee at the time the Optionee ceases Service:

      (i) The Optionee (or, in the event of Optionee’s death while holding the option, the personal representative of the Optionee’s estate or the person or persons to whom the option is transferred pursuant to the Optionee’s will or the laws of inheritance or the designated beneficiary or beneficiaries of such option) shall have a twelve (12)-month period following the date of such cessation of Service in which to exercise such option.

      (ii) During the twelve (12)-month exercise period, the option may not be exercised in the aggregate for more than the number of vested shares of Common Stock for which the option is exercisable at the time of the Optionee’s cessation of Service. However, should the Optionee cease to serve as a Board member by reason of death or Permanent Disability, then all shares at the time subject to the option shall immediately vest so that such option may, during the twelve (12)-month exercise period following such cessation of Board service, be exercised for any or all of those shares as fully vested shares of Common Stock.

      (iii) In no event shall the option remain exercisable after the expiration of the option term. Upon the expiration of the twelve (12)-month exercise period or (if earlier) upon the expiration of the option term, the option shall terminate and cease to be outstanding for any vested shares for which the option has not been exercised. However, the option shall, immediately upon the Optionee’s cessation of Service for any reason (other than cessation of Board service by reason of death or Permanent Disability), terminate and cease to be outstanding to the extent the option is not otherwise at that time exercisable for vested shares.

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II. CHANGE IN CONTROL/ HOSTILE TAKE-OVER

      A. Should a Change in Control occur prior to the Optionee’s cessation of Service, then the shares of Common Stock at the time subject to each outstanding option held by such Optionee under this Automatic Grant Program but not otherwise vested shall automatically vest in full so that each such option shall, immediately prior to the effective date of the Change in Control, become exercisable for all the option shares as fully vested shares of Common Stock and may be exercised for any or all of those vested shares. Immediately following the consummation of the Change in Control, each automatic option grant shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof) or otherwise continued in effect pursuant to the terms of the Change in Control transaction.

      B. Should a Hostile Take-Over occur prior to the Optionee’s cessation of Service, then the shares of Common Stock at the time subject to each outstanding option held by such Optionee under this Automatic Grant Program but not otherwise vested shall automatically vest in full so that each such option shall, immediately prior to the effective date of the Hostile Take-Over, become exercisable for all the option shares as fully vested shares of Common Stock and may be exercised for any or all of those vested shares. Each such option shall remain exercisable for such fully vested option shares until the expiration or sooner termination of the option term.

      C. All outstanding repurchase rights under this under this Automatic Grant Program shall automatically terminate, and the shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event of any Change in Control or Hostile Take-Over.

      D. Each option which is assumed in connection with a Change in Control or otherwise continued in effect shall be appropriately adjusted, immediately after such Change in Control, to apply to the number and class of securities which would have been issuable to the Optionee in consummation of such Change in Control had the option been exercised immediately prior to such Change in Control. Appropriate adjustments shall also be made to the exercise price payable per share under each outstanding option, provided the aggregate exercise price payable for such securities shall remain the same. To the extent the actual holders of the Corporation’s outstanding Common Stock receive cash consideration for their Common Stock in consummation of the Change in Control, the successor corporation may, in connection with the assumption or continuation of the outstanding options under the Automatic Grant Program, substitute one or more shares of its own common stock with a fair market value equivalent to the cash consideration paid per share of Common Stock in such Change in Control transaction.

III. REMAINING TERMS

      The remaining terms of each grant shall be the same as the terms in effect for option grants made under the Discretionary Grant Program.

IV. ALTERNATIVE AWARDS

      The Compensation Committee shall have full power and authority to award, in lieu of one or more initial or annual automatic option grants under this Article Four, unvested shares of Common Stock or restricted stock units which in each instance have an aggregate Fair Market Value substantially equal to the fair value (as determined for financial reporting purposes in accordance with Financial Accounting Standard 123R or any successor standard) of the automatic option grant which such award replaces. Any such alternative award shall be made at the same time the automatic option grant which it replaces would have been made, and the vesting provisions (including vesting acceleration) applicable to such award shall be substantially the same as in effect for the automatic option grant so replaced.

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ARTICLE FIVE

MISCELLANEOUS

I. TAX WITHHOLDING

      A. The Corporation’s obligation to deliver shares of Common Stock upon the exercise of options or stock appreciation rights or the issuance or vesting of such shares under the Plan, or to make any other payment in respect of any award granted under the Plan, shall be subject to the satisfaction of all applicable income and employment tax withholding requirements.

      B. The Plan Administrator may, in its discretion, provide any or all holders of Non-Statutory Options, stock appreciation rights, restricted stock units or any other share right awards pursuant to which vested shares of Common Stock are to be issued under the Plan (other than the option grants and other stock-based awards made under the Automatic Grant Program) and any or all Participants to whom vested or unvested shares of Common Stock are issued in a direct issuance under the Stock Issuance and Cash Bonus Program with the right to use shares of Common Stock in satisfaction of all or part of the Withholding Taxes to which such holders may become subject in connection with the exercise of their options or stock appreciation rights, the issuance to them of vested shares or the subsequent vesting of unvested shares issued to them. Such right may be provided to any such holder in either or both of the following formats:

      Stock Withholding: The election to have the Corporation withhold, from the shares of Common Stock otherwise issuable upon the exercise of such Non-Statutory Option or stock appreciation right or upon the issuance of fully-vested shares, a portion of those shares with an aggregate Fair Market Value equal to the percentage of the Withholding Taxes (not to exceed one hundred percent (100%)) designated by the holder. The shares of Common Stock so withheld shall reduce the number of shares of Common Stock authorized for issuance under the Plan.

      Stock Delivery: The election to deliver to the Corporation, at the time the Non-Statutory Option or stock appreciation right is exercised, the vested shares are issued or the unvested shares subsequently vest, one or more shares of Common Stock previously acquired by such holder (other than in connection with the exercise, share issuance or share vesting triggering the Withholding Taxes) with an aggregate Fair Market Value equal to the percentage of the Withholding Taxes (not to exceed one hundred percent (100%)) designated by the holder. The shares of Common Stock so delivered shall not be added to the shares of Common Stock authorized for issuance under the Plan.

II. SHARE ESCROW/ LEGENDS

      Unvested shares may, in the Plan Administrator’s discretion, be held in escrow by the Corporation until the Participant’s interest in such shares vests or may be issued directly to the Participant with restrictive legends on the certificates evidencing those unvested shares.

III. EFFECTIVE DATE AND TERM OF THE PLAN

      A. The Plan shall become effective on the Plan Effective Date.

      B. The Plan shall serve as the successor to the Predecessor Plans, and no further option grants shall be made under the Predecessor Plans if this Plan is approved by the stockholders at the 2005 Annual Meeting. Such stockholder approval shall not affect the options outstanding under the Predecessor Plans at the time of the 2005 Annual Meeting, and those options shall continue in full force and effect in accordance with their terms. However, should any of those options expire or terminate unexercised, the shares of Common Stock subject to those options at the time of expiration or termination shall be added to the share reserve of this Plan, up to the maximum number of additional shares permissible hereunder.

      C. The Plan shall terminate upon the earliest to occur of (i) March 15, 2015, (ii) the date on which all shares available for issuance under the Plan shall have been issued as fully vested shares or (iii) the termination of all outstanding options, stock appreciation rights, restricted stock units and other share right

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awards in connection with a Change in Control. Should the Plan terminate on March 15, 2015, then all option grants, stock appreciation rights, unvested stock issuances, restricted stock units and other share right awards outstanding at that time shall continue to have force and effect in accordance with the provisions of the documents evidencing such grants, issuances or awards.

      D. As required pursuant to Section 162(m) of the Code and the regulations promulgated thereunder, the Plan Administrator’s authority to grant new awards under the Stock Issuance and Cash Bonus Program that are intended to qualify as performance-based compensation within the meaning of Section 162(m) of the Code shall terminate upon the first meeting of the Corporation’s stockholders that occurs in the fifth year following the year in which the Corporation’s stockholders approved the Stock Issuance and Cash Bonus Program.

IV.     AMENDMENT OF THE PLAN

      A. The Board shall have complete and exclusive power and authority to amend or modify the Plan in any or all respects. However, no such amendment or modification shall adversely affect the rights and obligations with respect to stock options, stock appreciation rights, unvested stock issuances or other stock-based awards at the time outstanding under the Plan unless the Optionee or the Participant consents to such amendment or modification. In addition, amendments to the Plan will be subject to stockholder approval to the extent required under applicable law or regulation or pursuant to the listing standards of the stock exchange (or the Nasdaq National Market) on which the Common Stock is at the time primarily traded.

      B. The Compensation Committee of the Board shall have the discretionary authority to adopt and implement from time to time such addenda or subplans to the Plan as it may deem necessary in order to bring the Plan into compliance with applicable laws and regulations of any foreign jurisdictions in which grants or awards are to be made under the Plan and/or to obtain favorable tax treatment in those foreign jurisdictions for the individuals to whom the grants or awards are made.

      C. Options and stock appreciation rights may be granted under the Discretionary Grant Program and stock-based awards may be made under the Stock Issuance and Cash Bonus Program that in each instance involve shares of Common Stock in excess of the number of shares then available for issuance under the Plan, provided no shares shall actually be issued pursuant to those grants or awards until the number of shares of Common Stock available for issuance under the Plan is sufficiently increased by stockholder approval of an amendment of the Plan authorizing such increase. If stockholder approval is required and is not obtained within twelve (12) months after the date the first excess grant or award made against such contingent increase, then any options, stock appreciation rights or other stock-based awards granted on the basis of such excess shares shall terminate and cease to be outstanding.

V. USE OF PROCEEDS

      Any cash proceeds received by the Corporation from the sale of shares of Common Stock under the Plan shall be used for general corporate purposes.

VI. REGULATORY APPROVALS

      A. The implementation of the Plan, the granting of any stock option, stock appreciation right or other stock-based award under the Plan and the issuance of any shares of Common Stock (i) upon the exercise or vesting of any granted option, stock appreciation right or other stock-based award or (ii) under the Stock Issuance and Cash Bonus Program shall be subject to the Corporation’s procurement of all approvals and permits required by regulatory authorities having jurisdiction over the Plan, the stock options granted under it and the shares of Common Stock issued pursuant to it.

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      B. No shares of Common Stock or other assets shall be issued or delivered under the Plan unless and until there shall have been compliance with all applicable requirements of applicable securities laws, including the filing and effectiveness of the Form S-8 registration statement for the shares of Common Stock issuable under the Plan, and all applicable listing requirements of any Stock Exchange (or the Nasdaq National Market, if applicable) on which Common Stock is then listed for trading.

VII. NO EMPLOYMENT/ SERVICE RIGHTS

      Nothing in the Plan shall confer upon the Optionee or the Participant any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining such person) or of the Optionee or the Participant, which rights are hereby expressly reserved by each, to terminate such person’s Service at any time for any reason, with or without cause.

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APPENDIX

      The following definitions shall be in effect under the Plan:

      A. Annual Meeting shall mean the annual meeting of the Corporation’s stockholders.

      B. Automatic Grant Program shall mean the automatic option grant program in effect under Article Four of the Plan.

      C. Board shall mean the Corporation’s Board of Directors.

      D. Change in Control shall mean a change in ownership or control of the Corporation effected through any of the following transactions:

      (i) a merger, consolidation or other reorganization approved by the Corporation’s stockholders, unless securities representing more than fifty percent (50%) of the total combined voting power of the voting securities of the successor corporation are immediately thereafter beneficially owned, directly or indirectly and in substantially the same proportion, by the persons who beneficially owned the Corporation’s outstanding voting securities immediately prior to such transaction,

      (ii) a stockholder-approved sale, transfer or other disposition (including in whole or in part through one or more licensing arrangements) of all or substantially all of the Corporation’s assets, or

      (iii) the closing of any transaction or series of related transactions pursuant to which any person or any group of persons comprising a “group” within the meaning of Rule 13d-5(b)(1) of the 1934 Act (other than the Corporation or a person that, prior to such transaction or series of related transactions, directly or indirectly controls, is controlled by or is under common control with, the Corporation) becomes directly or indirectly the beneficial owner (within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing (or convertible into or exercisable for securities possessing) more than fifty percent (50%) of the total combined voting power of the Corporation’s securities (as measured in terms of the power to vote with respect to the election of Board members) outstanding immediately after the consummation of such transaction or series of related transactions, whether such transaction involves a direct issuance from the Corporation or the acquisition of outstanding securities held by one or more of the Corporation’s existing stockholders.

      E. Code shall mean the Internal Revenue Code of 1986, as amended.

      F. Common Stock shall mean the Corporation’s common stock.

      G. Compensation Committee shall mean the Compensation Committee of the Board comprised of two (2) or more non-employee Board members.

      H. Corporation shall mean SanDisk Corporation, a Delaware corporation, and any corporate successor to all or substantially all of the assets or voting stock of SanDisk Corporation which has by appropriate action assumed the Plan.

      I. Discretionary Grant Program shall mean the discretionary grant program in effect under Article Two of the Plan pursuant to which stock options and stock appreciation rights may be granted to one or more eligible individuals.

      J. Employee shall mean an individual who is in the employ of the Corporation (or any Parent or Subsidiary, whether now existing or subsequently established), subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance.

      K. Exercise Date shall mean the date on which the Corporation shall have received written notice of the option exercise.

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      L. Fair Market Value per share of Common Stock on any relevant date shall be determined in accordance with the following provisions:

      (i) If the Common Stock is at the time traded on the NASDAQ National Market, then the Fair Market Value shall be the closing selling price per share of Common Stock at the close of regular hours trading (i.e., before after- hours trading begins) on the NASDAQ National Market on the date in question, as such price is reported by the National Association of Securities Dealers. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists.

      (ii) If the Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock at the close of regular hours trading (i.e., before after-hours trading begins) on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists.

      M. Family Member means, with respect to a particular Optionee or Participant, any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, bother-in-law or sister-in-law.

      N. Hostile Take-Over shall mean a change in ownership or control of the Corporation effected through either of the following transactions:

      (i) a change in the composition of the Board over a period of thirty-six (36) consecutive months or less such that a majority of the Board members ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who either (A) have been Board members continuously since the beginning of such period or (B) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (A) who were still in office at the time the Board approved such election or nomination, or

      (ii) the acquisition, directly or indirectly, by any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation) of beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation’s outstanding securities pursuant to a tender or exchange offer made directly to the Corporation’s stockholders which the Board does not recommend such stockholders to accept.

      O. Incentive Option shall mean an option which satisfies the requirements of Code Section 422.

      P. Involuntary Termination shall mean the termination of the Service of any individual which occurs by reason of:

      (i) such individual’s involuntary dismissal or discharge by the Corporation (or any Parent or Subsidiary) for reasons other than Misconduct, or

      (ii) such individual’s voluntary resignation following (A) a change in his or her position with the Corporation (or any Parent or Subsidiary) which materially reduces his or her duties and responsibilities or the level of management to which he or she reports, (B) a reduction in his or her level of compensation (including base salary, fringe benefits and target bonus under any corporate-performance based bonus or incentive programs) by more than fifteen percent (15%) or (C) a relocation of such individual’s place of employment by more than fifty (50) miles, provided and only if such change, reduction or relocation is effected by the Corporation (or any Parent or Subsidiary) without the individual’s consent.

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      Q. Misconduct shall mean the commission of any act of fraud, embezzlement or dishonesty by the Optionee or Participant, any unauthorized use or disclosure by such person of confidential information or trade secrets of the Corporation (or any Parent or Subsidiary), or any other intentional misconduct by such person adversely affecting the business or affairs of the Corporation (or any Parent or Subsidiary) in a material manner. The foregoing definition shall not in any way preclude or restrict the right of the Corporation (or any Parent or Subsidiary) to discharge or dismiss any Optionee, Participant or other person in the Service of the Corporation (or any Parent or Subsidiary) for any other acts or omissions, but such other acts or omissions shall not be deemed, for purposes of the Plan, to constitute grounds for termination for Misconduct.

      R. 1934 Act shall mean the Securities Exchange Act of 1934, as amended.

      S. Non-Statutory Option shall mean an option not intended to satisfy the requirements of Code Section 422.

      T. Optionee shall mean any person to whom an option is granted under the Discretionary Grant or Automatic Grant Program.

      U. Parent shall mean any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation, provided each corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

      V. Participant shall mean any person who is issued shares of Common Stock or restricted stock units or other stock-based awards or cash bonus awards under the Stock Issuance and Cash Bonus Program.

      W. Permanent Disability or Permanently Disabled shall mean the inability of the Optionee or the Participant to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment expected to result in death or to be of continuous duration of twelve (12) months or more. However, solely for purposes of the Automatic Grant Program, Permanent Disability or Permanently Disabled shall mean the inability of the non-employee Board member to perform his or her usual duties as a Board member by reason of any medically determinable physical or mental impairment expected to result in death or to be of continuous duration of twelve (12) months or more.

      X. Plan shall mean the Corporation’s 2005 Stock Incentive Plan, as set forth in this document.

      Y. Plan Administrator shall mean the particular entity, whether the Compensation Committee, the Board or the Secondary Board Committee, which is authorized to administer the Discretionary Grant Program and Stock Issuance and Cash Award Program with respect to one or more classes of eligible persons, to the extent such entity is carrying out its administrative functions under those programs with respect to the persons under its jurisdiction.

      Z. Plan Effective Date shall mean the May 27, 2005 date on which the Plan is approved by the stockholders at the 2005 Annual Meeting.

      AA. Predecessor Plans shall mean (i) the Corporation’s 1995 Stock Option Plan and (ii) the Corporation’s 1995 Non-Employee Directors Stock Option Plan, as each such Plan is in effect immediately prior to the 2005 Annual Stockholders Meeting.

      BB. Secondary Board Committee shall mean a committee of one or more Board members appointed by the Board to administer the Discretionary Grant and Stock Issuance and Cash Bonus Programs with respect to eligible persons other than Section 16 Insiders.

      CC. Section 16 Insider shall mean an officer or director of the Corporation subject to the short-swing profit liabilities of Section 16 of the 1934 Act.

      DD. Service shall mean the performance of services for the Corporation (or any Parent or Subsidiary, whether now existing or subsequently established) by a person in the capacity of an

22

Employee, a non-employee member of the board of directors or a consultant or independent advisor, except to the extent otherwise specifically provided in the documents evidencing the option grant or stock issuance. For purposes of the Plan, an Optionee or Participant shall be deemed to cease Service immediately upon the occurrence of the either of the following events: (i) the Optionee or Participant no longer performs services in any of the foregoing capacities for the Corporation or any Parent or Subsidiary or (ii) the entity for which the Optionee or Participant is performing such services ceases to remain a Parent or Subsidiary of the Corporation, even though the Optionee or Participant may subsequently continue to perform services for that entity. Service shall not be deemed to cease during a period of military leave, sick leave or other personal leave approved by the Corporation; provided, however, that should such leave of absence exceed three (3) months, then for purposes of determining the period within which an Incentive Option may be exercised as such under the federal tax laws, the Optionee’s Service shall be deemed to cease on the first day immediately following the expiration of such three (3)-month period, unless Optionee is provided with the right to return to Service following such leave either by statute or by written contract. Except to the extent otherwise required by law or expressly authorized by the Plan Administrator or by the Corporation’s written policy on leaves of absence, no Service credit shall be given for vesting purposes for any period the Optionee or Participant is on a leave of absence.

      EE. Stock Exchange shall mean either the American Stock Exchange or the New York Stock Exchange.

      FF. Stock Issuance Agreement shall mean the agreement entered into by the Corporation and the Participant at the time of issuance of shares of Common Stock under the Stock Issuance and Cash Bonus Program.

      GG. Stock Issuance and Cash Bonus Program shall mean the stock issuance and cash bonus program in effect under Article Three of the Plan.

      HH. Subsidiary shall mean any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation, provided each corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

      II. 10% Stockholder shall mean the owner of stock (as determined under Code Section 424(d)) possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Corporation (or any Parent or Subsidiary).

      JJ. Withholding Taxes shall mean the applicable income and employment withholding taxes to which the holder of an option or stock appreciation right or shares of Common Stock or a cash bonus under the Plan may become subject in connection with the grant or exercise of those options or stock appreciation rights the issuance or vesting of those shares or the payment of such cash bonus.

23 EX-31.1 9 f22399exv31w1.htm EXHIBIT 31.1

EXHIBIT 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002

I, Eli Harari, certify that:

1. I have reviewed this quarterly report on Form 10-Q of SanDisk Corporation for the quarter ended July 2, 2006;

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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) 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 period covered by this report based on such evaluation; and

d) 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: August 10, 2006

/s/ Eli Harari  

Eli Harari 

Chief Executive Officer
(Principal Executive Officer) 

1

EX-31.1

exv31w1

EX-31.2

EXHIBIT 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002

I, Judy Bruner, certify that:

1. I have reviewed this quarterly report on Form 10-Q of SanDisk Corporation for the quarter ended July 2, 2006;

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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) 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 period covered by this report based on such evaluation; and

d) 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: August 10, 2006

/s/ Judy Bruner  

Judy Bruner 

Chief Financial Officer
(Principal Financial and Accounting Officer) 

1

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 quarterly report on Form 10-Q of SanDisk Corporation for the quarter ended July 2, 2006 (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
	(Principal Executive Officer)

August 10, 2006

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.

1

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 quarterly report on Form 10-Q of SanDisk Corporation for the quarter ended July 2, 2006 (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
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

August 10, 2006

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.

2