S-8

As filed with the Securities and Exchange Commission on November 28, 2006

Registration No. __________________
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM S-8

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

SANDISK CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

Delaware
(State or Other Jurisdiction of
Incorporation or Organization) 77-0191793
(I.R.S. Employer
Identification No.)

601 McCarthy Boulevard
Milpitas, California 95035
(Address, Including Zip Code, of Principal Executive Offices)

msystems Ltd. 2003 Stock Option and Restricted Stock Incentive Plan
msystems Ltd. Section 102 Stock Option/Stock Purchase and Stock Option Plans
(Full Title of the Plan)

Charles Van Orden, Esq.
Vice President, General Counsel and Secretary
SanDisk Corporation
601 McCarthy Boulevard
Milpitas, California 95035
(408) 801-1000
(Name, Address and Telephone Number, Including Area Code, of Agent For Service)

CALCULATION OF REGISTRATION FEE

		Proposed	Proposed
		Maximum	Maximum
Title Of	Amount	Offering	Aggregate	Amount Of
Securities	To Be	Price	Offering	Registration
To Be Registered	Registered	Per Unit	Price	Fee
Common Stock, $0.001 par value per share	5,388,283(1)(2) Shares	$47.55(3)	$256,212,857(3)	$27,415(3)

(1)	This Registration Statement covers, in addition to the number of shares of SanDisk Corporation, a Delaware corporation (the “Company” or the “Registrant”), common stock, par value $0.001 per share (the “Common Stock”), stated above, options and other rights to purchase or acquire the shares of Common Stock covered by this Registration Statement and, pursuant to Rule 416(c) under the Securities Act of 1933, as amended (the “Securities Act”), an additional indeterminate number of shares, options and rights that may be offered or issued pursuant to the msystems Ltd. 2003 Stock Option and Restricted Stock Incentive Plan and the msystems Ltd. Section 102 Stock Option/Stock Purchase and Stock Option Plans (the “Plans”) as a result of one or more adjustments under the Plans to prevent dilution resulting from one or more stock splits, stock dividends or similar transactions.
(2)	Each share of Common Stock is accompanied by a preferred stock purchase right pursuant to the Rights Agreement between the Company and Computershare Trust Company, Inc. dated September 15, 2003, as amended on November 6, 2006. Until the occurrence of certain events specified in the Rights Agreement, these rights are not exercisable, are evidenced by the certificates for the Common Stock and are transferred solely with the Common Stock. The value attributable to these rights, if any, is reflected in the value of the Common Stock, and, accordingly, no separate fee is paid.
(3)	Pursuant to Securities Act Rule 457(h), the maximum offering price, per share and in the aggregate, and the registration fee were calculated based upon the average of the high and low prices of the Common Stock on November 22, 2006, as quoted on the Nasdaq Global Market.

     The Exhibit Index for this Registration Statement is at page 8.

TABLE OF CONTENTS

EXPLANATORY NOTE
PART I
PART II
	Item 3. Incorporation of Certain Documents by Reference
	Item 4. Description of Securities
	Item 5. Interests of Named Experts and Counsel
	Item 6. Indemnification of Directors and Officers
	Item 7. Exemption from Registration Claimed
	Item 8. Exhibits
	Item 9. Undertakings
SIGNATURES
POWER OF ATTORNEY
EXHIBIT INDEX
EXHIBIT 4.1
EXHIBIT 4.2
EXHIBIT 5
EXHIBIT 23.1

EXPLANATORY NOTE

     This Registration Statement is being filed by the Company in connection with awards granted under the Plans that were assumed by the Company pursuant to that certain Agreement and Plan of Merger dated as of July 30, 2006, by and among the Company, Project Desert, Ltd. and msystems Ltd.

PART I

INFORMATION REQUIRED IN THE
SECTION 10(a) PROSPECTUS

     The document(s) containing the information specified in Part I of Form S-8 will be sent or given to participants as specified by Securities Act Rule 428(b)(1).

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PART II

INFORMATION REQUIRED IN THE
REGISTRATION STATEMENT

Item 3. Incorporation of Certain Documents by Reference

     The following documents of the Company filed with the Securities and Exchange Commission (the “Commission”) are incorporated herein by reference:

(a)	The Company’s Annual Report on Form 10-K for its fiscal year ended January 1, 2006, filed with the Commission on March 15, 2006, as subsequently amended on April 14, 2006 (Commission File No. 000-26734);
(b)	The Company’s Quarterly Reports on Form 10-Q for its fiscal quarters ended October 1, 2006, July 2, 2006 and April 2, 2006, filed with the Commission on November 8, 2006, August 10, 2006 and May 8, 2006, respectively (Commission File No. 000-26734);
(c)	The Company’s Current Reports on Form 8-K, filed with the Commission on November 22, 2006 (as amended on November 27, 2006), September 27, 2006, August 2, 2006, July 31, 2006 (as amended on August 1, 2006), July 12, 2006, June 26, 2006, June 1, 2006, May 15, 2006, May 9, 2006, May 3, 2006, April 10, 2006, March 27, 2006, February 23, 2006, February 14, 2006, January 27, 2006 and January 20, 2006 (each, Commission File No. 000-26734);
(d)	The description of the Company’s Common Stock contained in its Registration Statement on Form 8-A filed with the Commission on September 8, 1995 (Commission File No. 000-25283), and any other amendment or report filed for the purpose of updating such description; and
(e)	The description of the Company’s preferred stock purchase rights contained in its Registration Statement on Form 8-A filed with the Commission on September 25, 2003 (Commission File No. 000-25283), and any other amendment or report filed for the purpose of updating such description.

     All documents subsequently filed by the Company pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), prior to the filing of a post-effective amendment which indicates that all securities offered hereby have been sold or which deregisters all securities then remaining unsold, shall be deemed to be incorporated by reference into this Registration Statement and to be a part hereof from the date of filing of such documents; provided, however, that documents or information deemed to have been furnished and not filed in accordance with Commission rules shall not be deemed incorporated by reference into this Registration Statement unless specifically so incorporated by reference herein. Any statement contained herein or in a document, all or a portion of which is incorporated or deemed to be incorporated by reference herein, shall be deemed to be modified or superseded for purposes of this Registration Statement to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or amended, to constitute a part of this Registration Statement.

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Item 4. Description of Securities

     Not applicable.

Item 5. Interests of Named Experts and Counsel

     Not applicable.

Item 6. Indemnification of Directors and Officers

     Section 145 of the Delaware General Corporation Law authorizes a court to award or a corporation’s board of directors to grant indemnification to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act. The Registrant’s Bylaws provide for permissible indemnification of officers, employees and other agents to the maximum extent permitted by the Delaware General Corporation Law. In addition, the Registrant’s Certificate of Incorporation provides that, pursuant to Delaware law, its directors shall not be liable for monetary damages for breach of their fiduciary duty as directors to the Registrant and its stockholders. However, this provision in the Certificate of Incorporation does not eliminate the fiduciary duty of the directors, and in appropriate circumstances, equitable remedies such as injunctive or other forms of non-monetary relief will remain available under Delaware law. In addition, each director will continue to be subject to liability for (i) any breach of the director’s duty of loyalty to the Registrant or its stockholders, (ii) acts or omissions not in good faith or involving intentional misconduct or a knowing violation of law, (iii) payment of dividends or approval of stock repurchases and redemptions that are unlawful under Delaware law and (iv) any transaction from which the director derived any improper personal benefit. The provision also does not affect a director’s responsibilities under any other law, such as the federal securities laws or state or federal environmental laws. The Registrant has entered into Indemnification Agreements with each of its directors and certain of its officers which provide such directors and officers with further indemnification to the maximum extent permitted by the Delaware General Corporation Law.

Item 7. Exemption from Registration Claimed

     Not applicable.

Item 8. Exhibits

     See the attached Exhibit Index at page 8, which is incorporated herein by reference.

Item 9. Undertakings

     (a) The undersigned Registrant hereby undertakes:

     (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement:

(i) To include any prospectus required by Section 10(a)(3) of the Securities Act;

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(ii) To reflect in the prospectus any facts or events arising after the effective date of this Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in this Registration Statement; and

(iii) To include any material information with respect to the plan of distribution not previously disclosed in this Registration Statement or any material change to such information in this Registration Statement;

provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed with or furnished to the Commission by the Registrant pursuant to Section 13 or 15(d) of the Exchange Act that are incorporated by reference in this Registration Statement.

     (2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

     (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

     (b) The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act, each filing of the Registrant’s annual report pursuant to Section 13(a) or 15(d) of the Exchange Act (and, where applicable, each filing of an employee benefit plan’s annual report pursuant to Section 15(d) of the Exchange Act) that is incorporated by reference in this Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

     (h) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, executive officers and controlling persons of the Registrant pursuant to the provisions described in Item 6 above, or otherwise, the Registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

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SIGNATURES

     Pursuant to the requirements of the Securities Act, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-8 and has duly caused this Form S-8 Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Milpitas, State of California, on November 28, 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)

POWER OF ATTORNEY

     Each person whose signature appears below constitutes and appoints Dr. Eli Harari and Judy Bruner, and each of them, acting individually and without the other, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place, and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments, exhibits thereto and other documents in connection therewith) to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or either of them individually, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

     Pursuant to the requirements of the Securities Act, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.

Signature	Title	Date
/s/ Dr. Eli Harari Dr. Eli Harari	Chairman of the Board and Chief Executive Officer (Principal Executive Officer)	November 28, 2006
/s/ Judy Bruner Judy Bruner	Executive Vice President, Administration and Chief Financial Officer (Principal Financial and Accounting Officer)	November 28, 2006
/s/ Irwin Federman Irwin Federman	Vice Chairman of the Board and Lead Independent Director	November 27, 2006

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Signature	Title	Date
/s/ Steven J. Gomo Steven J. Gomo	Director	November 27, 2006
/s/ Eddy W. Hartenstein Eddy W. Hartenstein	Director	November 27, 2006
/s/ Catherine P. Lego Catherine P. Lego	Director	November 28, 2006
/s/ Michael E. Marks Michael E. Marks	Director	November 27, 2006
/s/ James D. Meindl James D. Meindl	Director	November 27, 2006

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EXHIBIT INDEX

Exhibit
Number	Description of Exhibit
4.1	msystems Ltd. 2003 Stock Option and Restricted Stock Incentive Plan.
4.2	msystems Ltd. Section 102 Stock Option/Stock Purchase and Stock Option Plans.
5.	Opinion of O’Melveny & Myers LLP (opinion re legality).
23.1	Consent of independent registered public accounting firm.
23.2	Consent of Counsel (included in Exhibit 5).
24.	Power of Attorney (included in this Registration Statement under “Signatures”).

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EX-4.1

Exhibit 4.1

M — Systems Flash Disk Pioneers Ltd.

2003 Stock Option and

Restricted Stock Incentive Plan

Adopted : November 5^TH, 2002

Table Of Contents

1.	PURPOSE; TYPES OF AWARDS; CONSTRUCTION	1
2.	DEFINITIONS	2
3.	ADMINISTRATION	3
4.	ELIGIBILITY	5
5.	SHARES	5
6.	TERMS AND CONDITIONS OF OPTIONS	5
7.	102 STOCK OPTIONS	8
8.	3(9) STOCK OPTIONS	9
9.	NONQUALIFIED STOCK OPTIONS	9
10.	INCENTIVE STOCK OPTIONS	9
11.	RESTRICTED STOCK	10
12.	OTHER SHARE OR SHARE-BASED AWARDS	11
13.	EFFECT OF CERTAIN CHANGES	11
14.	NONTRANSFERABILITY OF AWARDS; SURVIVING BENEFICIARY	13
15.	AGREEMENT BY GRANTEE REGARDING TAXES	13
16.	RIGHTS AS A SHAREHOLDER; VOTING AND DIVIDENDS	14
17.	NO RETENTION RIGHTS	14
18.	APPROVAL	14
19.	PERIOD DURING WHICH AWARDS MAY BE GRANTED	14
20.	AMENDMENT AND TERMINATION OF THE PLAN	15
21.	GOVERNING LAW	15

M-Systems Flash Disk Pioneers Ltd.
2003 Stock Option And
Restricted Stock Incentive Plan

1. PURPOSE; TYPES OF AWARDS; CONSTRUCTION.

1.1.	Purpose. The purpose of the M-Systems Flash Disk Pioneers Ltd. 2003 Stock Option and Restricted Stock Incentive Plan (the “Plan”) is to afford an incentive to employees, officers, directors, service providers and consultants of M-Systems Flash Disk Pioneers Ltd. (the “Company”), or any Subsidiary of the Company which now exists or hereafter is organized or acquired by the Company, to acquire a proprietary interest in the Company, to continue as employees, officers, directors, service providers or consultants, to increase their efforts on behalf of the Company and to promote the success of the Company’s business.
1.2.	Types of Awards. The Plan is intended to enable the Company to issue Awards under varying tax regimes, including without limitation (i) pursuant and subject to the provisions of Section 102 (“Section 102” and such options, “102 Stock Options”) of the Israeli Income Tax Ordinance (New Version) 1961, as amended (the “Ordinance”) and any regulations, rules, orders or procedures promulgated thereunder; (ii) pursuant to Section 3(9) of the Ordinance (“3(9) Stock Options”); (iii) as “incentive stock options” (“Incentive Stock Options”) within the meaning of Section 422 of the United States Internal Revenue Code of 1986, as amended (the “Code”); (iv) Nonqualified Stock Options (as defined below) (all 102 Stock Options, 3(9) Stock Options, Incentive Stock Options and Non-Qualified Stock Options, as well as options issued under other tax regimes collectively, the “Options”); (v) shares of restricted stock (“Restricted Stock”) under the Plan; and (vi) other share-based Awards pursuant to Section 12 hereof. Apart from issuance under the relevant tax regimes in the State of Israel and the United States of America, the Plan contemplates issuances to Grantees (as defined below) in other jurisdictions with respect to which the Committee (as defined below) is empowered to make the requisite adjustments in the Plan and set forth the relevant conditions in the Company’s agreement with the Grantee in order to comply with the requirements of the tax regimes in any such jurisdictions.
1.3.	Construction. To the extent any provision herein conflicts with the conditions of any relevant tax law or regulation which are relied upon for tax relief in respect of a particular Option or Share granted to a Grantee, the provisions of such law or regulation shall prevail over those of the Plan, and the Committee (as defined below) is empowered hereunder to interpret and enforce the said prevailing provisions.

2. DEFINITIONS.

As used in this Plan, the following words and phrases shall have the meanings indicated:

2.1.	“Award” shall mean any Share, Option, Restricted Stock or any other Stock-based award, granted to a Grantee under the Plan.
2.2.	“Board” shall mean the Board of Directors of the Company.
2.3.	“Committee” shall mean a committee established by the Board to administer the Plan.
2.4.	“Companies Law” shall mean the Israel Companies Law-1999, as amended.
2.5.	“Disability” shall mean the inability of a Grantee to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months, as determined by a medical doctor satisfactory to the Committee.
2.6.	“Exercise Period” shall mean the period in which the Option shall be exercisable.
2.7.	“Exercise Price” shall mean the exercise price for each Share covered by an Option.
2.8.	“Fair Market Value” per Share as of a particular date shall mean (i) the closing sales price per Share on the securities exchange on which the Shares are principally traded for the last preceding date on which there was a sale of such Shares on such exchange; or (ii) if the Shares are listed on the Nasdaq National Market, the last reported price per Share on the Nasdaq National Market on the last preceding date on which there was a sale of such Shares on the Nasdaq National Market; or (iii) if the Shares are then traded in an over-the-counter market, the average of the closing bid and asked prices for the Shares in such over-the-counter market for the last preceding date on which there was a sale of such Shares in such market; or (iv) if the Shares are not then listed on a securities exchange or market or traded in an over-the-counter market, such value as the Committee, in its sole discretion, shall determine, which determination shall be conclusive and binding on all parties.
2.9.	“Grantee” shall mean a person who receives a grant of Options, Restricted Stock, Shares or other Awards under the Plan, who at the time of grant is an employee, officer, director, service provider (e.g. suppliers, sub-contractors etc.) or consultant of the Company or any Subsidiary.
2.10.	“Nonqualified Stock Option” shall mean any Option granted to a U.S. resident, which Option is not designated as, or does not meet the conditions for an Incentive Stock Option.

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2.11.	“Parent” shall mean any company (other than the Company), which now exists or is hereafter organized, in an unbroken chain of companies ending with the Company if, at the time of granting an Award, each of the companies other than the Company owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other companies in such chain.
2.12.	“Retirement” shall mean a Grantee’s retirement pursuant to applicable law or in accordance with the terms of any tax-qualified retirement plan maintained by the Company or any of its affiliates in which the Grantee participates.
2.13.	“Shareholder(s)” shall mean the shareholder(s) of the Company.
2.14.	“Shares” shall mean the Ordinary Shares of the Company, par value of NIS 0.001 each.
2.15.	“Subsidiary” shall mean any company (other than the Company), which now exists or is hereafter organized or acquired by the Company, in an unbroken chain of companies beginning with the Company if, at the time of granting an Award, each of the companies other than the last company in the unbroken chain owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other companies in such chain.
2.16.	“Ten Percent Shareholder” shall mean a Grantee who, at the time an Incentive Stock Option is granted, owns, or is deemed to own pursuant to Section 424(d) of the Code, shares possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary.
2.17.	“Trustee” shall mean the trustee appointed by the Committee or the Board, as the case may be, to hold the respective Options, Restricted Stock and/or Shares, if so appointed.

3. ADMINISTRATION.

To the extent permitted under law, the Plan shall be administered by the Committee. However, in the event that the Board does not create a committee to administer the Plan, the Plan shall be administered by the Board in its entirety. Furthermore, in the event that an action necessary for the administration of the Plan is required under law to be taken by the Board, then such action shall be so taken by the Board. In any of the above events, all references herein to the Committee shall be construed as references to the Board.

The Committee shall have the authority, in its discretion, to administer the Plan and to exercise all the powers and authority either specifically granted to it under the Plan or necessary or advisable in the administration of the Plan, including, without limitation:

(i) the authority to grant Options, Restricted Stock and Shares and other Stock based Awards to the Grantees;

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(ii)	the authority to determine which Options shall constitute 102 Stock Options, 3(9) Stock Options, Incentive Stock Options, Nonqualified Stock Options or otherwise;
(iii)	the authority to determine whether options shall be issued under the “income” route or the “capital” route under Section 102;
(iii)	to determine the Exercise Price of the Shares covered by each Option;
(iv)	to determine the Grantees to whom, and the time or times at which Awards shall be granted;
(v)	to determine the number of Shares to be covered by each Award; (vi) to interpret the Plan; (vii) to prescribe, amend and rescind rules and regulations relating to the Plan;
(vi)	to interpret the Plan;
(vii)	to prescribe, amend and rescind rules and regulations relating to the Plan;
(viii)	to determine the terms and provisions of the Option Agreements as defined in Section 6 below (which need not be identical), and to cancel or suspend Awards, as necessary; and
(ix)	to make all other determinations deemed necessary or advisable for the administration of the Plan, including to adjust the terms of the Plan or any Agreement so as to reflect (i) changes in applicable Israeli, U.S. or other laws, and (ii) the laws of other jurisdictions within which the Company wishes to grant Awards.

The Committee shall have the authority to grant, in its discretion, to the holder of an outstanding Option, in exchange for the surrender and cancellation of such Option, a new Option having an exercise price lower or higher than provided in the Option so surrendered and canceled and containing such other terms and conditions as the Committee may prescribe in accordance with the provisions of the Plan or to set a new exercise price for the same Option lower or higher than that previously provided in the Option.

All decisions, determination and interpretations of the Committee shall be final and binding on all Grantees of any Awards under this Plan. No member of the Committee shall be liable for any action taken or determination made in good faith with respect to the Plan or any Award granted hereunder.

Each member of the Board and the Committee shall be indemnified and held harmless by the Company against any cost or expense (including fees of counsel) reasonably incurred by him/her, or liability (including any sum paid in settlement of a claim with the approval of the Company) arising out of any act or omission to act in connection with the Plan unless arising out of such member’s own fraud or bad faith, to the extent permitted by applicable law. Such indemnification shall be in addition to any rights of indemnification the member may have as director or otherwise under the charter documents of the Company, any agreement, any vote of share or disinterested directors, or otherwise.

No person shall be eligible to be a member of the Committee if such person’s membership would prevent the Plan from complying with exemptions from Section

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16 set forth in Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), if applicable.

At such time as any class of equity securities of the Company is registered pursuant to Section 12 of the Exchange Act, the Committee shall consist of at least two (2) individuals, each of whom is a Non-Employee Director, as defined in Rule 16b-3 above mentioned.

4. ELIGIBILITY.

Options, Restricted Stock and Shares may be granted to employees, officers, directors, service providers and consultants of the Company and any Subsidiary, provided, however, that 102 Stock Options and Incentive Stock Options may be granted only to employees of the Company or a Subsidiary and provided further that any member of the Committee shall be eligible to receive awards under the Plan while serving on the Committee, unless otherwise specified herein. A person who has been granted an Option, Restricted Stock or Share hereunder may be granted additional Options, Restricted Stock or Shares, if the Committee shall so determine. In determining the persons to whom Awards shall be granted and the number of Shares to be covered by each Award, the Committee shall take into account the duties of the respective persons, their present and potential contributions to the success of the Company and such other factors as the Committee shall deem relevant in connection with accomplishing the purpose of the Plan.

5. SHARES.

The maximum number of Shares reserved for the grant of Awards under the Plan shall be five million (5,000,000) Shares. The Board may increase or decrease the number of Shares to be reserved under the Plan. Such Shares may, in whole or in part, be authorized but unissued Shares or Shares that shall have been or may be reacquired by the Company (to the extent permitted under applicable law). Any of such Shares which may remain unsold and which are not subject to outstanding options at the termination of the Plan shall cease to be reserved for the purpose of the Plan, but until termination of the Plan, the Company shall at all times reserve a sufficient number of Shares to meet the requirements of the Plan.

If any outstanding Award under the Plan should, for any reason, expire, be canceled or be forfeited without having been exercised in full, the Shares allocable to the unexercised, canceled or terminated portion of such Award shall (unless the Plan shall have been terminated) become available for subsequent grants of Awards under the Plan.

6. TERMS AND CONDITIONS OF OPTIONS.

Each Option granted pursuant to the Plan shall be evidenced by a written agreement between the Company and the Grantee (the “Option Agreement”), in such form and containing such terms and conditions as the Committee shall from time to time approve, which Option Agreement shall comply with and be subject to the following terms and conditions, unless otherwise specifically provided in such Option Agreement. For purposes of interpreting this Section 6, a director’s service as a member of the Board shall be deemed to be employment with the Company, provided that for the purpose of Incentive Stock Options, a director of the Company or Subsidiary shall only be entitled to such Options in the event that there exists an

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employee-employer relationship between such director and the Company or Subsidiary.

6.1.	Number of Shares. Each Option Agreement shall state the number of Shares to which the Option relates.
6.2.	Type of Option. Each Option Agreement shall specifically state the type of Option granted thereunder and whether it constitutes a 102 Stock Option, 3(9) Stock Option, Incentive Stock Option, Nonqualified Stock Option or otherwise.
6.3.	Exercise Price. Each Option Agreement shall state the Exercise Price, which, in the case of an Incentive Stock Option, shall not be less than one hundred percent (100%) of the Fair Market Value of the Shares covered by the Option on the date of grant or such other amount as may be required pursuant to the Code. In the case of a 102 Stock Option, a 3(9) Stock Option or a Nonqualified Stock Option granted to any Grantee, the per Share exercise price shall be equal to the amount determined by the Committee or the Board, as the case may be, subject to all applicable law. In the case of an Incentive Stock Option granted to any Ten-Percent Shareholder, the Exercise Price shall be no less than 110% of the Fair Market Value of the Shares covered by the Option on the date of grant. In no event shall the Exercise Price of an Option be less than the nominal value of the shares for which such Option is exercisable. Subject to Section 3 and to the foregoing, the Committee may reduce the Exercise Price of any outstanding 102 Stock Option, 3(9) Stock Option or Nonqualified Stock Option. The Exercise Price shall also be subject to adjustment as provided in Section 13 hereof.
6.4.	Manner of Exercise. An Option may be exercised, as to any or all whole Shares as to which the Option has become exercisable, by written notice delivered in person or by mail to the Company or to any person designated by the Company for such purpose, specifying the number of Shares with respect to which the Option is being exercised, along with payment of the Exercise Price for such Shares in the manner specified in the following sentence. The Exercise Price shall be paid in full with respect to each Share, at the time of exercise, either in cash or cash equivalents or in such other manner as the Committee shall determine, including a cashless exercise procedure through a broker-dealer.
6.5.	Term and Vesting of Options. Each Option Agreement shall provide the vesting schedule for the Option as determined by the Committee, provided that (to the extent permitted under law) the Committee shall have the authority to accelerate the vesting of any outstanding Option at such time and under such circumstances as it, in its sole discretion, deems appropriate. Unless otherwise resolved by the Committee and stated in the Option Agreement, Options shall vest and become exercisable over a four (4) year period under the following schedule: fifty percent (50%) of the Shares covered by the Option on the second (2nd) anniversary of the date on which such Option is granted and six and one-quarter percent (6.25%) of the Shares covered by the Option at the end of each subsequent three-month period thereafter over the course of the following two (2) years; provided, however, that (to the extent permitted under law) the Committee, in its

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absolute discretion, may, on such terms and conditions as it may determine to be appropriate, accelerate or otherwise change the time at which such Option or any portion thereof may be exercised. The Option Agreement may contain performance goals and measurements, and the provisions with respect to any Option need not be the same as the provisions with respect to any other Option. The Exercise Period of an Option will be ten (10) years from the date of the grant of the Option unless otherwise determined by the Committee (to the extent permitted under law); provided, however, that in the case of an Incentive Stock Option granted to a Ten Percent Shareholder, such Exercise Period shall not exceed five (5) years from the date of grant of such Incentive Stock Option. At the end of the Exercise Period, all Awards not exercised shall be deemed null and void. The Exercise Period shall be subject to earlier termination as provided in Sections 6.6 and 6.7 hereof.

6.6. Termination. Except as provided in this Section 6.6 and in Section 6.7 hereof, an Option may not be exercised unless the Grantee is then in the employ of or maintaining a director, service provider or consultant relationship with the Company or a Subsidiary thereof or, in the case of an Incentive Stock Option, a company or a parent or subsidiary company of such company issuing or assuming the Option in a transaction to which Section 424(a) of the Code applies, and unless the Grantee has remained continuously so employed or in the director, service provider or consultant relationship since the date of grant of the Option. In the event that the employment or director, service provider or consultant relationship of a Grantee shall terminate (other than by reason of death, Disability or Retirement), all Options of such Grantee that are vested and exercisable at the time of such termination may, unless earlier terminated in accordance with their terms, be exercised within ninety (90) days after the date of such termination (or such different period as the Committee shall prescribe); provided, however, that if the Company (or the Subsidiary, when applicable) shall terminate the Grantee’s employment for Cause (as defined below), all Options theretofore granted to such Grantee (whether vested or not) shall, to the extent not theretofore exercised, terminate on the date of such termination or cessation unless otherwise determined by the Committee. In the case of a Grantee whose principal employer is a Subsidiary, the Grantee’s employment shall also be deemed to be terminated for purposes of this Section 6.6 as of the date on which such principal employer ceases to be a Subsidiary. Notwithstanding anything to the contrary, the Committee, in its absolute discretion may, on such terms and conditions as it may determine appropriate, extend the periods for which the Options held by any individual may continue to vest and be exercisable; provided, that such Options may lose their status as Incentive Stock Options under applicable law and be deemed Nonqualified Stock Options in the event that the period of vesting and/or exercisability of any option is extended beyond the later of: (i) ninety (90) days after the date of cessation of employment or performance of services; or (ii) the applicable period under Section 6.7 below.

For purposes of this Plan, the term “Cause” shall have the meaning as ascribed under the employment agreement between the Grantee and the Company (or its Subsidiary), if the Grantee is an employee, or the agreement governing the director, service provider or consultant

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relationship with the Company (or its Subsidiary), and notwithstanding the provisions or in the absence of any such agreement shall also mean any of the following resulting from an act or omission of Grantee: (i) fraud or embezzlement or felony or similar act; (ii) failure to substantially perform duties as an employee/service provider or to abide by the general policies of the Company (or a Subsidiary, when applicable) applicable to all employees/service providers (including, without limitation, policies relating to confidentiality and reasonable workplace conduct); or (iii) an act of the Grantee which constitutes a breach of trust between the Grantee and the Company or constitutes a material breach of discipline; or (iv) any other act or omission which in the reasonable opinion of the Company or a Subsidiary could be financially injurious to the Company or a Subsidiary or injurious to the business reputation of the Company or a Subsidiary.

6.7.

Death, Disability or Retirement of Grantee. If a Grantee shall die while employed by, or maintaining a director, service provider or consultant relationship with, the Company or a Subsidiary, (or within such different period as the Committee may have provided pursuant to Section 6.6 hereof), or if the Grantee’s employment or director, service provider or consultant relationship shall terminate by reason of Disability, all Options theretofore granted to such Grantee (to the extent vested and exercisable) may, unless earlier terminated in accordance with their terms, be exercised by the Grantee or by the Grantee’s estate or by a person who acquired the right to exercise such Options by bequest or inheritance or otherwise by result of death or Disability of the Grantee, at any time within one (1) year after the earlier of the death or Disability of the Grantee or the termination of such Grantee’s employment (or such different period as the Committee shall prescribe). In the event that an Option granted hereunder shall be exercised by the legal representatives of a deceased or former Grantee, written notice of such exercise shall be accompanied by a certified copy of letters testamentary or equivalent proof of the right of such legal representative to exercise such Option. In the event that the employment or director, service provider or consultant relationship of a Grantee shall terminate on account of such Grantee’s Retirement, all Options of such Grantee that are exercisable at the time of such Retirement may, unless earlier terminated in accordance with their terms, be exercised at any time within ninety (90) days after the date of such Retirement (or such different period as the Committee shall prescribe).

6.8.

Other Provisions. The Option Agreements evidencing Awards under the Plan shall contain such other terms and conditions not inconsistent with the Plan as the Committee may determine.

7. 102 STOCK OPTIONS.

Options granted pursuant to this Section 7 are intended to constitute 102 Stock Options and, subject to Section 102 of the Ordinance and the rules and regulations promulgated thereunder, as amended, the general terms and conditions specified in Section 6 hereof and other provisions of the Plan, except for said provisions of the Plan applying to Options under a different tax law or regulation, shall apply.

The Committee shall determine, at its sole discretion and subject to applicable law, whether 102 Stock Options issued to each Grantee shall be issued either under the

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“income” route or under the “capital” route, in accordance with the provisions of the Ordinance.

To the extent required by the Ordinance or the Income Tax Commissioner of the State of Israel, the 102 Stock Options which shall be granted pursuant to the Plan shall be issued to a Trustee nominated by the Committee and approved by the tax authorities in accordance with the provisions of the Ordinance, and the 102 Stock Options and the Shares issued upon the exercise of said Option shall be issued in the name of the Trustee, to be held for the benefit of the Grantee, for such period of time as may be required by the Ordinance under the terms of a trust agreement and related instruments as shall be approved by the Committee.

8. 3(9) STOCK OPTIONS.

Options granted pursuant to this Section 8 are intended to constitute 3(9) Stock Options and shall be subject to the general terms and conditions specified in Section 6 hereof and other provisions of the Plan, except for said provisions of the Plan applying to Options under a different tax law or regulation.

To the extent required by the Ordinance or the Income Tax Commissioner of the State of Israel, the 3(9) Stock Options, which shall be granted pursuant to the Plan, may be issued to a Trustee nominated by the Committee under the terms of a trust agreement and related instruments as shall be approved by the Committee in accordance with the provisions of the Ordinance.

9. NONQUALIFIED STOCK OPTIONS.

Options granted pursuant to this Section 9 are intended to constitute Nonqualified Stock Options and shall be subject to the general terms and conditions specified in Section 6 hereof and other provisions of the Plan, except for said provisions of the Plan applying to Options under a different tax law or regulation.

10. INCENTIVE STOCK OPTIONS.

Options granted pursuant to this Section 10 are intended to constitute Incentive Stock Options and shall be granted subject to both the following special terms and conditions and the general terms and conditions specified in Section 6 hereof and other provisions of the Plan, except for said provisions of the Plan applying to Options under a different tax law or regulation:

10.1. Value of Shares. The aggregate Fair Market Value (determined as of the date the Incentive Stock Option is granted) of the Shares with respect to which Incentive Stock Options granted under this Plan and all other option plans of any Subsidiary become exercisable for the first time by each Grantee during any calendar year shall not exceed one hundred thousand United States dollars ($100,000) with respect to such Grantee. To the extent that the aggregate Fair Market Value of Shares with respect to which the Incentive Stock Options are exercisable for the first time by any Grantee during any calendar years exceeds one hundred thousand United States dollars ($100,000), such Options shall be treated as Non-Qualified Stock Options. The foregoing shall be applied by taking options into account in the order in which they were granted, with the Fair Market Value of any Share to be determined at the time of the grant of the Option. In the event

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the foregoing results in the portion of an Incentive Stock Option exceeding the one hundred thousand United States dollars ($100,000) limitation, only such excess shall be treated as a Non-Qualified Stock Option.

11. Restricted Stock.

The Committee may award shares of Restricted Stock to any eligible employee, director, service provider or consultant, including under Section 102 of the Ordinance. Each Award of Restricted Stock under the Plan shall be evidenced by a written agreement between the Company and the Grantee (the “Restricted Stock Agreement”), in such form as the Committee shall from time to time approve, which Restricted Stock Agreement shall comply with and be subject to the following terms and conditions, unless otherwise specifically provided in such Agreement:

11.1.	Number of Shares. Each Restricted Stock Agreement shall state the number of shares of Restricted Stock to be subject to an Award.
11.2.	Restrictions. Shares of Restricted Stock may not be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of, except by will or the laws of descent and distribution, for such period as the Committee shall determine from the date on which the Award is granted (the “Restricted Period”). The Committee may also impose such additional or alternative restrictions and conditions on the shares of Restricted Stock as it deems appropriate including the satisfaction of performance criteria. Such performance criteria may include, but are not limited to, sales, earnings before interest and taxes, return on investment, earnings per share, any combination of the foregoing or rate of growth of any of the foregoing, as determined by the Committee. Certificates for Shares issued pursuant to Restricted Stock Awards shall bear an appropriate legend referring to such restrictions, and any attempt to dispose of any such shares in contravention of such restrictions shall be null and void and without effect. During the Restricted Period, such certificates shall be held in escrow by an escrow agent appointed by the Committee, or, if a Restricted Stock Award is made pursuant to Section 102, by the Trustee. In determining the Restricted Period of an Award the Committee may provide that the foregoing restrictions shall lapse with respect to specified percentages of the awarded shares on successive anniversaries of the date of such Award. To the extent required by the Ordinance or the Income Tax Commissioner of the State of Israel, the Restricted Stock issued pursuant to Section 102 of the Ordinance shall be issued to the Trustee in accordance with the provisions of the Ordinance and the Restricted Stock shall be held for the benefit of the Grantee for a period of not less than twenty-four (24) months from the date of grant (or such other period of time as may be required by the Ordinance).
11.3.	Adjustment of Performance Goals. The Committee may adjust performance goals to take into account changes in law and accounting and tax rules and to make such adjustments, as the Committee deems necessary or appropriate to reflect the inclusion or the exclusion of the impact of extraordinary or unusual items, events or circumstances. The Committee also may adjust the performance goals by reducing the amount to be received by any Grantee pursuant to an Award if and to the extent that the Committee deems it appropriate.

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11.4.	Forfeiture. Subject to such exceptions as may be determined by the Committee, if the Grantee’s continuous employment or director, service provider or consultant relationship with the Company or any Subsidiary shall terminate for any reason prior to the expiration of the Restricted Period of an Award, any shares remaining subject to restrictions (after taking into account the provisions of Section 11.6) shall thereupon be forfeited by the Grantee and transferred to, and reacquired by, the Company or a Subsidiary at no cost to the Company or Subsidiary, subject to all applicable law.
11.5.	Ownership. During the Restricted Period the Grantee shall possess all incidents of ownership of such Shares, subject to Section 11.2, including the right to receive dividends with respect to such Shares and to vote such Shares.
11.6.	Accelerated Lapse of Restrictions. Upon the occurrence of any of the events listed in Section 13.2 and subject to Section 13.3, all restrictions then outstanding with respect to Restricted Stock awarded hereunder shall automatically expire and be of no further force and effect. The Committee shall have the authority (and the Agreement may so provide) to cancel all or any portion of any outstanding restrictions prior to the expiration of the Restricted Period with respect to any or all of the shares of Restricted Stock awarded on such terms and conditions as the Committee shall deem appropriate.
11.7.	83(b) Election. In connection with the grant of Restricted Stock Awards, the Company shall allow the Grantee to make an 83(b) election within the time period prescribed by the Code.

12. OTHER SHARE OR SHARE-BASED AWARDS.

The Committee may grant other Awards under the Plan pursuant to which Shares (which may, but need not, be shares of Restricted Stock pursuant to Section 10.1 hereof), cash or a combination thereof, are or may in the future be acquired or received, or Awards denominated in stock units, including units valued on the basis of measures other than market value. The Committee may also grant stock appreciation rights without the grant of an accompanying option, which rights shall permit the Grantees to receive, at the time of any exercise of such rights, cash equal to the amount by which the Fair Market Value of all Shares in respect to which the right was granted exceeds the exercise price thereof. The Committee may, and it is hereby deemed to be an Award under the terms of the Plan, grant to Grantees (including employees) the opportunity to purchase Shares of the Company in connection with any public offerings of the Company’s securities. Such other share based Awards may be granted alone, in addition to, or in tandem with any Award of any type granted under the plan and must be consistent with the purposes of the Plan.

13. EFFECT OF CERTAIN CHANGES.

13.1. General. In the event of a subdivision of the outstanding share capital of the Company, any payment of a stock dividend (distribution of bonus shares), a recapitalization, a reorganization (which may include a combination or exchange of shares), a consolidation, a stock split, a spin-off or other corporate divestiture or division, a reclassification or other similar

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occurrence, the Committee shall, at its sole discretion make appropriate adjustments in one or more of (i) the number of Shares available for Awards, (ii) the number of such Shares covered by outstanding Awards, and (iii) the exercise price per share covered by the Option Awards (as defined below); provided, however, that any fractional shares resulting from such adjustment shall be rounded down to the nearest whole share and provided further that any adjustment to Awards granted shall be so adjusted as to maintain the proportionate number of Shares without changing the aggregate Exercise Price.

13.2. Merger and Sale of Company. In the event of (i) a sale of all or substantially all of the assets of the Company; or (ii) a sale (including an exchange) of all or substantially all of the shares of capital stock of the Company; or (iii) a merger, consolidation, amalgamation or like transaction of the Company with or into another corporation; or (iv) a scheme of arrangement for the purpose of effecting such sale, merger or amalgamation (all such transactions being herein referred to as a “Merger/Sale”), then, without the Grantee’s consent and action -

13.2.1.	the Committee in its sole discretion will use its efforts to cause that any Award then outstanding be assumed or an equivalent Award shall be substituted by such successor corporation or, in such event that such transaction is effected through a subsidiary, the parent of such successor corporation, under substantially the same terms as the Award, all of such terms as determined by the Committee to be, in its discretion, fair in the circumstances; and
13.2.2.	in such case that such successor corporation or other entity does not agree to assume the Award or to substitute an equivalent Award and, if the Award is an Option (“Option Award”), then the Committee shall, in lieu of such assumption or substitution of the Option Award and in its sole discretion, either (i) provide for the Grantee to have the right to exercise the Option Award as to all of the Shares or any part thereof, including Shares covered by the Option Award which would not otherwise be exercisable, under such terms and conditions as the Committee shall determine; or (ii) provide for the cancellation of each outstanding Option Award at the closing of such Merger/Sale, against payment to the Grantee of an amount in cash, securities or other assets equal to the amount, if any, by which (a) the fair market value of each Share covered by the Option Award as reflected under the terms of the Merger/Sale, as determined by the Committee, exceeds (b) the Exercise Price of each Share covered by the Option Award.
13.2.3.	Notwithstanding the foregoing, in the event of a Merger/Sale, the Committee may determine in its sole discretion that upon completion of such Merger/Sale, the terms of any Award be otherwise amended and modified, as the Committee shall deem in good faith to be appropriate, and if an Option Award, that the Option Award shall confer the right to purchase any other security or asset, or any combination thereof, or that its terms be otherwise amended or modified, as the Committee shall deem in good faith to be appropriate.

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13.3. Reservation of Rights. Except as expressly provided in this Section 13, the Grantee of an Award hereunder shall have no rights by reason of any subdivision or consolidation of stock of any class or the payment of any stock dividend (bonus shares) or any other increase or decrease in the number of shares of stock of any class or by reason of any dissolution, liquidation, Merger/Sale, or consolidation, divestiture or spin-off of assets or stock of another company; and any issue by the Company of stock of any class, or securities convertible into shares of stock of any class, shall not effect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares subject to an Award. The grant of an Award pursuant to the Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structures or to merge or to consolidate or to dissolve, liquidate or sell, or transfer all or part of its business or assets or engage in any similar transactions.

14. NONTRANSFERABILITY OF AWARDS; SURVIVING BENEFICIARY.

Unless otherwise approved by the Committee, all Awards granted under the Plan shall not be transferable otherwise than by will or by the laws of descent and distribution, and Awards may be exercised or otherwise realized, during the lifetime of the Grantee, only by the Grantee or by his guardian or legal representative, to the extent provided for herein. A Grantee may file with the Committee a written designation of a beneficiary on such form as may be prescribed by the Committee and may, from time to time, amend or revoke such designation. If no designated beneficiary survives the Grantee, the executor or administrator of the Grantee’s estate shall be deemed to be the Grantee’s beneficiary.

15. AGREEMENT BY GRANTEE REGARDING TAXES.

If the Committee shall so require, as a condition of exercise of an Option, the release of Shares by the Trustee or the expiration of the Restricted Period (each a “Tax Event”), each Grantee shall agree that, no later than the date of the Tax Event, he/she will pay to the Company or make arrangements satisfactory to the Committee and the Trustee (if applicable) regarding payment of any applicable taxes of any kind required by law to be withheld or paid upon the Tax Event. To the extent approved by the Committee and permitted by law, a withholding obligation may be satisfied by the withholding or delivery of Shares.

ALL TAX CONSEQUENCES UNDER ANY APPLICABLE LAW WHICH MAY ARISE FROM THE GRANT OF ANY OPTIONS, RESTRICTED STOCK OR SHARES, OR IN THE CASE OF AN OPTION, FROM ITS EXERCISE, FROM THE SALE OR DISPOSITION OF THE SHARES OR RESTRICTED STOCK OR FROM ANY OTHER ACT OF THE GRANTEE IN CONNECTION WITH THE FOREGOING, INCLUDING, WITHOUT LIMITATION, ANY TAX CONSEQUENCES RESULTING FROM THE ELECTION BY THE COMPANY OF EITHER THE “INCOME” ROUTE OR THE “CAPITAL” ROUTE IN ACCORDANCE WITH THE PROVISIONS OF THE ORDINANCE, SHALL BE BORNE SOLELY BY THE GRANTEE, AND THE GRANTEE SHALL INDEMNIFY THE COMPANY, ANY SUBSIDIARY AND THE TRUSTEE, AND SHALL HOLD THEM HARMLESS AGAINST AND FROM ANY LIABILITY FOR ANY SUCH TAX OR PENALTY, INTEREST OR INDEXATION THEREON OR THEREUPON.

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16. RIGHTS AS A SHAREHOLDER; VOTING AND DIVIDENDS.

A Grantee or a transferee of an Award shall have no rights as a Shareholder with respect to any Shares covered by the Award until the date of the issuance of a Share certificate to him/her for such Shares, or, in the case of 102 Stock Options or 3(9) Stock Options (if such 3(9) Stock Options are being held by a Trustee), until the date of the issuance of a Share certificate to the Trustee. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distribution of other rights for which the record date is prior to the date such Share Certificate is issued, except as provided in Section 13.1 hereof. In the event that a Trustee holds Shares issued upon the exercise of 102 Stock Options, any cash dividends paid by the Company on such Shares shall be paid directly to the Grantee, subject to any applicable taxation on distribution of dividends, and any stock dividends (bonus shares) shall be paid to the Trustee.

17. NO RETENTION RIGHTS.

Nothing in the Plan or in any Award granted or agreement entered into pursuant hereto shall confer upon any Grantee the right to continue in the employ of, or in a director, service provider or consultant relationship with, the Company or any Subsidiary or to be entitled to any remuneration or benefits not set forth in the Plan or such agreement or to interfere with or limit in any way the right of the Company or any such Subsidiary to terminate such Grantee’s employment or service. Awards granted under the Plan shall not be affected by any change in duties or position of a Grantee as long as such Grantee continues to be employed by, or in a director, service provider or consultant with, the Company or any Subsidiary.

18. APPROVAL.

The Plan shall take effect upon its adoption by the Board and shall terminate on the tenth anniversary of such date or such later date on which Awards granted under the Plan during such 10-year period are still outstanding. Notwithstanding the foregoing, in the event that approval of the Plan by the Shareholders is required under applicable law, in connection with the application of certain tax treatment or pursuant to applicable stock exchange rules or regulations or otherwise, such approval shall be obtained within the time required under the applicable law.

19.  PERIOD DURING WHICH AWARDS MAY BE GRANTED.

Awards may be granted pursuant to the Plan from time to time within a period of ten (10) years from the date the Plan is adopted by the Board. No Incentive Stock Option shall be exercised unless and until the Plan has been approved by the Shareholders, which approval shall be within twelve (12) months before or after the date the Plan was adopted by the Board.

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20. AMENDMENT AND TERMINATION OF THE PLAN.

The Board at any time and from time to time may suspend, terminate, modify or amend the Plan, including with respect to Awards made prior thereto; provided, however, that, unless otherwise determined by the Board, an amendment which requires Shareholder approval in order for the Plan to continue to comply with any law, regulation or stock exchange requirement, shall not be effective unless approved by the requisite vote of Shareholders.

21.  GOVERNING LAW.

The Plan and all determinations made and actions taken pursuant hereto shall be governed by the laws of the State of Israel. Certain definitions, which refer to laws other than the laws of the State of Israel shall be construed in accordance with such other laws.

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EX-4.2

Exhibit 4.2

M-SYSTEMS FLASH DISK PIONEERS LTD.

SECTION 102 STOCK OPTION /STOCK PURCHASE PLAN

1. Purpose. The M-Systems Flash Disk Pioneers Ltd. Section 102 Stock Option Plan (the “Plan”) is intended to (i) provide a method whereby employees (including officers and directors who are employees) of M-Systems Flash Disk Pioneers Ltd. (the “Company”) who are making and are expected to continue making substantial contributions to the successful management and growth of the Company may be offered an opportunity to acquire Ordinary Shares, par value NIS.001 (“Ordinary Shares” or “Shares”) of the Company, in order to increase their proprietary interests in the Company and their incentive to remain in and advance in the employ of the Company and, (ii) attract and retain personnel of experience and ability by granting such persons an opportunity to acquire Ordinary Shares in order to obtain a proprietary interest in the Company. Accordingly, the Company may, from time to time, grant restricted employee stock options (“Employee Stock Options”) to purchase Ordinary shares of the Company on the terms and conditions hereinafter established, to such employees as may be selected in the manner hereinafter provided. Employee Stock options and the Shares issuable thereunder shall be held in escrow for the benefit of such employees by or in the name of an escrow agent approved for such purposes by the Israel Tax Authority (the “Escrow Agent”). Employee Stock Options are referred to herein as “Option(s)”.

2. Application of Section 102 of the Income Tax Ordinance

     (a) The provisions governing the exemption of tax for options granted to employees as embodied in Section 102 of the Israel Income Tax Ordinance (New Version) (the “Ordinance”) and its regulations, Income Tax Rules (Tax Benefits in Stock Issuance to Workers) 5349-1989 (the “Rules”) shall be applied to the Plan and the Options. The Escrow Agent and each employee participating in this Plan shall comply with the Ordinance and Rules and with the Escrow Agreement entered into between the Company and the Escrow Agent.

     (b) No employee participating in this Plan shall claim an exemption from Israeli tax pursuant to Sections 95 or 97(a) of the Income Tax Ordinance (New Version) or pursuant to the Law for the Encouragement of Industry (Taxes) 5729-1960 in connection with a transfer by such employee of an Option or the underlying Shares prior to the end of the “Holding Period” as defined in Rule 1(i) of the Rules.

     (c) Each participating employee shall be obligated to immediately notify the Company and the Escrow Agent of his request, if any, to the Income Tax Authority pursuant to Rule 6(b) of the Rules in the event the Shares underlying the Options are registered on any stock exchange. Nothing herein shall obligate the Company to register its shares or any portion of its shares on a stock exchange.

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     (d) The Option, or the Shares issued upon exercise of the Option, as the case may be, shall be held by the Escrow Agent for two years from the date of the grant of the Option. After the two year holding period and subject to any further period under Sections 7(f), the Escrow Agent may release the Options or Shares to the employee only after (i) the receipt by the Escrow Agent of an acknowledgement from the Income Tax Authority that the employee has paid any applicable tax due pursuant to the Ordinance and the Rules, or (ii) the Escrow Agent withholds any applicable tax due pursuant to the Ordinance and Rules.

     (e) In the event a share dividend (bonus shares) is declared on Shares acquired pursuant to an Option, such dividend shares shall be subject to the provisions of Sections 2 and 7 and the holding period for such dividend shares shall be measured from the commencement of the holding period for the Option from which the dividend was declared.

     (f) The exemption under Section 102 of the Ordinance shall be forfeited and the employee shall be required to pay any applicable tax promptly at such time as: (i) the employee’s employment is terminated during the two year holding period (other than because of death or some other reason acceptable to the Income Tax Authority); (ii) the Company or the employee fails to comply with one or more other conditions for the exemption as required by the Ordinance, Rules or Income Tax Authority; or (iii) the Income Tax Authority withdraws or cancels the exemption for the Plan or the particular employee. Notwithstanding the loss of an exemption, the Escrow Agent shall continue to hold the Option (to the extent the Option remains exercisable following termination of employment) or Shares issued upon exercise of the Option for the remainder of the applicable holding period under Section 102 of the Ordinance.

3. Administration. The Plan shall be administered by the Board of Directors or a Stock Option Committee (the “Committee”) appointed by the Board of Directors of the Company. The Committee shall consist of no fewer than three members who may also be members of the Board of Directors of the Company and participate in the Plan. Subject to the terms and conditions of the Plan and relevant commitments of the Company, the Board of Directors, or if the Board of Directors so directs, the Committee, shall have full authority in its discretion, from time to time, and at any time, to select the employees to whom Options shall be granted, to determine the number of shares to be covered by each Option, the time at which the Option shall be granted, the terms and conditions of Option Agreements and, except as hereinafter provided, the

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Option exercise price and the term during which the Options may be exercised.

The Board of Directors may at any time appoint or remove members of the Committee and may fill vacancies, however caused, in the Committee. The Committee shall select one of its members as its Chairman, and shall hold its meetings at such time and place as it shall deem advisable. All actions of the Committee shall be taken by a majority of its members and can be taken by written consent in lieu of a meeting. The Committee shall make such rules and regulations for the conduct of its business as it shall deem advisable.

The initial Committee shall be comprised of Dov Moran, Arie Mergui, and Gideon Tolkowsky.

4. Interpretation and Amendment. The interpretation, construction or determination of any provisions of the Plan by the Board of Directors or the Committee if so empowered by the Board, shall be final and conclusive. No member of the Board of Directors or the Committee shall be liable for any action or determination made in good faith with respect to the Plan.

The Board of Directors may, at any time, amend, alter, suspend or terminate the Plan; provided, however, that any such action shall not impair any Options theretofore granted under the Plan.

5. Participants. Options may be granted under the Plan for the benefit of key employees of the Company (including employees who are also directors or officers of the Company).

Receipt of stock options under any other stock option plan maintained by the Company shall not, for that reason, preclude an employee from receiving Options under the Plan, provided however, that no employee shall be granted an Option if prior to the grant or as a result of the exercise of the Option, such employee would hold, directly or indirectly in his name or with a relative as defined in the Ordinance (i) 10% of the outstanding shares of the Company, (ii) 10% of the voting power of the Company, (iii) the right to hold or purchase 10% of the outstanding equity or voting power, or (iv) the right to obtain 10% of the “profit” of the Company as defined in the Ordinance.

6. Ordinary Shares. (a) The Ordinary Shares which may be issued and sold pursuant to Options granted under the Plan from time to time shall not exceed in the aggregate 245,000 Ordinary Shares of the Company.

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     (b) Shares issued under Options within two years from the date of the grant will be issued to the Escrow Agent for the benefit of the employee who shall have such rights of a shareholder as are set forth in the Option Agreement therefor.

     (c) In the event the employee’s rights do not vest in the Shares issued under Options and are reacquired by the Escrow Agent as trustee on behalf of the Company, such shares may be reissued under the Plan and, pending reissuance, the Escrow Agent shall vote the shares in accordance with the directions of the Board of Directors.

     (d) The Escrow Agent shall vote Shares held by the Escrow Agent in accordance with the directions of the Board of Directors until such time as the employee’s interest in such shares vests pursuant to the Plan. The Escrow Agent will have no rights to equity participation as to Ordinary Shares held in escrow except as otherwise specified by the Board of Directors or Committee.

7. Terms and Conditions of Options. Options granted pursuant to the Plan shall be in such form and on such terms as the Board of Directors or the Committee, as the case may be, shall, from time to time, approve, but subject, nevertheless, to the following terms and conditions:

     (a) The Option shall state the total number of shares of Ordinary Shares to which it relates and no fractional shares of Ordinary Shares shall be issued.

     (b) The option exercise price per Ordinary Share issuable upon the exercise of an Option, shall be such amount as may be determined by the Board of Directors or the Committee, as the case may be, and such price shall be set forth in the Option Agreement between the Company and the employee.

     (c) Notwithstanding any other provision of the Plan, the term of an Option shall be for a period of not more than ten (10) years and one (1) day from the date such Option is granted.

     (d) An Option must be granted within ten (10) years of the date the Plan is adopted.

     (e) Notwithstanding any other provisions of the Plan, the Escrow Agent shall hold the Option in favor of an employee or his successors or hiers for at least two years after the grant of the Option or purchase of Purchased Shares or such longer period as may be required for the full exercise of the Option or vesting of rights in the Purchased Shares as provided under the Option Agreement.

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     (f) Subject to subparagraph (e), the Option shall state the time or times at which it may be exercised in whole or in part (but in no event earlier than two years from the date of the grant) and such terms shall be incorporated into and be made a part of the Option Agreement between the Company and the employee.

     (g) The provisions of this Paragraph 7 and the provisions of any Option Agreement between the Company and an employee relating to the time of exercise, the restrictions against disposition and the vesting of the employee’s interest shall be applied according to their terms or according to such other terms and conditions, or at such other time and dates, as the Board of Directors or the Committee, as the case may be, may from time to time establish.

8. Termination of Employment. (a) Subject to paragraph 2(f) of the Plan and Section 102 of the Ordinance, the Option Agreement may provide that

          (i) if the employee to whom an Option has been granted (the “holder”) ceases to be employed by the Company as a result of his disability or his retirement with the consent of the Company, then any Options that are exercisable by him at the time he ceases to be employed by the Company, and only to the extent such Options are exercisable as of such time, may be exercised by him within two (2) years after the date of disability or one (1) year after the date of retirement with the consent of the Company (as determined by the Board of Directors or the Committee), respectively;

          (ii) if the holder of an Option ceases to be employed by the Company as a result of his dismissal without cause, then any Options that are exercisable by him at the time he ceases to be employed by the Company, and only to the extent such Options are exercisable as of such time, may be exercised by him within sixty (60) days after the date he ceases to be employed by the Company;

          (iii) if the holder of an Option ceases to be employed by the Company as a result of his dismissal for cause (as determined by the Board of Directors of the Company in its sole discretion), the Option Agreement may provide for the

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termination of any Options granted to such employee or allow him to exercise any Options that are exercisable by him at the time he ceases to be employed by the Company, and only to the extent such Options are exercisable as of such time, within thirty (30) days after the date he ceases to be employed by the Company.

     (b) Notwithstanding the foregoing, any termination of employment prior to the expiration of the 2 year period required under Section 102 of the Ordinance and Rules may subject the employee to forefeiture of the tax benefits available under Section 102 of the Ordinance.

9. Death. Subject to the provisions of Section 102 of the Ordinance, the Option Agreement may provide that if a holder of an Option shall die while in the employ of the Company, his estate, personal representative or beneficiary shall have the right to exercise the entire Option granted to the optionholder pursuant to the Plan at any time within two (2) years from the date of his death (or within such shorter period as may be specified by the Company in the Option Agreement), in respect of the total number of shares as to which he would have been entitled to exercise an Option at the date of his death.

10. Stock Splits, Mergers, etc. In case of any stock split, stock dividend or similar transaction applicable to all the outstanding Ordinary Shares of the Company, appropriate adjustment shall be made by the Board of Directors, whose determination shall be final, to the number of Ordinary Shares which may be purchased under the Plan and the number and option exercise price per Ordinary Share which may be purchased under outstanding Options. In the case of a merger, sale of assets or similar transaction which results in a replacement of the Company’s Ordinary Shares with stock of another corporation, the Company will be required to replace any outstanding Options granted under the Plan with comparable options to purchase the stock of such other corporation. The Company may provide for immediate maturity of all outstanding Options, with all Options not being exercised within the time period specified by the Board of Directors being terminated.

11. Transferability. Options are not assignable or transferable, except by will or the laws of descent and distribution to the extent set forth in Paragraph 9 and, Options, during an optionholder’s lifetime, may be exercised only by him.

12. Exercise of Options. An optionholder electing to exercise an Option shall give written notice to the Company of such election and of the number of Ordinary Shares that he has

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elected to acquire. An optionholder shall have no rights of a stockholder with respect to Ordinary Shares covered by the Option until after the date of issuance of a stock certificate to him upon partial or complete exercise of his Option and as may be otherwise set forth in the Option Agreement therefor.

13. Written Option. Agreements granting Options under the Plan (“Option Agreements”) shall be in writing, duly executed and delivered by or on behalf of the Company and the employee, and shall contain such terms and conditions as the Board of Directors or the Committee, as the case may be, deems advisable. If there is any conflict between the terms and conditions of any Option Agreement and of the Plan, the terms and conditions of the Plan shall control.

14. Payment. a. The employee shall waive a portion of his salary payment in consideration for the Option.

          b. The option exercise price shall be payable in cash, by certified check or by the tender of Ordinary Shares or, at the discretion of the Board of Directors, by paying in cash, at the minimum, the par value of the Ordinary Shares being acquired and executing a promissory note for the balance of the purchase or option exercise price. If the Ordinary Shares are tendered as payment of the option exercise price, the value of such shares shall be their fair market value as of the date of exercise. If such tender would result in the issuance of fractional Ordinary Shares, the Company shall instead return the difference in cash or by check to the employee.

15. Restrictions on Issuing Shares. The exercise of each Option shall be subject to the condition that if at any time the Company shall determine in its discretion that the satisfaction of withholding tax or other withholding liabilities, or that the listing, registration, or qualification of any shares otherwise deliverable upon such exercise upon any securities exchange or under any national, state or federal law, or that the consent or approval of any regulatory body, is necessary or desirable as a condition of, or in connection with, such exercise in the delivery or purchase of shares pursuant thereto, then in any such event, such exercise shall not be effective unless such withholding, listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Company.

16. Term of Plan. The Plan shall terminate ten (10) years after the Plan is adopted by the Board of Directors, and no Option shall be granted pursuant to the Plan after that date.

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17. Application of Funds. The proceeds received by the Company from the sale of Ordinary Shares pursuant the exercise of Options granted under the Plan will be used for general corporate purposes.

18. Obligation to Exercise Option. The granting of an Option shall impose no obligation on the optionholder to exercise such option.

19. Continuance of Employment. Neither the Plan nor any Option Agreement shall impose any obligation on the Company to continue the employment of any optionholder, and nothing in the Plan or in any Option shall confer upon any holder any right to continue in the employ of the Company or conflict with the right of either to terminate such employment at any time.

20. Effectiveness of the Plan. The Plan shall become effective on the date of its adoption by the Board of Directors, but subject, nevertheless, to such approvals as may be required by any public authorities, including but not limited to the Income Tax Authority.

M-SYSTEMS FLASH DISK PIONEERS LTD.

STOCK OPTION PLAN

(Incentive and Restricted Stock Options)

1. Purpose. The M-Systems Flash Disk Pioneers Ltd. (the “Plan”) is intended to provide a method whereby employees (including officers and directors) of M-Systems Flash Disk Pioneers Ltd. (the “Company”) and its subsidiaries who are making and are expected to continue making substantial contributions to the successful management and growth of the Company and its subsidiaries may be offered an opportunity to acquire Ordinary Shares, par value NIS 0.001 per share (the “Ordinary Shares”), of the Company, in order to increase their proprietary interests in the Company and their incentive to remain in and advance in the employ of the Company and its subsidiaries and to attract and retain personnel of experience and ability by granting such persons an opportunity to acquire a proprietary interest in the Company. Accordingly, the Company may, from time to time, grant to such employees as may be selected in the manner hereinafter provided, incentive stock options, as defined in Section 422 of the Internal Revenue Code of 1986 (the “Code”) (“Incentive Stock Options”), and restricted stock options (“Restricted Stock Options”) to purchase Ordinary Shares of the Company on the terms and conditions hereinafter established. The Incentive Stock Options and Restricted Stock Options sometimes are referred to herein individually as an “Option” and collectively as the “Options”.

2. Administration. The Plan shall be administered by the Board of Directors or a Stock Option Committee (the “Committee”) appointed by the Board of Directors of the Company. The Committee shall consist of no fewer than three members who may also be members of the Board of Directors of the Company and participate in the Plan. Should the Company become subject to the Securities Exchange Act of 1934, as amended (the “Exchange Act”) the Committee shall consist of not fewer than three (3) “disinterested persons”, as that term is defined in subparagraph (d)(3) of Rule 16b-3 (“Rule 16b-3”) under the Exchange Act. Members of the Committee then will not be able to participate in the Plan or become members if one year prior to an occurrence whereby the Company becomes subject to Rule 16b-3 they received an option under any plan of the Company. Subject to the terms and conditions of the Plan and relevant commitments of the Company, the Board of Directors, or, if the Board of Directors so directs, the Committee, shall have full authority in its discretion, from time to time, and at any time, to select the employees to whom Options shall be granted, to determine the number of shares to be covered by each Option, the time at which the Option shall be granted, the terms and conditions of Option Agreements (as hereinafter defined), and, except as hereinafter provided, the option exercise price and the term during which the Options may be exercised.

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The Board of Directors may at any time appoint or remove members of the Committee and may fill vacancies, however caused, in the Committee. The Committee shall select one of its members as its Chairman, and shall hold its meetings at such time and place as it shall deem advisable. A majority of its members shall constitute a quorum. All actions of the Committee shall be taken by a majority of its members and can be taken by unanimous written consent in lieu of a meeting. The Committee shall make such rules and regulations for the conduct of its business as it shall deem advisable.

The members of the initial Committee shall be Dov Moran, Arie Mergui and Gideon Tolkowsky.

3. Interpretation and Amendment. The interpretation, construction or determination of any provisions of the Plan by the Board of Directors or the Committee if so empowered by the Board, shall be final and conclusive. No member of the Board of Directors or the Committee shall be liable for any action or determination made in good faith with respect to the Plan.

The Board of Directors may, at any time, amend, alter, suspend or terminate the Plan; provided, however, that any such action shall not impair any Options theretofore granted under the Plan, and provided further that without the approval of the holders of at least the majority of the voting stock of the Company voting at a duly held meeting: (i) the total number of Ordinary Shares that may be purchased under the Plan shall not be increased (except as permitted by Paragraph 12); (ii) the minimum option exercise price shall not be decreased (except as permitted by Paragraph 12); (iii) the option period during which outstanding Options granted under the Plan may be exercised shall not be extended; and (iv) the class of individuals eligible to receive options under the Plan shall not be altered.

4. Participants. Options may be granted under the Plan to key employees of the Company and its subsidiaries (including employees who are also directors or officers of the Company or its subsidiaries). Solely for the purposes of granting Restricted Stock Options under the Plan, the term “employees” shall also include directors and officers of and consultants to the Company or any subsidiary. The status of the option as either Incentive Stock Options or Restricted Stock Options will be clearly set forth in the Option Agreements. The term “subsidiary” shall mean “subsidiary corporation” as defined in Section 425 of the Code. No Incentive Stock Option shall be granted to an employee who, at the time the Incentive Stock Option is granted, owns stock possessing more than ten percent

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(10%) of the total combined voting power of all classes of capital stock of the Company or any subsidiary of the Company; provided, however, that an Incentive Stock Option may be granted to such an employee if, at the time such Incentive Stock Option is granted, the option exercise price is at least 110 percent (110%) of the fair market value of the Ordinary Shares subject to the Incentive Stock Option, and such Incentive Stock Option is by its terms not exercisable after the expiration of five (5) years from the date such Incentive Stock Option is granted.

Subject to the preceding paragraph, receipt of stock options under any other stock option plan maintained by the Company or any subsidiary shall not, for that reason, preclude an employee from receiving Options under the Plan.

5. Ordinary Shares. The Ordinary Shares which may be issued and sold pursuant to Options granted under the Plan from time to time shall not exceed in the aggregate 100,000 Ordinary Shares of the Company to be issued and sold pursuant to Incentive Stock Options and Restricted Stock Options, as the Board of Directors or Committee, as the case may be, in its sole discretion, may determine. The Ordinary Shares issued and sold under the Plan may be the Company’s authorized but unissued shares or shares held by a trustee for later issuance as optioned shares as a result of the grant and exercise of an option. Shares issued to the trustee under the Plan may be voted by the Board of Directors until such shares are optioned shares as a result of the exercise of an option but such shares shall not be entitled to dividend or distribution in liquidation unless and until an option therefor is granted and exercised.

Should any Option expire or terminate for any reason without having been exercised in full, the unsold shares covered thereby shall be added to the shares otherwise available for option hereunder.

6. Terms and Conditions of Options. Options granted pursuant to the Plan shall be in such form and on such terms as the Board of Directors or Committee, as the case may be, shall, from time to time, approve, but subject, nevertheless, to the following terms and conditions:

     (a) The Option shall state (i) the total number of Ordinary Shares to which it relates and no fractional Ordinary Shares shall be issued, and (ii) the time or times at which it may be exercised in whole or in part.

     (b) The option exercise price per Ordinary Share

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issuable upon the exercise of an Incentive Stock Option shall be not less than one hundred percent (100%) of the fair market value of the Ordinary Shares covered by such option at the date such option is granted, or, in the case of an employee who at the time the Incentive Stock Option is granted owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of capital stock of the Company any subsidiary of the Company, the option exercise price shall be not less than one hundred and ten percent (110%) of the fair market value of Ordinary Shares covered by such Option.

     (c) The option exercise price per share of Ordinary Shares issuable upon the exercise of a Restricted Stock Option shall be determined by the Board of Directors or the Committee, as the case may be, but shall be not less than the lower of (i) seventy-five (75%) of the book value per share of Ordinary Shares as of the end of the fiscal year immediately preceding the date of such grant, or (ii) seventy-five (75%) of the fair market value per share of Ordinary Shares on the date of such grant.

     (d) Notwithstanding any other provision of the Plan, the term of an Incentive Stock Option and the term of a Restricted Stock Option shall be for a period of not more than ten (10) years from the date such option is granted.

     (e) An Option must be granted within ten (10) years of the date the Plan is adopted by the Board of Directors in accordance with Sections 17 and 21.

     (f) No individual shall be given the opportunity, under this Plan, to exercise Incentive Stock Options for the purchase of Ordinary Shares valued (at the time of grant of the Incentive Stock options) in excess of $100,000, in any calendar year, unless and to the extent that said Options shall have first become exercisable in the preceding year. No Incentive Stock Option shall be granted hereunder in such a manner as would cause the foregoing restrictions to be violated.

7. Restrictions on Disposition and Vesting of Interest in Employee. Shares of Ordinary Shares acquired by an employee pursuant to the exercise of a Restricted Stock Option under the Plan shall not be sold, transferred, or otherwise disposed of and shall not be pledged or otherwise hypothecated, except as provided in Section 12 and in this Section 7. (Any such sale, transfer or other disposition, or any pledge or other hypothecation shall hereinafter be referred to as a “disposition”). The Board of Directors or the Committee, as the case may be, shall provide for the issuance of restricted shares subject to this Section to a trustee (the “Trustee”) for

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the benefit of the employee until such time as the employee acquires a vested interest in accordance with the provisions of this Section 7. In the event of the termination of employment under conditions disallowing the vesting of rights in the employee partially or wholly, shares issued and subject to restrictions hereunder shall, except as provided below, be held by the Trustee free of any rights of the employee and the Trustee shall make payment to the employee of the original exercise price of the Restricted Stock Option the exercise of which resulted in the subject shares. Shares as to which the restrictions against disposition have lapsed and the employee’s interest has vested in accordance with the provisions set forth below shall be referred to as “free shares”. Shares as to which the restrictions against dispositon have not lapsed and the employee’s interest has not vested as provided below shall be referred to as “restricted shares”. Holders of restricted shares may but need not be permitted by the terms of the Option Agreement to vote their shares in any meeting of holders of Ordinary Shares.

     (a) The restrictions against disposition of shares acquired pursuant to the Plan shall lapse and the employee’s interest therein shall vest as determined by the Board of Directors or Committee, as the case may be, and such terms shall be incorporated into and be made a part of the Option Agreement between the Company and the employee. Any provision for the lapse of the restrictions against disposition and the vesting of the employee’s interest shall apply with respect to shares subject to an Option whether or not the Option has been exercised in whole or part on the date of lapse or vesting.

     (b) In the event of the termination of employment for any reason, shares issued to the employee pursuant to the exercise of a Restricted Stock Option under the Plan, which shares have not as of the date of termination of employment, become free shares as defined above, shall not be subject to any further right or interest of the employee. Within sixty (60) days following the lapse of the employee’s right to acquire a vested interest, the Company shall direct the Trustee to compensate the employee (at the original acquisition price) for such number of shares as the Company determines and shall direct the Trustee to release to the employee any shares for which no such payment has been directed. Nothing in this Paragraph 7 shall require the Company or the Trustee to make payment for shares issued to employees under the Plan.

     (c) Notwithstanding any of the foregoing restrictions, any restricted shares acquired under the Plan may at any time be pledged or otherwise hypothecated to secure borrowing by the employee to obtain the acquisition price to be

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paid by the employee for such shares, provided, however, that the amount of such borrowing may not exceed the acquisition price of such shares.

     (d) The provisions of this Paragraph 7 and the provisions of any Option Agreement between the Company and an employee relating to the restrictions against disposition and the vesting of the employee’s interest shall be applied according to their terms or according to such other terms and conditions, or at such other time and dates, as the Board of Directors or the Committee, as the case may be, may from time to time establish.

8. Notice of Election under Section 83(b). With respect to the exercise of Restricted Stock Options, each employee making an election under Section 83(b) of the Code and the Regulations and Rulings promulgated thereunder will provide a copy thereof to the Company within thirty (30) days of the filing of such election with the Internal Revenue Service. Any insider acquiring Options after the Company becomes subject to Rule 16b-3 who elects the election under Section 83(b) of the Code and the Regulations promulgated thereunder, shall notify the Company within thirty (30) days of filing such election.

9. Termination of Employment. The Option Agreement may provide that if the holder of an Option ceases to be employed by the Company or any subsidiary as a result of his disability or his retirement with the consent of the Company, then any Options that are exercisable by him at the time he ceases to be employed by the Company or its subsidiaries, and only to the extent such Options are exercisable as of such time, may be exercised by him within two (2) years after the date of disability or one (1) year after the date of retirement with the consent of the Company (as determined by the Board of Directors or the Committee), respectively. If the holder of an Option ceases to be employed by the Company or any subsidiary as a result of his dismissal without cause, then any Options that are exercisable by him at the time he ceases to be employed by the Company or its subsidiaries, and only to the extent such Options are exercisable as of such time, may be exercised by him within sixty (60) days after the date he ceases to be employed by the Company or its subsidiaries. If the holder of an Option ceases to be employed by the Company or any subsidiary as a result of his dismissal for cause (as determined by the Board of Directors in its sole discretion), the Option Agreement may provide for the termination of any options granted to such employee or allow him to exercise any Options that are exercisable by him at the time he ceases to be employed by the Company or its subsidiaries, and only to the extent such Options are exercisable as of such time, within

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thirty (30) days after the date he ceases to be employed by the Company or its subsidiaries.

Solely for purposes of the Plan, the transfer of an employee from the employ of the Company to a subsidiary of the Company, or vice-versa, shall not be deemed a termination of employment.

10. Death. The Option Agreement may provide that if a holder of an Option shall die while in the employ of the Company or any subsidiary of the Company, his estate, personal representative or beneficiary shall have the right to exercise the entire Option granted to the optionholder pursuant to the Plan at any time within two (2) years from the date of his death (or within such shorter period as may be specified by the Company in the Option Agreement), in respect of the total number of shares as to which he would have been entitled to exercise an Option at the date of his death.

11. Stock Splits, Mergers, etc. In case of any stock split, stock dividend or similar transaction applicable to all the outstanding shares of the Company equally which increases or decreases the number of outstanding Ordinary Shares, appropriate adjustment shall be made by the Board of Directors, whose determination shall be final, to the number of Ordinary Shares which may be purchased under the Plan, and the number of Ordinary Shares and option exercise price per Ordinary Share which may be purchased under outstanding options. In the case of a merger, sale of assets or similar transaction which results in a replacement of the Company’s Ordinary Shares with stock of another corporation, the Company will be required to replace any outstanding Options granted under the Plan with comparable options to purchase the stock of such other corporation. The Company may provide for immediate maturity of all outstanding Options prior to the effectiveness of such merger, sale of assets or similar transaction, with all Options not being exercised within the time period specified by the Board of Directors being terminated.

12. Transferability. Options are not assignable or transferable, except by will or the laws of descent and distribution to the extent set forth in Paragraph 10 and, during an optionholder’s lifetime, may be exercised only by him.

13. Exercise of Options. An optionholder electing to exercise an Option shall give written notice to the Company of such election and of the number of Ordinary Shares that he has elected to acquire. An optionholder of a Restricted Stock Option shall have no rights of a stockholder with respect to

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Ordinary Shares covered by this Option until after the date of issuance of a stock certificate to him upon partial or complete exercise of his Option except in the case restricted option shares are delivered to a Trustee whereby a proxy is delivered to the former optionholder. A holder of Incentive Stock Options shall have rights of a stockholder with respect to Ordinary Shares upon exercise of the Option.

14. Written Option Agreement. Agreements granting Options under the Plan (“Option Agreements”) shall be in writing, duly executed and delivered by or on behalf of the Company and the optionholder, shall contain such terms and conditions as the Board of Directors or Committee, as the case may be, deems advisable, and shall specify its application to a Restricted Stock Option or Incentive Stock Option. If there is any conflict between the terms and conditions of any Option Agreement and of the Plan, the terms and conditions of the Plan shall control.

15. Payment. The option exercise price shall be payable upon the exercise of the Option in cash, by certified check or by the tender of Ordinary Shares or, at the discretion of the Board of Directors, by paying in cash, at the minimum, the par value of the Ordinary Shares being acquired and executing a promissory note for the balance of the option exercise price, provided that said note shall bear interest in the case of Incentive Stock Options, at a rate which is no less than the lowest applicable U.S. federal rate required to be charged to preclude the recharacterization of any amount of stated principal as interest for U.S. federal tax purposes. In the case of Restricted Stock Options, the interest rate will be determined by the Board of Directors or the Committee, as the case may be. If the Ordinary Shares are tendered as payment of the option exercise price, the value of such shares shall be their fair market value as of the date of exercise. If such tender would result in the issuance of fractional Ordinary Shares, the Company shall instead return the difference in cash or by check to the employee.

16. Restrictions on Issuing Shares. The exercise of each option shall be subject to the condition that if at any time the Company shall determine in its discretion that the satisfaction of withholding tax or other withholding liabilities, or that the listing, registration, or qualification of any shares otherwise deliverable upon such exercise upon any securities exchange or under any state or federal law, or that the consent or approval of any regulatory body, is necessary or desirable as a condition of, or in connection with, such exercise in the delivery or purchase of shares pursuant thereto, then in any such event, such exercise

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shall not be effective unless such withholding, listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Company.

17. Term of Plan. The Plan shall terminate ten (10) years after the Plan is adopted by the Board of Directors, and no Option shall be granted pursuant to the Plan after that date.

18. Application of Funds. The proceeds received by the Company from the sale of Ordinary Shares pursuant to the exercise of Options granted under the Plan will be used for general corporate purposes.

19. Obligation to Exercise Option. The granting of an Option shall impose no obligation on the optionholder to exercise such option.

20. Continuance of Employment. Neither the Plan nor any Option Agreement shall impose any obligation on the Company or on any subsidiary of the Company to continue the employment of any optionholder, and nothing in the Plan or in any Option Agreement shall confer upon any optionholder any right to continue in the employ of the Company or the subsidiary of the Company or conflict with the right of either to terminate such employment at any time.

21. Effectiveness of the Plan. The Plan shall become effective on the date of its adoption by the Board of Directors, but subject, nevertheless, to (1) approval, within twelve (12) months thereof, by the stockholders representing at least a majority of the voting stock of the Company or by such greater percentage as may from time to time be required under the laws of the State of Israel, and (2) such approvals as may be required by any other public authorities. Options under this Plan may be granted but not exercised until it is approved by the Company’s shareholders. In the event the Plan is not approved, the Plan shall terminate and all Options granted shall be void and have no force or effect.

EX-5

EXHIBIT 5

[O’Melveny & Myers LLP Letterhead]

November 28, 2006

SanDisk Corporation
601 McCarthy Boulevard
Milpitas, California 95035

Re: Registration of Securities of SanDisk Corporation

Ladies and Gentlemen:

     In connection with the registration of up to 5,388,283 shares of Common Stock of SanDisk Corporation, a Delaware corporation (the “Company”), par value $0.001 per share (the “Shares”), and additional preferred stock purchase rights pursuant to the Rights Agreement, dated as of September 15, 2003 and amended on November 6, 2006, between the Company and Computershare Trust Company, Inc., as Rights Agent (“Rights”), under the Securities Act of 1933, as amended, pursuant to a Registration Statement on Form S-8 (the “Registration Statement”), filed with the Securities and Exchange Commission on or about the date hereof, such Shares and related Rights to be issued or delivered pursuant to the msystems Ltd. 2003 Stock Option and Restricted Stock Incentive Plan and the msystems Ltd. Section 102 Stock Option/Stock Purchase and Stock Option Plans (the “Plans”), you have requested our opinion set forth below.

     In our capacity as counsel, we have examined originals or copies of those corporate and other records of the Company we considered appropriate.

     On the basis of such examination and our consideration of those questions of law we considered relevant, and subject to the limitations and qualifications in this opinion, we are of the opinion that:

(1)	the Shares and related Rights have been duly authorized by all necessary corporate action on the part of the Company;
(2)	when issued in accordance with such authorization, the provisions of the Plans and relevant agreements duly authorized by and in accordance with the terms of the Plans, the Rights will be validly issued; and
(3)	when issued in accordance with such authorization, the provisions of the Plans and relevant agreements duly authorized by and in accordance with the terms of the Plans, and upon payment for and delivery of the Shares as contemplated in accordance with the Plans and either (a) the countersigning of the certificate or certificates representing the Shares by a duly authorized signatory of the registrar for the Company’s Common Stock, or (b) the book-entry of the Shares by the transfer agent for the Company’s Common Stock in the name of The Depository Trust Company or its nominee, the Shares will be validly issued, fully paid and non-assessable.

     We consent to your filing this opinion as an exhibit to the Registration Statement.

Respectfully submitted,
 

/s/ O’Melveny & Myers LLP

EX-23.1

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statement (Form S-8), pertaining to the msystems Ltd. 2003 Stock Option and Restricted Stock Incentive Plan and the msystems Ltd. Section 102 Stock Option/Stock Purchase and Stock Option Plans, of our reports dated March 8, 2006, with respect to the consolidated financial statements of SanDisk Corporation, included in its Annual Report (Form 10-K) for the year ended January 1, 2006, SanDisk Corporation management’s assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of SanDisk Corporation, filed with the Securities and Exchange Commission.

/s/ Ernst & Young LLP

San Jose, California
November 21, 2006